Introduction to Business
Business Administration (BA) 101
School of Business Administration
THE FIRST WEEK
ORGANIZATIONAL FORM
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PRINCIPAL TOPICS
1. Distinguish between an Organization’s Form and its Structure. An organization chooses a
form for the purpose of dealing with its external environment (customers, suppliers,
creditors, government agencies, etc.). An organization’s structure is the manner in which
an organization internally arranges its functions.
2. A firm can be any organizational form. Corporation and company are synonymous terms.
It will be assumed, unless otherwise specified, that a partnership is a general partnership
(a partnership’s form is determined by how third parties perceive the relationship between
its partners). A sole proprietorship should be identified by both the proprietor’s name and
the proprietorship’s assumed business name, if any.
3. In addition to identifying the characteristics of the three primary organizational forms1, be
able to explain an organization’s strategic rationale for selecting a particular form.
A. Liability from contractual obligations and torts2. A sole proprietor is personally
liable for all claims. A general partner may be jointly and severally liable for all
claims made against the partnership and committed by the other partners. A
corporation’s shareholders (stockholders) are not liable in contract or tort subject to
the Business Judgment Rule3. A shareholder’s liability is limited (“limited liability”)
to the extent of their investment (their stock’s purchase price).
B. Taxation. A sole proprietorship is an individual doing business in his or her own
name who will be the taxpayer. All partnerships are “pass-through” entities, i.e.,
1
Special Purpose Entities (SPEs) are created by state legislatures to accomplish some purpose. The form of each will
differ from state to state. Examples of SPEs include (1) Professional Corporations (PCs allow licensed professionals,
e.g., physicians, architects or engineers, to enjoy benefit of contractual immunity but not avoid malpractice liability),
(2) Limited Liability Corporations (LLCs are hybrids with characteristics of a partnership’s tax-treatment and a
corporation’s limited liability and (3) Subchapter-S Corporations (Sub-S corporations are general-purpose corporations
that elect “pass-through” tax treatment subject to restrictions that (a) limit the number of shareholders (100), (b)
require all shareholders to be individuals, no partnerships, corporations or non-resident aliens can be shareholders, (c)
no shareholder can have a “negative basis,” and (d) shareholders cannot provide services without triggering
employment-based liabilities; in other words, a shareholder must be either an investor or an employee, but cannot be
both at the same time.
2
A tort is a civil harm than injures someone in some way. Violating a statute or contract is not a tort. Torts occur from
negligent actions which may have been intentional.
3
A case-law derived legal principle holding that a corporation’s directors, managers, employees and other agents will
not be liable for their actions if they performed their duties (1) in good faith, (2) with the care of an ordinarily prudent
person in a like position under similar circumstances and (3) in a manner reasonably believed to have been in the
corporation’s best interests.
First Week Study Guide
Page 2
the partnership is not a tax-paying entity; rather, its profits pass-through to and
are reported on the partners’ personal tax returns. A corporation pays federal, state
(and sometime local) taxes on its net income. Cash dividends paid to and capital
gains earned by shareholders are also taxed. These two levels of tax liability are
referred to as “double-taxation.”
C. Control. A sole proprietor controls every aspect of his or her business. Major
partnership decisions, e.g., entry or exit of partners, distribution of losses or profits
or acquisition or disposition of assets, usually require unanimous consent.
Corporations are managed by a Board of Directors elected by its shareholders.
Directors may manage the corporation or delegate operational authority to hired
management. Bylaws will dictate which decisions can be made by a company’s
managers, directors or shareholders.
TEXTBOOK MATERIAL
Chapter 1
 Distinguish between for-profit and non-profit corporations (Section 1.3).
 Two essential resources: human (ideas) and capital (financial) (Sections 2.2 and 2.3).
 Managerial approach: decision-making that minimizes risk (predictable events);
Entrepreneurial approach: decision-making under uncertainty (unpredictable events)
(Section 2.4).
 Differentiate between stakeholders and shareholders (stockholders). Know that not all
stakeholders are shareholders but all shareholders are stakeholders (Section 3).
 Only two types of decisions: Strategic (what do we do?) and Tactical (how do we do what
we’ve decided to do?) (Section 5.3).
Chapter 5
 Know essential characteristics of three principal organizational forms (Sections 1, 2 and 3).
 Be aware of limitations of Special-Purpose Entities, e.g., Subchapter-S Corporations (Sub-S)
and Limited Liability Corporations (LLC) (Sections 2.4 and 2.5).
 Be able to explain purpose for Articles of Incorporation (Charter) vis-à-vis a corporation’s
Bylaws (Section 3.1). Note: In most western states, corporations register by filing Articles
of Incorporation whereas a Charter is filed in most eastern states; these documents are
virtually identical except in name.
 Know how corporate investors obtain a return on (and return of) their investment (Section
3.2).
 Franchises are not an organizational form; they are one manner of business association
(Section 5.3).
TERMS AND CONCEPTS
Creditor/Debtor
Revenue/Operating Expenses/Profit
Limited Liability
Liability (Joint and Several)
Bylaws
Board of Directors
Non-profit
Capital Gain
Agency Problem
Common Stock
Double Taxation
Non-profit
Business Judgment Rule
Perpetual Life
Articles of Incorporation (Charter)
Dividend (Cash and Stock)
Stock/Stockholders and Stakeholders
Revised December 28, 2010