BUSINESS ORGANIZATIONSChapter 3

Section 1

Forms of business organization

Did You Know?

In 1997 Dun & Bradstreet reported that corporation start-ups increased by 2 percent to reach a new high of 798,917. New corporations in Florida and New York represented 25 percent of that total

Key Terms

sole proprietorship/proprietorship A business owned and run by one person

unlimited liability The owner is personally and fully responsible for all losses and debts of the business

inventory A stock of finished goods and parts in reserve limited life A firm that legally ceases to exist when the

owner dies, quits, or sells the business partnership A business jointly owned by two or more

persons limited partnership The investor’s responsibility for the

debts of the business is limited by the size of his or her investment in the firm

bankruptcy A court-granted permission to an individual or business to cease or delay debt payments

Key Terms

corporation A form of business organization recognized by law as a separate legal entity having all the rights of an individual

charter A government document that gives permission to create a corporation

stock Ownership certificates in a firm stockholder/shareholder An investor who owns stock dividend A check representing a portion of the corporate

earnings bond A written promise to repay a loan at a later date principal An amount of borrowed money interest The price paid for the use of another’s money double taxation The taxing of stockholders’ dividends as

corporate profit and again as personal income

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 Proprietorship

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

Sole Proprietorship

The advantages to sole proprietorships are: 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 Proprietorship

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

Articles of the partnership document spell out how the partners divide up the profits or losses

The advantages of partnerships are: 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

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. Preferred Stock – represents nonvoting ownership shares of the

corporation Common Stock – represents basic ownership of the corporation

Corporations

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

Figure 3.2Stock OwnershipFigure 3.2Stock Ownership

Corporations

Figure 3.3Ownership, Control, and Organization of a Typical CorporationFigure 3.3Ownership, Control, and Organization of a Typical Corporation

AOL Stocks

Mert

•Has $200

Rachael

•Has $500

Becky

•Becky has $1,000

Share Sales

AOL has an IPO (initial public

offering)

Sells one stock to Mert for $30

Stock goes up to $80

Mert sells his one stock to Rachael

for $80 Mert’s Initial profit

is ___

Bubble bursts and Rachael

sells her stock to Becky for for

$15 Profit loss of

_____

Final Transaction

Racheal sells her share to

Becky for $15

Racheal is now only down $65

Becky is down $15 but up one

share

If Calculations are correct the

total money has to equal

the total money gained and the total number of stocks lost

How much does each

person have and what is the

net gain and loss?

Share SellsAOL has $30

(down 1 share and up $30 from initial

Mert has $250 (up $50 from

initial)

Rachael has $420 (up one share, down

$80 from initial)

Becky has $1000

Has any money been created?

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

Fortune 500 Companies

Rank 6 Company

Revenues($ millions)

Profits($ millions)

1 Exxon Mobil 452,926.0 41,060.0 2 Wal-Mart Stores 446,950.0 15,699.0 3 Chevron 245,621.0 26,895.0 4 ConocoPhillips 237,272.0 12,436.0 5 General Motors 150,276.0 9,190.0 6 General Electric 147,616.0 14,151.0 7 Berkshire Hathaway 143,688.0 10,254.0 8 Fannie Mae 137,451.0 -16,855.0 9 Ford Motor 136,264.0 20,213.0 10 Hewlett-Packard 127,245.0 7,074.0 11 AT&T 126,723.0 3,944.0 12 Valero Energy 125,095.0 2,090.0 13 Bank of America Corp. 115,074.0 1,446.0 14 McKesson 112,084.0 1,202.0 15 Verizon Communications 110,875.0 2,404.0 16 J.P. Morgan Chase & Co. 110,838.0 18,976.0 17 Apple 108,249.0 25,922.0 18 CVS Caremark 107,750.0 3,461.0

19 International Business Machines 106,916.0 15,855.0

20 Citigroup 102,939.0 11,067.0 21 Cardinal Health 102,644.2 959.0 22 UnitedHealth Group 101,862.0 5,142.0 23 Kroger 90,374.0 602.0 24 Costco Wholesale 88,915.0 1,462.0 25 Freddie Mac 88,262.0 -5,266.0

Profiles in Economics

Kenneth I. Chenault 1951

Section 2

BUISNESS GROWTH AND EXPANSION

Did You Know?

