Chapter 8 Types of Business Organizations Sole Proprietorships
Chapter 8 Types of Business Organizations
Sole Proprietorships The most common type of business today is the sole proprietorship. This is a business owned and managed by a single person. They account for more than 70 percent of all business in the US. However, they generate less than 5 percent of all sales by American businesses.
Example: Bart’s Comics Page 227 What was the first issue he needed to address? n Raising money to rent & renovate the store What did he have to do next? n Get a business license, site permit, register his business name What were some initial difficulties? n Business was slow, spend money on advertisements, and instore promotions. What occurred because of his success? n Paid back loans in 18 months & was earning a profit, added inventory, was able to secure a loan from bank.
Sole Proprietorships Advantages • • Easy to open or close - acquire funding, license, site permit, store name. It can close easily as long as outstanding bills are paid. Few regulations SP’s are lightly regulated. Must locate business in zoned area & abided by labor laws for employees. • • Freedom & Control makes all decisions without partner consent. You are your own boss. Owner keeps profits You can keep all profits, there are no partners.
Sole Proprietorships Disadvantages • • • Limited funds – Many SP’s at start up have limited money. Because they are new, banks are reluctant to give out loans. Limited life – If you leave the business, it ceases to exist because you are the owner. Unlimited liability – You are legally responsible for all financial aspects of the business. If the business fails and you own money, you must pay back all debts. This means you could lose your homes, cars, or personal savings.
Partnerships are businesses that are coowned by two or more people or “partners”. Partnerships exist in all kinds of businesses: Ex. Construction, real estate, law firms, doctors offices, and investment companies.
Types of Partnerships • • • General partnerships – the most common type, where partners share responsibility for managing the business. Each one is liable for business debts and loans. Limited partnerships – one or more partners is not involved in day-to-day operations. They are only liable for the funds he or she has invested. Limited liability partnership (LLP) – all partners are limited partners and are not responsible for the debts and other liabilities of other partners.
Partnerships Advantages • • • Easy to open and close – similar to SP’s, settle the bills and dissolve the company. Few regulations – similar to SP’s, most states have Uniform Partnership Act in place to lay out partnership rules. Access to resources – partners mean additional funds and usually easier to secure bank loans. Joint decision making – more knowledge and differing perspectives Specialization – partner may have specific skills to offset your weakness, ex. Accounting.
Partnerships Disadvantages • • • Unlimited liability – Both partners are responsible for the partnership’s debts. Potential for conflict – decision making can become a problem when two sides can not agree. Limited life – When a partner dies, retires, or leaves, or new partners are added, the original business does not exist legally.
Corporations are business owned by individuals, called stockholders. These individuals acquire ownership by purchasing stock, or shares of ownership in the corporation. Corporation that issues stock for sale that can be bought or sold freely is a private company A corporation that retains rights over who can buy or sell the stock is called a public company
Corporations Advantages • • Access to resources – Corporations have can borrow money from banks, or raise more money by selling stocks or issuing bonds. Professional managers – you can hire people with experience in financial and sales matters, which can lead to greater growth. Limited liability – stockholders are not liable for debts the corporation incurs, only the cost they paid for their stock. Unlimited life – the business will continue to operate if the owners or stockholders die, as long as it is a viable business.
Corporations Disadvantages • • Start-up cost and effort – it is very time consuming, difficult, and expensive to set up a corporation. Vast amount of state and federal paperwork and legal assistance from a law firm. Heavy regulation – must prepare annual reports to the Securities and Exchange Commission (SEC), government agency that oversees the sale of stock. Prepare and list quarterly financial reports for stockholders.
Corporations Disadvantages • • Double Taxation – they are taxed on their profits and on dividends they pay to stockholders. Loss of control – board of directors can vote against the owners of business and make decisions that they (owners) do not agree with.
Businesses Consolidation Sometimes companies merge together to become a mega-company. They occur for several reasons, such as: n n Increasing efficiency Gaining a new identity as a business Keeping rivals out of marketplace Diversifying the product line
Mergers A Horizontal merger is combining two or more companies that produce the same product or similar products. A Vertical merger is combining of companies involved in different steps of producing or marketing a product.
Examples of Mergers Horizontal Merger: In 2005, Reebok and Adidas merged together. They cut production and distribution costs by combining their operations. Vertical Merger In the late 1990’s Shell Oil which owned more refineries and Texaco which owned more gas stations joined together
Conglomerates are when a business is composes of several companies, each one producing different goods and services Some famous Conglomerates you may have heard of: n n General Electric AOL/ Time Warner Walt Disney Sony
Franchises, Co-Ops, and Nonprofits A Franchise is a business that licenses the right to sell its products in a particular area. Corporation Franchisees 1. Mc. Donald’s 30, 300 29, 300 2. Yum (KFC, Taco Bell) 3. 7 – Eleven 28, 200 4. Cendent (Howard 24, 600 Johnson, Avis) 5. Subway 21, 000
Franchise Advantages • • A sense of independence Would receive training and information from franchise, your success is their success. Provide proven products – Ex. Big Mac, Tacos, Fried chicken. Franchiser would pay for national or regional advertising
Franchise Disadvantages • • Invest your money, with no assurance of being successful. Potential competition from same franchise within the community. Multiple Mc. Donald’s, KFC’s, etc…
Cooperatives and Nonprofits Cooperatives are businesses operated for the shared benefit of the owners, who are also its customers. Nonprofits are institutions that benefit society, not to make a profit.
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