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Chapter 8: Business
Organizations
Companies are born. Companies die.
The market moves forward.
This is a natural cycle of business. Adam Smith would support this idea. Why?
Objectives
1.
Explain the characteristics of sole
proprietorships.
2.
Analyze the advantages of sole
proprietorships.
Key Terms
• sole proprietorship: a business owned and managed by a single individual
• business license: authorization to operate a business issued by a local government
• zoning laws: laws in a city or town that
designate certain areas, or zones, for residential and business use
• liability: the legal obligation to pay debts
• fringe benefits
: payments to employees other than
Introduction
• What are the risks and benefits of a sole
proprietorship?
– Sole proprietorships are easy to start and
when you are the sole owner, you receive all of the profits from the business.
– On the other hand, you have total liability for the company and could lose your investment as well as other personal property if the
The Role of Sole Proprietorships
• A sole proprietorship is a business owned
and managed by a single individual.
– In this type of business organization the lone entrepreneur earns all of the firm’s profits and is responsible for all its debts.
– More than 70 percent of all businesses in the United States are sole proprietorships but
Entrepreneurs
• The potential to make a profit is a big
incentive for entrepreneurs to start a sole
proprietorship.
– Entrepreneurs must be willing to assume total responsibility and take risks.
– A successful entrepreneur is:
• Optimistic • Enthusiastic
Advantages
• Sole proprietorships have many
advantages, including:
– They are easy to start - there is only a small amount of paperwork and legal expense
– There are minimum requirements - sole
Advantages, cont.
• There are few regulations - sole
proprietorships are the least regulated
form of business organization.
– However, sole proprietorships are subjected to zoning laws, which may prohibit them from operating businesses out of their homes.
Advantages, cont.
• Sole proprietors have full control - a high
level of freedom allows sole
Disadvantages
• Checkpoint: What are the disadvantages of sole proprietorships?
– Unlimited liability - sole proprietorships are fully and personally responsible for all their business debts – Limited access to resources
• Sole proprietorships must buy all the necessary
resources they need to run their business, which can be very expensive.
• They may lack in human capital.
Lack of Performance
• Sole proprietorships often have trouble finding and keeping good employees.
– Many sole
proprietorships do not have the ability to offer fringe benefits.
– How does this cartoon show a major
Review
• Now that you have learned the risks and
benefits of a sole proprietorship, go back
and answer the Chapter Essential
Question.
Chapter 8: Business
Organizations
Objectives
1.
Compare and contrast different types of
partnerships.
2.
Analyze the advantages of partnerships.
3.
Analyze the disadvantages of
partnerships.
Key Terms
• partnership: a business organization owned by two or more persons who agree on a specific division of responsibilities and profits
• general partnership: a type of partnership in which all partners share equally in both
responsibility and liability
• limited partnership: a type of partnership in which only one partner is required to be a general partner
Key Terms, cont.
• articles of partnership: a partnership agreement that spells out each partner’s rights and
responsibilities
• assets: the money and other valuables belonging to an individual or business
• business franchise: a semi-independent
business that pays fees to a parent company in return for the exclusive right to sell a certain
product or service in a given area
Introduction
• What are the risks and benefits of
partnerships and franchises?
– Partnerships are easy to start up, have more assets to contribute, and are subject to few regulations. But, like sole proprietorships, there is unlimited liability for at least one of the partners.
– Franchises allow each owner a level of control and benefit from the support of the parent
Partnerships
• A partnership is a business organization
owned by two or more persons who agree
on a specific division of responsibilities
and profits.
• There are three types of partnerships
– General partnerships – Limited partnerships
Types of Partnerships
• General Partnerships
– All parties share equally in both responsibility and liability
• Limited Partnerships
– Only one partner is required to be a general partner
Types of Partnerships, cont.
• Limited Liability Partnerships
– This partnership acts like a general
partnership, except that all partners have
Advantages
• Checkpoint: What are the advantages of
partnerships?
