Chapter 3 & 4 and Weeks 3: Structure & Governance Flashcards
What are the three forms of Business Ownership?
- Sole Proprietorship
- Partnership
- Corporation
Define a Sole Proprietorship and explain its benefits and disadvantages
Own by one person - may have many employees
Benefits:
(+) Controls day-to-day business operations
(+) least expensive
(+) the owner can operate without interference
(+&-) entailed all profits and loses
Disadvantages:
(-) Holds the burden of all legal and financial responsibilities
(-) Responsible for business debts and liabilities
(-) Hard to survive during tough economic times
(-) Not enough financial support
(-) Once the owner dies, the business dies as well
(-) liquidating (selling) assets are slow
- Ex. of Sole Proprietorship: Local retail stores, repair outlets, service businesses, auto mechanic garage
What are the two types of Partnership, and explain their benefits and disadvantages
General partnership: Both partners provide their financial, managerial, and technical capabilities
(+) Individual risk is reduced
(+) Attaining funds may be easier
(+) less expensive and easier than sole
(-) unlimited liability for the partner’s debts and obligations
(-) each partner is held financially accountable for the other partner’s debts and decisions
(-) tax and continuity - partners are taxed as individuals because partnerships are not recognized as legal entities
(-) liquidating (selling) assets are slow
Limited Partnership: One (or more) owners will severe as general partners who manage the business and have the same unlimited liability as sole proprietors
(-) limited partners who are not involved with business affairs are liable for the amount they invested into the business
(+) easy to form, start-up fees are low
(+) Limited partnerships can attract investors that would not want a general partnership
- Greater capital
(+) only the owner can control the business
(-) survival of a limited partnership depends on the owners and their willingness to continue the business
(-) income generated is taxed as personal income (higher tax rate)
Define a Corporation, and explain how it’s owned and how it’s publicy held and privately held
- Independent legal entity
- Owned by shareholders/investors who purchase stock
- Corporation issues shares which define the ownership structure and voting rights
- Shares of public corporations are sold to individuals or companies who have the capital to purchase them
○ Corporations are defined as publicly held or publicly traded - A private corporation or closely held corporation: shares owned by only a few individuals, the public cannot purchase a share
Define the four key beneifts of the Corporate Form
- Limited Liability
- Owners are not held personally responsible for the debts or losses in the business
- - Permanence
- Corporation does not cease operation once the owner/shareholders retires or dies - Transferability of Ownership
- Ownership of a corporation can be transferred through the buying and selling of the company’s shares - Access to Capital
- Investors can easily turn their money into cash by selling shares onto market
Disavantages of the Corporate Form
- Costly - costly than sole and partnership
-
Worker-owned Co-operatives - are owned and controlled by their employees
○ Retail Co-operatives: members are also the customers whose purchase of a share in the co-op is a perquisite to shopping in the co-op
○ Credit Unions: members invest in a share in the organization as a perquisite for their participation
○ Housing Co-operatives: organizations tend to arise in areas where residents costs are high
What are the two different traits of Worker Co-operatives
- Members are the Owners
- own the business as a group and therefore share the profit - The businesses’s decision making is democratic
- that is, each member has one vote and, therefore can equally influence the management of business
Define stakeholder
an individual or group that has one or more different kinds of stake in a business
- Affected by actions and decisions of the business, direct stake in the success of the business
Define Corporate Goverance
the system of rules, practices, and processes by which a company is directed and controlled
What is a challenge of Coporate Goverance in a corporation? What is the Principle-Agent problem?
The seperation of ownership from control
See image:
Precorporate period: (together) Owners (ownership) and Managers (control)
Corporate period: Shareholders (owners) and Management (control)
- managers have the true power now
- owners are not really owners in a big corporation with a million shares
Principle Agent Problem: growth of attained by management has resulted flaws in corporate governance
- Problems arise because the interests are different between the principles (owners) and the agents (management)
What are the Four Major Groups involved in Corporate Governance
- Shareholders (owners)
- Board of directors
○ Oversee the management of the business - Managers
○ Run the company and manage it on a daily basis - Employees
○ Perform operational work
- Board of directors
What is “Good” Governance? Hint: 5 things
- Organizations can engage in co-operative relationships with suppliers, distributors and competitors
- Aim is to improve efficiency and flexibility to meet customer needs
- Accountability
-
Fairness
○ Consideration is given to stakeholders, each treated equitably -
Transparency
○ Management does not hide information from stakeholders - Reliable Leadership
-
Stakeholder engagement
○ Management is aware of stakeholder’s expectations
What are the 3 categories of Organizations?
Hint: Learned in ADMS 1010
- Public/governmental - provides goods and services not necessarily generating profit
- Private/non-governmental - includes voluntary, offers good and services not necessarily generating profit
- Private - produce goods and services with the intent to make profit for the benefit of their owners
What is an organization? Hint: 4 things
- Social
○ Entities maintained by people- Interact with the environment
○ Obtains inputs from the environment (raw materials, people, technology, etc.) goes into the organization to become outputs (goods and services) - Goal-orientated
- Structure-based
○ To ensure work is allocated and coordinated
- Interact with the environment
Define a system
System: independent elements working together to achieve a goal(s)
- Interdependence of the elements creates an entity that is sum of its parts
