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31 terms

Organization of Business

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sole proprietorship
a business owned and managed by one person (most common form of business in US, but least used)
partnership
legal form of business with 2 or more owners (3rd largest form of business in US, medium use)
corporation
legal entity with authority to act and have liability separate form its owners (2nd largest form of businesses in US, but most used)
franchise
the right to use a specific business's name and sell its products or services in a given territory
cooperatives
business owned and controlled by the people who use it - producers, consumers, or workers with similar needs who pool their resources for mutual gain; top 3 are Nationalwide Mutual, CHS (food inc), and Dairy Farmers of America (food/ag)
major ownership decisions
1. ease to start and to terminate 2. scalability 3. ownership distribution 4. ownership transferability 5. personal liability 6. taxation
advantages of a sole proprietorship
1. easy to start/terminate 2. being your own boss 3. pride of ownership 4. retain profit 5. no special taxes 6. leaving a legacy
disadvantages of sole proprietorship
1. unlimited liability 2. limited financial resources 3. difficulty in management 4. time commitment 5. few fringe benefits 6. limited growth 7. limited life span
types of partnerships
general, limited, limited liability
general partnership
all owners share in operating the business and in assuming liability for business' debts
limited partnership
a partnership with one or more general partners and one or more limited partners
general partner
an owner who has unlimited liability and is active in managing the firm
limited partner
an owner who invests money in the business, but enjoys limited liability
limited liability
liability for the debts of the business is limited to the amount the limited partner puts into the company; personal assets are not at risk
limited liability partnership (LLP)
a partnership that limits partners' risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision (you're not at fault if your partner screws up)
advantages of partnerships
more financial resources, shared management and pooled skills and knowledge, longer survival, no special taxes
disadvantages of partnerships
unlimited liability, division of profits, disagreements among partners, difficult to terminate
advantages of corporations
more money for investment, limited liability, separation of ownership from management, ease of ownership change, perpetual life, size, ease of drawing in talented employees
disadvantages of corporations
initial cost, paperwork two tax returns, termination difficult, double taxation, corporate governance, size
limited liability company (LLC)
a unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships
advantages of LLC
limited liability, choice of normal taxation, flexible ownership rules, flexible distribution of profits and losses, operating flexibility
disadvantages of LLC
no stock and therefore ownership is nontransferable, limited life span (set dissolution dates), fewer incentives, taxes, paperwork
franchise advantages
management and marketing assistance, personal ownership, recognized name, financial advice and assistance, lower failure rate
disadvantages of franchises
high start up costs, shared profit (royalty), management regulation, coattail effects, restrictions on selling, fraudulent franchisors
cooperatives need to avoid
1. uncommitted directors, 'dead weight' members, lack of transparency, lack of enough capital
not-for-profit organizations
organization whose primary objective is to support some issue or matter of private interest or public concern for non-commercial purposes
characteristics of not-for-profits
1. no profits, profit distribution, or stock insurance 2. does not pay taxes 3. monetary contribution to no-for-profit organizations are not included in taxable income
corporate governance
relationship of a company to its shareholders and, more broadly, to society
corporate pyramid
1. owners/stock holders elect board of directors 2. board of directors hires officers 3. officers set corporate objectives and select managers 4. managers supervise employees 5. employees work
Sarbanes-Oxley Act
prohibits audit firms from doing a variety of non-audit work for their clients (ie. forbid company loans to company execs, top execs must certify company accounts, makes managers responsible for maintaining an adequate internal control structure
business organization takeaways
there are many ways to organize a business, in terms of flexibility and ability to grow, the corporation is the more successful form of organization in US economy (but also presents most governance probs), franchising and cooperatives are alternative ways to exercise entrepreneurial control over organizations