Chapter 8 - Business
Organizations
“Anyone who tells you money can’t buy you
happiness, doesn’t have any.”
Movie Recommendations:
• Glengarry Glenn Ross
• The Boiler Room
• Other People’s Money
• Wall Street
The Boiler Room
A wonderfully educational and enlightening film on how to legally steal people’s
retirement funds.
Wall Street
For those of you that want to learn
the “Pump and Dump” investment
strategy. Also called market
manipulation, and highly illegal.
“I love money. I love money more
than the things it can buy. There's
only one thing I love more than
money. You know what that is?
OTHER PEOPLE'S MONEY. “
3 Major Types of Business
• Sole Proprietorships
• Partnerships
• Corporations
Sole Proprietorship
Business owned and operated by a single individual.
*They make up only about 4% of sales, but earn about
10% of all profits.
What are a few examples?
What are some of the advantages of running your own
business?
Advantages:
• You get to keep any, and ALL profits!
Remember: “Greed is good.”
• The business does not have to pay a separate income tax.
Because it is not recognized as a separate legal entity.
• It is easy to get out of. Just pay off any outstanding debt, and stop
selling goods or services. Not so true if you join the mafia.
Oh yeah…… YOU CAN DO WHATEVER YOU WANT!!! YOU’RE
THE BOSS!!!!!!!!!
Unfortunately, there is a catch. You have what is called
“Unlimited Liability.” If anything happens, it’s your fault.
You bear all the responsibilities of losses and debts.
Also, due the size of smaller businesses, it may be difficult
to carry a minimum inventory. Sometimes this can be
expensive and difficult to maintain.
Partnerships
A business that is jointly owned by 2 or more persons.
General Partnership: This is the most common. In this case, all
partners are responsible for operations, management, and finances of
the business.
Limited Partnership: At least one partner is not active in the daily
running and responsibilities of the partnership. May not be obligated
to the debts either.
Advantages:
• Also easy to start. A handshake is all you need. (However, legal contracts
might be a good idea.)
• Ease of management
• Lack of separate taxes (just like in a proprietorship).
• Can usually attract financial capital easier than a proprietorship. Usually
larger and have an easier time getting approved for a bank loan. This can
help with quicker expansion.
• More efficient operations. Law firms, for example, might have a few
partners working together to offer services.
Disadvantages:
•
•
If one partner causes the firm to suffer huge losses, the other partners are
responsible.
In a limited partnership, the “limited partner” is only responsible for the
debts that total the size of their initial investment. If more money is lost
than that, the “general partners” are liable for the rest.
How much do you trust your business
with someone else?
Corporations
A form of business organization recognized by law as a
separate legal entity, with all the rights of an individual.
Do you think businesses should have the rights of
individuals? Or should only people have individual rights?
Once the corporation is given permission by the government, a
charter is issued stating that company’s name, purpose,
address, and any other features of its business.
The charter also specifies the number of shares of stock, or
ownership certificates in the firm. These shares are then sold
to investors in order to raise funding to help the corporation.
This makes the investors “owners” in the company.
If the company is profitable, dividends can be issued.
Dividends are corporate earning sent back to the shareholders
in the form of cash.
One of the fastest and easiest ways to raise funding the quickest is to
issue stock. There are two types of stock that can be issued; common
stock, and preferred stock.
Common Stock: receives a vote for each share of stock owned. These
shareholders can elect members of the board of directors, who determine
company policies, and hire management.
Preferred Stock: nonvoting shareholders. These shareholders do not get a
say in company leadership or policy. However, they receive dividends
first, and will receive their investment back first if the company goes out
of business.
Which one would you prefer to own? Which one does Warren Buffet
prefer to own?
Bonds
A written promise to pay borrowed money back at a later
date, with interest.
The principal of a bond is the initial amount borrowed by the
company, government, school district, etc.
The interest is what the borrower will pay back, on top of the
principal amount. The higher the interest, the more valuable
the bond.
*Churchill’s ROTC building was payed for with a bond*
What do all of these have
in common?
Franchise
A temporary business investment that involves renting or leasing
another business firm’s successful business model.
The franchisor is the actual owner of the business name, model, and
concept, etc.
The franchisee is the investor who rents or leases the business name
and model.
This is a very common/simple way to “own” your own business.
Why are fast-food restaurants so commonly franchised? Why
not other types of businesses?
What is the “heart” of a business?
How do you know if a business is “healthy?”
What tells you if a business is a good
investment?
The Income Statement is a great place to start if you want to
find those answers.
