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Unit 2

Starting and Organizing a Business

THINK ABOUT IT

Different types of businesses have different requirements for ownership, taxation, accounting, and financial reporting, among many other considerations. Depending on which type of business a person owns or works for, there could be significant differences in what is required of her/him.

2.1 Explain types of business ownership

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Types of Business Ownership

BL:003 Explain types of business ownership

Sole proprietorship
Partnership
Corporation
Hybrid structure

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Sole Proprietorship

BL:003 Explain types of business ownership

One owner assumes �all profits and risks.
Unlimited liability

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Partnership

BL:003 Explain types of business ownership

Two or more owners �share all profits and risks.
General partnership

Unlimited liability

Limited partnership

Limited liability

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Corporations

BL:003 Explain types of business ownership

Owned by stockholders only �liable for the amount invested
Governed by board of directors
Four types:

Private
“C” corporation
“S” corporation
Nonprofit

A corporation functions independently of its owners but is treated as a person with legal rights, duties, and powers.

Because a corporation is considered separate from its owners, the owners are not liable for the company’s actions, and their personal property cannot be taken to pay outstanding debts.

Owners are only liable for the money they invested in a corporation.

To own a corporation, a person purchases shares of stock and becomes a stockholder (or shareholder).

The more shares of a stock a person owns, the more control the person has over the business.

Corporations are governed by a board or directors, consisting of people who make decisions about the activities of the business.

The company’s officers (president, CEO, CFO, etc.) execute these decisions and run the day-to-day aspects of the business.

Corporations are generally established as one of four types. The type of corporation determines how the business is taxed by the government and which legal guidelines it must follow.

A private corporation does not offer shares for sale to the general public.

It might have just a few shareholders who oftentimes also operate and manage the business.
A private corporation is not usually required to make its financial activities public, but it must prepare reports for the states in which it operates for tax purposes.
Private corporations are taxed on the profits made by the companies themselves, and their shareholders are taxed on the dividends that they earn on their investments in the company. This is often called dual taxation.

A “C” corporation, also known as a public corporation, can sell unlimited shares of stock to the general public.

Federal law requires “C” corporations to provide financial information (e.g., earnings, assets, debts) to the public.
This information is outlined in a formal document called an annual report.
They are also subject to dual taxation.

An “S” corporation carries the same liability protection of a corporation, but is taxed as a partnership to help smaller businesses avoid dual taxation.

To qualify as an “S” corporation, a company must have 100 or fewer shareholders and meet a number of other government regulations.

A nonprofit (or not-for-profit) corporation operates to accomplish a specific mission other than making a profit.

That mission is typically charitable, educational, religious, or scientific in nature and intended to help society.
Income is used to fund programs and cover operational costs.

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Corporation Growth

BL:003 Explain types of business ownership

Merger
Consolidation
Expansion

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Hybrid Structures

BL:003 Explain types of business ownership

Limited liability partnership
Limited liability company

A hybrid structure enables owners to combine the advantages of a corporation with the benefits of either a sole proprietorship or a partnership.

Depending on the number of owners, a hybrid business can be structured as a:

Limited liability partnership (LLP)
Limited liability company (LLC)

Characteristics of hybrid business structures include:

Limited liability—Personal assets cannot be taken to pay company debts.
Limited life—Most states require that the company dissolve after a certain amount of time and/or upon the death, retirement, or resignation of an owner.
Limited taxation—Taxes are claimed only on individual members’ personal income tax returns.
Unlimited owners/partners—Hybrid structures can have as many members as desired.

Discussion #2: Ask students if they were going to open a business what type would they want to open. What factors will they consider before making this decision?

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2.2 Describe types of business models

An architect’s blueprints are the starting points for any construction project.

You can’t construct a building without blueprints.
Businesses are similar—they all have a plan in order to run.
Business owners and managers would not be able to run their businesses without a business model.

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Business Models

Focuses on products �that business plans �to sell or provide
Describes business’s target customers
Often evolves over time

EC138: Describe types of business models

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Manufacturer model
Distributor model
Direct sales model

Many Types of Models

EC138: Describe types of business models

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Contractual �agreement
Use likeness �of established companies
McDonald’s

The Franchise Model

EC138: Describe types of business models

Credit: Donald Trung/CC Creative Commons Attribution-Share Alike 4.0 International license

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Freemium model

Gives portion of �services away
A preview

Subscription �model

Service for �recurring fee

Freemium and Subscription Models

EC138: Describe types of business models

Credit: https://zoom.us/meetings

People encounter freemium and subscription models every day.

Freemium model

A business with a freemium model gives a portion of its goods or services away for free to allow customers to preview the business’s products.
The business hopes that after trying out the free version of a product (e.g., a phone app), consumers will purchase a more sophisticated or premium version of the same good or service.

Subscription model

A company with a subscription business model typically offers a good or service in exchange for a recurring fee, usually charged monthly.
Frequently, subscriptions (e.g., cell phone data plans) involve long-term contracts.

Discussion #2: Ask students what business model they would choose if they were to start their own business. What would their product be? A good or a service? How would customers access that product?

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2.3 Explain the organizational design �of businesses

Businesses, like schools and governments, need clear, well-planned organizational design

It creates clear lines of authority.
Organizational design prevents confusion and loss of productivity.
Good organizational design increases productivity, and allows businesses to compete better with other businesses.

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Design establishes �two types of authority

Line authority

Day-to-day operations

Staff authority

Advisory authority

Authority

EC:103 Explain the organizational design of businesses

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More authority, �more responsibility
Division of labor
Span of control

EC:103 Explain the organizational design of businesses

Responsibility

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Functional Structure

Stable environment

Steady demand
Small number �of products

More structure
Narrow perspectives

EC:103 Explain the organizational design of businesses

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Divisional Structure

Organized by product, �process, territory, or �customer type
Encourages flexibility
Efforts could �be duplicated

EC:103 Explain the organizational design of businesses

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Matrix Structure

EC:103 Explain the organizational design of businesses

Combines divisional and �functional structures
Project oriented
Encourages flexibility, �teamwork, and �communication
More managers �to answer to

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Lateral Relations

Teamwork in organizational design
Special projects and task forces

EC:103 Explain the organizational design of businesses

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Acknowledgments

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