Transcript Business Organizations

UNIT 3:
BUSINESS STRUCTURES
How to start an economic institution?
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Starting a business requires more than
natural resources, labor, and capital.
An entrepreneur is an individual who is
willing to organize and manage a business
in order to make a profit.
The entrepreneur answers the basic economic
questions about what, how, and for whom a
good or service will be produced.
 He/she assumes ALL the RISK.
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Examples of entrepreneurs?
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Many of the nation’s entrepreneurs became
famous for their ability to organize and
manage.
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Andrew Carnegie in steel,
Bill Gates in computers,
Ray Kroc (McDonald’s) in fast foods,
Sean Combs or Tim McGraw in music,
Sir Richard Branson in travel and phones.
WHAT STRATEGIES DO
ENTREPRENEURS USE?
Entrepreneurs must make many decisions as they start
up new businesses.
 One of the first decisions they face is what form of
business organization best serves their interests.
 A business organization is an establishment formed
to carry on commerce.
 In
other words, a business organization is a company and
these business organizations can be set-up as a:
(1) Corporation (private, public, or S-Corp)
(2) Partnership (GP, LP, LLP , LLC) , or
(3) Sole proprietorship
THE TYPES OF BUSINESSES
Corporations
Larger and more complex
THE TYPES OF BUSINESSES
Corporations:
Corporations defined:
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The most complex form of a business
organization is the corporation.
A corporation is a legal entity or being, owned
by individual stockholders, each of whom faces
limited liability for the firm’s debts.
Stockholders own stock, also called shares,
which represent their portion of ownership in
the corporation.
THE TYPES OF BUSINESSES
Corporations:
Corporation’s Structure:
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A corporation has the following general structure:
Stockholders
(owners of stock)
Board of Directors
(some of the board members ARE stockholders and some are NOT)
CEO
CIO
Regional IT
Managers
CFO
Regional
Warehouse
Managers
Warehouse Managers
Sales Managers
Salesmen
COO
Controller of
Accounting
Customer
Support Regional
Managers
Customer
Support
Managers
CMO
Regional Sales
Managers
Store Managers
Store Employees
Customer Service Representatives
THE TYPES OF BUSINESSES
Corporations:
Corporations raise money through the sale of
stocks and/or bonds:
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Bonds:
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LESS RISK because a bond promises to pay interest
and to repay the full amount borrowed.
You become the “bank” for the corporation
Stock:
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MORE RISK because your money is lost if the
company goes bankrupt.
It is more of a gamble.
THE TYPES OF BUSINESSES
Corporations:
How to raise money?
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The stock is registered with the Securities and Exchange
Commission (SEC: the protector of investors)
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The largest corporations are usually listed on the New
York Stock Exchange (owned by Euronext).
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Some stocks for smaller companies many be listed
National Association of Securities Dealers Automated
Quotation (NASDAQ), AMEX (Euronext), or OTCBB (Overthe–counter bulletin board).
THE TYPES OF BUSINESSES
Other U.S. Exchange Markets
Stocks are bought and sold at financial markets called stock
exchanges, such as the…
The Arizona Stock Exchange
Chicago Exchange
Chicago Options Exchange
Chicago Board of Trade
Chicago Mercantile Exchange
Kansas City Board of Trade
Minneapolis Grain Exchange
Pacific Stock Exchange
Philadelphia Stock Exchange
THE TYPES OF BUSINESSES
Other World Exchange Markets
Stocks are bought and sold at financial markets called stock
exchanges, such as the…
THE TYPES OF BUSINESSES
Corporations:
Three Types of Corporations:
1.) Private Corporations: Stock is only given to employees or
family members. These stockholders cannot trade (or sell)
their stock to the public.
2.) Publicly-traded Corporations: It has many shareholders
who can buy or sell stock on the open market.
 Stocks are bought and sold at public stock exchanges,
such as the New York Stock Exchange (NYSE).
THE TYPES OF BUSINESSES
Corporations:
Disadvantages of Corporations:
3.) Does it have morals?
Since corporations are legal entities (basically having
the same rights has people), is there harm in giving
rights to a entity with no moral code, soul, etc.?
The Corporation:
Movie about the power
that corporations have
and their ability to have
the same rights as people.
5 Minute Clip
THE TYPES OF BUSINESSES
Corporations:
Advantages of Corporations:
1.) Very Little Liability: A corporation is defined as an "entity"
because it has a legal identity separate from those of its
owners.
