Section Focus:

1. What are the different types of

business organizations?
2. Describe the characteristics of

sole proprietorships,
and corporations .

partnerships,

3. Analyze the advantages and disadvantages of

business organizations.
4. What is the difference between
stocks [owner] and bonds [lender] ?
5. What are the advantages and
disadvantages of franchises?
6. What makes McDonalds the greatest franchise ever?
[not the greatest hamburgers, just the greatest franchise]

Business Organizations
22 Million businesses

Sole Proprietorships
72%-over 16 million

Partnerships
8% - 1.5 million
Lets start
a dance
company.

Corporations
20% - 4 million

Total Business Sales

Sole Proprietorships
5% $434 billion
[Ave. $60,000]
Partnerships
11%
$500 billion
[Ave. $250,000]
Corporations [Ave. $3 M]
84%
$8 trillion
45 made over $20 bil.
143 Made over $10 bil.
Only 20 nations have GDPs
greater than Wal-Marts $379 bil.

THE BUSINESS POPULATION

Business Shares of Domestic Output
Percentage of Firms Percentage of Sales

Corporations
20%
Partnerships
8%

Sole
Proprietorships
72%

Farmer

Corporations
84%

Partnerships 11%
Sole Proprietorship 5%

Business Failures

Over 500,000 small businesses are launched each year.

One third of these start-ups fail within two years.

1. Sole proprietorships one individual

in business for himself.
They make up 72% of all businesses and
take in 5% of total profits.
They are the simplest to form because of
the small amount of capital needed to start up.
Examples are beauticians, dentists, lawyers,
dry-cleaning and lawn care and lemonade stands.

Distribution of Sole Proprietorships

Based on Annual Sales and Industry

2. Advantages of a Sole Proprietorship

A. Easy to quit the business if the
owner decides to do so. There are
no co-owners to consult.

B. Owners receive the entire profit.

C. Easy to formno complicated legal documents or
complicated tax forms, small amount of capital needed.

Personal satisfaction (psychological-being your

own boss) prestige and a sense of accomplishment.
D. Total control can make decisions
quickly, can hire and fire easily, can
respond quickly to trends.

3. Disadvantages of Sole proprietorships

A. Unlimited liability (debt) - have to forfeit

their personal possessions as well as their
businesses. (auto, other business, house, savings)
B. Burden of sole responsibility must
have business sense.
C. Limited potential for growth collateral (any
thing of value to guarantee a loan [like giving up
your personal possessions) [Lets say you put
your home up for collateral but have to give it up]
I want medical benefits!

D. Difficult to attract qualified employeescant

offer fringe benefits. [Lets say you ask for more benefits]
E. Short life span depends on owners health
and competence. If the owner dies,
dies it is over.

4 Partnership - business
operated by 2 or more people.

They are the least common with only

8% and take in only 11% of profits.
Two Forms of Partnerships

5 1. General equal decision making & unlimited liability

among partners.

6 2. Limited some non-active

partners join as an
investment (and thus have limited liability-just the
investment, not the property). He is a silent partner.

Lets say your silent partner puts up $30,000 to insure the loan.
I gave $30,000 as a silent partner,
so I dont have to do anything.

Advantages of Partnerships
[Two heads are better than one.]

Two Heads

better than

One Head

7 Specialization specific duties assigned to

different partners.
A. Sharing of losses. Can borrow more and can sustain
heavier losses.
B. Easy to form. Small amount of money to start & operate.
C. Shared decision making more informed decisions.
D. Personal satisfaction sense of accomplishment.

Distribution of Partnerships
Based on Annual Sales & Industry

8.

Disadvantages of Partnerships

A. Disagreements among partners

conflicts delay decisions, lower employee
morale, & lessen efficiency. Each partner
is responsible for the acts of all other
partners. Must choose good partners.

B. Have to share the profits.

C. Unlimited liability can lose their
business and personal possessions.

D. Limited life sickness, conflicts,

or death can end the partnership.

Take That!

