Forms of business organizations chapter 3week1


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Business Organizations

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Forms of business organizations chapter 3week1

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