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Forms of business organizations chapter 3week1


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Business Organizations

Business Organizations

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    Section One: Forms of Business Organization
  • 2. I. Forming a Proprietorship
    Easiest form of business to start-needs only the occasional licenses and fees
    Ease of start up
    Relative ease of management
    Decisions can be made quickly
  • 3. Proprietorship Advantages
    Owner enjoys the PROFITS of successful management without having to share
    No separate business income taxes
    Not recognized as a separate legal entity
    Owner must pay individual income taxes on profits
    Business is exempt from any tax on the income
    Psychological satisfaction
    Easy to get out of business
  • 4. Proprietary Disadvantages
    Unlimited liability
    Owner is personally and fully responsible for all loses and debts of the business
    If business fails, the owner’s personal possessions may be taken away to satisfy business debts
    Difficult to raise capital
    Personal financial resources are limited
    Size and efficiency: Inventory is any unused stock of finished goods/parts in reserve
  • 5. Proprietary Disadvantages
    Limited Managerial Skills
    Difficulty of attracting qualified employees
    Fringe benefits- Employee benefits such as vacation, sick leave, retirement, medical, and health insurance may not be available
    Limited lifespan: The firm legally ceases to exist when the owner dies, quits, or sells the business
  • 6. II. Partnerships
    Owned by 2 or more persons
    Least numerous business organization
    Smallest proportion of sales and net income
  • 7. Types of Partnerships
    General Partnership: All partners are responsible for the management and financial obligations of the business.
    Limited Partnership: At least one partner is not active in the daily running of the business, although he or she may have contributed funds to finance the operation
  • 8. Forming a Partnership
    Relatively easy to start
    Articles of Partnership: Formal legal papers which specify arrangements between partners
  • 9. Advantages of Partnerships
    Ease of start up.
    Articles of Partnership involves attorney fees and filing fee for the state.
    Ease of management: Each partner usually brings different areas of expertise to the business.
    Lack of special taxes: Partners draw profits from the firm and then pay individual income taxes at the end of the year
  • 10. Advantages of Partnerships
    Usually attract financial capital more easily than a sole proprietorship
    Slightly larger size = greater efficiency
    Lawyers, doctors, accountants
    Usually attract top talent to their organizations
  • 11. Disadvantages of Partnerships
    Unlimited Liability: Each partner is fully responsible for the acts of all partners
    Limited Partnership: The limited partner has limited liability
    Investor’s responsibility for the debts of the business is limited by the size of their investment in the firm
    If business fails with a large debt, the limited partner (investor) only loses their original investment, leaving the general partners to make up the rest
  • 12. Disadvantages of Partnerships
    Limited Life: When a partner leaves or dies, the partnership must be dissolved and reorganized.
    The new partner may try to keep an agreement to keep its name
    Potential for Conflict: “Why can’t we all just get along?”
  • 13. III. Corporations
    Defn: A form of business organization recognized by law a a separate legal entity having all as an individual.
    Can buy & sell property
    Enter into legal contracts and sue and besued
    Account for 1/5 of the firms in the US
    Account for 90% of all sales
  • 14. Forming a Corporation
    Very formal and legal arrangement
    Incorporation (or forming a corporation) must file for permission from the state where business will have be headquartered
    Charter: A government document that gives permission to create a corporation if approved
    States the company name, address, purpose of business, and the number of shares of stock, or ownership certificates, within the firm
  • 15. Forming a Corporation, continued
    Shares of stock are sold to investors called…
    stockholders, or shareholders.
    $$ is then used to set-up corporation (remember “Tucker” DVD)
    A check, or dividend, is paid to shareholders if the corporation is profitable
  • 16. Corporate Structure: Common Stock
    Investors become owners with certain ownership rights, depending on type of stock purchased:
    Common Stock: Basic ownership of corporation
    Owner usually receives 1 vote for each share of stock
    Used to elect board of directors who direct the corporation’s business by setting policies/goals
    The Board hires a professional management team to run the business on a daily basis
  • 17. Common Stock
    The dividend is variable and common stock shareholders are the last to receive a dividend or get their $$ back if corporation fails.
  • 18. Preferred Stock
    Nonvoting ownership shares of a corporation
    These shareholders receive dividends first and they are fixed
    If there are funds or property left after a business fails, preferred stockholders get their investment back first!
    Preferred stockholders cannot elect the board of directors-THEY CANNOT VOTE!!
  • 19. Advantages of the Corporation
    Ease of raising financial capital
    Need more capital?
    Sell additional stock
    Borrow $$ by issuing bonds: Written promise to repay the amount borrowed at a later date
    Principal: Amount borrowed to be repaid later
    Interest: The price paid by the corporation for the use of another’s $$
  • 20. Advantages of the Corporation
    Ease of finding professional managers
    Limited liability for its owners
    Corporation is fully responsible for its debts and obligations
    **Because limited liability is so attractive, many firms incorporate just to take advantage of it
  • 21. Advantages of the Corporation
    Unlimited life: Corporation continues to exist even when ownership changes
    Because the corporation is a legal entity, the name of the company remains the same, and the corporation continues to do business
    Ease of transferring ownership: If a shareholder no longer wants to be an owner, they can sell the stock
  • 22. Disadvantages of the Corporation
    Difficult to get a charter
    Depending on the state, attorneys’ fees and filing expense can cost several thousand $$
    Owners/shareholders have little say in business affairs after voting for board of directors
    Double Taxation: Corporate profits
    Stockholders’ dividends are taxed twice: once as corporate profit and again as personal income
  • 23. Disadvantages of the Corporation
    Lots of Government regulation:
    Register with state where the Corp. is chartered
    To sell stock to the public, the Corp. must register with the Securities and Exchange Commission
    Provide detailed financial statements on regular basis to the general public
    When taking over another business, the Corp may require federal approval
  • 24. Government and Business Regulation
    Business Regulation: In the 20th century, various consumer groups demanded regulation of giant corporations.
    Federal and state governments responded by passing stronger regulations.
    Rigorous regulations for banks, insurance companies, electricity, telephone, and transportation
    Ex?, Sherman and Clayton Anti-trust Acts, FDIC, Federal Reserve, FCC, Dept. of Transportation
  • 25. Government and Business Regulation
    Business Development: States try to attract new industry. Offer tax credit or a reduction in taxes for a business to move to a state
    Examples in TX?