business organizations

3. Reading Outcome:
1. What are the different types of
business organizations?
2. Describe the characteristics of
sole proprietorships, partnerships,
and corporations.
3. Analyze the advantages and disadvantages of
business organizations.
4. What is the difference between
stocks [owner] and bonds [lender]?
5. What are the advantages and
disadvantages of franchises?
6. What makes McDonald’s the greatest franchise ever?
[not the greatest hamburgers, just the greatest franchise]

4. Total Business SalesTotal Business Sales
Sole ProprietorshipsSole Proprietorships
5% $434 billion5% $434 billion
[Ave. $60,000][Ave. $60,000]
PartnershipsPartnerships
11% $500 billion11% $500 billion
[Ave. $250,000][Ave. $250,000]
CorporationsCorporations [Ave. $3 M][Ave. $3 M]
84% $8 trillion84% $8 trillion
45 made over $2045 made over $20 bil.bil.
143 Made over $10 bil.143 Made over $10 bil.
22 Million businesses22 Million businesses
Sole ProprietorshipsSole Proprietorships
72%-over 16 million72%-over 16 million
PartnershipsPartnerships
8% - 1.5 million8% - 1.5 million
CorporationsCorporations
20% - 4 million20% - 4 million
Business OrganizationsBusiness Organizations

5. THE BUSINESS POPULATIONTHE BUSINESS POPULATION
Business Shares of Domestic OutputBusiness Shares of Domestic Output
CorporationsCorporations
20%20%
PPartnershipsartnerships
8%8%
SoleSole
ProprietorshipProprietorship
ss
72%72%
Partnerships 11%Partnerships 11%
CorporationsCorporations
84%84%
Percentage of FirmsPercentage of Firms Percentage of SalesPercentage of Sales
Sole Proprietorship 5%Sole Proprietorship 5%

6. 1. Sole proprietorshipsSole proprietorships – oneone individualindividual
in business for himself.
They make up 72%72% of all businesses and
take in 5%5% of total profits.

7. AA. EasyEasy to quit the business if the
owner decides to do so. There are
no co-owners to consult.
BB. Owners receive the entireentire profit.
CC. EasyEasy to form–no complicated legal documents or
complicated tax forms, small amount of capital needed.
Personal satisfaction (psychological-being your
own boss) prestige and a sense of accomplishment.
DD. TotalTotal control – can make decisions
quickly, can hire and fire easily, can
respond quickly to trends.
2.2. AdvantagesAdvantages of a Sole Proprietorshipof a Sole Proprietorship

8. AA. UnlimitedUnlimited liability (debt) - have to forfeit
their personal possessions as well as their
businesses. (auto, other business, house, savings)
B.B. Burden of solesole responsibility – must
have business sense.
C.C. LimitedLimited potential for growth – collateralcollateral (any
thing of value to guarantee a loan [like giving up
your personal possessions) [Let’s say you put
your homehome up for collateral but have to give it up]
D.D. DifficultDifficult to attract qualified employees–can’t
offer fringe benefits. [Let’s say you ask for more benefits]
E.E. ShortShort life span – depends on owner’s health
and competence. If the owner diesdies, it is over.
3.3. DisadvantagesDisadvantages of Sole proprietorshipsof Sole proprietorships

9. 66 2. LimitedLimited – some non-active partners join as an
investment (and thus have limited liability-just the
investment, not the property). He is a “silent”“silent” partner.
Two Forms of PartnershipsTwo Forms of Partnerships
55 1. GeneralGeneral – equal decision making & unlimited liabilityunlimited liability
among partners.
Let’s say your silent partner puts up $30,000 to insure the loan.

10. SpecializationSpecialization – specific duties assigned to
different partners.
A.A. SharingSharing of losses. Can borrow more and can sustain
heavier losses.
B.B. EasyEasy to form. Small amount of money to start & operate.
C.C. SharedShared decision making – more informed decisions.
D. Personal satisfaction – sense of accomplishment.
Advantages of PartnershipsAdvantages of Partnerships
[“Two heads are better than one.”][“Two heads are better than one.”]
Two HeadsTwo Heads better thanbetter than One HeadOne Head

11. 88.. DISADVANTAGES OF PARTNERSHIPSDISADVANTAGES OF PARTNERSHIPS
A.A. DisagreementsDisagreements among partners –
conflicts delay decisions, lower employee
morale, & lessen efficiency. Each partner
is responsible for the acts of all other
partners. Must choose good partners.
B.B. Have to shareshare the profits.
C. UnlimitedUnlimited liability – can lose their
business and personal possessions.
D. Limited lifeLimited life – sickness, conflicts,
or death can end the partnership.

