Chapter 8: Business
Organizations
Section 1
Objectives
1. Explain the characteristics of sole
proprietorships.
2. Analyze the advantages of sole
proprietorships.
3. Analyze the disadvantages of sole
proprietorships.
Key Terms
• sole proprietorship: a business owned and
managed by a single individual
• business license: authorization to operate a
business issued by a local government
• zoning laws: laws in a city or town that
designate certain areas, or zones, for residential
and business use
• liability: the legal obligation to pay debts
• fringe benefits: payments to employees other
than wages or salary.
Introduction
• What are the risks and benefits of a sole
proprietorship?
– Sole proprietorships are easy to start and
when you are the sole owner, you receive all
of the profits from the business.
– On the other hand, you have total liability for
the company and could lose your investment
as well as other personal property if the
business fails.
The Role of Sole Proprietorships
• A sole proprietorship is a business owned
and managed by a single individual.
– In this type of business organization the lone
entrepreneur earns all of the firm’s profits and
is responsible for all its debts.
– More than 70 percent of all businesses in the
United States are sole proprietorships but
they are small, generating only 4 percent of all
U.S. sales.
Entrepreneurs
• The potential to make a profit is a big
incentive for entrepreneurs to start a sole
proprietorship.
– Entrepreneurs must be willing to assume total
responsibility and take risks.
– A successful entrepreneur is:
• Optimistic
• Enthusiastic
• Focused on the future
Characteristics of Proprietorships
Advantages
• Sole proprietorships have many
advantages, including:
– They are easy to start - there is only a small
amount of paperwork and legal expense
– There are minimum requirements - sole
proprietors need only a business license, a
state permit if not working out of their home,
and a name for their business
Advantages, cont.
• There are few regulations - sole
proprietorships are the least regulated
form of business organization.
– However, sole proprietorships are subjected
to zoning laws, which may prohibit them from
operating businesses out of their homes.
• They are the sole receiver of profit - the
owner gets to keep all of the profits after
paying income taxes.
Advantages, cont.
• Sole proprietors have
full control - a high
level of freedom
allows sole
proprietors to run
their company as
they wish.
Disadvantages
• Checkpoint: What are the disadvantages of sole
proprietorships?
– Unlimited liability - sole proprietorships are fully and
personally responsible for all their business debts
– Limited access to resources
• Sole proprietorships must buy all the necessary
resources they need to run their business, which can
be very expensive.
• They may lack in human capital.
• Demands on a sole proprietorships can be personally
and financially exhausting.
Lack of Performance
• Sole proprietorships
often have trouble
finding and keeping
good employees.
– Many sole
proprietorships do not
have the ability to offer
fringe benefits.
– How does this cartoon
show a major
disadvantage of a sole
proprietorship?
Review
• Now that you have learned the risks and
benefits of a sole proprietorship, go back
and answer the Chapter Essential
Question.
– Why do some businesses succeed and other
fail?
Chapter 8: Business
Organizations
Section 2
Objectives
1. Compare and contrast different types of
partnerships.
2. Analyze the advantages of partnerships.
3. Analyze the disadvantages of
partnerships.
4. Explain how a business franchise
operates.
Key Terms
• partnership: a business organization owned by
two or more persons who agree on a specific
division of responsibilities and profits
• general partnership: a type of partnership in
which all partners share equally in both
responsibility and liability
• limited partnership: a type of partnership in
which only one partner is required to be a
general partner
• limited liability partnership (LLP): a type of
partnership in which all partners are limited
partners
Key Terms, cont.
• articles of partnership: a partnership
agreement that spells out each partner’s rights
and responsibilities
• assets: the money and other valuables
belonging to an individual or business
• business franchise: a semi-independent
business that pays fees to a parent company in
return for the exclusive right to sell a certain
product or service in a given area
• royalties: the share of earnings given by a
franchisee as a payment to the franchiser
Introduction
• What are the risks and benefits of
partnerships and franchises?
– Partnerships are easy to start up, have more
assets to contribute, and are subject to few
regulations. But, like sole proprietorships,
there is unlimited liability for at least one of
the partners.
– Franchises allow each owner a level of control
and benefit from the support of the parent
company. Disadvantages include high fees,
royalties, and purchasing restrictions.
Partnerships
• A partnership is a business organization
owned by two or more persons who agree
on a specific division of responsibilities
and profits.
• There are three types of partnerships
– General partnerships
– Limited partnerships
– Limited liability partnerships
Types of Partnerships
• General Partnerships
– All parties share equally in both responsibility
and liability
• Limited Partnerships
– Only one partner is required to be a general
partner
– Limited partners only contribute money; they
are not liable for the firm’s actions
Types of Partnerships, cont.
• Limited Liability Partnerships
– This partnership acts like a general
partnership, except that all partners have
limited personal liability in certain situations,
such as another partner’s mistakes.
