Chapter 5 Business
Organization
5-1 Business in the U.S. Economy
 Goals:
 Describe
 Discuss
the changing status of U.S. employment.
the role of business in the U.S. economy.
 Describe
three major types of businesses.
The Changing U.S. Job Market


Employment Data:

In 2007 144 million people held jobs.

Projection for 2014 was to be 164 million people

In May 2015, 148 million people held jobs. http://data.bls.gov/timeseries/LNS12000000
Pressures on Employees

Technology would allow people to work fewer hours. However, downsizing has actually
occurred more due to technology.

Companies have streamlined production and implemented other cost-cutting procedures.
Businesses have required employees to take on new tasks and work extra hours. Wages
have been decreased or increased costs outweigh the rise in income.

Survey (prior to 2008) reported that 7 of 10 parents felt they were not able to spend
enough time with their children. Children have seen their parents take on second jobs,
different jobs, enroll in classes in order to make things work. These experiences will
shape your life and your future decisions.

Economic pressure has resulted in the increased used of contingent workers. Contingent
workers don’t have a long-term contract.

Pros: Flexibility it offers. Cons: Can’t find permanent employment (by choice or not).
Business and the Economy



Size of Businesses

Most U.S. businesses are quite small. Nearly 20 million businesses have no other employees other than
the owner. About 5 million companies employ less than 20 employees.

Majority of the U.S. companies consists of small businesses (less than 20 employees).
Roles of Business

They provide employment for millions of people.

Wages are used to purchase goods and services.

Profits earned by businesses are used to compensate owners and investors.

Businesses pay taxes to Federal, State and Local Governments.

Governments spend these taxes to proved services (i.e. clean water, maintained streets, police,
hospitals, schools).

Most important role is to make and distribute products and services needed by consumers, governments
and other businesses.
Impact on a Community

When a new business opens, it pays wages to its workers and buys goods and services form other
businesses in the area (sometimes). Essentially, it’s new money in the community. It becomes cyclical.

Employees spend the money in the community which might result in the need for more employees to
meet the needs of the consumer.

When a large business opens in an area, other businesses may follow. Or maybe not. Sometimes the new
business drives the competitors out.

If a new business relocates to an area employees might need housing, transportation, entertainment.

Taxes paid by both business and individuals should revitalize the area.

Business Activities

Generate Ideas – Business begins with an idea. Business must continue to improve and develop
new ideas in order to remain successful. They must remain competitive and continue to develop.

Raising Capital – Businesses need financial resources to operate. Need capital to buy buildings,
hire and train workers and complete day-to-day operations. Some capital comes from owners.
Most is obtained through loans from financial institutions or investors. Businesses needs more
capital as it develops and grows.

Employing and Training Personnel – Businesses need human resources. Even business that begin
with no employees other than the owner will add part-time and full-time employees as they
grow. New employees receive training in order to perform their jobs correctly as well as
continuing training as new procedures or tasks are added or even technology is introduced.

Buying Goods and Services – All business buy goods and services. Businesses use many of the
purchases for their own operation. (i.e. Automobile manufacturers need steel, aluminum, plastic,
tires, batteries, air bags, air conditioners… Retailers buy an assortment of product to sell to
customers like display equipment and computers. Some businesses employ the services of other
companies like lawn care, advertising, legal and accounting).

Marketing Goods and Services – Marketing refers to the activities directed at providing the goods
and services wanted by business’s customers. They must satisfy customers who usually can
choose to buy from competitors offering similar products and services.

Maintaining Business Records – All businesses need some type of record-keeping system. They
need to track performance and make decisions. Customers need information about orders an
payments. Government requires businesses to keep records. Technology helps
Types of Businesses

Three major categories of business

Producers – Create the products and services used by individuals and other
businesses.

Extractor – Take resources from nature for direct consumption or use in developing
other products.

Farmers – Cultivate land and use other natural resources to grow crops and raise
livestock for consumption.

Manufacturers – Get supplies from other producers and convert them into products.
Sell their products to consumers and other businesses.

Intermediaries – Involved in selling the goods and services of producers to
consumers and other businesses. Most common type are retailers and
wholesalers.

Service Businesses - Carry out activities that are consumed by its customers.
They include dentists, lawyers, health care, pet sitters, painters, furniture
movers. Newer types of service businesses are internet service providers,
web designers and online travel agents.

It is the fastest growing part of the economy.
5-2 Forms of Business Ownership

Goals:

Understand the three major forms of business ownership.

Determine when each form of business ownership is most
appropriate.

Recognize other specialized business ownership forms.
Business Ownership

Proprietorship

Owned and run by just one person. Easiest form of business to start and end. Very few legal
requirements.


Partnership

Owned and controlled by two or ore people who have entered into an agreement. Easy to start.


Sole control of the business. You receive all the profits, but you also have all the debts. If the business fails,
and you owe money to creditors they can take your personal assets (depending on the form of business you
create).
Owners are responsible for key business decisions. The partners share investments and profits based on the
terms of their partnership agreement (get it in writing). Also depending on the agreement, the partners are
liable for the debts of the business.
Corporation

A separate legal entity formed by documents filed with a state. Owned by one or more shareholders
and managed by a board of directors. Most corporations have several owners who invest in the
business by purchasing shares of stock. More difficult to form than a proprietorship or partnership.

Not all owners have direct involvement in decision-making about business functions. They don’t have access
to profits unless the board of directors approves it. Corporations protect the liability of stockholders to only
the amount of money they invested.
Choosing a Form of Business Ownership

Choosing a Proprietorship

Most businesses begin as a proprietorship.

They prefer to work for themselves and have total control of the business.

