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Business organizations

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  • 1. Forms of Business Organization Chapters 18 & 19
  • 2. Legal Forms of BusinessSole Proprietorships Partnerships Corporations General Partnership Regular Corporation Subchapter S Limited Partnership Corporation (S-Corporation) Master Limited Partnership
  • 3. Sole ProprietorshipsBusiness owned (and usually operated)by one personSimplest form of business ownershipMost popular form of businessorganization – 72.2% of allMost common in:– Retailing– Service– Agriculture
  • 4. Sole Proprietorship -- AdvantagesEase of Startup – Little legal documentation – No co-owners to consultLeast expensive to startPride of OwnershipRetention of profitsFlexibilityNo Business Income Tax
  • 5. Sole Proprietorship -- DisadvantagesUnlimited LiabilityLimited Life – Business ends when ownerleaves the businessLimited Access to Start-up CapitalLimited Access to CreditLimited Management ExpertiseDifficulty in Hiring EmployeesProprietor not considered an employee
  • 6. PartnershipsTwo or more ownersLeast numerous form – 7.7% of allbusinessesPartnership Agreement– Specifies rights and obligations of partners– If written, called the Articles of Partnership (Articles of Co-partnership)
  • 7. Partnership -- AdvantagesGreater Access to CapitalGreater Access to CreditRetention of ProfitsMore Management ExpertiseNo Business Income Tax
  • 8. Partnership -- DisadvantagesShared ProfitsUnlimited Liability for “General Partners”Each partner has “Agency” powerLimited Life– Business ends when any partner withdrawsManagement DisagreementsFrozen Investment
  • 9. Types of PartnersGeneral Partner– Unlimited Liability– Assumes Management RoleLimited Partner– Liability limited to Investment– May not take active managerial roleEvery partnership must have at least onegeneral partner
  • 10. Types of PartnersGeneral Partnership– All partners are general partnersLimited Partnership– One or more limited partnersMaster Limited Partnership– Owned & managed like a corporation– Taxed like a partnership– Shares may be sold
  • 11. CorporationsGenerally larger than other forms (Except for S-Corporation)– 20.1% of all U.S. Businesses– Account for 87.1% of all U.S. Business IncomeConsidered a separate legal entity– Owners called “Stockholders” or Shareholders”Ownership evidenced by “Stock Certificate”Governed by “Board of Directors”
  • 12. Corporations -- AdvantagesLimited LiabilityEase of Ownership TransferUnlimited LifeGreater Access to CapitalSpecialized Management Expertise
  • 13. Corporations -- DisadvantagesMore difficult & costly to form– Requires a “Corporate Charter”Subject to greater governmental scrutinyDiluted earningsDouble taxation
  • 14. Corporations vs. Sole Proprietorships SP CorpIncome $1,000,000 $1,000,000Expenses 500,000 500,000EBT $500,000 $500,000 (Assume Business Tax Rate = 50%)Business Tax 0 250,000Net Profit $500,000 $250,000 (Assume a 30% Personal Tax Rate)Personal Tax 150,000 75,000$ to Owners $350,000 $175,000
  • 15. Corporate CharterLegal Permission to Operate as aCorporationIssued by stateMay not conduct business as acorporation without a charter
  • 16. Contents of a Corporate Charter Company Name & Address Names & addresses of Incorporators Purpose of the Corporation Maximum amount of stock & Classes of Stock to be issued Rights & Privileges of stockholders Length of time the corporation is to exist
  • 17. Stockholder RightsCommon Stock– Votes in corporate matters– One vote per share ownedPreferred Stock– No voting rights– Dividend claims are paid 1stDividend– Distribution of earnings to the stockholders of a corporation
  • 18. Organizational Chart Owners/ Stockholders/ Shareholders Chief Executive Officer (CEO) Board of Directors President Senior Vice PresidentVice President Vice President Vice President Vice President Finance Production Marketing Human Resources
  • 19. Types of CorporationsGovernment-Owned Corporation– aka “Public Corporation”– Owned & operated by government– Post office, NASA, FDICQuasi-Government Corporation– Aka “Quasi-Public Corporation”– Privately owned, government controlled monopoly– Public utilities, Fannie Mae, Freddie Mac, Sallie MaePrivate Corporation– Owned by individuals or other companies
  • 20. Types of CorporationsNot-For-Profit Corporation– Organized to provide a social, educational, religious, or other service– Habitat for Humanity, Red CrossFor-Profit CorporationClosed Corporation– Stock owned by relatively few people– Stock not sold to general publicOpen Corporation– Stock is bought and sold on security exchanges– Can be purchased by any individual
  • 21. Types of CorporationsS-Corporation (Subchapter-S Corporation)– Corporate structure designed for small business– Taxed as a partnership if there are 75 or fewer stockholders– No non-resident alien stockholders– Only one class of stockLimited-Liability Company (LLC)– Combines the benefits of a corporation & partnership– Not limited to 75 stockholders
  • 22. Mergers & AcquisitionsHostile takeoverTypes of mergers– Horizontal: Similar products / services– Vertical: Different but related firms– Conglomerate: Completely different industriesMerger Trends– Divestiture– Leveraged Buyout (LBO)
  • 23. FranchisingFranchise– License to operate an individually owned business as though it were part of a chain of outlets or stores– The business itselfFranchising– Actual granting of a franchise
  • 24. FranchisingFranchisor– Supplies a known & advertised business name– Supplies management skills– Supplies training & materials– Supplies method of doing businessFranchisee:– Supplies labor & capital– Operates the franchised business– Agrees to abide by the franchise agreement
  • 25. Franchising AdvantagesFranchisor– Fast, Selective Distribution– Motivated FranchiseeFranchisee– Opportunity to start a business– Business Experience of others– Nationally recognized name– National promotional campaigns
  • 26. Franchising DisadvantagesMainly from Franchisee’s Viewpoint:– Franchisor’s contract can dictate every aspect of the business– Pay for security– Long hours– Competition from same company