Characteristics of Partnerships
Advantages
• Checkpoint: What are the advantages of
partnerships?
– Ease of start-up - partnerships are easy and
inexpensive to establish. It is a good idea,
though, to sign a partnership agreement,
which spells out the rights and responsibilities
of each partner.
– Little government regulation
– More capital - with more people involved,
more capital can be raised.
Advantages, cont.
• Better employees partnerships can attract
and keep talented
employees more easily
than sole proprietors can
• Taxes - partnerships are
not subjected to any
special taxes
• Shared decision-making each partner brings
different strengths and
skills to the business
Disadvantages
• Disadvantages of partnerships include:
– Unlimited liability - at least one partner has
unlimited liability (unless the partnership is an
LLP) which means that person could lose
everything
– Lack of performance - a partnership may not
outlast the life of one of the general partners
Disadvantages, cont.
• Potential for conflict interpersonal conflicts
between partnerships can
lead to disagreements
and, in some cases, an
end to the partnership
Franchises
• Sometimes people opt to form a business
franchise instead of a partnership.
– A business franchise is a semi-independent
business that pays fees to a parent company.
– In return, the business is granted the
exclusive right to sell a certain product or
service in a given area.
Advantages
• Advantages of franchises include:
– Built-in reputation
– Management training and support
– Standardized quality
– National advertising programs
– Financial assistance
– Centralized buying power
Disadvantages
• With their many advantages comes a few
disadvantages of franchises:
– High franchising fees and royalties
– Strict operating standards
– Purchasing restrictions
– Limited product line
– Checkpoint: What are the advantages and
disadvantages of franchises?
Review
• Now that you have learned about the risks
and benefits of partnerships and
franchises, go back and answer the
Chapter Essential Question.
– Why do some businesses succeed and others
fail?
Chapter 8: Business
Organizations
Section 3
Objectives
1. Explain the characteristics of
corporations.
2. Analyze the advantages of
incorporation.
3. Analyze the disadvantages of
incorporation.
4. Compare and contrast corporate
combinations.
5. Describe the role of multinational
corporations.
Key Terms
• corporation: a legal entity, or being, owned by individual
stockholders, each of whom has limited liability for the
firm’s debts
• stock: a certificate of ownership in a corporation
• closely held corporation: a type of corporation that
issues stock to only a few people, who are often family
members
• publicly held corporation: a type of corporation that
sells stock on the open market
• bond: a formal contract issued by a corporation or other
entity that includes a promise to repay borrowed money
with interest at fixed intervals
Key Terms, cont.
• certificate of incorporation: a license to form a
corporation issued by a state government
• dividend: the portion of corporate profits paid
out to stockholders
• limited liability corporation (LLC): a type of
business with limited liability for the owners, with
the advantage of not paying corporate
income tax
• horizontal merger: the combination of two or
more firms competing in the same market with
the same good or service
Key Terms, cont.
• vertical merger: two or more firms
involved in different stages of producing
the same good or service
• conglomerate: a business combination
merging more than three businesses that
produce unrelated products or services
• multinational corporation (MNC): a large
corporation that produces and sells its
goods and services in more than one
country
Introduction
• What are the risks and benefits of
corporations?
– Corporations provide the opportunity for
stockholders to own part of a company and
reap the benefits of that company’s success.
Corporations provide flexibility for their
stockholders.
Introduction
• What are the risks and benefits of corporations?
– Corporations provide the opportunity for stockholders
to own part of a company and reap the benefits of that
company’s success. Corporations provide flexibility
for their stockholders.
– On the other hand, corporations are difficult and
expensive to start and must pay double taxes. Also,
the original owners can lose control over their
company, since decisions are made by corporate
officers an board of directors.
Corporations
• The most complex form
of business organization
is the corporation.
– Individual stockholders
own stock in a
corporation and are,
therefore, part-owner of
the company that issues
the stock.
– In the United States,
corporations account for
about 20 percent of all
businesses but more
than 80 percent of all
sales.
Types of Corporations
• Closely held corporations
– Corporations that issue stock to only a few
people, often family members.
• Publicly held corporations
– Corporations that sell stock on the open
market.
• Owners of a corporation elect a board of
directors that makes all the major
decisions.
Characteristics of Corporations
Advantages
• Incorporation, or
forming a corporation,
offers advantages to
stockholders and the
company itself.
– Advantages for
stockholders:
• Unlimited liability
• Flexibility with easily
transferable stock
Advantages, cont.
• Advantages for the
company:
– More potential for
growth and longevity
– Ability to raise money
by borrowing
– No need for special
managerial skills
Corporations have a self-interest in developing profitable products
and services. For example, consumer concern about global
warming has led many corporations to develop eco-friendly
technology.
Disadvantages
• Checkpoint: What are the disadvantages of
incorporation?
