A business is an economic institution that seeks profit by allocating resources to satisfy customers.
How an establishment is formed to carry out its goal of commercial enterprise is its business organization.
In Chapter 8 we will be looking at the various forms of business organizations.
A business owned and managed by a single individual.
The owner gets to keep the profits but is also responsible for all debt incurred.
In the US 75% of all businesses fall into this category but these businesses only generate 6% of all US sales.
Advantages of this type of business organization
1. Ease of Start-Up :
a. Authorizations in the form of a business license issued by local government will be required but is easy to obtain.
Certain businesses, such as a restaurant or day care may require additional licenses. (See regulations)
b. If not operating out of a home a business will need a site permit to use another location of operation.
c. A business must have a legal registered name.
2. Relatively Few Regulations:
A business using this type of organization will be under the fewest regulations in the US.
The business will have to follow codes for specific industries and various authorizations.
Zoning laws may need to be followed meaning the business will have to operate in a designated area of a town or city.
3. All profit goes to the owner .
4. The owner will have full control .
5. If the business is failing it is easy to discontinue provided all debts and obligations are paid or a settlement has been worked out . (See liability)
1. Unlimited Personal Liability:
A business owner is legally bound to pay all debts even if the business fails.
Example: You buy a tractor to dig holes for swimming pools and your business fails.
Even thought you have closed your doors you still owe money on that tractor and you are legally bound to pay for.
2. Limited Access to Resources:
A sole proprietor in most cases has limited capital and funds.
Expenses may be hard to cover.
Another situation might be that business will do very well but the owner can not meet the demand and has to turn down work.
Many demands can exhaust a sole proprietor financially and physically.
3. If the owner dies or is incapacitated the business in most cases will not survive leading to a lack of permanence.
4. Employee issues can be a constant problem because the business can not offer the security and fringe benefits to employees other forms of organizations can offer.
Business Organizations Continued: Partnerships
Partnerships : A business organization owned by two or more persons who agree on a specific division of responsibilities and profits.
This type of organization is very common amongst lawyers, doctors, and accountants.
Often an employee will work for such a firm with the goal of becoming a full partner.
Types of Partnerships
General Partnership : Partners share equally in both responsibility and liability.
Limited Partnership : Only one partner is required to be the general partner. That partner is fully responsible and liable, while the other partner only contributes money and is an investor.
Limited Liability Partnerships (LLP): All partners are limited partners.
Advantages of this type of business organization
1. Ease of start up, little regulation, and inexpensive.
You will need to develop articles of partnership, or a legal partnership agreement, that spells out each partner’s rights and responsibilities.
If you do not create articles of partnership you will fall under the Uniform Partnership Act (UPA) that will legally establish common ownership interests, profit and loss sharing, and management responsibilities.
This is a generic state mandated article of partnership.
2. Shared decision making and being able to take advantage of a partner’s specialization or expertise.
3. The ability to pool assets and capital.
4. Partnerships are not subject to any special taxes, individuals will pay taxes based on income.
Unlimited liability. Based on the articles of partnership of the UPA a partner could lose everything and be responsible for debt and liability.
Limited partners can lose their investment.
A potential for conflict among partners exits.
Business Organizations Continued: Corporations and Mergers
Corporations : The most complex form of business organization.
Businesses often rely on investment to expand operations.
This investment comes in the form of stocks. Stocks are a certificate of ownership in a corporation an individual purchases in order to become a part-owner of that company.
If a company issues 1000 shares of stock and a person buys one share they own 1/1000th of that company.
Corporations account for 20% of all businesses in the US, but sell 90% of all products sold and 70% of the net income of the US.
Two Types of Corporations
Closely or Privately Held Corporations : Little stock is available has been issued and often it has been sold to family members or close associates.
Publicly Held Corporations : Stock has been sold on the open market such as the New York Stock Exchange, and the corporation has many investors.
The Board of Directors
Stockholders elect a Board of Directors that appoint officers who will be concerned with the day to day operation of the corporation.
Advantages of Incorporation
a. Limited liability for owners/stockholders.
b. Easily transferable ownership.
c. Ability to attract capital and raise money.
d. The corporation in most cases will have long life and will continue indefinitely.
Bonds : Besides issuing stocks a corporation can also sell bonds.
Bonds are formal contracts to repay borrowed money from investors with interest at fixed intervals.
Disadvantages of Incorporation
a. They are difficult and expensive to start.
You will need legal aid and will need to go through application processes.
You will also need to file for a state license known as a certificate of incorporation that creates a corporate charter.