Demonstration of Unlimited Liability

Harold Nodoe,
Nodoe Gloria Poor and Jack Rich owned the
Trio Dress Shoppe as a partnership. Under the terms of
Their partnership agreement, Nodoe and Poor were
entitled each to 40% of the profits,
profits while the remaining
20% went to Rich.
Rich Last month the firm collapsed.
collapsed After
selling off everything it owned, the company still owed
its creditors $10,000.
$10,000 Since Nodoe and Poor had no
assets of their own, the creditors recovered the total
amount owed to them from Jack Richs personal bank
account.
account

Harold Nodoe

Gloria Poor

Jack Rich

Largest Corporate Profits 1. Wal-Mart

$379 B 2007
2. Exxon Mobil
359
3. Chevron
204
4. Conoco
187
5. General Motors 173
6. GE
173
7. Ford
172
8. Citigroup
146
9. Bank of America 116
10. AIG
110
11. HP
104
12. J.P. Morgan
100
13. Berkshire-Hath 99
14. Verizon
93
15. HP
92
16. IBM
99
17. Valero
91
18. Home Depot
90
19. McKesson
88
20. Citigroup
82

Largest Employers

1. Wal-Mart 1.35 M associates

2.
3.
4.
5.
6.
7.

[1.6 million associates worldwide]

Sears Holding
General Motors
McDs
UPS
IBM
GE

400,000
386,000
364,000
359,000
316,000
313,000

Wal-Mart has 4,179 total stores

in the U.S.; 1,868 Wal-Mart stores,
1,586 Wal-Mart Super Centers, &
725 Sams Clubs in the U.S.
The GDPs for the Virgin Islands
is $1.8 billion; for Djibouti, it
is $582 million; and for
Afghanistan, it is $21 billion.

Wal-Mart example
Wal-Marts IPO was in 1972. 300,000 shares
were sold at $16.50 per share.
share
The stock has split 11 times (2 for 1 splits)
splits since
then last split was in 1999.
If you purchased 100 shares of Wal-Mart on the day
of the IPO you would have spent $1,650.
$1,650
Today you would have 204,000 shares of stock.
stock
Today current value of your shares would be
$11,044,560 (stock closed at $54.14 yesterday).
Each quarter you would be receiving a check for
$136,680 (at current dividend of .67).
.67 Annual
income for dividends alone would be $546,720!
$546,720

Corporations a business organization

recognized as a separate legal entity (existence).

10 Stockholders are the owners of a corporation who invest

by buying shares.
Stock the certificate of ownership.
ownership
9 Corporations make up about 20% of business organizations
but produce over 90% of total sales.
Corporations can operate like a sole proprietor. Inc. means
the business is a corporation. [Treated by the courts as an
artificial person. They can sue, be sued, enter into contracts,
and pay taxes.
Two Types of Corporations
11 Publicly owned anyone can invest by buying shares,
so unlimited # of owners. Includes most corporations.
12 Closed is owned by a limited number of stockholders.
Ford Motor Company was family owned (closed) until 1956.
They went public in 1956 & issued 10,200,000 shares of stock.
13 Wal-Mart leads all other corporations in sales at $371 billion.

Corporate Trivia
A corporation can be sued but the people who own the
corporation (stockholders)
stockholders can not be sued.
sued
A corporation has potentially perpetual life.
life
1.) Nearly all large companies are corporations.
corporations
2.) Nearly all corporations are small companies.
companies
3.) Therefore, a small minority of corporations constitute
nearly all the large companies.
companies
In other words, of 4 million corporations,
corporations about 2,000 are
large companies,
companies and these 2,000 large corporations
constitute the vast majority of the nations large companies.
companies
Also, the 15% of corporations that do more than $1 million
in sales take in in 85% of the receipts of corporations.
corporations

Where The Jobs Are And Were

2007
1980
1.
2.
3.
4.
5.
6.

Wal-Mart
1,350,000
McDonalds 418,000
Sears Holding 400,000
UPS
355,000
Ford
327,500
GM
325,000

GM
Ford
GE
IT&T

853,000
495,000
405,000
368,000

[International Telephone & Telegraph]

IBM

337,000

Then there are new jobs in new technologies that

didnt exist in 1980. Cisco has 34,000;
34,000 Microsoft
has 55,000;
55,000 Oracle has 40,000;
40,000 & Dell has 46,000
Surviving as a business is no small feat.
1/3 of the firms in the Fortune 500 list in 1970 no longer exist.
exist

If a company had only 200 shares

and you bought a share, you would
own 1/200th of the company.

