Chapter 3


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Chapter 3

  1. 1. Chapter 3 Business Organizations
  2. 2. 3-1: Forms of Business Organization <ul><li>Sole Proprietorships </li></ul><ul><ul><li>Most common form of business organization in the U.S. (71.6% of all businesses) </li></ul></ul><ul><ul><li>Business owned and run by a single individual. </li></ul></ul><ul><ul><li>Smallest form of business. </li></ul></ul><ul><ul><li>Have the smallest fraction of total sales. (4.6% of all sales) </li></ul></ul><ul><ul><li>Relatively profitable. (20.9% net income) </li></ul></ul><ul><ul><li>Easiest form of business to start because it involves almost no requirements except for occasional business licenses and fees. </li></ul></ul>
  3. 3. <ul><ul><li>7. Advantages of Sole Proprietorships </li></ul></ul><ul><ul><ul><li>Easy to start up. </li></ul></ul></ul><ul><ul><ul><li>Management is simple. </li></ul></ul></ul><ul><ul><ul><li>Owner keeps all the profits. </li></ul></ul></ul><ul><ul><ul><li>Does not have to pay separate business income taxes because the business is not recognized as a separate legal entity. </li></ul></ul></ul><ul><ul><ul><li>Psychological satisfaction from being own boss. </li></ul></ul></ul><ul><ul><ul><li>Easy to get out of business. </li></ul></ul></ul><ul><ul><li>8. Disadvantages of Sole Proprietorships </li></ul></ul><ul><ul><ul><li>Unlimited liability. Owner is personally and fully responsible for all losses and debts of the business. </li></ul></ul></ul><ul><ul><ul><li>- Owner’s personal possessions may be taken away to satisfy business debts. </li></ul></ul></ul>
  4. 4. <ul><ul><ul><li>2. Difficult to raise financial capital. </li></ul></ul></ul><ul><ul><ul><li>- Cost a lot of money to start up a business. </li></ul></ul></ul><ul><ul><ul><li>- Banks are often reluctant to lend money to new or very small businesses. </li></ul></ul></ul><ul><ul><ul><li>3. Small and inefficient. </li></ul></ul></ul><ul><ul><li>4. Proprietor often has limited managerial experience. </li></ul></ul><ul><ul><li>5. Difficulty of attracting qualified employees. </li></ul></ul><ul><ul><li>6. Limited life. </li></ul></ul><ul><ul><li> - Business ceases to exist when owner dies, quits or sells the business. </li></ul></ul>
  5. 5. <ul><li>2. Partnerships </li></ul><ul><ul><li>Business jointly owned by 2 or more individuals. </li></ul></ul><ul><ul><li>Least numerous form of business organizations in the U.S. (8.5% of all businesses) </li></ul></ul><ul><ul><li>Have the second smallest fraction of total sales. (11.8% of all sales) </li></ul></ul><ul><ul><li>Second most profitable. (25.7% of all net income) </li></ul></ul><ul><ul><li>Shares many of the same strengths and weaknesses of a sole proprietorship. </li></ul></ul><ul><ul><li>2 types of partnership </li></ul></ul><ul><ul><ul><li>General partnership – all partners are responsible for the management and financial obligations of the business. </li></ul></ul></ul><ul><ul><ul><li>Limited partnership – at least one partner is not active in the daily running of the business and has limited responsibility for the debts and obligations of the business. </li></ul></ul></ul>
  6. 6. <ul><ul><li>Forming a partnership </li></ul></ul><ul><ul><ul><li>Formal legal papers called Articles of Partnership are usually drawn up to specify how profits and losses are to be divided and obligations of the partners. </li></ul></ul></ul><ul><li>8. Advantages </li></ul><ul><li>1. Ease of start-up. </li></ul><ul><li>2. Ease of management. </li></ul><ul><li>3. Lack of special taxes. </li></ul><ul><li>4. Can attract financial capital more easily than proprietorships. </li></ul><ul><li>5. More efficient operations with slightly larger size. </li></ul><ul><li>6. Easier to attract top talent. </li></ul>