2.) Access to Many Resources: corporations have more access
to physical capital and they have access to human capital.
(well educated business leaders)
3.) Indefinite Life (immortal): a corporation will not cease to
exist if the owner passes, or retires.
4.) Easy to Raise Money: through the selling of stock/bonds a
company can raise money to fund operations.
THE TYPES OF BUSINESSES
Corporations:
Disadvantages of Corporations:
1.) Owner has Little Control: he/she has little control
over the company.
2.) Does NOT React quickly to changes in the market:
corporations are huge bureaucracies and they are
not quick to response to the marketplaces.
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Everything has to be approved by the Board of Directors
(which takes valuable time)
THE TYPES OF BUSINESSES
Corporation Cartoons:
THE TYPES OF BUSINESSES
Partnerships
Two or more owners who split
responsibility of the management of
the company
Partnerships:
Good and Bad
THE TYPES OF BUSINESSES
Partnerships
Types of Partnerships:
1.) General Partnerships: Partners in a general partnership share
equally in both responsibility and liability, but not in taxes (more
on this later).
EX: Bob, Sue & Tim are partners: 1/3, 1/3, 1/3 split in liability
and ownership.
2.) Limited Partnerships (L.P.): In a limited partnership only
one partner is required to be a general partner.
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That is, only ONE partner has UNLIMITED personal liability
for the firm’s actions. The remaining partner/partners
contribute only money.
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The main advantage of being the general partner is in having
control of the business. The other investors do not take part in the
management of the company.
THE TYPES OF BUSINESSES
Partnerships
Types of Partnerships:
3.) Limited Liability Partnerships (L.L.P.):
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In this type of partnership, all partners are limited
partners. All partners are limited from personal liability
from another partner’s mistakes.
 Good for businesses where all partners want to take an
active role in management.
 Good news: If a partner screws up, you will not be
liable for their actions.
 Bad news: Company name (which is associated
with you) will go down the tubes.
THE TYPES OF BUSINESSES
Types of Partnerships:
4.) Limited Liability Company (L.L.C.):
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In this type of partnership, all partners are limited partners.
It is the same as a L.L.P., EXCEPT the tax benefits.
Tax Benefits: individual partners are taxed at a personal
level .
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EX: If Bob and Tim start a business and the company
makes $100,000. Then Bob and Tim pay less tax because
they split the profit between them, thus only personally
reporting $50,000 each.
THE TYPES OF BUSINESSES
4.) Limited Liability Company (L.L.C.):
EX: If Bob and Tim start a business and the company makes
$100,000. (Here are two ways this could play out)
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Business Tax Rate based on $100,000: 34% = Tax: $34,000.
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Personal Tax Rate based on $50,000: 25% = Tax: $12,500 each!
NOTE: If the LLC itself had been taxed on the entire $100,000 then
the tax rate would be 34%!
Business Tax Rate Table
Personal Tax Rate Table
Taxable income
Tax rate
Tax Rate
Single
10%
First $50,000
15%
$0 – $7,550
$50,001–$75,000
25%
15%
$7,551 – $30,650
$75,001–$100,000
34%
25%
$30,651 – $74,200
$100,001–$335,000
39%
28%
$74,201 – $154,800
$335,001–$10,000,000
34%
33%
$154,801 – $336,550
$10,000,001–$15,000,000
35%
35%
$336,551+
$15,000,001–$18,333,333
38%
Over $18,333,333
35%
THE TYPES OF BUSINESSES
4.) Limited Liability Company (L.L.C.): Another example
EX: If the company makes $500,000 during the year.
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There are 4 partners:
Solution: $500,000 / 4 = $125,000 each
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Tax if an LLC: $125,000 @ 28% = $35,000 (times 4 = $140,000)
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Tax if NOT a LLC: $500,000 @ 34% = $170,000
Personal Tax Rate Table
Business Tax Rate Table
Taxable income
Tax rate
First $50,000
15%
Marginal Tax Rate
Single
10%
$0 – $7,550
$50,001–$75,000
25%
15%
$7,551 – $30,650
$75,001–$100,000
34%
25%
$30,651 – $74,200
$100,001–$335,000
39%
28%
$74,201 – $154,800
$335,001–$10,000,000
34%
33%
$154,801 – $336,550
$10,000,001–$15,000,000
35%
35%
$336,551+
$15,000,001–$18,333,333
38%
Over $18,333,333
35%
THE TYPES OF BUSINESSES
4.) Professional Corporation (P.C.):
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Professional Corporations (PCs) corporations are
organized as partnerships for the purpose of providing
professional services.
