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BUSINESS

ORGANIZATIONS

Nguyen Thanh Van M.A
Chapter Issues
=Major forms of business
organizations
=How businesses are created
=Advantages and disadvantages of
these business organizations
=Alternative business forms to apply
to various circumstances
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Business Organizations
Sole
Proprietorship
Partnership Corporation
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One owner
Not a separate legal
entity from the owner

I. Sole Proprietorships
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I. Sole Proprietorship
1. Definition
= A person doing business for himself/herself
= Usually the proprietor owns all of the business property
= Responsible for control of the business
= Responsible for management
= Responsible for liabilities
= Profits from the business are taxed personally to the
proprietor

Nguyen Thanh Van
NetSolutions
A Sole Proprietorship
On November 1, 2008, I started a sole
proprietorship called NetSolutions. I plan to
use my knowledge of microcomputers and
offer computer consulting services for a fee. I
am the only owner of the company.
Chris Clark,
Owner
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I.2. Advantages of a sole
proprietorship
A. It is easy to set up and close down
- The owner needs only capital and has
desire to set up a business, he is free to
do whatever he likes as long as he is not
against the law.
- Whenever he meets any difficulties or
does not want to continue to run the
business, he can close it down.
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I.2. Advantages of a sole
proprietorship
B. The owners freedom
- The owner is free to deal with any
problems in the business such as what to
do, how to do and for whom.
- Free to change the business field.
- Free to set up and close down the
bisuness whenever he likes
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I.3. Disadvantages of a sole
proprietorship
A. Limited fund
- Capital must come from the owners
resources or is borrowed
- It is difficult for him to borrow from
financial institutions without mortgage
or guarantee of the third party
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I.3. Disadvantages of a sole
proprietorship
B. Limited ability
- No one can be an expert in all fields but in
a business, the owner has to deal with a
lot of problems such as marketing,
accounting, public relation, etc
- He needs to have enough abilities in
different fields
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I.3. Disadvantages of a sole
proprietorship
C. Limited life
Whose life is it?
- It is easy to be closed
down if the owner
does not find out the
best solution to any
problem in running
the business
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I.3. Disadvantages of a sole
proprietorship
D. Unlimited liability
- The only one owner of the company has
to be personally liable for all debts of the
company.
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Two or more owners
Not a separate legal
entity from the
owners

II. Partnerships
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II. General Partnership
1. Definition: An association of
two or more persons to carry
on business as co-owners for
a profit
= General partners control the
operations & profits
= Each of the partners has a
fiduciary duty to the other
partner(s)


= No need to enter into a
formal agreement for a
partnership to exist at law
= However, agreements are
preferable, esp. regarding
finances, management and
dissolution issues

= If the agreement does not
state otherwise, the profits
of the partnership are
divided equally
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Partnership Form of
Organization
Partnership
Agreement
Voluntary
Association
Limited
Life
Taxation
Unlimited
Liability
Mutual
Agency Co-
Ownership
of Property
C1
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Partnership Agreement
=It defines the relationship between
partners in terms of
Ebusiness responsibilities
Eprofit sharing
Etransfer of interest
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Organizing a Partnership
Partners can invest both assets and liabilities in the
partnership.
Assets and liabilities are recorded at an agreed-
upon value, normally fair market value.
Asset contributions increase the partners capital
account.
Withdrawals from the partnership decrease the
partners capital account.
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Organizing a Partnership
On 2/15/08, Smith and Jones form a
partnership. Smith contributes $120,000
cash. Jones contributes land valued at
$40,000.
Smith, Capital 120,000
Jones, Capital 40,000
To record initial investment in partnership
P1
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Dividing Income or Loss
Three frequently used methods to divide
income or loss are allocation on:
1. Stated ratios.
2. Capital balances.
3. Services, capital and stated ratios.
Partners are not employees of the partnership but are its
owners. This means there are no salaries reported as
expense on the income statement. Profits or losses of
the partnership are divided on some agreed upon ratio.
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Allocation Based on
Stated Ratios
Smith and Jones agree to divide profits or
losses for Smith and for Jones. For
2008, the partnership reported net income
of $60,000.
Dec. 31 Income Summary 60,000
Smith, Capital 45,000
Jones, Capital 15,000
To record division of 2008 net income.
$60,000 = $45,000
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2. Advantages of a
partnership
A. Has more capital than a sole
proprietorship
- Internal source: from partners
- External sources: Their ability to make
loans from outside.
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2. Advantages of a
partnership
B. Has more experience, ability than a sole
proprietorship
- Two heads are better than one
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3. Disadvantages of a
partnership
A. Limited fund
B. Limited Life
C. Unlimited liability
D. Disagreement
among partners
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Termination of General
Partnership
= Dissolution occurs when
an event takes place to
dissolve the partnership
= Change of the composition
of the partners
= Withdrawal of a partner
= Bankruptcy of a partner
concerning the business
= Death of a partner
= Winding up of the
partnership involves
completing any unfinished
business
= If terminated, partnership
must be reformed
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II. 4.Kinds of Partnership
Limited
Partnerships
(LP)
General partners
assume management
duties and unlimited
liability for partnership
debts.
Limited partners
have no personal
liability beyond
invested amounts.
Limited
Liability
Partnerships
(LLP)
Protects innocent
partners from
malpractice or
negligence claims.

