Transcript Chapter Seven

Chapter Seven
Business Organization
The Three Types of Business
Organization
 Sole
Proprietorship
 Partnerships
 Corporations
Sole Proprietorship

If you alone own
and control the
service.
Opportunity Benefits of Sole
Proprietorships

Owner has direct
control
 Small initial
investment
 Owner receives all
profits
 Owner can dissolve
business when
necessary.
Opportunity Costs of Sole
Proprietorships


All losses are borne by
owner
Difficulty in raising
financial capital


Limited growth potential
Only one person in
authority
 Lack of longevity
 Unlimited liability
Partnerships

A business owned
and controlled by
two or more people.
REMEMBER!

Partnerships don’t
have to be just two
people.
 JC Penney: The
man with a
thousand partners.
Two forms of partnerships


General Partnerships:
Equal decision making.
Limited Partnerships:
Partners join as
investors, offering
capital, but little, if any,
role in decision making.

VENTURE
CAPITALISTS
Advantages of Partnerships

Two or more individuals
own the business.


Specialization
Losses are shared by
partners.
 More money is
available to invest in
business
 Sharing management
responsibilities
 Taxes are shared by
partners
Disadvantages of
Partnerships

Division of authority
 Unlimited liability.
 Difficulty in raising
additional capital.
 Lack of longevity.
 Legal complications
when there is a
change in
ownership.
Advantages of Corporations
Limited liability.
Easy to raise needed
capital.
Business owned by a
group of individuals.
Responsibilities for
running the business
divided among many
individuals
Easy change in ownership
and business continues
as long as it makes
profits. – LONGEVITY.
Disadvantages of
Corporations

Corporate charters
are $$$
 Federal and state
govts. monitor
corporations more.
 ***Slow process of
decision making.
Corporations

Legally distinct from
their owners and
treated as if individuals.

Corporations can






Own property
Hire workers
Make contracts
Pay taxes
Sue and be sued
Make and sell products.
What kind of companies are
organized as corporations?
– food, steel, oil companies
are corporations.
 Insurance companies, supermarket
chains, major companies.
 USUALLY
Forming a corporation

When expansion
calls for more than
adding more
partners.
 GET A LAWYER!
Forming a corporation:

Lawyer applies for a
state license:
ARTICLES OF
INCORPORATION.
 Reviewed by state
officials. If all in
order they grant

CORPORATE
CHARTERS
Corporate Structure

The corporate
charter identifies the
officers.


Chairman of the
board – symbolic
head of the
corporation.
CEO – Chief
Executive Officer –
the REAL power.
Corporate Structure

Board of Directors –
people from inside or
outside the company.

Key decision making
body.


Decide on product lines.
Hires / fires corporate
officers to do the day-today running of the
corporation.

Sees that boards
policies are carried
out.
Corporate Finances

Most common way
to raise money is
selling STOCK.


STOCK – represents
ownership of the
firm.
Ownership is issued
in portions called
SHARES.
Corporate finances

If you buy 100
shares of stock in a
company, you own
100 pieces of that
company. If that
company has a total
of 10,000 shares
available – you own
1% of the company.
Why own stock?

DIVIDENDS – profits
on your investment.


PREFERRED
STOCK –
guarantees
dividends.
COMMON STOCK –
potential for
dividends.
Why own stock?

SOMETIMES can
make more money
for you.
 The “fun” of being
involved with a
corporation or a
product.
Benefits for stockholders

Flexibility of
ownership.
 Limited liability.



Can’t be sued for
corporate problems.
If the corporation
folds, you only lose
what you invested.
Private assets can’t
be seized.
The trade-off

Common stock
ownership allows a
“voice” on how the
company is run.
 Preferred stock
does not.
IMPORTANT ADVICE TO FUTURE
CORPORATE HEADS!!!

ALWAYS hold or
directly control 51%
of your company’s
stock.
 OR have a lack of
control at annual
shareholder
meetings.
 You can lose your
job!
Other disadvantages!

If you own stock,
corporate profits are
taxed twice.


You pay taxes as
being a member of
the corporation.
You pay taxes on the
profits / dividends
you take.
The corporation raises money

If there are
thousands of
shareholders, there
is enormous
amounts of money
through the sale of
stock.
 eBay has 6,643,058
shares available.
Other ways corporations raise
$$.

Corporate bonds.



You loan your money to
the company.
You DO NOT own the
company.
Repaid the principal and
the interest.


Principal – the actual
money borrowed.
Interest – the price you
gave to that principal.
Example of Corporate Bonds

You hold a 1 year
$1,000 bond.
 At the end of the
year you are paid
back the $1,000
principal AND the
5% ($50) interest.
Corporate Combinations

Most corporations
seek to expand.


Build new facilities
Legally combines
with another
enterprise.

MERGERS!
Three types of Mergers
(corporate combinations)

Horizontal
 Vertical
 Conglomerate
Horizontal Combination

Buying up
companies involved
in the same industry.
 THINK STANDARD
OIL – John D.
Rockefeller.
Horizontal combinations

All the companies
merging do the
same thing.
 Standard Oil: all the
companies
Rockefeller bought,
processed oil into
gas.
Vertical Combination

A merger between
two or more
companies involved
in different
production phases
of the same good or
service.
 THINK US STEEL /
Andrew Carnegie.
Conglomerate Combinations.

Merger of
companies
producing unrelated
products.
 Subsidiaries.
 Started in the
1960s.
Acme Brick Company
Johns Manville
Ben Bridge Jeweler
Jordan's Furniture
Benjamin Moore & Co.
Justin Brands
Berkshire Hathaway Group
Larson-Juhl
Berkshire Hathaway
Homestates Companies
McLane Company
Borsheim's Fine Jewelry
MidAmerican Energy
Holdings Company
Buffalo NEWS, Buffalo NY
MiTek Inc.
Clayton Homes
Nebraska Furniture Mart
CORT Business Services
NetJets®
CTB Inc.
The Pampered Chef®
Fechheimer Brothers Company
Precision Steel Warehouse, Inc.
FlightSafety
RC Willey Home Furnishings
Fruit of the Loom®
Scott Fetzer Companies
Garan Incorporated
See's Candies
GEICO Direct Auto
Insurance
Shaw Industries
General Re
Star Furniture
Helzberg Diamonds
United States Liability
Insurance Group
H.H. Brown Shoe Group
Wesco Financial
Corporation
International Dairy Queen,
XTRA Corporation
Inc.
Opportunity Benefits of
Combinations
Efficiency –
centralized decision
making.
 Potential lower
costs.
 Easier to acquire
financial capital.

Opportunity Costs of
Combinations

Can lead to
unemployment
(don’t need to
double the jobs)
 Reduced
competition in the
market place.

MONOPOLIES.
Franchises

One company
agrees – for a fee –
to let another person
or group set up a
FRANCHISE.


Have to uphold the
reputation of the
parent company.
Get training and
advertising.
Cooperatives

Co-ops –
businesses owned
by their members.

Membership gives
privileges.
Cooperatives
Nonprofit Organizations

Does not focus on
financial gain and
profits.
 Business
organization but
pursues other goals.
 Income isn’t taxed.
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