Business Ownership

Forms of Business Organization

Dr Kalsoom Sumra
Kalsoom.sumra@comsats.edu.pk
kalsoomsumra@gmail.com
Business How it’s How it Advantages Disadvantages
Type formed grows
 Sole Proprietorship

A business owned and managed by one

individual; the business and the owner
are one and the same in the eyes of
the law
 Sole Proprietorship

Advantages
 Easy to start up

 Ease of management

 Owner keeps the profits

 Owner does not have to

pay separate business
income tax
 Psychological satisfaction

 Easy to discontinue
 Sole Proprietorship
Disadvantages
 Unlimited liability

 Limited access to raising

financial capital
 Small size-may have limited
inventory
 Limited managerial
experience
 Difficulty of attracting
qualified employees
 Limited life
Watch “Poop to Profit” answer
questions discuss – turn in for
a class participation grade

https://www.facebook.com/w
atch/?v=2419623831619256
 Activity

 Working in groups of two – list the

advantages of partnerships.
 Create a list of qualities that you think are
most important in forming a successful
business partnership and why
 Be prepared to discuss your list in class
 Partnership
An association of
two or more
people who co-
own a business
for the purpose of
making a profit

A partnership agreement or the Uniform Partnership Act

 Partnership
Advantages
 Ease of start up

 Ease of management

 Lack of special taxes on

partnership’s income
 Larger pool of capital

 Ability to attract limited

partners
 More efficient operations
that come from larger size
 Partnership
Disadvantages

 Unlimited liability
of at least one
partner
 Limited life
 Lack of continuity
 Potential for
personality and
authority conflicts
 Special Partnerships
 Limited partnership-one or more partners are not
active in the running of the business, and whose
liability for the partnership’s debt is restricted to
the amount invested in the business
 General partnership- all partners are jointly
responsible for management and debts(most
common form)
 Articles of Partnership: contract between partners
spelling out the rules of partnership.
Dividing profit
Dividing responsibility
Admitting new partners
Buying out partners
 Corporations
A separate legal entity apart from its
owners which receives the right to
exist from the state in which in which
it is incorporated
 Domestic
 Foreign
 Alien
 Publicly held
 Closely held
Corporations- 20% of Business
74%-profits
 Corporations
Certificate of Incorporation
 Name
 Statement of purpose
 Time horizon
 Names and addresses of incorporators
 Place of business
 Capital stock authorization’
 Capital required at time of incorporation
 Provisions for preemptive rights
 Restrictions on transferring shares
 Names and addresses of officers
 By-laws
Corporate Structure
 Stock
Common stock – (owners are 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.)
 Stock (cont)
 Preferred Stock – (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 company’s profits
increase. They are like a silent partner
because they can not vote and have no say
in how the business is run.
 508 points
10-19-87
24% drop
in one day

On this day, Sam Walton,

the richest man in the world,
had a paper loss of $1.5 billion.
 Corporations
Advantages
 Ease of raising financial
capital
 Limited liability for its
owners
 Board of directors can hire
professional managers to run
the firm
 Unlimited life
 Ease of transferring
ownership of the corporation
 Corporations
Disadvantages
 Double taxation of corporate
profits
 Difficulty and expense of
getting a charter
 Shareholders (owners)
have little voice in how the
business is run
 Subject to more government
regulations than others forms
of business
 Franchises

 Franchising is a form of business organization in

which a firm that already has a successful product
or service (franchisor) licenses its trademark and
method of doing business to another business or
individual (franchisee) in exchange for a franchise
fee and an ongoing royalty payment.
 Some franchisors are established firms (like
McDonald’s) while others are first-time enterprises
being launched by entrepreneurs.
Franchisor- actual owner of the business that
lets other investors rent or lease its name,
business profile, and way of doing business
Franchisee- investor who rents or leases the
business model from the franchisor and then
hope to recoup his/her investments by selling
the franchisor’s goods or service
Advantages and Disadvantages of
Buying a Franchising
Advantages
•A proven product or service
• within an established market.
• An established trademark or
business system.
• Franchisor’s training, technical support, and
managerial expertise.
• An established marketing
network.
• Availability of financing (varies).
• Potential for business growth.
Disadvantages
•Cost of the franchise.
• Restrictions on creativity.
• Duration and nature of commitment.
• Risk of fraud, misunderstandings, or
of franchisor commitment.
• Poor performance on the part of other
franchisees.
• Potential for failure.
 Stop and Think
 If you started your own business what
would it be?
 What are some of the 4 Factors of
production you would need.
2 examples for each
 Questions
1. Name at least 3 advantages and
disadvantages of a sole proprietorships,
partnership, corporation, and Franchise.