This will include the following information:
1. The corporate name
2. A statement of purpose.
3. The length of time the business will run, usually this will be listed as “for perpetuity.”
4. The founders’ names and info.
5. HQ address
6. Method of fund-raising. (stocks or stocks and bonds)
7. The rules for the corps management.
b. Double Taxation:
The Corp will pay taxes on profit.
The stockholders will receive dividends, or the portion of corporate profit they are entitled to, and they will be taxed of those dividends.
c. Loss of control can occur.
A board of directors, managers, and/or officers can act in a way that is not in an owners/stockholders best interest.
They could be acting in a way to protect their jobs, stealing, or avoiding difficult decisions for example.
d. Corporations face more regulation and must file reports to the federal Securities and Exchange Commission (SEC).
As a corporation continues to grow managers and owners may decide it makes sense to merge or combine the firm with another company or companies.
This can lead to larger more efficient firms and more monopoly power.
Mergers will often fall under the scrutiny of the federal government because of the potential of monopoly and unfair practices.
Types of Mergers
Horizontal Mergers : The combination of two or more firms competing in the same market with the same good or service.
These mergers tend to boost revenues and reduce costs.
Example: Chrysler and Daimler-Benz merging to form DaimlerChrysler in 1998.
Vertical Mergers : The combination of two or more firms involved in different stages of producing the same good or service.
This allows a firm to control all phases of production.
Example: A soup company merging with the company that provided them with cans and merging with the trucking company that shipped the soup.
Conglomerates: The combination of more than three businesses that make unrelated products.
Usually no one business earns the majority of the firm’s profits.
Example: An auto maker merges with a shoe company and a rubber duck producer.
Multinational Corporations (MNC)
A large corporation that produces and sells its goods and services throughout the world.
They will obey the law and pay taxes in each country they operate in.
Advantages: They provide jobs and help spread new technologies and production methods worldwide.
Disadvantages: They can have great influence over the culture and politics in a country and the jobs they provide are often low wage with poor working conditions.
Other Types of Organizations…The Franchise
Business Franchises : A semi-independent business that pays fees to a parent company in return for the exclusive right to sell a certain product or service in a given area.
It allows owners some degree of control and the owner benefits from the support of the parent company.
Example: McDonalds, Sonic, and KFC
1. Management training and support.
2. Standardized quality.
3. National advertising support.
4. Financial assistance.
5. Centralized buying power passed on from the parent company.
1. High start up costs and franchise fees combined with giving up a share of profits and earnings in the form or royalties to the parent company.
2. Strict operating standards must be followed such as operating hours and dress codes.
3. Purchasing restrictions on supplies and suppliers.
4. Limited product line and no room for deviation.
A business organization owned and operated by a group of individuals for their mutual benefit.
1. Consumer Cooperative : Retail outlet owned and operated by consumers.
Membership is often required and pooled resources allow members to receive discount prices on goods.
2. Service Cooperative : Provides a service instead of good at a discount.
3. Producer Cooperative : Agricultural marketing cooperative that helps members sell products at the highest prices possible so they can focus on production.
Institution or organization that operates like a business but does not operate for the purpose of generating profits.
Almost all provide a service and not a good and engage in activities that benefit society.
Example: Red Cross, Salvation Army, Churches, and the YMCA.
A nonprofit organization that works to improve the image, working conditions, and skill levels of people in a particular occupation.
They also provide up-to-date information and training.
Example: The American Bar Association for lawyers provides information on new laws and helps law firms to identify and follow proper codes of conduct.
A nonprofit organization that promotes collective business interests for a city, state, or other geographical area.
Example: A local chamber of commerce works to bring businesses to a city.
A nonprofit organization that promotes the interests of a particular industry
Example: Automotive Dealers Association
A nonprofit organization that promotes the interests and fringe benefits of workers in a particular industry.
Example: United Auto Workers or UAW
Labor Market Trends
It is to the benefit of individuals, the government, and businesses to track labor trends such as hot upcoming new jobs, employment, and unemployment.
The Labor Force
All nonmilitary people who are both employed and unemployed.
Economists only consider an individual employed if they meet the following requirements:
1. They are 16 or older.
2. They worked at least one hour for pay in the last week or they worked 15 hours or more without pay in a family business or on a family farm.
A person can still be considered employed if they hold a job but have not worked due to illness, vacation, bad weather, or a labor dispute.
If a person does not meet the criteria of being employed they will be considered unemployed.
They must also be actively seeking employment.
Outside of the Labor Force
Individuals who are underage, students, full time parents, or retired are not considered in employment and unemployment figures and statistics.
Discouraged workers are people who can work or did work that are not looking for a job and are also not considered in figures and statistics.
