Chapter 3. Business Organizations

Transcription

1 Chapter 3 Business Organizations

2 Section 1 Forms of Structure Sole Proprietorships Partnerships Corporations

3 Business Firm Distribution Percentage of Businesses (Number of Firms) 72% Proprietorships 19% Corporations 9%....Partnerships

4 Percentage of Sales Proprietorships.4% Corporations... 83% Partnerships....13%

5 Net Income (Profits) 10% Proprietorships 70% Corporations & LLCs 20%....Partnerships

6 Sole Proprietorship A business owned and run by one person. They are the smallest form of a business.

7 Advantages 1. Easy to start 2. Flexibility of Management 3. Profits stay with owner 4. Simpler & Lower Taxes 5. Pride of Ownership 6. Easy Exit

8 Disadvantages 1. Unlimited liability 2. Difficult to raise money 3. Size & Efficiency Inventory inefficiencies 4. Limited Skills 5. Attracting Qualified Employees 6. Limited Life

9 Unlimited Liability This means that the owner is personally and fully responsible for all losses and debts of the business.

10 Partnerships A business jointly owned by two or more persons. General All partners share responsibilities and rewards. Limited One or more partners do not actively participate or run the business.

11 Forming a Partnership Because more than one owner is involved, formal legal papers called articles of partnership are usually drawn up to specify arrangements between the partners. A legally binding document that specifies the sharing of responsibilities & profits.

12 Advantages 1. Easy to start 2. Ease of Management 3. No special or extra Taxes 4. Not as difficult to raise funds 5. Larger in size thus normally More Efficient 6. Easier to attract top talent

13 Disadvantages Unlimited liability between partners If one partner causes the firm to suffer a huge loss, each partner is fully and personally responsible for the loss. Limited Life If one partner dies or leaves the partnership the partnership is dissolved and a new one must be created. Conflicts & Disagreements Many times one partner cannot work with the other.

14 Corporation It is a legal entity separate from its owners. Corporations can do almost anything an individual can do.

15 Forming a Corporation Articles of Incorporation is a written application to the state requesting permission to form a corporation. Charter is the legal authorization to organize a business as a corporation issued by the state.

16 Stock & Shareholders Common Stock is the basic unit of ownership of a corporation. Shareholders (owners of common stock) own a piece of the company. If the company sells 1000 shares of stock and you own 10 shares you own 1% of the company.

17 Financing a Business Common Stock represents the basic unit of ownership that gives the holder partial ownership of the bricks and mortar of the corporation. Preferred Stock a type of stock a company issues to raise money. It pays a fixed dividend and gives the owner NO ownership in the company. Bonds a written promise to repay a loan with principle and interest. Normally sold in $ 1,000 to $ 10,000 increments.

18 Dividends A payment from after tax earnings made to shareholders of preferred and/or common stock. Note! Not all companies pay dividends on common shares. Dividends are double taxed. Taxed at the corporate level and then taxed again at the personal level.

19 Corporate Structure The Owners of the Corporation (Stockholders) vote for the Board of Directors. The Board of Directors hire and give instructions to the officers (CEO, CFO, COO, etc.) of the Corporation on how they want the business run. The Officers hire the staff and manage the day to day operations of the company.

20 Advantages 1. Easy to raise money Stocks, Bonds, Loans, etc 2. Specialized management 3. Limited liability to Owners 4. Unlimited life 5. Easy to transfer Ownership

21 Disadvantages Difficult and somewhat expensive to start Less direct control of operations Double taxation Limited activities & Government Regulations

22 Government & Business Regulation Business Regulation In the twentieth century government at all levels have passed stronger legislation on businesses. Limiting rates that can be charged Requiring licenses to operate Consumer protection laws Business Development Government also tries to attract businesses in order to create jobs. Tax credits Selling bonds to finance infrastructure

23 Section 2 Growth & Expansion Growth through Reinvestment Reinvestment is taking the company s profits (net income) and using that money for growth and expansion. Growing through Mergers Acquisition of another company also known as a merger allows the company to grow faster than it can grow by reinvestment.

24 Estimating Cash Flows Net Income Net Income are the funds leftover from revenues after the company deducts expenses and taxes. Depreciation is the non-cash charge taken for the wear and tear on its capital goods. Cash Flow is the combination of net Income and Depreciation. Reinvesting Companies takes this money and improves their facilities and operations by re-investing this money in themselves. However, they sometimes use these funds to buy other companies who do the same thing they do or a supplier. This is considered mergers and acquisitions.

25 Types of Mergers Horizontal Mergers between companies that produce the same types of goods or services. Vertical Mergers between companies involved in different steps of manufacturing or marketing process. Note! Mergers are a way for businesses to grow faster, become more efficient, or eliminate competition.

26 Other Business Classifications Conglomerate is a firm made up of many unrelated divisions or subsidiaries. To qualify as a conglomerate the firm must own four or more different companies, non of which contribute a majority of its sales. Diversification is one of the main reasons to form conglomerates. Multinational Business is a firm that sells and produces products in multiple countries. They are important because they can move resources, financial capital, and goods and services across national boundaries.

27 Section 3 Other Business Classifications Nonprofit Organizations operate in a businesslike manner to promote the collective interests of its members rather than seek financial gain.

28 Cooperatives Consumer A voluntary association of consumers that work together to buy goods in bulk to benefit the association thus reducing prices. Service Service cooperatives usually provides services like insurance, credit, etc. One good example is a Credit Union Producer A producer cooperative helps members sell or market items produced by its members. Farmer coops or manufacturer coops etc. are some examples.

29 Labor, Professional and Business Organizations Labor Unions an organization of workers formed to represent its members interests in employment matters. Professional Associations a group formed to improve working conditions, skill levels, and public perception of the profession. AMA, ABA etc.

30 Business Associations Trade associations and other business special interest groups work to promote the collective interests of those businesses. Chamber of Commerce promote community, economic growth, education and other community interests. Better Business Bureaus provide general information on companies in the community and keep records on consumer inquiries and complaints.

31 Government s Role Direct Role is when government competes with private industry. The United States Postal Service, FDIC and the TVA are examples of government competing with private business.

32 Government s Role (continued) Indirect Role when government intervenes to insure a market economy works smoothly and efficiently. Examples include the regulation of public utilities and the enforcement of anti-trust laws to keep competition in place.