It’s easier than other businesses. Begins by buying a selling as a business. You
don’t need a business name. Will need to obtain required government licenses
and permits. Need to account for income, expenses and pay taxes on profits of
the business. Eventually, when you obtain a name, you will need to register the
name with local, state and federal governments.

Provide tax advantages for the owner. Income is taxes as part of your personal
income. Business expenses can be used to reduce the income.

In the eyes of the law, the owner is the same as the business. Debts of the
business are the responsibility of the owner. Personal assets not connected to
the business will need to be used to pay business debts if the business assets
are not adequate to cover those debts.

Choosing a Partnership

More complex and formal than a proprietorship.

Can be formed by the verbal agreement of two or more people.

Better to have a partnership agreement. Partnership Agreement is a written
agreement among all owners. Details the rules and procedures that guide ownership
and operations.


Identifies the business name, the investments, and other contributions of each partner.
Shows profits and losses and how they will be divided among the partners. Defines the
authority and responsibilities granted to each person and how the partnership can be
dissolved. Most states require that partnerships register a business name as well as the
name of each person in the partnership.

Advantages and Disadvantages: Two or more people can contribute to the investment
needed to start the business as wee as the expertise required to run a business. Each
partner is responsible for decisions made by all other partners. No protection for the
personal assets of any partner. Similar to Proprietorship.
Good ownership form for people who share an idea for a business. They want to
cooperate in managing and investing in the business.

Choosing a Corporation

Becoming increasingly popular for new an small businesses.

Subject to many more laws and more difficult to form than proprietorship or partnership.

Corporations are treated as an “individual” by governments. They must follow the laws of the
state in which they are organized.

To form a corporation, they must file articles of incorporation. They are written legal
documents that defines ownership and operating procedures and conditions for the business.

States usually provide a form that can be filled out. Business must create corporate bylaws
that are the operating procedures for the corporation. Must name a board of directors, the
people who will make the major policy and financial decisions for the business. Corporation
also issues shares of stock to investors.

Advantages to Owners: Liability of any owner is limited to the amount of money invested.
Amount of debt of the business dose not matter. People can invest in the business and
receive some of the profit without having to take part in the day-to-day management and
operations. Business can be easily expanded and ownership can be changed by the sale of
stock.

Disadvantages: Decision making is shared among managers, the board of directors, and
shareholders. Records are required and more laws regulate operations than for other forms
of ownership. Pay corporate taxes on profits earned. Investors also pay taxes on their
individual earnings form the business.
Other Forms of Ownership


Specialized Partnerships and Corporations

Limited Liability Partnership – Identifies some investors who cannot lose more than the amount of their
investment, but they are not allowed to participate in the day-to-day management of the business.

Joint Venture – Unique business organized by two or more other businesses to operate for a limited time and
for a specific project.

S-Corporation – Offers the limited liability of a corporation. Income is passed through to the owners based on
their investment and is taxes on their individual tax returns.

Limited Liability Company (LLC) – Combines the best features of a partnership and a corporation. Provides
liability protection for owners. Simpler set of organizing and operating requirements than a corporation. No
articles of incorporation or bylaws. Simple document much like a partnership agreement must be developed.

Nonprofit Corporation – Group of people who join to do some activity that benefits the public. Free from
corporate income taxes. Raise funds by receiving grants and donations from individuals and businesses. Must
organize as a corporation.
Cooperatives and Franchises

Cooperative is owned by members, serves their needs and managed in their interest. Form a consumer
cooperates so that they can purchase goods and services cheaper as a group than they could individually.
Large numbers of small businesses will have greater bargaining power than the individual businesses.

Franchise – Written contract granting permission to operate a business to sell products and services in a set
way. Franchiser – Grants the rights to another business. Franchisee – Company purchasing the rights to run
the business.

Examples: Jiffy Lube, Century 21 and MAACO Collision Repair and Auto Painting.
5-3 Organizational Structure for Businesses

Goals:
 Understand
important principles in designing an effective
organization.
 Compare
alternative organizational structures for businesses.

Designing an Effective Business Organization

Many new business fail in the first few years.



Business needs to be well organized to help people do their work properly.
Setting Direction: From top down

Mission Statement is a short, specific written statement of the reason a business exists and what it
wants to achieve.

A Goal is a precise statement of the results the business expects to achieve. Used to define what needs
to be accomplished and to determine if the business is successful. Written after the Mission Statement.

Policies which are guidelines used in making consistent decisions.

Procedures which are descriptions of the way work is to be done.
Principles of Effective Organization

Several principles guide the effective organization of work.

Responsibility – The obligation to complete specific work

Authority – The right to make decisions about how responsibilities should be accomplished.

Accountability – Taking responsibility for the results achieved.

With every job assignment, managers and employees have a set of responsibility as part of their job,
authority to make the correct decisions and the accountability (positive and negative) for their job.

Unity of Command – Clear reporting relationship for all staff of a business. People need to know who is
the leader and how decision will be made.

Span of Control – The number of employees who are assigned to a particular work task and manager.
Organizations need to make sure that workers have a balance of supervision and freedom to do their
work.

Types of Organizational Structures

As more people are hired, will need a structure.

Organizational Chart – Diagram that shows the structure of an organization,
classifications of work and jobs, and the relationships among those
classifications.

Functional Organization Structure – Work is arranged within main business
functions such as production, operations, marketing, and human resources. All
the people with jobs related to one of the functions will work together.


Advantage is that people work with others who have the same skills. Disadvantage,
people become focused on their specific function than on the success of the whole
business.
Matrix Organization Structure – Work is structured around specific projects,
products, or customer groups.

People with varied backgrounds are assigned together because their expertise is
required for the project or to serve the customer. Can be interesting and motivating
to employees. They work with many different people. They are focused on a specific
project or task. Can be confusing and inefficient without effective leadership and
communication.