TYPES OF BUSINESS ORGANIZATIONS

 Sole proprietorship – a business owned and run by one person.

 Advantages:
-easy start-up
-flexible (can make decisions quickly)  management is all you
-the profits are yours
-you are your own boss
-no business taxes; all income for you
-easy exit  pay your bills and stop working

 Disadvantages
-unlimited liability  you are responsible for everything
-it’s hard to borrow money
- Size and efficiency—you have to do everything yourself. You may be good at some things (making
the product) but not at others (keeping the financial records, doing the insurance paperwork)
-limited management experience
-hard time finding qualified employees
-limited life

 Partnerships – business jointly owned by two or more persons.

 There are two types of partnerships:

*General partnerships – all partners actively run the business
*Limited partnership – at least one partner is not active in running the business and has limited responsibility
for the debts & obligations of the business.

 Forming a Partnership
Legal papers are drafted that specify:
-how profits are divided.
-how new partners may join.
-how property is divided if the partnership ends.

 Advantages of partnerships:
-easy to start
-easy to manage
-you get your share of the profits
-can attract financial capital easier than sole proprietorships
-larger, so some economies of scale present
 More efficient operations (people can specialize)
-easier to attract qualified employees

 Disadvantages of partnerships:
-responsible for the acts of all the other partners
-if you are a limited partner, not involved in daily activity, you only lose your original investment
- limited life  when a partner dies or leaves, it ends. It must be dissolved legally and reorganized with the
remaining partners.
-conflict between partners
-bankruptcy – if you’re not a limited partner, you have to pay any debts!

 Corporation – a form of business organization that is recognized by the law as having all the legal rights of
an individual.
 They have the right to buy & sell property, enter into legal contracts, and to sue & be sued.
 In 2000, corporations were 19.9% of business organizations, but were responsible for 88.8% of all sales.
 Forming a Corporation:
– File for permission from the federal (national) government or the state where your HQ will be
– ―charter‖ is granted: states name, address, purpose, number of shares of stock, etc.
– Sell stock at an initial price
– Stock value goes up and down according to your profitability
 – Issue dividends

 Corporate Structure:
– Stock – a certificate of ownership in a firm.
– Stockholders – a.k.a. – shareholders – investors in a corporation (they own stock).
– The money from the stockholders (investors) is used to set up the firm. This money is called financial
capital.

 Types of Stock
– Common stock – basic form of ownership in a corporation. Each share is worth one vote for the board
of directors, who run the company.
– Preferred Stock – non-voting shares of stock, but these shareholders receive profits before common
stockholders.

Ownership, Control, and Organization of a Typical Corporation

 Advantages of Corporations
– Easy to raise financial capital
 sell stock
 issue bonds  a written promise to repay the amount borrowed in the future
– Hire professional managers
– Limited liability for the corporation’s owners: the corporation itself is responsible for all debts, not the
owners. If it goes out of business, stockholders do not have to repay the corporation’s debts.
– Unlimited life – the firm doesn’t die when a shareholder does.
– Ease of transferring ownership:
 If you don’t want to be part owner any more, you just sell your stock.
 Much easier than a sole proprietorship trying to find someone to buy the entire business.

 Disadvantages of Corporations
– Difficult to start
– Shareholders have little say about how the business is run
– Double taxation – the firm’s profits are taxed and then the profit that is distributed to shareholders is also
taxed.
– Subject to government regulation.
– Corporations are subject to more government regulation than sole proprietorships and partnerships.
 register with the state
 register with the Securities & Exchange Commission—the SEC—to sell stock to the public
 publish info on their sales and profits on a regular basis
 get approval to buy or merge with other companies.

 LLCs - ―Limited Liability Company‖

– The major advantage of a Sole Proprietorship is no double taxation. Its owner just calculates her profits and
reports them as her income, and pays income taxes.
– The major disadvantage of a Sole Proprietorship is its unlimited liability.
– For instance, if someone slips and falls in her Sole Proprietorship, the injured person could sue her for the
business assets, her home, and other personal assets of the proprietor.
 Forming your company as an LLC instead of a Sole Proprietorship keeps the major advantage and loses
the disadvantage: it keeps single taxation but limits the liability of the owners for losses and debts of
the company.
 For instance, if a client slips and falls on the property of an LLC, the injured person can only sue for
assets that belong to the company (not the proprietor’s personal assets).
 Sole Proprietors can also take out ―liability insurance‖ in case of accident or injury.

 Why Merge?
– Merger: combining two or more businesses to form a single firm.
– Grow faster
– Become more efficient
– Acquire or deliver a better product
– Eliminate a rival
– Change image

 Types of Mergers
– Horizontal merger – when two or more firms that make the same product join forces.
– Vertical merger – when firms involved in different steps of the manufacturing or marketing join
together.

 Conglomerate: a firm that has at least four businesses, each making unrelated products (no product has the
majority of sales). These companies don’t have ―all their eggs in one basket‖ and so can take some risks with
new products. (Panasonic, Sony, GE…)
 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.
– Pay taxes in each country / must follow the law of each country

 Nonprofits
– Firms use scarce resources to produce goods and services in order to make a profit for their owners.
– Other organizations operate on a ―not-for-profit‖ basis
– A nonprofit organization operates like a business to promote the collective interests of its members rather
than to seek financial gain for its owners
– Examples: schools, churches, hospitals, welfare groups, and adoption agencies.
– Many of these organizations are legally incorporated to take advantage of unlimited life and limited liability.
– They are similar to profit-seeking businesses, but do not issue stock, pay dividends, or pay income taxes.
– The profits they produce are used to further the goals of the group.

 Cooperative - a voluntary association of people formed to carry on some kind of economic activity that will
benefit its members.
 Producer and worker cooperatives are associations in which the members join in production and marketing
and share the profits.
– The consumer cooperative is a voluntary association
– They buy bulk amounts of goods such as food and clothing on behalf of its members.
– The goal is lower prices for members.
  Credit Unions
– An example of a cooperative is a credit union
– It is a financial organization that accepts deposits from, and makes loans to, employees of a particular
company or government agency.
 Labor union is an organization of workers in the same industry.

 What is the purpose of labor unions?

• To negotiate with management to get the best working conditions they can, including:
– pay
– working hours (lunches & breaks)
– health plan coverage & other benefits
– vacation days
– clean air and other environmental issues
– This is called ―collective bargaining‖

 3 Types of Business According to Activities

 Service Business
– A service type of business provides intangible products (products with no physical form). Service type firms
offer professional skills, expertise, advice, and other similar products.
– Examples of service businesses are: schools, repair shops, hair salons, banks, accounting firms, and law firms.

 Merchandising Business
– This type of business buys products at wholesale price and sells the same at retail price. They are known as
"buy and sell" businesses. They make profit by selling the products at prices higher than their purchase costs.
– A merchandising business sells a product without changing its form. Examples are: grocery stores, convenience
stores, distributors, and other resellers.

 Manufacturing Business
– Unlike a merchandising business, a manufacturing business buys products with the intention of using them as
materials in making a new product. Thus, there is a transformation of the products purchased.
– A manufacturing business combines raw materials, labor, and factory overhead in its production process. The
manufactured goods will then be sold to customers.

 Hybrid Business
– Hybrid businesses are companies that may be classified in more than one type of business. A
restaurant, for example, combines ingredients in making a fine meal (manufacturing), sells a cold
bottle of wine (merchandising), and fills customer orders (service).
– Nonetheless, these companies may be classified according to their major business interest. In that
case, restaurants are more of the service type – they provide dining services.

References:
http://www.accountingverse.com/accounting-basics/types-of-businesses.html