14 Stockholders (owners)
owners and bondholders (lenders)
enders
For companies, stocks and bonds are 2 ways to raise
money. For consumers, they are a way to earn money.
15 Common stock (owners are voters)
voters gives a voice in how
the corporation is run and a share in variable dividends
high dividends if profits are high. The Board of Directors
may wish to withhold all dividends if the money is needed
for plant expansion or payment on debts. Because they can
vote, they determine how a corporation is managed. They
get one vote for every share they own.
In a good year, they will receive a higher dividend than
preferred stockholders. (Preferred stock dividends are
fixed, common stock is not, so they are taking more risk.
Preferred Stock (non-voters)
non-voters guaranteed dividends that are
paid from profits before the company pays any dividends
on common stock.
If the company is unable to pay this fixed dividend in full,
it makes up the difference when the companys profits
increase. They are like a silent partner because they can
not vote and have no say in how the business is run.

16 Corporate Bonds a certificate issued by a corporation in

exchange for money borrowed from investors. There is a
written promise to repay the amount borrowed at a later
date (an I.O.U.)
I.O.U. lending money for 10, 20, or 30 years.
Bondholders are creditors,
creditors not owners.

17 Advantages of Corporations from a Stockholders Viewpoint

A 1. Limited liability limited to the amount invested. His
personal assets may not be seized to pay corporate debts.
B 2. May earn a profit without working.
18 Advantages From the Corporations Viewpoint
A 1. Separation of ownership from management can hire
the best management available. Specialized talent can be
hired in all areas.
B 2. Easy to raise capital can issue stocks or sell bonds
allowing the corporation to tap the savings of thousands.
C 3. Longevity they have a life independent of their owners.

Disadvantages of a Corporation
Disadvantages from the stockholders point of view.
view
1. When stockholders earn a profit, they feel no great sense
of pride.

19 Disadvantages from the corporations point of view.

view
A 1. Slow in decision making must go thru chain of command.
command
B

2. Many government restrictions must follow regulations of the

SEC, comply with laws on merging and maintain many records.
3. Heavy organizing expenses pay for its charter and then

depending on the state, expenses can run from a few

hundred to thousands of dollars.
D 4. Double taxation when a company distributes profits
(dividends) to its stockholders, they have to pay personal
income tax on dividends in excess of $100. Corporations
earnings are subject to taxation.
The income tax on corporations is 15% on the first $50,000;
25% from $50,001- $75,000; 34% from $75,001-$100,000;
39% from $100,001-$335,000; 35% from 335,001-$10 mil.
38% from 10M-18.3million; & a flat 35% over$18.3 million.

Bull and Bear Markets

Then there is the

kangaroo market.

10-19-87

508 points
24% drop
in one day

On this day, Sam Walton,

Walton
the richest man in the world,
had a paper loss of $1.5 billion.

Date
Decline
% Decline
10/19/87
508 points
24%
10/28/29
38 points
13%
10/29/29
31 points
12%
11/26/29
26 points
10%
12/18/1899
6 points
8%
8/12/32
6 points
8%
3/14/07
7 points
8%
10/26/87
156 points
8%
7/21/33
8 points
8%
10/18/37
11 points
8%
2/01/17
7 points
7%
10/27/97
554 points
7%
[$700 billion lost in one day]
4/14/2000
661 points
6%
3/2000-2/2003 $7.7 trillion was lost
[Market value was worth $17 trillion]
trillion

Advantages/Disadvantages of Sole Proprietorships

Advantages
Disadvantages
Freedom

Unlimited Liability

Ease of Formation

Lack of Continuity

Low Start-up Costs

Difficulty
Raising Money

Single Taxation

Reliance On
One Person

Advantages/Disadvantages of General Partnership

Advantages

Disadvantages

Larger Talent Pool

Unlimited Liability

Larger Money Pool

Lack of Continuity
Ownership

Ease of Formation

Transfer Difficult

Single Taxation

Possibility of
Conflict

Advantages/Disadvantages of Corporations
Advantages

Limited Liability

Disadvantages
Stockholder Revolts

Continuity
Greater likelihood of

professional Management

Easier Access to Money

High Start-up cost

High Cost of
Regulation
Double Taxation

3 Types of Corporate Combinations

20 1. What are the three ways corporate merger combinations can

take place? (A merger is when one company absorbs another)