The federal government’s Bureau of Economic Analysis reported that, in contrast to the American public’s suspicions, U.S.-based multinational companies do not establish most of their manufacturing affiliates in low-wage countries. In 1996, 87 percent of U.S. multinational affiliates’ employment was reported in relatively high-wage countries, primarily in Europe

Key Terms

merger A combination of two or more businesses to form a single firm income statement A report showing a business’s sales, expenses,

and profits for a certain period net income Revenues minus expenses and taxes depreciation A non-cash charge the firm takes for the general wear

and tear on its capital goods cash flow The sum of net income and non-cash charges such as

depreciation horizontal merger The kind of merger in which two or more firms

that produce the same kind of product join forces vertical merger The kind of merger in which firms involved in

different steps of manufacturing or marketing join together conglomerate A firm that has at least four businesses, each making

unrelated products, none of which is responsible for the majority of the firm’s sales

multinational A corporation that has manufacturing or service operations in a number of different countries

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 Investment

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 Investment

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 Investment

Figure 3.4Figure 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

A conglomerate is composed of four or more businesses, each making unrelated products, none of which is responsible for a majority of its sales

Growth Through Mergers

A multinational is a corporation with manufacturing and service operations in several countries, which are subjected to each nation’s business regulations

Section 3

OTHER ORGANIZATIONS

Did You Know?

The National Center for Charitable Statistics reported that nearly 1.5 million organizations had registered with the federal government in 1997 as tax-exempt, private nonprofit organizations. Because some organizations do not need to register with the Internal Revenue Service, this number does not include all types of nonprofit organizations described in Section 3

Key Terms

nonprofit organization An organization that operates in a businesslike way to promote the collective interests of its members rather than to seek financial gain for its owners

cooperative/co-op A voluntary association of people formed to carry on some kind of economic activity that will benefit its members

credit union A financial organization that accepts deposits from, and makes loans to, employees from a particular company or government agency

labor union An organization of workers formed to represent its members’ interests in various employment matters

collective bargaining Union negotiations with management over issues such as pay, working hours, health care coverage, and other job-related matters

Key Terms

professional association A group of people in a specialized occupation that works to improve the working conditions, skill levels, and public perceptions of the profession

chamber of commerce An organization that promotes the welfare of its members and the community

Better Business Bureau A nonprofit organization sponsored by local businesses to provide general information on companies

public utility Investor- or municipal-owned company that offers an important product, such as water or electricity, to the public

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-for-profit” 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

Cooperatives

A cooperative is voluntary association of people who carry on an economic activity that benefits its members

Figure 3.7Cooperatives in the United StatesFigure 3.7Cooperatives in the United States

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

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

Section 1: Forms of Business Organization

Sole proprietorships are small, easy-to-manage enterprises owned by one person. They are relatively numerous and profitable. Disadvantages include raising financial capital and attracting qualified employeesPartnerships are owned by two or more persons. Their slightly larger size makes it easier to attract financial capital and qualified workers. Disadvantages include the unlimited liability of each general partner for the acts of the other partners, the limited life of the partnership, and the potential for conflict among partners

Section 1: Forms of Business Organization

Corporations are owned by shareholders who vote to elect the board of directors. Shareholders have limited liability and are not liable for the actions or debts of the corporation. The relatively large size of the corporation allows for specialized functions and large-scale manufacturing within the firm.

Disadvantages of corporations include the cost of obtaining charters, limited shareholder influence over corporate policies, and having to deal with some government regulations

The corporation is recognized as a separate legal entity and so must pay a separate corporate income tax not paid by proprietorships and partnerships

Section 2: Business Growth and Expansion

Businesses can grow by reinvesting their cash flows in plant, equipment, and new technology

Businesses can also expand through mergers. Most mergers take place because firms want to become bigger, more efficient, acquire a new product, catch up to or eliminate a competitor, or change its corporate identity

A horizontal merger takes place when two firms that produce similar products come together. A vertical merger is one that involves two or more firms at different stages of manufacturing or marketing.

Section 2: Business Growth and Expansion

A conglomerate is a large firm that has at least four different businesses, none of which is responsible for a majority of sales

A multinational can be an ordinary corporation or a conglomerate, but it has manufacturing or service operations in several different countries. Multinationals introduce new technology, generate jobs, and produce tax revenues for the host countries

Section 3: Other Organizations

Nonprofit organizations function like a business, but on a not-for-profit basis to further a cause or for the welfare of their members

The cooperative, or co-op, is one of the major nonprofit organizations. The co-op can be organized to provide goods and services, or to help producers

• Professional associations work to improve the working conditions, skill levels, and public perceptions of their profession.

• Businesses often form a chamber of commerce or a Better Business Bureau to promote their collective interests

Section 3: Other Organizations

Government plays a direct role in the economy when it provides goods and services directly to consumers; it plays an indirect role when it provides Social Security, veterans’ benefits, unemployment compensation, and financial aid to college students, or when it regulates businesses