Section Focus:
1. What are the different types of
business organizations?
2. Describe the characteristics of
sole proprietorships,
and corporations.
partnerships,
3. Analyze the advantages and disadvantages of
business organizations.
4. What is the difference between
stocks [owner] and bonds [lender]?
5. What are the advantages and
disadvantages of franchises?
6. What makes McDonald’s the greatest franchise ever?
[not the greatest hamburgers, just the greatest franchise]
Business Organizations
22 Million businesses
Sole Proprietorships
72%-over 16 million
Partnerships
8% - 1.5 million
Let’s start
a dance
company.
Corporations
20% - 4 million
Total Business Sales
Sole Proprietorships
5% $434 billion
[Ave. $60,000]
Partnerships
11%
$500 billion
[Ave. $250,000]
Corporations [Ave. $3 M]
84%
$8 trillion
45 made over $20 bil.
143 Made over $10 bil.
Only 20 nations have GDPs
greater than Wal-Marts $379 bil.
THE BUSINESS POPULATION
Business Shares of Domestic Output
Percentage of Firms Percentage of Sales
Corporations
20%
Partnerships
8%
Sole
Proprietorships
72%
Farmer
Corporations
84%
Partnerships 11%
Sole Proprietorship 5%
Business Failures
Over 500,000 small businesses are launched each year.
One third of these start-ups fail within two years.
1. Sole proprietorships – one individual
in business for himself.
They make up 72% of all businesses and
take in 5% of total profits.
They are the simplest to form because of
the small amount of capital needed to start up.
Examples are beauticians, dentists, lawyers,
dry-cleaning and lawn care and lemonade stands.
Distribution of Sole Proprietorships
Based on Annual Sales and Industry
2. Advantages of a Sole Proprietorship
A. Easy to quit the business if the
owner decides to do so. There are
no co-owners to consult.
B. Owners receive the entire profit.
C. Easy to form–no complicated legal documents or
complicated tax forms, small amount of capital needed.
Personal satisfaction (psychological-being your
own boss) prestige and a sense of accomplishment.
D. Total control – can make decisions
quickly, can hire and fire easily, can
respond quickly to trends.
3. Disadvantages of Sole proprietorships
A. Unlimited liability (debt) - have to forfeit
their personal possessions as well as their
businesses. (auto, other business, house, savings)
B. Burden of sole responsibility – must
have business sense.
C. Limited potential for growth – collateral (any
thing of value to guarantee a loan [like giving up
your personal possessions) [Let’s say you put
your home up for collateral but have to give it up]
I want medical benefits!
D. Difficult to attract qualified employees–can’t
offer fringe benefits. [Let’s say you ask for more benefits]
E. Short life span – depends on owner’s health
and competence. If the owner dies, it is over.
4 Partnership - business
operated by 2 or more people.
They are the least common with only
8% and take in only 11% of profits.
Two Forms of Partnerships
5
1. General – equal decision making & unlimited liability
among partners.
6 2. Limited – some non-active
partners join as an
investment (and thus have limited liability-just the
investment, not the property). He is a “silent” partner.
Let’s say your silent partner puts up $30,000 to insure the loan.
I gave $30,000 as a silent partner, so
I don’t have to do anything.
Advantages of Partnerships
[“Two heads are better than one.”]
Two Heads
7
better than
One Head
Specialization – specific duties assigned to
different partners.
A. Sharing of losses. Can borrow more and can sustain
heavier losses.
B. Easy to form. Small amount of money to start & operate.
C. Shared decision making – more informed decisions.
D. Personal satisfaction – sense of accomplishment.
Distribution of Partnerships
Based on Annual Sales & Industry
8. Disadvantages of Partnerships
A. Disagreements among partners –
conflicts delay decisions, lower employee
morale, & lessen efficiency. Each partner
is responsible for the acts of all other
partners. Must choose good partners.
B. Have to share the profits.
C. Unlimited liability – can lose their
business and personal possessions.
D. Limited life – sickness, conflicts,
or death can end the partnership.
Take That!