  7. 7. <ul><ul><li>Disadvantages </li></ul></ul><ul><ul><li>1. Each partner is fully responsible for the acts of all other partners. </li></ul></ul><ul><ul><li> In a limited partnership, a partner’s responsibility for the debts of the business is limited by the size of their investment in the firm. </li></ul></ul><ul><ul><li>2. Limited life. </li></ul></ul><ul><ul><li>3. Potential for conflict between partners. </li></ul></ul>
  8. 8. <ul><li>Corporations </li></ul><ul><ul><li>Second smallest number of business organizations in the U.S. (19.9% of all businesses) </li></ul></ul><ul><ul><li>Largest fraction of total sales. (83.6% of all sales) </li></ul></ul><ul><ul><li>Most profitable. (53.4% of all net income) </li></ul></ul><ul><ul><li>Recognized by the law as a separate legal entity with all the rights of an individual. </li></ul></ul><ul><ul><ul><li>Can buy and sell property. </li></ul></ul></ul><ul><ul><ul><li>Enter into legal contracts. </li></ul></ul></ul><ul><ul><ul><li>Sue and be sued. </li></ul></ul></ul>
  9. 9. <ul><ul><li>5. Forming a Corporation </li></ul></ul><ul><ul><ul><li>Very formal legal arrangement. </li></ul></ul></ul><ul><ul><ul><li>Must obtain a charter, or written government approval to establish a corporation. </li></ul></ul></ul><ul><ul><ul><li>Charter also specifies the number of shares of stock, or ownership certificates in the firm. Shares are sold to stockholders or shareholders. </li></ul></ul></ul><ul><ul><li>6. Corporate Structure </li></ul></ul><ul><ul><li>1. Common stock represents the basic ownership of a corporation. </li></ul></ul><ul><ul><li> - Stockholder has one vote per one share of stock. </li></ul></ul><ul><ul><li>- Vote elects Board of Directors who sets broad policies and goals. </li></ul></ul><ul><ul><li>- Board of Directors hire management team to run the business on a daily basis. chart </li></ul></ul>
  10. 10. <ul><ul><li>2. Preferred stock represents nonvoting ownership shares of a corporation. </li></ul></ul><ul><ul><li>- Owners of preferred stock have no right to elect Board of Directors. </li></ul></ul><ul><ul><li>- Receive dividends before common stockholders. A dividend is a check that transfers a portion of the company profits to stockholders, usually quarterly. </li></ul></ul><ul><ul><li>- If corporation goes out of business, preferred stockholders get their investment back before common stockholders. the skinny on... </li></ul></ul><ul><ul><li>3. Advantages of Corporations </li></ul></ul><ul><ul><li> 1. Easy to raise financial capital. </li></ul></ul><ul><ul><li> - sell additional stock </li></ul></ul><ul><ul><li> - sell bonds </li></ul></ul>
  11. 11. <ul><ul><li> 2. Limited liability for its owners. </li></ul></ul><ul><ul><li> - Corporation is responsible, not its owners. </li></ul></ul><ul><ul><li> 3. Directors can hire professional managers to run the firm. </li></ul></ul><ul><ul><li> 4. Unlimited life. </li></ul></ul><ul><ul><li> 5. Ease in transferring ownership. </li></ul></ul><ul><ul><li>4. Disadvantages of Corporations </li></ul></ul><ul><ul><li> 1. Double taxation of corporate profits. </li></ul></ul><ul><ul><li> 2. Difficulty and expense of getting a charter. </li></ul></ul><ul><ul><li> 3. Owners have little voice in how the business is run. </li></ul></ul><ul><ul><li> - Separation of ownership and management. </li></ul></ul><ul><ul><li> 4. Subject to more government regulation. </li></ul></ul>