Transcript Partnerships - cloudfront.net

CHAPTER
3
Business Organizations
Section 1: Forms of Business
Organization
• Main Idea: Businesses may be organized as
individual proprietorships, partnerships, or
corporations.
• Objectives:
• Describe the characteristics of the sole proprietorship.
• Understand the advantages and disadvantages of the
partnership.
• Describe the structure and features of the corporation.
Section 1 Introduction
• There are three main forms of business
organizations in the economy today–the sole
proprietorship, the partnership, and the
corporation.
• Each offers its owners significant advantages
and disadvantages.
Sole Proprietorships
• A sole proprietorship is a business run
by one person. It is the smallest type
of business organization in size, yet the
most numerous and profitable.
• The advantages to sole proprietorships:
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ease of start-up
ease of management
owner gets all the profits
business itself pays no income taxes
taxes only on the owner’s personal income
psychological satisfaction of owning one’s
business
• ease of closing the business
Sole Proprietorships (cont.)
• The disadvantages to sole proprietorships are:
• the owner has unlimited liability
• it is hard to raise financial capital
• owner may not be able to hire enough personnel or
stock enough inventory to operate efficiently
• owner may have limited managerial experience
• hard to attract qualified employees
• business has limited life and legally stops existing when
the owner dies or sell the business
Partnerships
• A partnership is a business jointly owned by two
or more persons. It is the least and has the
second smallest proportion of sales and net
income.
• General partnerships are:
• a type of business in which all partners are involved in the
management and finances.
• In a limited partnership, at least one partner is
not involved in management. This partner may
have helped to finance the business.
Partnerships (cont.)
• Articles of the partnership document spell out
how the partners divide up the profits or
losses.
• The advantages of partnerships are:
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the ease of start-up
ease of management
no special taxes on a partnership
easier to raise capital through bank loans or new
partner
• larger size aids efficient operations
• easier to attract skilled employees.
Partnerships (cont.)
• The disadvantages of partnerships are:
• partners are responsible for the acts of each and every
partner, except in a limited partnership where the
limits are spelled out
• limited life of partnerships ends if a partner leaves
• potential for partner conflicts.
Corporations
• A corporation is a business organization
recognized by law as a separate legal entity
with all the rights of an individual.
• Corporations receive a charter, or government
permission to create a corporation, which
includes details about stock ownership.
• Investors who buy common or preferred stock
in a corporation become owners of the firm.
Corporations (cont.)
• The advantages of corporations are: ease of
raising capital; professionals may run the firm
instead of the owners (shareholders); owners
have limited liability; business’s life is unlimited;
easy to transfer ownership.
• The disadvantages of corporations are; a charter
is expensive; ownership and management are
separated so shareholders have little say in
running the business; corporate income is taxed
twice; subject to government regulation.
Corporations (cont.)
Figure 3.2
Stock Ownership
Corporations (cont.)
Figure 3.3
Ownership, Control, and Organization of a Typical Corporation
Government and Business Regulation
• Federal and state governments regulate
interest rates and utility rates.
• State governments may offer industrial
development bonds to help industries relocate
or tax credits to draw investments.
Section 2: Business Growth and
Expansion
• Main Idea: Businesses grow through merging
with other companies and by investing in the
machinery, tools, and equipment used to
produce goods and services.
• Objectives:
• Explain how businesses can reinvest their profits to
grow and expand.
• Recognize the reasons that cause firms to merge.
• Identify two different types of mergers.
Section 2 Introduction
• A business can grow in one of two ways.
• First it can grow by reinvesting some of its
profits.
• A business can also expand by engaging in a
merger–a combination of two or more
businesses to form a single firm
Growth Through Reinvestment
• Business revenue can be used to invest in
factories, machinery, or new technologies.
• Before reinvesting, a business must estimate
its cash flow. The business first records its
total sales and then subtracts all expenses,
taxes, and depreciation. The result is the
business’s net income.
Growth Through Reinvestment (cont.)
• Depreciation is added back to net income to
get cash flow, or the bottom line—the real
measure of business profit.
• Business owners then decide whether part of
the cash flow should be reinvested in the
business to generate additional sales and
more profits.
Growth Through Reinvestment (cont.)
Figure 3.4
Growth Through Mergers
• When firms merge, one gives up its separate legal
identity.
• A company may merge with another to grow
faster; become more efficient; acquire or deliver
a better product; eliminate a rival; or change its
image.
• A horizontal merger is the joining of firms that
make the same product. A vertical merger is the
joining of firms involved in different stages of
manufacturing or marketing.
Growth Through Mergers (cont.)
• A conglomerate is
composed of four or
more businesses, each
making unrelated
products, none of
which is responsible for
a majority of its sales.
Figure 3.6
Conglomerate Structure
Growth Through Mergers (cont.)
• A multinational is a
corporation with
manufacturing and
service operations in
several countries,
which are subjected
to each nation’s
business regulations.
Figure 3.6
Conglomerate Structure
Section 3: Other Organizations
• Main Idea: Producer and worker cooperatives
are associations in which the members join in
production and marketing to lower costs for
their members’ benefit.
• Objectives:
• Describe nonprofit organizations.
• Explain the direct and indirect role of government in
our economy.
Section 3 Introduction
• Most businesses use scarce resources to
produce goods and services in hopes of
earning a profit for their owners.
• Other organizations operate on a “not-forprofit” basis.
• A nonprofit organization operates in a
businesslike way to promote the collective
interests of its members rather than to seek
financial gain for its owners.
Community and Civic Organizations
• A nonprofit organizations is in business to
promote its members’ collective interests, not to
seek financial gain.
• Many nonprofit organizations incorporate to take
advantage of a corporation’s unlimited life and
limited liability
• If the nonprofit organization has money after its
expenses are paid, its board of directors may
apply the surplus to other projects that further
the organization’s mission.
Cooperatives
• A cooperative is
voluntary association
of people who carry
on an economic
activity that benefits
its members.
Figure 3.7
Cooperatives in the United States
Cooperatives
• Consumer cooperatives buy food and other
necessities in bulk. Members donate time to
the co-op, and members pay lower prices for
goods.
• Service cooperatives, such as credit unions,
offer services to its members at lower rates.
• Producer cooperatives help members, such as
farmers, promote or sell their products.
Labor, Professional, and Business
Organizations
• Labor unions represent workers’ interest and
negotiate with management through collective
bargaining..
• Professional associations set standards for those
in the profession and influence government
policies on issues concerning members’ interest.
• Business associations are industries or trade
associations that represent specific kinds of
businesses. Some business associations, such as
the Better Business Bureau, help protect the
consumer.
Government
• Government plays a direct role in the economy when
its agencies produce and distribute goods and services
to consumers such as the Tennessee Valley Authority
(electricity), and the U.S. Postal Service (stamps and
mail delivery).
• Government corporations have boards of directors, but
Congress’s money rather than investor’s money
supports their work.
• Government plays an indirect role when it regulates
public utilities or when it grants money to people in
the form of Social Security and student financial aid.
Key Terms
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sole proprietorship
proprietorship
unlimited liability
inventory
limited life
partnership
limited partnership
bankruptcy
corporation
charter
stock
stockholder
shareholder
dividend
bond
principal
interest
double taxation
Merger
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income statement
net income
depreciation
cash flow
horizontal merger
vertical merger
conglomerate
multinational
nonprofit organization
cooperative
co-op
credit union
labor union
collective bargaining
professional association
chamber of commerce
Better Business Bureau
public utility