Chapter 3: Business Organization

 

Comparison of Business Organizations

 

 

Sole Proprietorship

Partnership

Corporation

Definition

Owned and controlled by one person

Owned and controlled by 2 or more people

Owned by stock holders and treated by law as an individual legal entity

Unique Characteristic

Most common form in the U.S.

2 types: general and limited

2 types: publicly owned and closed

Earns greatest % of total sales in the U.S.

Advantages

1.    requires small amount of capital

2.    quick decision making; total control

3.    easy to form

4.    receives all profits from company

5.    personal satisfaction in success

6.    few legal considerations

1.    requires small amount of capital

2.    shared decision-making

3.    easy to form

4.    shared business losses and profits

5.    personal satisfaction in success

6.    few legal considerations

1.    easy to raise capital

2.    professional managers and specialists

3.    profit for share holders

4.    limited liability

5.    longevity

Disadvantages

1.    lack of longevity

2.    unlimited liability

3.    limited growth potential

4.    sole responsibility for business

1.    lack of longevity

2.    unlimited liability (general only)

3.    disagreements and conflicts between partners, questions of trust

1.    lack of personal satisfaction

2.    slow decision-making process

3.    profits are taxed twice (corporate and shareholder income tax)

4.    many legal restrictions: corporate charter, articles of incorporation

5.    complex to set up

 

Corporate Structure


OWNERS

Shareholders

                        Common

                        Preferred

            Board of Directors

                        Chairman of the Board

           

EMPLOYEES

President or Chief Executive Officer

            Vice Presidents

Chief Operations Officer

Chief Financial Officer

Chief Production Officer

Financing Business Growth

1.      Reinvest profits

2.      Issue stock (IPO)

3.      Borrow money (IPO corporate paper and bonds)

4.      Acquisition (merger)

·         Horizontal

  • Vertical
  • Conglomerate

Growth Options

SP

P

C

SC

Reinvest Profits

 

 

 

 

Issue Stock

 

 

 

 

Borrow from Bank

 

 

 

 

Borrow with IPO

 

 

 

 

Merge

 

 

 

 

 

Special Business Types

 

S Corporations

            Hybrid small corporations

            Limited liability to share holders

            Profits distributed to share holders taxed as personal income only

 

Franchises

            License to operate a store individually (appears to be part of a chain)

            Examples:

                        McDonalds

                        Auntie Anne’s Pretzels

 

Not For Profit Corporations

            Operate as a business

            Purpose of company is not to make a profit

            Purpose may be educational, social, charitable, religious, etc.

            Examples:

American Red Cross

Urban League

March of Dimes

Junior Achievement

 

Cooperatives

            Perform business functions for their members

            Not for profit

            Consumer; Service, Producer

            Most common: agriculture co-ops

 

Government-Owned Corporations

            Owned and operated by governments (federal, state, local)

            Supplies a need not adequately met by the free market

            Examples:

                        Tennessee Valley Authority

U.S. Postal Service

                        Federal Deposit Insurance Corporation

                        Memphis, Light, Gas & Water