Download Chapter 5

Forms of Business Ownership
and Organization
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Most Businesses are Small
Businesses
 What is a Small Business?
 A firm that is independently owned and operated,
not dominant in its field, and meets industryspecific size standards for income or number of
employees.
 98 percent have fewer than 100 employees
 Over 14 million people in the U.S. are earning
business income without any employees
 Almost half the sales in U.S. are made by small
businesses
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Most Businesses Are Small
Businesses
 Most non-farming small businesses have been
concentrated in retailing in the service industries
 Typical Small-Business Ventures
 Dentists
 Home Builders
 Florists, etc
 Almost half of small businesses in the U.S. are
home based businesses (firms operated from the
residence of the business owner)
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 David vs. Goliath: Business Sectors Most
Dominated and Least Dominated by Small Firms
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 Major Industries Dominated by Small Businesses
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Contributions or Small Business
to the Economy
 Creating New Jobs
 Creating New Industries
 Attracting New Industries
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Advantages of a Small Business
 Small businesses differ greatly in:
 Forms of organization
 Market positions
 Staff capabilities
 Managerial styles
 Organizational structures
 Financial resources
 These differences usually seem like advantages to
small-business owners
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 Advantages of Small-Business Ownership
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Advantages of a Small Business
 Innovation
 Example: Start-up business to offer online bookstore
shopping and delivery.
 Typically develop twice as many product innovations
per employee as larger firms
 Also obtain the more patents per sales dollar than
larger businesses
 Key innovations developed by small businesses
include the airplane, audio tape recorder, doubleknit fabrics, optical scanner, PC, soft contact lenses,
and the zipper
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Advantages of a Small Business
 Lower Costs
 Example: Small retailer who can prepare sales flyers
on a PC.
 Small firms may be able to provide goods and
services at prices that large firms cannot match
 Overhead costs are usually minimized
 Typically, organizations are lean -- with the smallest
staffs and few support personnel
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Advantages of a Small Business
 Superior Customer Service
 Example: Free alterations on clothing purchases
from a small boutique.
 Small firms can operate with greater flexibility
 This allows tailoring of product lines and services to
the needs of customers
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Advantages of a Small Business
 Filling Isolated Niches
 Example: Retail store that specializes in selling
products designed for left-handed consumers.
 Large businesses tend to focus on the large segments
of the overall market
 Growth prospects of market niches are too limited,
and expenses involved in serving them to great, for
large firms
 This creates opportunity for small firms
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Disadvantages of a Small Business
 In addition to being vulnerable to economic
downturns, primary disadvantages include:
 Management Shortcomings
 Inadequate Financing
 Government Regulation
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Disadvantages of a Small Business
 Management Shortcomings
 People often go into business with little, if any, business
training
 Owners often hesitate to turn to consultants for advice
in areas were they lack knowledge or experience
 Frequently struggle with “rose-colored-glasses
syndrome”
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Disadvantages of a Small Business
 Inadequate Financing
 Too often, new business owners assume a that they will
generate enough funds in the first few weeks or months
to finance continuing operations
 Provisions must be made for uneven cash flows
 Banks often very reluctant to make small business loans
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 Sources of Small-Business Financing
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Disadvantages of a Small Business
 Government Regulation
 Small-business owners often complain bitterly of
excessive government regulation and red tape
 Paperwork costs account for billions of small-business
dollars each year
 Taxes are another burdensome expense for small
businesses
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Alternatives for Organizing
a Business
 Sole Proprietorships
 Sole proprietor—form of business ownership in
which the company is owned and operated by one
person.
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Alternatives for Organizing
a Business
 Partnerships
 Partnership—form of business ownership in which
the company is operated by two or more people who
are co-owners by voluntary legal agreement.
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Alternatives for Organizing
a Business
 Corporations
 Corporations—business that
stands as a legal entity with
assets and liabilities separate
from those of its owner(s).
 S corporations
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 Double Taxation: A Disadvantage of the
Corporate Form of Organization
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Alternatives for Organizing
a Business
 Changing Legal Structures to Meet Changing
Needs
 Considerations of the appropriate legal structure
include:
 Personal financial situations and the need for
additional funds
 Management skills and limitations
 Management styles and capabilities for working with
others
 Concerns about exposure to personal liability
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Organizing and Operating a
Corporation
 Types of Corporations
 Domestic—A firm is considered a domestic
corporation in the state where it is incorporated
 Foreign—When company does business in a state
other than the one where it has filed incorporation
papers, it is registered as a foreign corporation in
each of those states
 Alien—A firm incorporated in one nation that
operates in another is known as an alien corporation
where it operates
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Organizing and Operating a
Corporation
 The Incorporation Process
 Where to Incorporate
 The Corporate Charter
 Articles of Incorporation
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Organizing and
Operating a
Corporation
 Levels of Management in
a Corporation
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Organizing and Operating a
Corporation
 Corporate Management
 Stockholders—person or organization who has bought
shares of stock in a corporation and is entitled to some
of its profits.


Closed or Closely Held
Publicly Held
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Organizing and Operating a
Corporation
 Corporate Management
 Stock Ownership and Stockholder Rights


Preferred stock owners have limited voting rights;
receive dividends before others
Common stock owners have voting rights but only
residual claims on assets and are the last to receive any
income distributions
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Organizing and Operating a
Corporation
 Corporate Management
 Board or Directors—elected governing body of a
corporation.

Sets policy, authorizes major transactions, and hires and
supervises the CEO
 Corporate Officers and Managers

Make most major corporate decisions
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Organizing and Operating a
Corporation
 Employee-Owned Corporations
 Employee ownership: where workers buy shares of
stock in the company that employees them


Corporate organization stays the same
Most stockholders are also employees
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Organizing and Operating a
Corporation
 Not-for-Profit Corporations
 Organizations that pursue objectives other than
returning profits to owners
 Include:





Museums
Libraries
Religious and human-service organizations
Zoos
Thousands of other groups
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Public and Collective Ownership
 Public Ownership
 When a unit or agency of government owns and
operates an organization
 Government-Owned Corporations
 Used When:



Private investors are not willing to invest in high-risk
projects
When private ownership has failed
Operating public companies can be used to foster
competition
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Public and Collective Ownership
 Customer-Owned Businesses: Cooperatives
 Cooperative: an organization whose owners join
forces to collectively operate all or part of the
functions in their industry
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Joining Forces
 Mergers and Acquisitions (M&A)
 Merger



Vertical Merger- merger that combines firms operating at different
levels in the production and marketing process.
Horizontal Merger- merger that joins firms in the same industry for
the purpose of diversification, increasing customer bases, cutting costs,
or expanding product lines.
Conglomerate Merger- merger that combines unrelated firms, usually
with the goal of diversification, spurring sales growth, or spending a
cash surplus in order to avoid a takeover attempt.
 Acquisition
 Joint Venture
 Specialized Partnership
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Have a good day
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