Ch. 8: Business Organizations
Business Brainstorm
• Think of your business, would you want to
own it by yourself, or with others?
– What are the pros/cons of each option?
– If shared ownership, in what structure?
Section 1: Sole Proprietorships
• Small, family-owned businesses have long served as
the foundation to America’s economy.
Business Organization
• A business organization is any establishment formed
to carry on commercial activity.
Liability vs. Rewards
• Liability is the legal obligation to pay bills and
take responsibility for something.
• Rewards are the benefits/profits received
from businesses.
– We will categorize businesses according to who is
liable/rewarded for them.
Sole Proprietorship
• A sole proprietorship is a business owned and
managed by a single individual.
Sole Proprietorship
• Owners of sole proprietorships hold all of the liability
& benefits of the business.
– A majority of the businesses in America (75%)
– Account for a minority of the total sales (6%)
Start-Up
• Sole proprietorships are relatively easy to start.
• Most require minimal legal requirements.
Legal Requirements
• Business License: Authorization from local
government
• Site Permit: certificate of occupancy for a
building (if not based at home)
• Name: businesses must register their name
• Zoning Laws: Cities and towns designate
separate areas for different uses.
Advantages and Disadvantages
• Sole responsibility:
• Requires a high degree of initiative and energy
– Receive all rewards (profits)
– Responsible for all liability (potential loss)
Section 2: Partnerships
• A partnership is any business organization owned by
two or more people who divide ownership
(responsibility, and profit/liability)
General Partnership
• Partners in general partnership share equally in both
responsibility and liability.
Limited Partnership
• Only one partner is required to have unlimited
personal liability.
• One or more partners may be limited.
– They do not actively manage the business.
– Can only lose the amount of money the invested.
Limited Liability Partnership (LLP)
• Recognized by many states, all partners have limited
liability in the event of extreme mistakes or problems.
– Attorneys, physicians, dentists, accountants
Advantages of Partnership
•
•
•
•
Relative ease of start-up
Shared decision making and responsibility
Specialization: each partner may have different strengths
Larger pools of capital/assets
Disadvantages of Partnerships
• Unlimited liability
– Unless an LLP, at least one partner has unlimited liability
• Potential for conflict
– Minority owner can get run over
Section 3: Corporations, Mergers, and
Multinationals
• Increasingly, American business is controlled
by large, multinational corporations.
Corporations
• A corporation is a legal entity owned by individual
stockholders who face limited liability for the firm’s
debt.
Stock
• Corporations are owned by anyone with stock in the
company.
• Stock is a certificate of ownership in a company.
Private Corporations (closely held)
• Some corporations are incorporated, but only issue stock to
select people.
• Stock is rarely traded and is often held within families.
Publicly Trade Corporations
• Publicly held corporations are traded on the open
market (Ex: New York Stock Exchange).
• Anyone can buy shares in a publically traded
company.
Advantages of Incorporation
•
•
•
•
Limited liability
Easily transferable ownership
Ability to attract large amounts of capital
Long life
Disadvantages of Incorporation
•
•
•
•
Expense and difficulty of start-up
Double taxation
Potential loss of control by founders
More requirements and regulations
Horizontal Mergers
• Horizontal mergers are when two companies
competing in the same market merge together.
• Chrysler + Daimler-Benz = DaimlerChrysler
Vertical Merger
• Vertical mergers combine two or more firms
involved in different stages of producing the
same good.
• Owning the natural resource mining,
transportation, and manufacturing of the a
product.
Conglomerates
• Conglomerates merge more than three businesses
that make unrelated products.
– Kraft Foods
– Time Warner
– Coca-Cola
Multinational Conglomerates
• Multinational conglomerates operate and sell all of
the world.
– Coca Cola CEO: "We are not an American company. We are
an international company that happens to be based in
Atlanta, Georgia."
Section 4: Other Organizations
• Franchises, nonprofit organizations, and
cooperatives are other forms of business
structures.
Business Franchise
• A franchise is a semi-independent business that pays
fees to a parent company in exchange for using their
brand.
Advantages to Franchises
•
•
•
•
•
Management training and support
Standardized quality
National advertising/brand recognition
Financial assistance
Centralized buying power
Disadvantages of Franchises
•
•
•
•
•
Franchising fees and royalties
Strict operating standards
Purchasing restrictions
Limited product line
Summary: Limited freedom
Cooperative Organizations
• A cooperative is a business owned and operated by a
group of individuals for shared benefit.
• Example: Farm cooperative
Nonprofit Organizations
• Nonprofits operate like businesses, but do not operate to
generate a profit.
• Education, hospitals, social work agencies, Churches, YMCAs,
museums, etc.
Professional and Business
Organizations
• Professional organizations are resources for a given
occupation
– National Education Association, American Medical
Association
• Business Associations are resources for local
businesses
– Better Business Bureau