2. What is the current trend in corporate combinations?
A Horizontal Combinations (a grouping of competitors)
competitors
a merger between corporations that make the same product.
This would be a merger of two or more banks,
banks or railroads,
railroads
or airline companies,
companies etc. Firms may merge to catch up with
or eliminate their rivals. Chevron-Texaco bought Unical Oil.
Royal Caribbean Cruises acquired Celebrity Cruise Line and
doubled in size, & became the 2nd largest cruise line behind Carnival.
Carnival

Staples tried to acquire Office Depot but the government

blocked it on the grounds

Morgan-Chase-Bank One58 B
Compaq-HP
23 B
Chevron-Texaco
43 B
Sprint-Nextel
35 B

Chrysler

that it would reduce competition.

competition
Cingular-AT&T Wireless
41 B
GTE-Bell Atlantic
71 B
Daimler-Chrysler-Benz
41 B
Bank of Am.-FleetBoston Finan. 47 B

American Motors

Chrysler

Standard Oil Trust: John D. Rockefeller had become rich during the Civil War
supplying grain and meat, but he realized the potential the discovery of oil would
bring about.
In 1863, he built a refinery in Ohio which brought in quick profits
In 1870,
1870 he and some associates formed the Standard Oil Company of Ohio.
Ohio
Because Rockefeller had no need for storage and insurance fees, he negotiated
with the railroad for refunds which allowed him to reduce the cost of oil,
underselling his competitors
When Rockefeller had enough capital, he intended to buy out his competitors
refineries (horizontal consolidation),
consolidation but most state laws prevented one company
from buying stock in another
Rockefellers lawyer, Samuel Dodd, found a loophole
In 1882, the owners of
Standard Oil and the allied
companies would combine
their operations.
Companies would turn over
their assets to 9 trustees and
in turn would get a share of
the profits
This new type of monopoly
would be called a trust
comprising 40 companies

B Vertical Combinations

merger of companies that

are involved in different phases of production of the same
product. [Purchasing one of your suppliers]
suppliers

Examples

1. Automaker buys a tire factory

2. Bridgestone Tire buying a rubber plantation
3. Campbell Soup buying mushroom farms
4. Funeral Home bought a cemetery and a floral shop
5. Ford bought a steel mill to produce steel needed for autos
Resources
[ore, coal, & iron]

Shell Oil Co. owns

Transportation
[shipping & RR cos]
Steel Mills
USX (Steel)

1. Oil fields
2. Refineries, and
3. Retail gasoline
stations

Carnegie Steel: At the age of 30, Andrew Carnegie

wisely decided to invest his wealth into steel
shortly after the Bessemer Steel process came to
light.
In the 1870s, he set up the first American steel
mills in Pittsburg, PA.
By 1889,
1889 the Carnegie Steel Company was
established.
He soon had enough money to buy the
companies that performed each phase of
production (mines, pig iron furnaces, shipping
companies, rail lines) This is known as vertical
consolidation
This allowed Carnegie Steel to keep low
production costs and therefore low prices for
consumers.
This was because of the phenomenon known as
economies of scale
As production increases, costs are lowered
Small companies could not compete because
they did not own all phases of production.

C Conglomerate (Unrelated) Combination merger

between four or more companies producing unrelated products.
None is responsible for the majority of sales.
These mergers may include a number of subsidiaries acquired

companies that have not been required to abandon their corporate identity.

American Brands, Inc.

Tobacco Products

Distilled Spirits

About $3 trillion in mergers

each year worldwide & about

$1.6 trillion in the U.S.

Diversification is a good

reason for conglomerate

mergers. You are not
putting all of your eggs
in one basket. Your overall sales and profits will be
protected.