There have been many positive and negative changes in the US job market and labor force.
The US has changed from agrarian to industrial in its history and a shift in the labor force occurred.
The US has also shifted from blue collar jobs and industry to white collar.
The US now provides fewer goods and more services as a result of the shift to white collar jobs.
As a result of international competition the US position in the world has changed and fewer industrial jobs exist because of cheaper foreign labor and costs.
The US population has a higher degree of education and more college graduates than ever before.
As a result you must consider the following:
1. The learning effect: The theory that education increases productivity and results in higher wages.
2. The screening effect: The theory that completion of college indicates to employers that a job applicant is intelligent and hard working.
More women are in the work force.
It appears that workers will have to stay in the work force longer due to changes in the US.
Contingent employment: A temporary or part-time job.
A current trend in the US is the replacement of full time workers with contingent employees.
Pros: Flexible work arrangements can benefit firms and employees. (example they can hire seasonal workers or workers as needed)
Discharging employees is easier for firms. The costs are lower for the firms and they do not have to provide fringe benefits.
Cons: Workers are paid less, they get no fringe benefits, and a lack of job security for workers.
It has been found that temp workers would prefer full time employment.
In the past US wages have increased but over the last 20 or so years some wages are decreasing.
Some of the change has come from lower pay and more fringe benefits but benefits have been taken away from many workers recently due to high costs.
Global competition and immigration issues have also impacted wages in the US.
Labor and Wages
Labor and wages fall under supply and demand.
The more demand for a certain service the more it pays and so on.
Skill Level Impact
The higher the skill level of a worker in most cases the higher the wage.
Most people are put into one of four job categories based on skill levels by economists.
Job requires no special skills and little to no training or education.
The worker usually receives an hourly wage.
Example: Dishwasher, janitor, farm worker, or cafeteria worker…
or Mr. Hinsley.
Minimal skills and education will be needed to perform the job.
In many cases a process or equipment are being used and the worker earns an hourly wage.
Example: Wait staff, short order cooks, or word processor/typist/secretary.
Special abilities, training, and education are needed in order to do the job.
The job is more complicated and in most cases the workers are expected to work with little direct supervision for and hourly wage.
Example: Mechanic, plumber, chef, or firefighter.
Advanced skills, education, and training are needed.
Often the jobs are white collar and are salary.
Example: Teacher, doctor, banker, lawyer, and any other professional.
This occurs when a person doing the same job with the same skills, experience, education, performance and/or training as another person are paid less for the job.
Women: Traditionally women have been paid less for labor.
Minorities: Traditionally minorities have been paid less for labor.
Laws now exist to combat these issues, but barriers still exist.
These illegal, “invisible” barriers are often referred to as the “glass ceiling.”
Other Factors That Impact Wages in the US
Minimum Wage Laws: In 1938 Congress passed the Fair Labor Standards Act that created a minimum wage that can be legally paid to workers in the United States.
It also required overtime pay for more than 40 hours of work in a week and theoretically is a level that allows a person to support themselves.
Safety Laws: Wages are impacted by laws that make the work place safer.
Safety laws often decrease wages as the workplace becomes safer and the more dangerous the job the higher the “hazard” pay will be.
Tech changes, employer reactions, and foreign labor impact wages in the United States.
When machines can replace workers or aid them wages for that job will go down.
Firms are building factories in other countries because they can pay lower wages and cut costs.
Labor unions are organizations of workers that try to improve working conditions, wages, and benefits for its members.
They historically have had many positives and negatives and do impact wages.
Pros and Cons of Unions
1. They have made jobs safer.
2. They have increased wages and benefits.
3. They have saved jobs.
4. They have depressed wages on non members.
5. They have pressed employers to raise wages too much.
6. When unions have pushed wages up, the quantity of labor demanded has gone down. (Job loss)
7. Featherbedding, of the practice of negotiating to keep unnecessary workers on payrolls, harms businesses and firms.
8. Unions and firms have battled often.
9. High union pay has caused firms to go outside the country.
10. Union job security has caused workers to become less productive.
Currently unions are losing more power because women are not likely to join unions, tech and other factors have decrease the amount of jobs and workers in traditional unionized industries, union jobs are going overseas, and the US population has more education than ever and people are not going into blue collar jobs.
Many argue the need for unions is past because of the laws that are now on the books.
Strikes and work stoppages.
Collective bargaining, or the process in which the union and company representatives meet to negotiate new labor contracts.
Mediation may be used and a neutral third party will be brought in to try to find a solution to a labor issue that both sides will accept.
Arbitration might become necessary where a third party imposes a legally binding decision on both sides.