Chapter Eight
Business Organization
Copy This Down
Type of
Business
Sole
Proprietorship
Partnership
Corporation
Characteristics
Advantages
Disadvantages
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
 Easy
to open or Close
 Owner has direct control
 Small initial investment
 Freedom and control
 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/Limited life
Unlimited liability
Two Terms with Sole
Proprietorship
 Limited
life- a situation where a
business closes if the owner dies,
retires, or leaves for some other
reason.
 Unlimited liability- a business owner is
responsible for all the businesses
losses and debts.
Mary Kay Ash
 Direct
sales until a man she trained
got a promotion that was hers.
 Son Richard and nine beauty
consultants
 Started: $5000 (personal money)
 Sales in 1964: $198,000 1965:
$800,000
 2.5 billion in 2009, 35 markets world
wide
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.
Three 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
 Limited Liability Partnerships: All
partners are limited partners
Advantages of Partnerships



Easy to open/close
Few regulations
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

Unlimited Liability
 Division of authority
 Difficulty in raising
additional capital.
 Lack of longevity.
 Legal complications
when there is a
change in
ownership.
Corporations
 Business
owned by stockholders who
own the rights to the company’s profits
but face limited liability for the
company’s debts and losses.
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.
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.
 Loss of control
What kind of companies are
organized as corporations?
– food, steel, oil companies
are corporations.
 Insurance companies, supermarket
chains, major companies.
 USUALLY
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.
Corporation Key terms
 Public
company- issues stock that can be
publicly traded
 Private company- controls who can buy
or sell its stock
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.
















Acme Brick Company
International Dairy Queen, Inc.
Applied Underwriters
Iscar Metalworking Companies
Ben Bridge Jeweler
Johns Manville
Benjamin Moore & Co.
Jordan's Furniture
Berkshire Hathaway Group
Justin Brands
Berkshire
Hathaway Homestate Companies
Larson-Juhl
BoatU.S.
Marmon Holdings, Inc.
Borsheims Fine Jewelry
McLane Company

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


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



Buffalo NEWS, Buffalo NY
Medical Protective
Burlington Northern Santa Fe
Corp.
MidAmerican Energy Holdings
Company
Business Wire
MiTek Inc.
Central States Indemnity
Company
National Indemnity Company
Clayton Homes
Nebraska Furniture Mart
CORT Business Services
NetJets®
CTB Inc.
The Pampered Chef®














Fechheimer Brothers
Company
Precision Steel Warehouse,
Inc.
FlightSafety
RC Willey Home Furnishings
Forest River
Richline Group
Fruit of the Loom®
Scott Fetzer Companies
Garan Incorporated
See's Candies
Gateway Underwriters Agency
Shaw Industries
GEICO Auto Insurance
Star Furniture








General Re
TTI, Inc.
Helzberg Diamonds
United States Liability
Insurance Group
H.H. Brown Shoe Group
Wesco Financial
Corporation
HomeServices of
America, a subsidiary of
MidAmerican Energy
Holdings Company
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.
Three types of cooperatives
 Consumer-
they require some kind of
membership payment
 Sam’s
Club
 Service Credit
offer members a service
unions
 Producer-
owned/ operated by
producers
 Agricultural
products
Nonprofit Organizations

Does not focus on
financial gain and
profits.
 Business
organization but
pursues other goals.
 Income isn’t taxed.
That’s It!