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Business Organizations

Chapter 3:. Business Organizations. Section 1:. Forms of Business Organizations. 3 Types. Sole-Proprietorships Partnerships Corporations. Sole Proprietorship. Definition: a business owned and run by one person Easy to form; not a lot of requirements. Sole Proprietorship. Advantages

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Business Organizations

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  1. Chapter 3: Business Organizations

  2. Section 1: Forms of Business Organizations

  3. 3 Types • Sole-Proprietorships • Partnerships • Corporations

  4. Sole Proprietorship • Definition: a business owned and run by one person • Easy to form; not a lot of requirements

  5. Sole Proprietorship • Advantages • Easy to start up/easy to get out • Relatively easy to manage; no consulting • No sharing of profits • No separate business income tax; just personal income tax • Personal psychological satisfaction • Disadvantages • Owner hasunlimited liabilityor fully responsible • Difficult to raise financial capital • Could be difficult to operate efficiently • Owner sometimes has limited managerial experience • Difficult to attract qualified employees • Limited life

  6. Partnerships • Definition: jointly owned by two or more people • Two Types: 1) general: all partners are responsible for management and finances 2) limited: at least one person is not active in the daily operations

  7. Partnerships • Advantages • Easy to start • Easy to manage • Lack of specific taxes • Easier to attract financial capital • A little more efficient • Easier to attract top talent • Disadvantages • Partners are responsible for one another; limited liability does exist, however • Limited life • Potential for conflict b/t partners

  8. Corporations • Definition: a form of business organization recognized by law as a separate legal entity having all the rights of an individual

  9. Forming a Corporation • Very formal • Must file for permission with government • If approved, a charter is granted • Money fromstockand shareholders is used to set up corporation • If profitable, the corp. can issue a dividend

  10. Corporate Structure • Stockholders’ rights depends on the type of stock bought • Common Stock: basic ownership of a corp.. One vote for each share used to elect board of directors • Preferred Stock: nonvoting ownership shares; get their dividends first and their investment back first if corp fails

  11. Corporation • Advantages • Easier to raise financial capital; can sell more stock or borrow through bonds • Directors can hire managers • Limited liability for owners • Unlimited ilfe: can exist with different owners • Easy to transfer ownership • Disadvantages • Difficulty and expense of getting charter • Owners have little say in how it’s ran • Double taxation • Subject to more government regulation

  12. Section 2: Business Growth and Expansion

  13. Can grow in 2 ways: • Reinvesting profits • merger

  14. Growth Through Investment • Use revenues to invest in factories, machinery and new technologies • Can use an income statement to show process • Report that shows sales, expenses and profits

  15. Estimating Cash Flows • 1st: figure out total sales (revenue) • 2nd: find net income: subtract expenses and taxes from total sales (loans, salaries, depreciation, capital) • Depreciation is a non-cash charge b/c money doesn’t go anywhere else • 3rd: Find cash flow, the sum of net income and non-cash charges real measure of profits for the business b/c it represents the total amount of new funds

  16. Reinvesting Cash Flows • Can be paid to owners • Can reinvest in company

  17. Growth Through Mergers • Reasons for Merging: • Grow faster • Become more efficient (both in production and financially) • Acquire or deliver a better product

  18. Types of Mergers Horizontal merger: • Occurs when two companies that make the same product come together (2 banks) Vertical Merger: • occurs when firms involved in different steps of manufacturing or marketing join together (car company merging with a tire company)

  19. Conglomerates • Has at least 4 businesses, each making unrelated products, none of which are responsible for the majority of sales -don’t put all eggs in 1 basket http://www.pg.com/en_US/brands/all_brands.shtml

  20. Multinational • Has manufacturing or service operations in a number of countries • Has to obey all laws, pay taxes • Can be helpful in creating jobs and generating tax revenue • Can hurt by paying low wages, exporting resources or blocking local business development

  21. Are They Always What They Seem? • http://www.youtube.com/watch?v=M5uYCWVfuPQ https://www.youtube.com/watch?v=ysVSe8ottJU

  22. Section 3 Other Organizations

  23. Non-profit: promotes the collective interests of members rather than seeking financial gain for owners

  24. Community and Civic Organizations • Types of nonprofit (schools, churches welfare groups) • Similar to profit seeking, but do not issue stocks, pay dividends or income taxes • Use profit to further work

  25. Cooperatives • Also called co-op: voluntary association of people formed to carry on some type of econ activity that will benefit members. (type of non-profit) • 3 types: • Consumer (buys things in bulk to try and offer lower prices to members) • Service (offers services to members) Ex. Credit Union • Producer (helps members promote or sell)

  26. Labor, Professional and Business Organizations • Labor Unions: organization of workers formed to represent members interests in employment matters • Participate in collective bargaining: negotiation with management over issues • Can also pressure government

  27. Are Union Needed? • http://www.youtube.com/watch?v=afgjmsaTf8A • http://www.youtube.com/watch?v=YIwcLcH5wjg

  28. Professional Associations: Work to improve working conditions, skill levels and public perception (Ex. AMA) • Business Associations: promote interests of businesses • Ex. Chamber of Commerce • Industry or Trade Associations: represent specific kinds; interested in shaping gov’t policy that affects them • Some protect consumer; Better Business Bureau

  29. Government (non profit) • Direct Role: • Supplies good or service that competes with private business (Ex. TVA, FDIC and U.S. Postal Service) • Organized as government owned and operate similar to private bus. • Profits go back into business and losses covered by Congress • Local examples: police, education, etc. • Indirect Role • Acts as umpire to make sure market economy operates smoothly • Gives people power in the market • Ex. Social Security, financial aid for college • Ex. Regulates public utilities (water/electric) • Not a lot of competition

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