R.J. Reynolds- one of biggest

1. Sea-land (containerized shipping)

2. KFC (2nd largest fast-food chain)
3. Del Monte (fruit processor)
4. Heublein (distilled spirits)

Pfizer makes Viagra & Lipitor.

1. Chewing gum (Trident,Dentyne)

2. Razors (Schick)
3. Cough drops (Halls)
4. Breath mints (Clorets, Certs)
5. Antacids (Rolaids)

The trends in mergers in the 90s was toward vertical and

horizontal combinations.
combinations
The biggest cause of merger failures was mismatched corporations,
therefore, conglomerate mergers were the ones most likely to fail.

Advantages of Corporate Mergers

1. Efficiency eliminates overlapping jobs, can share resources

and marketing skills. Mergers may lead to lower consumer
prices making them better able to compete in world markets.
2. Less expensive,
expensive compared to having to build new plants and
hire new employees.
3. Stockholders in the acquired corporations normally benefit
by having stock go up in value by about 30%.
30%
4. Increased size means they can borrow more money.

1. Managers of merged corporations may not have

the necessary supervisory skills.
skills
2. Added unemployment when some positions are
eliminated. 12,500 were laid off in Fleet BostonBank of America merger saving $650M.
When Cingular bought AT&T Wireless,
Wireless 10,000
were laid off.
3. Purchasing corporations stock normally declines.
declines
4. Higher prices and fewer choices for consumers.
5. Acquiring corporation normally goes into debt.
debt

What Town is This?

22 Franchise gives an individual an agreement to market a

companys product in return for a percentage ( royalty)
royalty
of the profits. Semi-independent business.

The company is the franchiser and the individual is the franchisee.

franchisee
The 1st franchise operation was started by Singer Company in 1851
to sell sewing machines. In the last 40 years, franchising has really
taken off, led by Ray Kroc of McDonalds.
McDonalds
Today we have franchising for everything from hemorrhoid clinics
[You bend, we mend] to auto clinics. A typical large city in the
U.S. will have its share of Burger Kings, Foto-Mat, KFCs, Goodyear,
Taco Bell, Pizza Hut, Dunkin Donuts, and others.
There are 3,000 franchises in 670 industries,
industries with 600,000 outlets.
outlets
The franchiser will train your personnel,
personnel take care of marketing
and accounting.
accounting The franchisee receives a tried-and-tested business
method.
method

23 Advantages of Franchises

A 1. Benefits of a well known trade name,

name systemized
management,
management and national advertisement.
B 2. Less than 5% fail each year (65% of all independently
owned businesses fail within the first 5 years).
C 3. Chance to own your own business with minimum risk.
risk

24 Disadvantages of Franchises

A 1. May be too many restrictions imposed so independence

is sacrificed.
B 2. Takes a lot of money for start-up
3. May lose your investment if the company goes bankrupt.
Some franchises such as pizza, video rentals, frozen yogurt,
instant printing, & tanning parlors will not make it
because they are either too competitive or too unhealthy.
Tanning beds are very dangerous. There are two major types
of ultraviolet radiation-UV-A [think of A=Aging]. They have a
longer wavelength & penetrate more deeply into the dermis
and damage collagen & elastin giving you the dry, leathery,
wrinkly look. UV-B [think of B = Burning] are a shorter
wavelength & cause sunburn. Both cause melanoma, damage
the DNA of the skin surface and cause skin cancer.

25 Cooperatives voluntary association of people formed

to carry on some kind of economic activity benefiting members.

Different Types of Cooperatives:

1. Producer Coop group of farmers who join to get better

prices for their goods. They eliminate the middle-man charges.
2. Housing Coop formed by members to buy the building
they live in.
3. Purchasing Coop retail store owned and operated by
its customers.
4. Credit Union members pool their savings so they can
borrow from it at lower rates (the most common form of coop)
coop
5. Service Coop provides service to its members
(electrical or telephone)
6. Baby-Sitting Coop families swap baby-sitting duties
without ever exchanging money.

26 Nonprofit Organizations provides products without

making a profit. Churches are the most common.
(Boy Scouts, Y.M.C.A., Salvation Army, & Goodwill)