Demonstration of “Unlimited Liability”
Harold Nodoe, Gloria Poor and Jack Rich owned the
Trio Dress Shoppe as a partnership. Under the terms of
Their partnership agreement, Nodoe and Poor were
entitled each to 40% of the profits, while the remaining
20% went to Rich. Last month the firm collapsed. After
selling off everything it owned, the company still owed
its creditors $10,000. Since Nodoe and Poor had no
assets of their own, the creditors recovered the total
amount owed to them from Jack Rich’s personal bank
account.
Harold Nodoe
Gloria Poor
Jack Rich
Largest Corporate Profits - 2007
1. Wal-Mart
$379 B
2. Exxon Mobil
359
3. Chevron
204
4. Conoco
187
5. General Motors 173
6. GE
173
7. Ford
172
8. Citigroup
146
9. Bank of America 116
10. AIG
110
11. HP
104
12. J.P. Morgan
100
13. Berkshire-Hath 99
14. Verizon
93
15. HP
92
16. IBM
99
17. Valero
91
18. Home Depot
90
19. McKesson
88
20. Citigroup
82
Largest Employers
1. Wal-Mart 1.35 M “associates”
[1.6 million ‘associates” worldwide]
2.
3.
4.
5.
6.
7.
Sears Holding
General Motors
McD’s
UPS
IBM
GE
400,000
386,000
364,000
359,000
316,000
313,000
Wal-Mart has 4,179 total stores
in the U.S.; 1,868 Wal-Mart stores,
1,586 Wal-Mart Super Centers, &
725 Sam’s Clubs in the U.S.
The GDPs for the Virgin Islands
is $1.8 billion; for Djibouti, it
is $582 million; and for
Afghanistan, it is $21 billion.
Wal-Mart example
• Wal-Mart’s IPO was in 1972. 300,000 shares
were sold at $16.50 per share.
• The stock has split 11 times (2 for 1 splits) since
then – last split was in 1999.
• If you purchased 100 shares of Wal-Mart on the
day of the IPO you would have spent $1,650.
• Today you would have 204,000 shares of stock.
• Today current value of your shares would be
$11,044,560 (stock closed at $54.14 yesterday).
• Each quarter you would be receiving a check for
$136,680 (at current dividend of .67). Annual
income for dividends alone would be $546,720!
9
Corporations – a business organization
recognized as a separate legal entity (existence).
10 Stockholders – are the owners of a corporation who invest
by buying shares.
Stock – the certificate of ownership.
9 Corporations make up about 20% of business organizations
but produce over 90% of total sales.
Corporations can operate like a sole proprietor. Inc. means
the business is a corporation. [Treated by the courts as an
“artificial person”. They can sue, be sued, enter into contracts,
and pay taxes.
Two Types of Corporations
11 Publicly owned – anyone can invest by buying shares,
so unlimited # of owners. Includes most corporations.
12 Closed – is owned by a limited number of stockholders.
Ford Motor Company was family owned (closed) until 1956.
They went public in 1956 & issued 10,200,000 shares of stock.
13 Wal-Mart leads all other corporations in sales at $371 billion.
Corporate Trivia
• A corporation can be sued but the people who own the
corporation (stockholders) can not be sued.
• A corporation has potentially perpetual life.
• 1.) Nearly all large companies are corporations.
• 2.) Nearly all corporations are small companies.
• 3.) Therefore, a small minority of corporations constitute
nearly all the large companies.
• In other words, of 4 million corporations, about 2,000 are
large companies, and these 2,000 large corporations
constitute the vast majority of the nation’s large companies.
• Also, the 15% of corporations that do more than $1 million
in sales take in in 85% of the receipts of corporations.
Where The Jobs Are And Were
2007
1980
1.
2.
3.
4.
5.
6.
Wal-Mart
1,350,000
McDonald’s 418,000
Sears Holding 400,000
UPS
355,000
Ford
327,500
GM
325,000
GM
Ford
GE
IT&T
853,000
495,000
405,000
368,000
[International Telephone & Telegraph]
IBM
337,000
Then there are new jobs in new technologies that
didn’t exist in 1980. Cisco has 34,000; Microsoft
has 55,000; Oracle has 40,000; & Dell has 46,000
Surviving as a business is no small feat.
