Chapter Seven
Business Organization

The Three Types of Business
Organization
 Sole Proprietorship
 Partnerships
 Corporations

Sole Proprietorship
 If you alone own and control the service.

Opportunity Benefits of Sole
Proprietorships
 Owner has direct control
 Small initial investment
 Owner receives all profits
 Owner can dissolve business when necessary.

Opportunity Costs of Sole
Proprietorships
 All losses are borne by owner
 Difficulty in raising financial capital
 Limited growth potential
 Only one person in authority
 Lack of longevity
 Unlimited liability

Partnerships
 A business owned and controlled by two or more people.

REMEMBER!
 Partnerships don ’ t have to be just two people.
 JC Penney: The man with a thousand partners.

Two forms of partnerships
 General Partnerships:
Equal decision making.
 Limited Partnerships:
Partners join as investors, offering capital, but little, if any, role in decision making.
 VENTURE
CAPITALISTS

Advantages of Partnerships
 Two or more individuals own the business.
 Specialization
 Losses are shared by partners.
 More money is available to invest in business
 Sharing management responsibilities
 Taxes are shared by partners

Disadvantages of
Partnerships
 Division of authority
 Unlimited liability.
 Difficulty in raising additional capital.
 Lack of longevity.
 Legal complications when there is a change in ownership.

Advantages of Corporations
Limited liability.
Easy to raise needed capital.
Business owned by a group of individuals.
Responsibilities for running the business divided among many individuals
Easy change in ownership and business continues as long as it makes profits. – LONGEVITY.

Disadvantages of
Corporations
 Corporate charters are $$$
 Federal and state govts. monitor corporations more.
 ***Slow process of decision making.

Corporations
 Legally distinct from their owners and treated as if individuals.
 Corporations can

Own property
 Hire workers

Make contracts

Pay taxes

Sue and be sued

Make and sell products.

What kind of companies are organized as corporations?
 USUALLY – food, steel, oil companies are corporations.
 Insurance companies, supermarket chains, major companies.

Forming a corporation
 When expansion calls for more than adding more partners.
 GET A LAWYER!

Forming a corporation:
 Lawyer applies for a state license:
ARTICLES OF
INCORPORATION.
 Reviewed by state officials. If all in order they grant
 CORPORATE
CHARTERS

Corporate Structure
 The corporate charter identifies the officers.
 Chairman of the board – symbolic head of the corporation.
 CEO – Chief
Executive Officer – the REAL power.

Corporate Structure
 Board of Directors – people from inside or outside the company.
 Key decision making body.

Decide on product lines.

Hires / fires corporate officers to do the day-today running of the corporation.

Sees that boards policies are carried out.

Corporate Finances
 Most common way to raise money is selling STOCK.
 STOCK – represents ownership of the firm.
 Ownership is issued in portions called
SHARES.

Corporate finances
 If you buy 100 shares of stock in a company, you own
100 pieces of that company. If that company has a total of 10,000 shares available – you own
1% of the company.

Why own stock?
 DIVIDENDS – profits on your investment.
 PREFERRED
STOCK – guarantees dividends.
 COMMON STOCK – potential for dividends.

Why own stock?
 SOMETIMES can make more money for you.
 The “ fun ” of being involved with a corporation or a product.

Benefits for stockholders
 Flexibility of ownership.
 Limited liability.
 Can ’ t be sued for corporate problems.


If the corporation folds, you only lose what you invested.
Private assets can ’ t be seized.

The trade-off
 Common stock ownership allows a
“ voice ” on how the company is run.
 Preferred stock does not.

IMPORTANT ADVICE TO FUTURE
CORPORATE HEADS!!!
 ALWAYS hold or directly control 51% of your company ’ s stock.
 OR have a lack of control at annual shareholder meetings.
 You can lose your job!

Other disadvantages!
 If you own stock, corporate profits are taxed twice.
 You pay taxes as being a member of the corporation.
 You pay taxes on the profits / dividends you take.

The corporation raises money
 If there are thousands of shareholders, there is enormous amounts of money through the sale of stock.
 eBay has 6,643,058 shares available.

Other ways corporations raise
$$.
 Corporate bonds.
 You loan your money to the company.
 You DO NOT own the company.
 Repaid the principal and the interest.


Principal – the actual money borrowed.
Interest – the price you gave to that principal.

Example of Corporate Bonds
 You hold a 1 year
$1,000 bond.
 At the end of the year you are paid back the $1,000 principal AND the
5% ($50) interest.

Corporate Combinations
 Most corporations seek to expand.
 Build new facilities
 Legally combines with another enterprise.

MERGERS!

Three types of Mergers
(corporate combinations)
 Horizontal
 Vertical
 Conglomerate

Horizontal Combination
 Buying up companies involved in the same industry.
 THINK STANDARD
OIL – John D.
Rockefeller.

Horizontal combinations
 All the companies merging do the same thing.
 Standard Oil: all the companies
Rockefeller bought, processed oil into gas.

Vertical Combination
 A merger between two or more companies involved in different production phases of the same good or service.
 THINK US STEEL /
Andrew Carnegie.

Conglomerate Combinations.
 Merger of companies producing unrelated products.
 Subsidiaries.
 Started in the
1960s.

B H
Acme Brick Company
Ben Bridge Jeweler
Johns Manville
Jordan's Furniture
Benjamin Moore & Co.
Justin Brands
Berkshire Hathaway Group Larson-Juhl
Berkshire Hathaway
Homestates Companies
McLane Company
Borsheim's Fine Jewelry
MidAmerican Energy
Holdings Company
Buffalo NEWS, Buffalo NY MiTek Inc.

Clayton Homes
CORT Business Services
Nebraska Furniture Mart
NetJets®
The Pampered Chef®
CTB Inc.
Fechheimer Brothers Company Precision Steel Warehouse, Inc.
FlightSafety
Fruit of the Loom®
Garan Incorporated
RC Willey Home Furnishings
Scott Fetzer Companies
See's Candies

GEICO Direct Auto
Insurance
General Re
Shaw Industries
Helzberg Diamonds
Star Furniture
United States Liability
Insurance Group
H.H. Brown Shoe Group
Wesco Financial
Corporation
International Dairy Queen,
Inc.
XTRA Corporation

Opportunity Benefits of
Combinations
 Efficiency – centralized decision making.
 Potential lower costs.
 Easier to acquire financial capital.

Opportunity Costs of
Combinations
 Can lead to unemployment
(don ’ t need to double the jobs)
 Reduced competition in the market place.
 MONOPOLIES.

Franchises
 One company agrees – for a fee – to let another person or group set up a
FRANCHISE.
 Have to uphold the reputation of the parent company.
 Get training and advertising.

Cooperatives
 Co-ops – businesses owned by their members.
 Membership gives privileges.

Cooperatives

Nonprofit Organizations
 Does not focus on financial gain and profits.
 Business organization but pursues other goals.
 Income isn ’ t taxed.

D