Typically professions requiring a license, such as
doctors, chiropractors, lawyers, accountants, architects,
and engineers that are required to form PCs.
The formation of a PC involves additional steps, such as
approval by the appropriate state licensing body &
agreements to ethical codes.
PCs may be set up as L.L.C.s or L.L.P. or L.P. or a
general partnership.
THE TYPES OF BUSINESSES
P.C. Examples
1.) Law Firms: generally, lawyers group together in
order to reduce the high cost of operating a law
firm.
2.) CPA / Accounting Firms: two or more accountant
come together to handle the large amount of tax
work that is completed yearly.
3.) Doctors: with medical cost for doctors at a all time
high, some physicians choose to come together is
reduce the individual costs and generate more
revenue by seeing more patients during a day.
THE TYPES OF BUSINESSES
Partnerships
Advantages of Partnerships:
1.) Shared Decision Making and Specialization: divide up the
work and the costs of the company.
 Able to tap into HUMAN CAPITAL resources.
2.) Combining of Capital: combine the money and human
resources (intelligence) of two in order to get started.
Disadvantages of Partnerships:
1.) Loss of Individual Control: you must share the decisionmaking (even in a LP, because the others are giving you
money, you have to listen to their needs)
2.) Disagreements: if a conflict starts, then the business could
suffer because of the disagreement
THE TYPES OF BUSINESSES
Sole Proprietorships
The smallest of them all, but the most
versatile and easiest to start.
THE TYPES OF BUSINESSES
ORGANIZATIONS
Sole Proprietorships
The Role of Sole Proprietorships:
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A sole proprietorship is a business owned and managed
by a single individual.
According to the Internal Revenue Service, about 75
PERCENT of all US businesses are sole proprietorships.
Advantages of Sole Proprietorships:
1.) Easy to Start: While you need to do more than just hang
out a sign to start your own business, a sole proprietorship
is simple to establish.
 With just a small amount of paperwork and legal
expense, just about anyone can start a sole
proprietorship.
THE TYPES OF BUSINESSES
ORGANIZATIONS
Sole Proprietorships
Advantages of Sole Proprietorships:
2.) Few Regulations: A proprietorship is the least-regulated
form of business organization.
 They are the least expensive form of ownership to
establish.
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This does not mean they have NO regulations!
 Even the smallest business, however, is subject to some
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regulation, especially industry-specific regulations.
For example, a gourmet soft pretzel stand would be subject
to health codes, and a painting business would be subject to
codes regarding dangerous chemicals.
THE TYPES OF BUSINESSES
ORGANIZATIONS
Sole Proprietorships
Advantages of Sole Proprietorships:
3.) Total control of decisions: sole proprietors can run their
businesses as they wish.
 This means that they can respond quickly to changes
in the marketplace.
4.) Easy to Discontinue: Finally, if sole proprietors decide to
stop operations and do something else for a living, they can
do so easily.
THE TYPES OF BUSINESSES
Sole Proprietorships
Disadvantages of Sole Proprietorships:
1.) Unlimited Personal Liability: sole proprietors are fully
and personally responsible for all their actions.
2.) Limited Access To Resources: This makes it difficult or
impossible for them to expand quickly.
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Also, they may lack HUMAN CAPITAL
3.) No Benefits: No healthcare plan, dental coverage, 401k
retirement plan, or paid vacations.
THE END
EMAIL ME ANY
QUESTIONS
PRACTICE
QUESTIONS FROM
PAST UNITS
ANSWER THE FOLLOWING ON
YOUR OWN PAPER
PRACTICE FOR MIDTERM
ANSWER THE FOLLOWING ON YOUR OWN PAPER
1. What are the three basic questions that every economy
must ask itself?
WHAT, FOR WHOM, HOW
2. What are two key indicators that can help a nation determine
what stage of the business cycle it is in?
GDP (Gross Domestic Product) & Unemployment Rate
3. By moving from one point on the PPF to another point on the PPF
you will experience what type of loss?
Opportunity Cost
4. Draw the Demand and Supply curves together. What will happen to
the equilibrium price & quantity if the demand curve shifts to the
left?