Most states hold all
partners personally
liable for partnership
debts.
Limited
Liability
Corporation
s
(LLC)
Owners have same
limited liability feature
as owners of a
corporation.

A limited liability
corporation typically
has a limited life.
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Limited Partnership
= Definition: 2 or more persons (partners) who have entered into
an agreement to carry on a business venture for profit
= MUST have a written agreement that is filed with the state
= General partners (at least one)
EManage the business
EAre personally liable to creditors
EHave the duty to account to the limited partners
= Limited partners (at least one) are investors only
EDo not manage the business
EAre not liable for debts
= Limited partners become general partners if they participate in
or manage the business (lose their limited liability)
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Termination of Limited
Partnership
= Similar to the termination of a
general partnership
= Death, insanity, withdrawal of
a limited or general partner
will terminate
= Bankruptcy of a general
partner = termination
= Bankruptcy of a limited
partner does not
= Organization must wind up the
business
= Creditors are paid and profits
are dispersed according to
agreement
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Graphic Organizer
II.5.Similarities and Differences Between
Partnerships and Sole Proprietorships
Increased
diversity of
experience
Shared losses
Combined
funds
Both
Pride in
owning and
running business
Easy to set up
Low taxes
Unlimited liability
for debts
Huge time
demands
Quicker
decision-
making
Owner keeps
all profits
Owner is
own boss
Relatively easy
to get credit
Partnerships
Sole Proprietorships
Shared
decision-
making
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III.1. Definition
One or more owners
Separate legal entity
from the owner(s)

III. Corporations
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III. Corporations
= Legal entities/persons
= Can sue & be sued
= It has liability
= It has constitutional rights
= Liable for agents actions and contracts
= Close corporation: Shares held by only one or small group of
shareholders; stock not traded on a stock exchange
= Public corporation: Stock is traded on a stock exchange; is likely
to have many shareholders

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Privately Held
Publicly Held
Ownership
can be
III.1.1. Corporate Form of
Organization
Existence is
separate from
owners
An entity
created by law
Has rights and
privileges
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III.1.2. Creating A
Corporation

=Articles of
Incorporation and an
application are sent to
the appropriate
Government office
=The office issues a
Certificate of
Incorporation
=Incorporators hold a
first organization
meeting
=At the first meeting
E Elect a Board of
Directors
EEnact bylaws or
rules that govern
internal operations
(bylaws cannot
contradict the
Articles of
Incorporation)
EIssue the
corporations stock
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Advantages
=Separate legal entity
=Limited liability of stockholders
=Transferable ownership rights
=Continuous life
=Lack of mutual agency for stockholders
=Ease of capital accumulation
Disadvantages
=Governmental regulation
=Corporate taxation
III.2. Characteristics of
Corporations
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III.2.1. Advantages of A
Corporation
A. A major advantage of
a corporation is its
limited liability.
If your company loses money,
the stockholders lose
only what they invested.
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III.2.1. Advantages of A Corporation
B. Unlimited life
Another advantage is that the
corporation doesnt end if the owners
sell their shares or die
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III.2.1. Advantages of A Corporation
C.It is easy to transfer ownership
- Sale of close corporation is like a
sole proprietorship sale as price of
shares is not determined on a stock
exchange
- Must determine the market
value of the close corporation
and its shares. May need
specialists to determine value.
- Sale of stock of public corporations
may be traded on stock exchange.
Price is known and therefore no
specialists need to be hired to
determine market value.
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III.2.2. Disadvantages of a Corporation
A.Costly and complicated to set up
It is more difficult to start a corporation
than a sole proprietorship or a
partnership and running a
corporation can be much more
complicated.
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III.2.2.Disadvantages of A
Corporation
B. Double taxation
Profit
of
the corporation
Dividend
Of
Stockholder 1
Dividend
Of
Stockholder 2
Dividend
Of
Stockholder 3
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Double taxation
=Corporate profits are taxed at
corporate tax rate.
=Dividends are taxed at each
individual shareholders tax rate.
=In effect this is double taxation
of the same profits.
=Under the law, since there are
two separate entities
(corporations and shareholders)
they are taxed twice.
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III.3. Parties To A Corporation
= Shareholders
EOwners of the
corporation
ESee Storetrax.com v.
Gurland
= Board of Directors
EHave management
power over large
decisions
EHave fiduciary duties to
the shareholders
= Managers
EAppointed/hired by
directors to manage
day-to-day decisions
= Employees
EWorkers
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Governance of the Corporation