12. DEMONSTRATION OFDEMONSTRATION OF ““UNLIMITED LIABILITYUNLIMITED LIABILITY””
Harold NodoeNodoe, Gloria PoorPoor and Jack RichRich owned the
Trio Dress ShoppeTrio Dress Shoppe as a partnership. Under the terms of
Their partnership agreement, Nodoe and PoorNodoe and Poor were
entitled each to 40% of the profits40% of the profits, while the remaining
20%20% went to RichRich. Last month the firm collapsedfirm collapsed. After
selling off everything it owned, the company still owedowed
its creditors $10,000its creditors $10,000. Since Nodoe and PoorNodoe and Poor had nono
assetsassets of their own, the creditors recovered the totalcreditors recovered the total
amountamount owed to them from Jack Rich’s personal bankJack Rich’s personal bank
accountaccount.

13. CorporateCorporate
A corporation can be suedcan be sued but the people who own the corporation
(stockholdersstockholders) can not be suedcan not be sued.
 A corporation.
 1.) Nearly all large companies are corporationsNearly all large companies are corporations.
 2.) Nearly all corporations are small companiesNearly all corporations are small companies.
 3.) Therefore, a small minority of corporations constitutea small minority of corporations constitute
nearly all the large companiesnearly all the large companies.
 In other words, of 4 million corporations4 million corporations, about 2,000 are2,000 are
large companieslarge companies, and these 2,000 large corporations2,000 large corporations
constituteconstitute thethe vast majorityvast majority of theof the nation’s largenation’s large
companiescompanies.
 Also, the 15% of corporations that do more than $115% of corporations that do more than $1
million in sales take in in 85% of the receipts ofmillion in sales take in in 85% of the receipts of
corporationscorporations.

14. StockholdersStockholders (ownersowners) and bondholders (lendersenders)
For companies, stocks and bonds are 2 ways to raise
money. For consumers, they are a way to earn money.
Common stockCommon stock – (owners are votersvoters) gives a voice in how
the corporation is run and a share in variable dividends –
high dividends if profits are high. The Board of Directors
may wish to withhold all dividends if the money is needed
for plant expansion or payment on debts. Because they can
vote, they determine how a corporation is managed. They
get one vote for every share they own.
In a good year, they will receive a higherhigher dividend than
preferred stockholders. (Preferred stock dividends are
fixed, common stock is not, so they are taking more risk.
Preferred StockPreferred Stock – (non-votersnon-voters) guaranteed dividends that are
paid from profits before the company pays any dividends
on common stock.
If the company is unable to pay this fixed dividend in full,
it makes up the difference when the company’s profits
increase. They are like a silent partnerlike a silent partner because they can
not vote and have no say in how the business is run.

15. Corporate BondsCorporate Bonds – a certificate issued by a corporation in
exchange for money borrowed from investors. There is a
written promise to repay the amount borrowed at a later
date (an I.O.U.I.O.U.) lending money for 10, 20, or 30 years.
BondholdersBondholders are creditorscreditors, not owners.
Advantages of Corporations from a Stockholders ViewpointAdvantages of Corporations from a Stockholders Viewpoint
AA 1. LimitedLimited liability – limited to the amount invested. His
personal assets may not be seized to pay corporate debts.
BB 2. May earn a profit withoutwithout working.
Advantages From the Corporation’s ViewpointAdvantages From the Corporation’s Viewpoint
AA 1. SeparationSeparation of ownership from managementof ownership from management – can hire
the best management available. Specialized talent can be
hired in all areas.
BB 2. EasyEasy to raise capitalto raise capital – can issue stocks or sell bonds
allowing the corporation to tap the savings of thousands.
CC 3. LongevityLongevity – they have a life independentindependent of their owners.

16. DISADVANTAGES OF A CORPORATIONDISADVANTAGES OF A CORPORATION
Disadvantages from the stockholders point of viewDisadvantages from the stockholders point of view.
. When stockholders earn a profit, they feel no great sense
of pride.
BB 2. ManyMany government restrictionsgovernment restrictions – must follow regulations of the
SEC, comply with laws on merging and maintain many records.
CC 3. HeavyHeavy organizing expensesorganizing expenses – pay for its charter and then
depending on the state, expenses can run from a few
hundred to thousands of dollars.
DD 4. DoubleDouble taxationtaxation – when a company distributes profits
(dividends) to its stockholders, they have to pay personal
income tax on dividends in excess of $100. Corporations
earnings are subject to taxation.
Disadvantages from the corporation’s point of viewDisadvantages from the corporation’s point of view.
A 1. SlowSlow in decision making – must goin decision making – must go thru chain ofthru chain of commandcommand.

17. AA HorizontalHorizontal Combinations – (a grouping of “competitors”“competitors”)
a merger between corporations that make the same product.
This would be a merger of two or more banksbanks, or railroadsrailroads,
or airline companiesairline companies, etc. Firms may merge to catch up with
or eliminate their rivals. Chevron-Texaco bought Unical Oil.
Royal Caribbean CruisesRoyal Caribbean Cruises acquired Celebrity Cruise LineCelebrity Cruise Line and
doubled in size, & became the 2nd
largest cruise line behind CarnivalCarnival.