– Ease of start-up - partnerships are easy and inexpensive to establish. It is a good idea, though, to sign a partnership agreement,
which spells out the rights and responsibilities of each partner.
– Little government regulation
Advantages, cont.
• Better employees -
partnerships can attract and keep talented
employees more easily than sole proprietors can • Taxes - partnerships are
not subjected to any special taxes
• Shared decision-making - each partner brings
Disadvantages
• Disadvantages of partnerships include:
– Unlimited liability - at least one partner has
unlimited liability (unless the partnership is an LLP) which means that person could lose
everything
Disadvantages, cont.
• Potential for conflict - interpersonal conflicts between partnerships can lead to
Demonstration of
“
Unlimited Liability”
Harold Nodoe, Gloria Poor and Jack Rich owned the
Trio Dress Shoppe as a partnership. Under the terms of Their partnership agreement, Nodoe and Poor were entitled each to 40% of the profits, while the remaining
20% went to Rich. Last month the firm collapsed. After
selling off everything it owned, the company still owed its creditors $10,000. Since Nodoe and Poor had no assets of their own, the creditors recovered the total amount owed to them from Jack Rich’s personal bank account.
Franchises
• Sometimes people opt to form a business
franchise instead of a partnership.
– A business franchise is a semi-independent business that pays fees to a parent company. – In return, the business is granted the
Advantages
• Advantages of franchises include:
– Built-in reputation
– Management training and support – Standardized quality
– National advertising programs – Financial assistance
Disadvantages
• With their many advantages comes a few
disadvantages of franchises:
– High franchising fees and royalties – Strict operating standards
– Purchasing restrictions – Limited product line
Review
• Now that you have learned about the risks
and benefits of partnerships and
franchises, go back and answer the
Chapter Essential Question.
Chapter 8: Business
Organizations
Objectives
1.
Explain the characteristics of corporations.
2.
Analyze the advantages of incorporation.
3.
Analyze the disadvantages of
incorporation.
4.
Compare and contrast corporate
combinations.
Key Terms
• corporation: a legal entity, or being, owned by individual stockholders, each of whom has limited liability for the firm’s debts
• stock: a certificate of ownership in a corporation
• closely held corporation: a type of corporation that
issues stock to only a few people, who are often family members
• publicly held corporation: a type of corporation that sells stock on the open market
•
bond: a formal contract issued by a
Key Terms, cont.
• certificate of incorporation: a license to form a corporation issued by a state government
• dividend: the portion of corporate profits paid out to stockholders
• limited liability corporation (LLC): a type of
business with limited liability for the owners, with the advantage of not paying corporate
income tax
• horizontal merger:
Key Terms, cont.
• vertical merger:
two or more firms
involved in different stages of producing
the same good or service
• conglomerate:
a business combination
merging more than three businesses that
produce unrelated products or services
• multinational corporation (MNC):
a large
Introduction
• What are the risks and benefits of
corporations?
– Corporations provide the opportunity for
stockholders to own part of a company and reap the benefits of that company’s success. Corporations provide flexibility for their
Introduction
• What are the risks and benefits of corporations?
– Corporations provide the opportunity for stockholders to own part of a company and reap the benefits of
that company’s success. Corporations provide flexibility for their stockholders.
– On the other hand, corporations are difficult and
expensive to start and must pay double taxes. Also, the original owners can lose control over their
Corporations
• The most complex form of business organization is the corporation.
– Individual stockholders own stock in a
corporation and are, therefore, part-owner of the company that issues the stock.
– In the United States,
Types of Corporations
• Closely held corporations
– Corporations that issue stock to only a few people, often family members.
• Publicly held corporations
– Corporations that sell stock on the open market.
• Owners of a corporation elect a board of
directors that makes all the major
Advantages
• Incorporation, or forming a
corporation, offers advantages to
stockholders and the company itself.
– Advantages for stockholders:
• Unlimited liability
Advantages, cont.