– Difficulty and expense of start-up
• Corporate charters can be difficult, expensive, and time
consuming to create.
– Double taxation
• Corporations must pay corporate income taxes as well
as taxes on the dividends paid to stockholders
– Loss of control
• Owners do not manage the activities of a corporation
– More regulation
Corporate Combinations
• Corporations can grow larger by merging with
another corporation.
• There are three types of mergers:
– Horizontal mergers are the combination of two or
more firms competing in the same market with the
same good or service, such as the merger between
Cingular and AT&T in 2004.
– Vertical mergers join two or more firms involved in
different stages of producing the same good or
service.
– Conglomerates occur when three or more businesses
that produce unrelated products or services merge.
Horizontal and Vertical Mergers
Multinational Corporations
• Multinational corporations are the world’s
largest corporations and they sell their
goods and services in more than one
country.
– Advantages
• Benefit consumers by producing jobs and products
around the world.
• Help poorer countries enjoy better living standards
• Spread new technology across the globe
Disadvantages of MNCs
• Disadvantages
– Unduly influence culture and politics in
countries in which they operate.
– Jobs in poorer countries are often marked by
low wages and poor working conditions.
Review
• Now that you have learned about the risks
and benefits of corporations, go back and
answer the Chapter Essential Question.
– Why do some businesses succeed and others
fail?
Chapter 8: Business
Organizations
Section 4
Objectives
1. Identify the different types of
cooperative organizations.
2. Understand the purpose of nonprofit
organizations, including professional and
business organizations.
Key Terms
• cooperative: a business organization owned
and operated by a group of individuals for
their shared benefit
• consumer cooperative: a retail outlet owned
and operated by consumers that sells
merchandise to members at reduced rates
• service cooperative: a type of cooperative
that provides a service rather than a good
• producer cooperative: an agricultural
marketing cooperative that helps members
sell their products
Key Terms, cont.
• nonprofit organization: an institution that functions
much like a business, but does not operate for the
purpose of making a profit
• professional organization: a nonprofit organization
that works to improve the image, working conditions,
and skill levels of people in particular occupations
• business association: a group organized to
promote the collective business interests of an area
or group of similar business interests
• trade association: nonprofit organizations that
promote the interests of particular industries
Introduction
• How are some businesses organized to
help others?
– Cooperatives are businesses created by a
group of individuals who share benefits.
– Nonprofit organizations are run like a
business but their goal is not to make a profit.
Instead these organizations seek to benefit
the public in some way.
Cooperatives
• A cooperative is a type of business
organization owned and operated by a
group of individuals for their shared
benefit.
– First instituted by Benjamin Franklin,
cooperatives are based on the following
principles:
• Voluntary and open membership
• Control of the organization by its members
• Sharing of contributions and benefits by members
Cooperatives, cont.
• Cooperatives do not
have to pay income
taxes because they
are not corporations.
• Cooperatives are
found in many
industries including
farming and health
care.
Consumer Cooperatives
• There are three kinds of cooperatives.
– Consumer cooperatives are retail outlets
owned and operated by consumers.
• They sell merchandise to members at reduced
prices.
• Examples of consumer cooperatives include
discount price clubs and housing co-ops.
• Some co-ops require members to work a small
number of hours to maintain membership.
Service and Producer Cooperatives
• Service cooperatives are co-ops that provide a
service.
– Some service co-ops offer discounted insurance,
health care, or legal help.
– Credit unions are an example of a service
co-op.
• Producer cooperatives are agricultural marketing
co-ops that help members sell their products.
– Members focus their attention on their crops or
livestock while the co-op markets the goods for the
highest possible price.
Nonprofits
• Nonprofit organizations function like a business
but do not operate for the purpose of generating
profit.
– Examples of nonprofits include museums, public
schools, the American Red Cross, hospitals,
churches, and many other groups and charities.
– Nonprofits, like co-ops, are exempt from paying
income taxes, but the nonprofit must meet certain
requirements to qualify for tax-exempt status.
– Nonprofits have limits on their political activity.
Professional Organizations
• Some nonprofits provide support to
particular occupations or geographical
areas.
– Professional organizations work to improve
the image, working conditions, and skill levels
of people in particular occupations such as
the National Education Association for
educators.
– Keep members up-to-date on industry trends.
– Set codes of conduct that members must
follow.
Business Associations
• Promote the collective
business interests of a
city, state, or other
geographical area.
– The Better Business
Bureau (BBB), which
aims to protect
consumers by promoting
an ethical and fair
marketplace is an
example of a business
association.
Trade Associations
• Trade associations promote the interests
of particular industries.
• Many trade associations hire lobbyists to
work with state legislatures and Congress
to try to influence laws that affect an
industry.
Review
• Now that you have learned how some
businesses are organized to help others,
go back and answer the Chapter Essential
Question.
– Why do some businesses succeed and others
fail?