Starting and Organizing a Business

Types of Business Ownership

Slide 1 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.

KEY CONCEPTS

Slide #2 There are millions of businesses operating in the United States today.

• Most of them operate within one of four types of business ownership:

  • Sole proprietorship

  • Partnership

  • Corporation

  • Hybrid structure

Slide #3 A sole proprietorship is owned by one person who assumes all the profits and risks from the business.

• By taking all the risks, a sole proprietor experiences unlimited liability, meaning any debts that the business owes can be collected from the owner’s personal assets.

• Over 70% of the businesses in the U.S. are sole proprietorships, and many have fewer than 50 employees.

• Many accountants who run a small or home-based business in which they do people’s taxes are operating sole proprietorships.

Discussion #1: Ask students if they know anyone who owns a sole proprietorship. Do they have any employees or is the owner the only person who works for the business?

Slide #4 A business that is owned by two or more people is called a partnership.

• Often, the purpose of forming a partnership is to combine capital, experience, and/or abilities.

• In a partnership, partners share both the profits and the risk of loss.

• Of the two basic types of partnerships, the most common is a general partnership, in which each partner has unlimited liability.

• A limited partnership, on the other hand, permits a partner to invest money in a business but have limited liability, meaning the amount of financial responsibility could be limited to, for example, the amount invested by that partner.

Slide #5 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.

Slide #6 There are three ways that corporations can grow once they’ve been established.

• A merger occurs when two businesses combine to form one company.

  • This usually happens when a larger company purchases a small company (referred to as an acquisition).

• Consolidation is the act of acquiring many smaller companies.

• Expansion involves making significant additions to the corporation, such as adding a new product line or building a new facility.

  • To do so, the company will need to obtain more capital by selling more shares of its stock, reinvesting company profits, or obtaining a bank loan.

Slide #7 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?

Types of Business Models—Discussion Guide

Slide 1 THINK ABOUT IT

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.

KEY CONCEPTS

Slide #2 A business model is a company’s method or plan for making money.

• It focuses on the products (goods and/or services) that the business plans to sell or provide, the processes that the business plans to use to produce or acquire its products, and the business’s target customers.

• Some businesses maintain the same business model for as long as they are in operation.

• Other businesses update their business models over time—especially when the environment around them, including their target market, changes.

Discussion #1: Ask students to share examples of businesses they experience in their daily lives. How do those businesses make money?

Slide #3 There are various types of business models.

• The manufacturer model involves transforming raw materials into products to sell to either consumers or other manufacturers who need these items to assemble their own products.

• A business that uses the distributor model buys products from a manufacturer and then resells those products to retailers, industrial users, or final consumers.

• A business with a direct sales model generates revenue though salespeople who give presentations and sell products directly to consumers, usually in a non-retail setting.

Slide #4 A franchise model is unique compared to the other business models.

• A franchise is a contractual agreement between a parent company (a franchisor) and a franchisee to distribute goods or services.

• It involves an established company, like McDonald’s, giving a franchise owner the rights to use its brand, products, business model, etc.

• A franchise commonly costs between $20,000 and $50,000. In exchange for agreeing to follow the franchisor’s rules, the franchise owner gains the advantage of having the resources of the established brand.

Slide #5 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?

Organizational Business Design—Discussion Guide

Slide 1 THINK ABOUT IT

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.

KEY CONCEPTS

Slide #2 Authority is the formally granted ability of an individual to make decisions, pursue goals, and obtain resources necessary to support those decisions and goals.

• Effective organizational designs establish two types of authority to managers and supervisors.

• Line authority: the direct authority that affects a business’s day-to-day operations (e.g., a supervisor in a factory)

• Staff authority: refers to advisory authority and often does not include the right to actually make decisions (e.g., a public relations specialist)

Discussion #1: Ask students to think about different types of authority in their lives. Can they identify the different types of authority, line and staff, and where they may have seen those examples?

Slide #3 Authority is also closely tied to the ideas of responsibility and delegation.

• Responsibility means having a duty to get a job done.

• The more authority an employee is given, the more responsibility s/he has to produce results.

• Separating a big job into several smaller tasks is an organizational principle known as division of labor.

• Unity of command is another principle. It means that no employee should have to report to more than one manager or supervisor.

• Businesses also need to weigh management’s span of control, the term for how many workers one supervisor manages.

Slide #4 In a functional structure, each unit or department within the organization has its own set of responsibilities and activities.

• The traditional structure is ideal for organizations that function within a stable environment, such as a company that produces a small number of products with a steady demand.

• A significant advantage to a functional structure is that employees become more skilled in their area of expertise.

• A disadvantage is that it can create narrow perspectives among managers and employees.

Slide #5 In a divisional structure, the organization is broken down into units; however, these units are different from the types you would find in a functional structure.

• A divisional structure could be organized in a number of different ways, including: by product, by process, by territory, or by customer type.

• An advantage to a divisional structure is that it is more flexible than a traditional functional structure.

• A disadvantage is that work efforts could be duplicated across different divisions.

Discussion #2: Ask students to think of why a business might want to organize its business by product. What are advantages they can think of for a divisional structure? What about disadvantages?

Slide #6 The matrix structure combines the functional structure and the divisional structure. Under the matrix structure, authority flows both down and across the organization.

• Each employee can belong to both a traditional functional department as well as a cross functional team.

• These assignments might be temporary or permanent. Roles tend to be project oriented.

• An advantage to a matrix organizational structure is that it encourages flexibility, teamwork, and communication between departments.

• A disadvantage is that it gives employees more than one manager to answer to.

Slide #7 Teamwork and cooperation are essential for a successful company culture.

• The amount of teamwork included in any type of organizational design is called lateral relations.

• Particularly notable in special projects and task forces.

• No matter what structure an organization’s leaders choose to implement, they should strive to include as much teamwork and cooperation among employees as possible.

Discussion #3: Ask students why teamwork is an important part of considering organizational design, regardless of structure.