Managing Business

Lecture 3 - Formation and Classification of Organisations

Learning Outcomes
At the end of the lecture, you should be able to:

Identify the basic forms of organization. Explain the advantages and disadvantages of each type of business ownership Understand the impact of the form of business ownership on risk

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations

Business Ownership Decisions

Advantages and disadvantages of each type of business ownership Impact of the form of business ownership on return on investment Impact of the form of business ownership on risk Methods to obtain ownership of existing businesses
Managing Business (ABUS002-3-1) Formation and Classification of Organisations

Forms of Business Ownership

Sole Proprietorship
Owned by a single owner.

Partnership
Co-owned by two or more people. Co-owners must register with the state and may need an occupational license.

Corporation
State chartered entity that pays taxes and is legally distinct from its owners.
Managing Business (ABUS002-3-1) Formation and Classification of Organisations

Sole Proprietors
Must be willing to accept full responsibility for firm performance Business profits are not shared with creditors Need strong leadership skills, must be well organized, and communicate well with employees

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations

Sole Proprietorship
Advantages
All earnings go to the sole proprietor Easy organization Complete control Lower taxes

Disadvantages
Sole proprietor incurs all losses Unlimited liability Limited funds Limited skills

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations

Types of Partnerships
General Partnerships
All partners have unlimited liability.

Limited Partnerships
Some partners have personal liability that is limited to the cash or property they invested in the firm. One or more general partners who actively manage the business, receive a salary, share in profits and losses, have unlimited liability. Personal earnings received from the partnership are subject to personal income taxes.

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations

Partnerships
Advantages
Additional funding Losses are shared More specialization

Disadvantages
Control is shared Unlimited liability for general partners Profits are shared

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations

Other Business Forms

S Corporation
Firm has 75 or fewer employees. Owners have limited liability, but are taxed as if the firm were a partnership.

Limited Liability Corporation (LLC)

Has all the favorable features of a general partnership but also offers limited liability for the partners.

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations

Corporations
Individual or group must adopt corporate charter and file it with the state
Describes name of the firm, stock issued, firms operations Must also establish bylaws Shareholders have limited liability Shareholders elect members of board of directors

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations

Stockholders Elect members of board of directors who are responsible for establishing general policies of the firm
Elect president and other key officers who run the business

Earn return on investment in two ways

May receive dividends Stock may increase in value

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations

Corporations
Advantages
Limited liability Access to funds Transfer of ownership

Disadvantages
High organizational expense Financial disclosure Agency problems High taxes

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations

Private vs. Public

Ownership of privately held corporations is restricted to a small group of investors. Publicly held shares can be easily purchased or sold by investors.
Act of initially selling stock is called going public. Publicly held corporations obtain additional funds by issuing new common stock.

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations

Joint Venture
A joint venture is an agreement between two or more parties to contribute a part of their resources (assets and/or expertise) to a specific project. A joint venture involves:
A high level of commitment, funds, time A degree of risk A management voice for both parties Equity participation by each partner

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations

Joint Venture
Advantages
Better returns Greater control over production and marketing Direct identity Pooling of each partners strengths

Disadvantages
High capital cost Time consuming Cultural differences Political risks

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations

Summary of Main Teaching Points

Explain how business owners select a form of ownership. Understand how the potential return and risk of a business are affected by its form of ownership. Describe the impact of the form of business ownership on return on investment.

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations

Question and Answer Session

Q&A
Managing Business (ABUS002-3-1) Formation and Classification of Organisations

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Organisation Structure and Concepts

Managing Business (ABUS002-3-1)

Formation and Classification of Organisations