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Business organizations


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Business organizations

  1. 1. Forms of Business Organization Chapters 18 & 19
  2. 2. Legal Forms of BusinessSole Proprietorships Partnerships Corporations General Partnership Regular Corporation Subchapter S Limited Partnership Corporation (S-Corporation) Master Limited Partnership
  3. 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. 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. 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. 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. 7. Partnership -- AdvantagesGreater Access to CapitalGreater Access to CreditRetention of ProfitsMore Management ExpertiseNo Business Income Tax
  8. 8. Partnership -- DisadvantagesShared ProfitsUnlimited Liability for “General Partners”Each partner has “Agency” powerLimited Life– Business ends when any partner withdrawsManagement DisagreementsFrozen Investment
  9. 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. 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. 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. 12. Corporations -- AdvantagesLimited LiabilityEase of Ownership TransferUnlimited LifeGreater Access to CapitalSpecialized Management Expertise
  13. 13. Corporations -- DisadvantagesMore difficult & costly to form– Requires a “Corporate Charter”Subject to greater governmental scrutinyDiluted earningsDouble taxation
  14. 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. 15. Corporate CharterLegal Permission to Operate as aCorporationIssued by stateMay not conduct business as acorporation without a charter
  16. 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. 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. 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. 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. 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. 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. 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. 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. 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. 25. Franchising AdvantagesFranchisor– Fast, Selective Distribution– Motivated FranchiseeFranchisee– Opportunity to start a business– Business Experience of others– Nationally recognized name– National promotional campaigns
  26. 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