• Advantages for the company:
– More potential for growth and longevity – Ability to raise money
by borrowing
– No need for special managerial skills
Corporations have a self-interest in developing profitable products and services. For example, consumer concern about global
Disadvantages
• Checkpoint: What are the disadvantages of incorporation?
– Difficulty and expense of start-up
• Corporate charters can be difficult, expensive, and time consuming to create.
– Double taxation
• Corporations must pay corporate income taxes as well as taxes on the dividends paid to stockholders
– Loss of control
• Owners do not manage the activities of a corporation
Corporate Combinations
• Corporations can grow larger by merging with another corporation.
• There are three types of mergers:
– Horizontal mergers are the combination of two or more firms competing in the same market with the same good or service, such as the merger between Cingular and AT&T in 2004.
– Vertical mergers join two or more firms involved in different stages of producing the same good or
service.
Multinational Corporations
• Multinational corporations are the world’s
largest corporations and they sell their
goods and services in more than one
country.
– Advantages
• Benefit consumers by producing jobs and products around the world.
Disadvantages of MNCs
• Disadvantages
– Unduly influence culture and politics in countries in which they operate.
Review
• Now that you have learned about the risks
and benefits of corporations, go back and
answer the Chapter Essential Question.
Chapter 8: Business
Organizations
Objectives
1.
Identify the different types of cooperative
organizations.
2.
Understand the purpose of nonprofit
Key Terms
• cooperative:
a business organization owned
and operated by a group of individuals for
their shared benefit
• consumer cooperative:
a retail outlet owned
and operated by consumers that sells
merchandise to members at reduced rates
• service cooperative:
a type of cooperative
that provides a service rather than a good
• producer cooperative:
an agricultural
Key Terms, cont.
• nonprofit organization: an institution that functions much like a business, but does not operate for the purpose of making a profit
• professional organization: a nonprofit organization that works to improve the image, working
conditions, and skill levels of people in particular occupations
• business association: a group organized to promote the collective business interests of an area or group of similar business interests
Introduction
• How are some businesses organized to
help others?
– Cooperatives are businesses created by a group of individuals who share benefits.
– Nonprofit organizations are run like a
Cooperatives
• A cooperative is a type of business
organization owned and operated by a
group of individuals for their shared
benefit.
– First instituted by Benjamin Franklin,
cooperatives are based on the following principles:
• Voluntary and open membership
• Control of the organization by its members
Cooperatives, cont.
• Cooperatives do not have to pay income taxes because they are not corporations. • Cooperatives are
found in many
Consumer Cooperatives
• There are three kinds of cooperatives.
– Consumer cooperatives are retail outlets owned and operated by consumers.
• They sell merchandise to members at reduced prices.
• Examples of consumer cooperatives include discount price clubs and housing co-ops.
Service and Producer Cooperatives
• Service cooperatives are co-ops that provide a service.
– Some service co-ops offer discounted insurance, health care, or legal help.
– Credit unions are an example of a service co-op.
• Producer cooperatives are agricultural
marketing co-ops that help members sell their products.
– Members focus their attention on their crops or
Nonprofits
• Nonprofit organizations function like a business but do not operate for the purpose of generating profit.
– Examples of nonprofits include museums, public schools, the American Red Cross, hospitals,
churches, and many other groups and charities. – Nonprofits, like co-ops, are exempt from paying
income taxes, but the nonprofit must meet certain requirements to qualify for tax-exempt status.
Professional Organizations
• Some nonprofits provide support to
particular occupations or geographical
areas.
– Professional organizations work to improve the image, working conditions, and skill levels of people in particular occupations such as
the National Education Association for educators.
– Keep members up-to-date on industry trends. – Set codes of conduct that members must
Business Associations
• Promote the collective business interests of a city, state, or other
geographical area.
– The Better Business Bureau (BBB), which aims to protect
consumers by promoting an ethical and fair
marketplace is an