2. Name and describe the two types of

partnerships

3. Name and describe the two types of

stock.
 From Poop To Profit

 Watch video, discuss, answer questions –

turn in for a grade

 Watch what is a corporation and answer

questions for a grade
 Business Growth and
Expansion
Essential Question:
How are businesses formed and how
do they grow?
 Growth through
Reinvestments
 Business revenue can be used for
 Investment in factories
 Machinery
 Technologies
 Before reinvestments:
 Must estimate its cash flow.
 First records its total sales and then subtracts
all expenses, taxes, and depreciation = net
income
 Net income + depreciation = cash flow (or the
bottom line) real measure of business profit.
 Decide to reinvest part of cash flow or
additional sales and more profits
 Growth Through Mergers
(cont)

 Horizontal mergers: joining of firms that

make the same product (Nextel and Sprint)

 Vertical Merger: joining of firms involved in

different stages of manufacturing or
marketing
 Growth Through Mergers
 Firms merge, one gives up it separate
legal identity
 Company may merge with another to
 Grow faster
 Become more efficient (synergy)
 Economies of scale (larger size)
 Acquire or deliver a better product
(diversification)
 Eliminate a rival
 Change or lose its corporate identify
 Growth Through Mergers
(cont)
• Conglomerate: composed of
four or more businesses
• Marketing unrelated
products
• None are responsible for a
majority of sales
• Multinational: corporation with
manufacturing and service
operations in several countries
-Subject to each nation’s
business regulations
 Entrepreneurial Startup:
Incubators
 Incubator: Program designed to support
successful development of startups by providing
business resources.
 business, marketing, and networking advice

 computing resources (computers, net access,

servers)
 financial advisors

 management teams

 access to loans and banks

 access to angel investors and/or venture

capitalists
 legal advisors (such as for intellectual property
rights)
 Venture Capitalists

 venture capital ("VC"): Financial

resources given to early-stage companies.
 given to startups by VC firms (groups)

 VC firm gets % of profits or equity (stock)

 different from bank loans; does not need to be

paid back
 Venture Capitalists (cont)
 Stages of VC financing:
 seed funding: initial minimal funds; often given
by angels
 start-up: early funds from VC firm for
marketing/dev
 growth ("series A"): large investment ($1-2M) for
preferred stock
 second round: company is successful, but not
profiting
 expansion ("mezzanine"): $ given to a newly
profitable company
 exit/bridge: VC firm sells stock once company
matures
 Crowdfunding?
Crowdfunding is a method for obtaining
project funding, by soliciting contributions
from a large group of people, and especially
from an online community.
 Why Does it Work?
Small donations from many people can
raise a lot of money.

By tapping into your online social

connections, you can reach a much
broader audience in less time than
traditional fundraising processes.
 Be a Thinker
 With a neighbor develop 2 examples
of each type of merger
 Vertical

 Horizontal

 Conglomerate

 Whywould companies ever want to

merge????
1. What does cash flow represent?
2. What can business owners do with cash flow to further
help their business?
3. What can happen when cash flows are reinvested in the
business?
4. What happens when two firms merge?
5. What are five possible reasons for mergers?
6. What is the difference between a horizontal merger and a
vertical merger?
7. What is the main reason for a conglomerate to want
diversification?
8. What are advantages and disadvantages of
multinationals?
 Nonprofit Organizations

Essential Question:
How does a market economy support
nonprofit organizations?
 Community and Civic
Organizations
 Nonprofit Organization: business to
promote its members’ collective
interest, not seek financial gain
 Incorporate to take advantage of a
corporation’s unlimited life and limited
liability
 If money remains after expenses are
paid,
 Cooperatives
 Voluntary association of people who carry on an
economic activity that benefits its members
 Consumer Cooperatives: buy food and other
necessities in bulk
 Members donate time to the co-op

 Members pay lower prices for goods

 Service Co-ops: credit unions, offer services to its

members at lower rates
 Producer Co-ops: help members, farmers,
promote or sell their products
 Labor, Professional, and
Business Organizations
 Labor unions: represent workers’ interest
and negotiate with management through
collective bargaining
 Professional association: set standards
for those in the profession and influence
government policies on issues concern
members’ interest
 Business Associations: industries or trade
associations that represent specific
businesses
 Government
 Direct Role  Indirect Role:
 Agencies produce  Regulates public
and distribute utilities
goods and services  Grants money to
to consumers such people in form of
as the TVA Social Security
(electricity) or US and student
Postal Service financial aid
 Gov’t Corp:
 Board of directors

 Congress’ money v.
investors’ money
Define the following words:

Bankruptcy

Credit Union

Nonprofit organization
 Nonprofits - copy & answer

1. Describe a community organization.

2. Name and describe the three types
of cooperatives.
3. What is a labor union?
4. What is a professional organization?
5. What is a business association?
 Cont.

6. Define collective bargaining, credit union,

and Better Business Bureau
7. What are some examples of the
governments direct role in the economy?
8. What are some examples of the
governments indirect role in the
economy?