=Shareholders are the owners of the corporation
EResidual claims to profits and assets
ERights to vote to:
EElect the board of directors
EAdopt the financial statements
EApprove the auditors for the coming year
=Board of Directors and Managers are responsible for
day-to-day operation of the corporation in accordance
with standards set out in the corporations act.
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Stockholders
Board of Directors
President, Vice-President,
and Other Officers
Employees of the Corporation
III.3.1. Organizing and Managing
a Corporation
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Corporate Organization Chart
Secretary Vice President
Finance
Vice President
Production
Vice President
Marketing
President
Board of Directors
Stockholders
Ultimate
control.
Stockholders
usually meet
once a year.
III.3.1.Organizing and Managing
a Corporation
Selected by a
vote of the
stockholders.
Overall
responsibility
for managing
the company.
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OVote at stockholders meetings
OSell stock
OPurchase additional shares of stock
OReceive dividends, if any
OShare equally in any assets remaining
after creditors are paid in a liquidation
III.3.2.Rights of Stockholders
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Each unit of
ownership is
called a share of
stock.
A stock certificate
serves as proof
that a stockholder
has purchased
shares.
Stock Certificates and
Transfer
When the stock is sold, the stockholder signs a transfer
endorsement on the back of the stock certificate.
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Par value is an
arbitrary amount
assigned to each
share of stock when
it is authorized.
Market price is the
amount that each
share of stock will
sell for in the market.
Selling (Issuing) Stock

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Shareholders/ General Assembly
Board of Directors
Chairman of the Board
CEO / president
Vice President -
Sales
Vice President -
Manufacturing
Vice President
Accounting and
Finance
Vice President -
Personnel
Secretary
Controller (accounting) Treasurer (finance)
Represents
the
corporation
III.3.3.Authority Structure
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III.4. Termination of the Corporation
(Dissolution)
=Voluntary
EApproval of the shareholders
and the Board of Directors
EArticles of Dissolution are
filed with the government
=Involuntary
EThe government dissolves it
ESometimes due to fraud in
the establishment of
corporation or bankruptcy of
the corporation
=Wind up business to pay
creditors and disburse profits
to shareholders
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III.5.Professional Corporations
(PCs)
=Created by laws
=Created to have
limited liability for its
members
=Example: Doctors join
to reduce liability risk
for malpractice of a
member-doctor
=Stock usually not sold
to outside investors
=Has special tax
treatment with IRS

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IV. Other Forms of Business
Organizations
=Joint Ventures:
General partnership
for a limited time &
purpose
=Cooperatives:
Association created to
provide economic
service to its members
=Syndicates: Persons
join together to
finance a specific
project


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Franchises
=Three types:
E1) product distributorships (i.e. Ford Dealership)
E2) trademark/trade-name licensing (i.e. Coca-Cola)
E3) business format franchising (i.e. McDonalds)
=Franchisor grants a right to sell goods or services
to a franchisee in return for payment of a
franchise fee
=Uniform product or services and the use of a
trademark help the franchisee establish quickly in
the market
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Franchises
=Laws are still developing
Elaws protect investors
EFTC Franchise Rule: Franchisor is required to
give an offering circular (disclosure statement)
to potential franchisees
ESome governments have laws to regulate
franchises as well
EThe franchise agreement sets forth rights and
obligations of the parties, i.e. territorial rights, fees and
royalties, termination, etc.

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Advantages of a Franchise
An advantage of opening a franchise
is that its easy to start.
The name of the parent company can
be a big draw for customers.
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Advantages of a Franchise
You can operate a franchise yourself,
as a sole proprietor, as a partnership
with someone else, or even as a
corporation.
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Disadvantage of a Franchise
The disadvantage of running a
franchise is that the franchisor is often
very strict about how the business is
run.
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