1/3 of the firms in the Fortune 500 list in 1970 no longer exist.
If a company had only 200 shares
and you bought a share, you would
own 1/200th of the company.
14 Stockholders (owners) and bondholders (lenders)
For companies, stocks and bonds are 2 ways to raise
money. For consumers, they are a way to earn money.
15 Common stock – (owners are voters) gives a voice in how
the corporation is run and a share in variable dividends –
high dividends if profits are high. The Board of Directors
may wish to withhold all dividends if the money is needed
for plant expansion or payment on debts. Because they can
vote, they determine how a corporation is managed. They
get one vote for every share they own.
In a good year, they will receive a higher dividend than
preferred stockholders. (Preferred stock dividends are
fixed, common stock is not, so they are taking more risk.
Preferred Stock – (non-voters) guaranteed dividends that are
paid from profits before the company pays any dividends
on common stock.
If the company is unable to pay this fixed dividend in full,
it makes up the difference when the company’s profits
increase. They are like a silent partner because they can
not vote and have no say in how the business is run.
16 Corporate Bonds – a certificate issued by a corporation in
exchange for money borrowed from investors. There is a
written promise to repay the amount borrowed at a later
date (an I.O.U.) lending money for 10, 20, or 30 years.
Bondholders are creditors, not owners.
17 Advantages of Corporations from a Stockholders Viewpoint
A 1. Limited liability – limited to the amount invested. His
personal assets may not be seized to pay corporate debts.
B 2. May earn a profit without working.
18 Advantages From the Corporation’s Viewpoint
A 1. Separation of ownership from management – can hire
the best management available. Specialized talent can be
hired in all areas.
B 2. Easy to raise capital – can issue stocks or sell bonds
allowing the corporation to tap the savings of thousands.
C 3. Longevity – they have a life independent of their owners.
Disadvantages of a Corporation
Disadvantages from the stockholders point of view.
1. When stockholders earn a profit, they feel no great sense
of pride.
19 Disadvantages from the corporation’s point of view.
A 1. Slow in decision making – must go thru chain of command.
B
C
2. Many government restrictions – must follow regulations of the
SEC, comply with laws on merging and maintain many records.
3. Heavy organizing expenses – pay for its charter and then
depending on the state, expenses can run from a few
hundred to thousands of dollars.
D 4. Double taxation – when a company distributes profits
(dividends) to its stockholders, they have to pay personal
income tax on dividends in excess of $100. Corporations
earnings are subject to taxation.
The income tax on corporations is 15% on the first $50,000;
25% from $50,001- $75,000; 34% from $75,001-$100,000;
39% from $100,001-$335,000; 35% from 335,001-$10 mil.
38% from 10M-18.3million; & a flat 35% over$18.3 million.
Bull and Bear Markets
Then there is the kangaroo market.
10-19-87
508 points
24% drop
in one day
On this day, Sam Walton,
the richest man in the world,
had a paper loss of $1.5 billion.
Date
Decline
% Decline
10/19/87
508 points
24%
10/28/29
38 points
13%
10/29/29
31 points
12%
11/26/29
26 points
10%
12/18/1899
6 points
8%
8/12/32
6 points
8%
3/14/07
7 points
8%
10/26/87
156 points
8%
7/21/33
8 points
8%
10/18/37
11 points
8%
2/01/17
7 points
7%
10/27/97
554 points
7%
[$700 billion lost in one day]
4/14/2000
661 points
6%
3/2000-2/2003 $7.7 trillion was lost
[Market value was worth $17 trillion]
Advantages/Disadvantages of Sole Proprietorships
Advantages
Disadvantages
Freedom
Unlimited Liability
Ease of Formation
Lack of Continuity
Low Start-up Costs
Difficulty
Raising Money
Single Taxation
Reliance On
One Person
Advantages/Disadvantages of General Partnership
Advantages
Disadvantages
Larger Talent Pool
Unlimited Liability
Larger Money Pool
Lack of Continuity
Ownership
Ease of Formation
Transfer Difficult
Single Taxation
Possibility of
Conflict
Advantages/Disadvantages of Corporations
Advantages
Limited Liability
Disadvantages
Stockholder Revolts
Continuity
Greater likelihood of
professional Management
Easier Access to Money
High Start-up cost
High Cost of
Regulation
Double Taxation
3 Types of Corporate Combinations
20 1. What are the three ways corporate merger combinations can
take place? (A merger is when one company absorbs another)
2. What is the current trend in corporate combinations?
A
Horizontal Combinations – (a grouping of “competitors”)
a merger between corporations that make the same product.