An income statement includes a business’s sales, expenses, net
income, and cash-flows for period of time.
Every publicly-traded company must submit a report of this to
the SEC every year. If you are looking to invest, this is a great
place to check on the ‘financial health” of a business.
*But this may not tell the whole story of the business as an
investment option*
Tracking the flow of
money through a business
is the key to understanding
it’s health. Once you
understand it’s debts, and
expenses, you can tally its
Net Income (income after
taxes and expenses).
However, some assets within a business lose value over time (they
depreciate). Capital goods, such as machinery, vehicles, and
electronics, wear down and becomes less effective. This must be
recorded as these items still hold value, and is included even in the sale
of a company.
Once this is taken into consideration, you can now calculate a
company’s cash flow, or true profits. The more cash that is freed up in
a business, the more that cash can be re-invested in that business to
allow for growth.
*This is one major key to understanding whether a business is a good
investment option.*
5/3rds Bank’s assets
Even banks have Income Statements, and
cash flows. It is common to hear banks
advertise to customers and investors, that
they are “conservative.”
Why is this comforting?
How can you tell if a bank is really
“conservative” in it’s business?
Hint: look at the ratio of securities held vs.
loans. Then, what kind of loans are being
issued.
Mergers
Companies can also grow by joining up with others into one legal entity.
There are two types of mergers; horizontal, and vertical.
Horizontal: firms that produce the same good or service join together.
Ex: JP Morgan joining Chase Manhattan to for JP Morgan Chase.
Vertical: firms that perform different stages of the business (manufacturing,
advertising, marketing, sales, research and development, etc.) join together.
Ex: In 2000, America Online combined with media conglomerate Time Warner.
The merger is considered a vertical one because Time Warner supplied content
to consumers through properties like CNN and Time Magazine, while AOL
distributed such information via its internet service.
When companies grow so big through mergers and
acquisitions, that they have about four or more businesses in
different industries, they are considered a conglomerate.
When a company operates it’s businesses in multiple countries,
then it is considered to be multinational.
What are some conglomerates that you can think of?
Entrepreneurs have a difficult time competing against these major
corporations and conglomerates. However, they do have some unique
places they can go for support.
Many entrepreneurs learn business basics through “incubators,” or
places where someone can go to learn accounting, engineering, and
management skills. Universities have often filled this role, and even
entered agreements with companies to foster this type of an
environment.
Why would a company want to enter an agreement with a university?
3 major sources of funding for start-ups
Venture Capitalists: A financial provider willing to risk investment into
an unknown, possibly in exchange for future ownership.
Angel Investor: they like to support start-ups of close family or friends
who would not receive help otherwise. “Angel” investors usually have a
greater interest in seeing the business become successful.
Crowdfunding: using social networking to appeal to potential investors.
What examples of crowdfunding have you seen”
Nonprofit Organizations
An organization that works in a business like way to promote the
collective interests of its members, rather than seek financial gains for
its owners.
Don’t let the name fool you……… We will look at some very well
known “non-profits” later.
A common type of nonprofit organization is a cooperative, or co-op. These are
voluntary organizations that are formed to carry on some sort of economic activity
that will benefit its members. The three main categories are:
Consumer cooperatives: usually buys goods in bulk at a discount to sell at lower
prices.
Service cooperatives: provides services such as insurance, or childcare to its
members, rather than the sale of goods. Credit Unions are a financial service that
accepts deposits and makes loans to its members.
Producer cooperatives: mostly made of producers, such as farmers, who promote or
sell their products directly to markets or consumers. The Ocean Spray cranberry coop markets theirs directly to consumers.
Labor Unions
Are cooperatives that organize and represent their member’s interests in
employment matters. Labor unions use collective bargaining to negotiate with
management on issues such as, pay, benefits, safety standards, health-care, and
vacation time.
The largest labor union is the NEA, National Education Association. They represent
the interests of public school teachers, administrators, and even substitute teachers.
Another notable union is the AFL-CIO (American Federation of Labor-Congress of
Industrial Organization). It has about 12 million members, and is comprised of 57
other unions and organizations in various industries.
Open Shop vs. Closed Shop States
Businesses also organize to promote their collective interests. Most
communities have a local chamber of commerce, which promotes
education programs and lobbies favorable legislation that benefits its
member businesses.
Some business organizations benefit the consumers. The Better
Business Bureau is a nonprofit organization sponsored by local
businesses, that provides information on companies, and maintains
records of consumer inquiries and complaints.
“If a company has a union, they deserve it.”
How have Labor Unions benefited us in the past?
How can they be problematic?