Decrease in price and decrease in quantity
5. An effective price ceiling will create a shortage or surplus?
Shortage
6. What economist stated that the markets should be free, but government
should be allowed to step in and help promote stability?
John Keynes
PRACTICE FOR MIDTERM
ANSWER THE FOLLOWING ON YOUR OWN PAPER
7. What economist believed that the factors of production should
be PRIVATE with little or no government involvement in the
markets?
Adam Smith
8. What are the four factors of production?
Land, Labor, Capital, & Entrepreneurship
9. In what market do Households sell the factors of production to
firms?
Factor Market
10. Using the PPF, tell what is the
opportunity cost of moving from
Point C to Point E.
7 Units of CDs
11. What is the definition of capital?
The MAN-MADE goods used to
produced a consumer good
PRACTICE FOR MIDTERM
ANSWER THE FOLLOWING ON YOUR OWN PAPER
12. A price ceiling is characterized by:
a)
b)
c)
d)
a shift of the supply curve to the right.
a shift of the demand curve to the left.
a long-term loss of market revenues for suppliers
a price set below the current market price.
13. Which of the following is not allowed in a
command economy?
a)
b)
c)
d)
government regulation of the economy
environmental controls
minimum wage
ownership of corporate stock
PRACTICE FOR MIDTERM
ANSWER THE FOLLOWING ON YOUR OWN PAPER
14. The statement ‘the quantity demanded of a
product varies inversely with its price’ is a
definition of:
a) the law of demand
b) laissez-faire
c) the law of competition
d) the invisible hand
15. Which of the following is a primary
characteristic of a capitalist system?
a)
b)
c)
d)
private ownership of property
governmental regulation of business
equal distribution of resources
income tax
PRACTICE FOR MIDTERM
ANSWER THE FOLLOWING ON YOUR OWN PAPER
16. In the graph, what information
is determined by looking at the
intersection of the supply and
demand curves?
a) efficiency of production
b) amount supplied at a specific
price
c) increase in demand
d) increase in taxes that the
business pay on its profits
PRACTICE FOR MIDTERM
ANSWER THE FOLLOWING ON YOUR OWN PAPER
17. In the graph, what information
is determined by looking at the
shift of the supply curve from
S1 to S2?
a)
b)
c)
d)
Increase in resource costs
Increase in supply
Increases in demand
Price has decreased
Unit 3 Focus
Questions
Focus Questions
1. What are the advantages and disadvantages of
a limited liability partnership?
ADVANTAGES
1.) Easy to Start
2.) Little government regulation
3.) Shared Decision Making and Specialization
4.) Pool of capital (human and physical)
5.) Not liable for other partners actions
DISADVANTAGES
1.) Unlimited Liability
2.) Loss of individual control
3.) Disagreements
Focus Questions
2. What are the advantages and disadvantages of
a corporation?
ADVANTAGES
1.) Very Little Liability
2.) Many Resources are Available
3.) Continues after death of Owner
4.) Easy to Raise Money for it
DISADVANTAGES
1.) Owner has little control
2.) Does NOT react quickly to changes in the market
(large bureaucracies)
Unit 3 Focus Questions
Q#3: Why are many sole proprietorships run by
part-time entrepreneurs who earn most of
their income by being employed by another
firm?
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A: Many sole proprietorships are too small to
generate enough profit to cover expenses (so the
owner has to work somewhere else to support his
business and family)
Unit 3 Focus Questions
Q#4: If publicly traded corporations account for
ONLY 1% of all corporations, why should society
care what they do?
A: Though there are few publicly held corporations, they
tend to be huge and control a majority of the market
and economy.
Q#4: Corporations are:
a.
b.
c.
d.
The most common type of business
The easiest form of business to start
The type of business that is best able to raise funds
The least-regulated form of business
Unit 3 Unit Questions
Q#5: Which of the following is not true of private
corporations?
a.
b.
c.
d.
They exist to earn a profit
They must reorganize when an owner dies
Their income is taxed more than employee earnings
They are treated as an individual separate from their owners by
the law (limited liability: the corporation would be punished for
wrong doings and not the owners)
Q#6: Paul and his flower shop. He put in a lot of work
but his shop still failed and he had a lot of debt to
pay the bank. Why would it have been better for
him to organize his business as a corporation?
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Paul would not have been liable for the debt of the
company, he would not have lost his home in the
bankruptcy proceedings, and he could have shared the
management responsibility with other owners.