This would be a merger of two or more banks, or railroads,
or airline companies, etc. Firms may merge to catch up with
or eliminate their rivals. Chevron-Texaco bought Unical Oil.
Royal Caribbean Cruises acquired Celebrity Cruise Line and
doubled in size, & became the 2nd largest cruise line behind Carnival.
Staples tried to acquire Office Depot but the government
blocked it on the grounds
Morgan-Chase-Bank One58 B
Compaq-HP
23 B
Chevron-Texaco
43 B
Sprint-Nextel
35 B
Chrysler
that it would reduce competition.
Cingular-AT&T Wireless
41 B
GTE-Bell Atlantic
71 B
Daimler-Chrysler-Benz
41 B
Bank of Am.-FleetBoston Finan. 47 B
American Motors
Chrysler
Standard Oil Trust: John D. Rockefeller had become rich during the Civil War
supplying grain and meat, but he realized the potential the discovery of oil would
bring about.
• In 1863, he built a refinery in Ohio which brought in quick profits
• In 1870, he and some associates formed the Standard Oil Company of Ohio.
• Because Rockefeller had no need for storage and insurance fees, he negotiated
with the railroad for refunds which allowed him to reduce the cost of oil,
underselling his competitors
• When Rockefeller had enough capital, he intended to “buy out” his competitors
refineries (horizontal consolidation), but most state laws prevented one company
from buying stock in another
• Rockefeller’s lawyer, Samuel Dodd, found a loophole
• In 1882, the owners of
Standard Oil and the “allied”
companies would combine
their operations.
• Companies would turn over
their assets to 9 trustees and
in turn would get a share of
the profits
• This new type of monopoly
would be called a trust
comprising 40 companies
B Vertical Combinations –
merger of companies that
are involved in different phases of production of the same
product. [Purchasing one of your “suppliers”]
Examples
1.
2.
3.
4.
5.
Automaker buys a tire factory
Bridgestone Tire buying a rubber plantation
Campbell Soup buying mushroom farms
Funeral Home bought a cemetery and a floral shop
Ford bought a steel mill to produce steel needed for autos
Resources
[ore, coal, & iron]
Shell Oil Co. owns
Transportation
[shipping & RR co’s]
Steel Mills
USX (Steel)
1. Oil fields
2. Refineries, and
3. Retail gasoline
stations
Carnegie Steel: At the age of 30, Andrew Carnegie
wisely decided to invest his wealth into steel
shortly after the Bessemer Steel process came to
light.
• In the 1870’s, he set up the first American steel
mills in Pittsburg, PA.
• By 1889, the Carnegie Steel Company was
established.
• He soon had enough money to buy the
companies that performed each phase of
production (mines, pig iron furnaces, shipping
companies, rail lines…) This is known as vertical
consolidation
• This allowed Carnegie Steel to keep low
production costs and therefore low prices for
consumers.
• This was because of the phenomenon known as
economies of scale
• As production increases, costs are lowered
• Small companies could not compete because
they did not own all phases of production.
C Conglomerate (Unrelated) Combination –merger
between four or more companies producing unrelated products.
None is responsible for the majority of sales.
These mergers may include a number of subsidiaries – acquired
companies that have not been required to abandon their corporate identity.
American Brands, Inc.
Tobacco Products
Distilled Spirits
About $3 trillion in mergers
each year worldwide & about
$1.6 trillion in the U.S.
Diversification is a good
reason for conglomerate
mergers. You are not
“putting all of your eggs
in one basket.” Your overall sales and profits will be
protected.