18. Examples
1. Automaker1. Automaker buys a tire factorytire factory
2. Bridgestone Tire2. Bridgestone Tire buying a rubber plantationrubber plantation
3. Campbell Soup3. Campbell Soup buying mushroom farmsmushroom farms
4. Funeral Home4. Funeral Home bought a cemeterycemetery and a floral shopfloral shop
5. Ford5. Ford bought a steel millsteel mill to produce steel needed for autos
ShellShell Oil CoOil Co. owns
1. Oil fields
2. Refineries, and
3. Retail gasoline
stations

19. dvantages of Corporate Mergersdvantages of Corporate Mergers
EfficiencyEfficiency – eliminates overlapping jobs, can share resources
and marketing skills. Mergers may lead to lower consumerlower consumer
pricesprices making them better able to competecompete in world markets.
Less expensiveLess expensive, compared to having to build new plants and
hire new employees.
Stockholders in the acquired corporationsacquired corporations normally benefit
by having stock go up in value by about 30%30%.
Increased size means they can borrow more money.

20. .. Managers of merged corporationsManagers of merged corporations may not havenot have
the necessary supervisorynecessary supervisory skillsskills.
. Added unemploymentAdded unemployment when some positions are
eliminated. 12,500 were laid off in Fleet Boston-
Bank of America merger saving $650M.
When Cingular bought AT&TCingular bought AT&T WirelessWireless, 10,00010,000
were laid off.
. Purchasing corporation’s stock normally declinesPurchasing corporation’s stock normally declines.
. Higher prices and fewer choicesHigher prices and fewer choices for consumers.
. Acquiring corporation normallycorporation normally goes into debtdebt.

21. FranchiseFranchise gives an individual an agreement to market a
company’s product in return for a percentage (royaltyroyalty)
of the profits. Semi-independent business.
The company is the franchiserfranchiser and the individual is the franchiseefranchisee.
The 1st
franchise operation was started by Singer CompanySinger Company in 1851
to sell sewing machines. In the last 40 years, franchising has really
taken off, led by Ray KrocRay Kroc of McDonald’sMcDonald’s.
Today we have franchising for everything from hemorrhoid clinics
[“You bend, we mend”][“You bend, we mend”] to auto clinics. A typical large city in the
U.S. will have its share of Burger Kings, Foto-Mat, KFCs, Goodyear,
Taco Bell, Pizza Hut, Dunkin Donuts, and others.
There are 3,0003,000 franchisesfranchises in 670670 industriesindustries, with 600,000600,000 outletsoutlets.
The franchiser will train your personneltrain your personnel, take care of marketingmarketing
and accountingaccounting. The franchiseefranchisee receives a tried-and-testedtried-and-tested businessbusiness
methodmethod.

22. Advantages of FranchisesAdvantages of Franchises
AA 1. Benefits of a well known tradetrade namename, systemized
managementmanagement, and nationalnational advertisement.
BB 2. Less than 5%5% fail each year (65% of all independently
owned businesses fail within the first 5 years).
CC 3. Chance to own yourown your own businessbusiness with minimum riskrisk.
Disadvantages of FranchisesDisadvantages of Franchises
AA 1. May be tootoo manymany restrictions imposed so independence
is sacrificed.
BB 2. Takes a lotlot of money for start-up
3. May lose your investment if the company goes bankrupt.
Some franchises such as pizza, video rentals, frozen yogurt,
instant printing, & tanning parlors will not make it
because they are either too competitivetoo competitive or too unhealthytoo unhealthy.

23. CooperativesCooperatives – voluntary association of people formed
to carry on some kind of economic activity benefiting members.
Different Types of Cooperatives:Different Types of Cooperatives:
1. Producer CoopProducer Coop – group of farmers who join to get better
prices for their goods. They eliminate the middle-man charges.
2. Housing CoopHousing Coop – formed by members to buy the building
they live in.
3. Purchasing CoopPurchasing Coop – retail store owned and operated by
its customers.
4. Credit UnionCredit Union – members pool their savings so they can
borrow from it at lower rates (the most common form of coopmost common form of coop)
5. Service CoopService Coop – provides service to its members
(electrical or telephone)
6. Baby-Sitting CoopBaby-Sitting Coop – families swap baby-sitting duties
without ever exchanging money.
2626 NonprofitNonprofit OrganizationsOrganizations – provides products without
making a profit. Churches are the most common.
(Boy Scouts, Y.M.C.A., Salvation Army, & Goodwill)

24. Thanks
Any Questions?
Prof. Manoj Srivastava