R.J. Reynolds- one of biggest
1.
2.
3.
4.
Sea-land (containerized shipping)
KFC (2nd largest fast-food chain)
Del Monte (fruit processor)
Heublein (distilled spirits)
Pfizer makes Viagra & Lipitor.
1.
2.
3.
4.
5.
Chewing gum (Trident,Dentyne)
Razors (Schick)
Cough drops (Halls)
Breath mints (Clorets, Certs)
Antacids (Rolaids)
The “trends in mergers” in the 90s was toward vertical and
horizontal combinations.
The biggest cause of merger failures was mismatched corporations,
therefore, conglomerate mergers were the ones most likely to fail.
Advantages of Corporate Mergers
1. Efficiency – eliminates overlapping jobs, can share resources
and marketing skills. Mergers may lead to lower consumer
prices making them better able to compete in world markets.
2. Less expensive, compared to having to build new plants and
hire new employees.
3. Stockholders in the acquired corporations normally benefit
by having stock go up in value by about 30%.
4. Increased size means they can borrow more money.
1. Managers of merged corporations may not have
the necessary supervisory skills.
2. Added unemployment when some positions are
eliminated. 12,500 were laid off in Fleet BostonBank of America merger saving $650M.
When Cingular bought AT&T Wireless, 10,000
were laid off.
3. Purchasing corporation’s stock normally declines.
4. Higher prices and fewer choices for consumers.
5. Acquiring corporation normally goes into debt.
What Town is This?
22 Franchise gives an individual an agreement to market a
company’s product in return for a percentage (royalty)
of the profits. Semi-independent business.
The company is the franchiser and the individual is the franchisee.
The 1st franchise operation was started by Singer Company in 1851
to sell sewing machines. In the last 40 years, franchising has really
taken off, led by Ray Kroc of McDonald’s.
Today we have franchising for everything from hemorrhoid clinics
[“You bend, we mend”] to auto clinics. A typical large city in the
U.S. will have its share of Burger Kings, Foto-Mat, KFCs, Goodyear,
Taco Bell, Pizza Hut, Dunkin Donuts, and others.
There are 3,000 franchises in 670 industries, with 600,000 outlets.
The franchiser will train your personnel, take care of marketing
and accounting. The franchisee receives a tried-and-tested business
method.
23 Advantages of Franchises
A
B
C
1. Benefits of a well known trade name, systemized
management, and national advertisement.
2. Less than 5% fail each year (65% of all independently
owned businesses fail within the first 5 years).
3. Chance to own your own business with minimum risk.
24 Disadvantages of Franchises
A
B
1. May be too many restrictions imposed so independence
is sacrificed.
2. Takes a lot of money for start-up
3. May lose your investment if the company goes bankrupt.
Some franchises such as pizza, video rentals, frozen yogurt,
instant printing, & tanning parlors will not make it
because they are either too competitive or too unhealthy.
Tanning beds are very dangerous. There are two major types
of ultraviolet radiation-UV-A [think of A=Aging]. They have a
longer wavelength & penetrate more deeply into the dermis
and damage collagen & elastin giving you the dry, leathery,
wrinkly look. UV-B [think of B = Burning] are a shorter
wavelength & cause sunburn. Both cause melanoma, damage
the DNA of the skin surface and cause skin cancer.
25 Cooperatives – voluntary association of people formed
to carry on some kind of economic activity benefiting members.
Different Types of Cooperatives:
1. Producer Coop – group of farmers who join to get better
prices for their goods. They eliminate the middle-man charges.
2. Housing Coop – formed by members to buy the building
they live in.
3. Purchasing Coop – retail store owned and operated by
its customers.
4. Credit Union – members pool their savings so they can
borrow from it at lower rates (the most common form of coop)
5. Service Coop – provides service to its members
(electrical or telephone)
6. Baby-Sitting Coop – families swap baby-sitting duties
without ever exchanging money.
26 Nonprofit Organizations – provides products without
making a profit. Churches are the most common.
(Boy Scouts, Y.M.C.A., Salvation Army, & Goodwill)