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Business Organizations Flashcards

The Corporate World and Franchises

Corporations

  • Definition: An organization owned by many people but treated by law as a single entity (like a person).
  • It's a business organization authorized to act as a single entity regardless of the number of owners.
  • Thousands of shareholders (owners) exist, but the government recognizes them as one entity.
  • Powers: Corporations can:
    • Own property.
    • Pay taxes.
    • Make contracts.
    • Sue and be sued.

Ownership

  • Owned by shareholders: People who buy stock in the corporation.

Examples

  • Nike
  • IBM
  • Google

Advantages of Corporations

  • Limited Liability: Stockholders are not personally responsible for the actions of the corporation.
    • Only the business (corporation) can lose money and assets.
    • Liability is limited to the investment amount.
    • Personal assets of shareholders are protected if the company is sued.
  • Long Lifespan: Corporations tend to exist for long periods due to the large number of owners. The business continues even if some owners leave or pass away.

Disadvantages of Corporations

  • Higher Taxes: Corporations pay more taxes than other business types.

Corporate Structure

  • Complexity: Corporations are the most complex business type to form.
  • Stockholders:
    • Become part-owners by buying stock.
    • Earn dividends (a portion of the profit distributed to stockholders).
  • Types of Stock:
    • Common Stock:
      • Gives stockholders the right to vote on corporate decisions.
      • Entitles stockholders to a percentage of future profits.
    • Preferred Stock:
      • Does not grant voting rights.
      • Guarantees a fixed dividend amount each year.
      • Preferred stockholders have the first claim on assets if the corporation liquidates.
  • Board of Directors:
    • Elected by stockholders.
    • Supervise and control the corporation.
    • Hire people to manage the day-to-day operations of the business.

Franchises

  • Definition: A contract where the franchisor sells the right to use its name and sell its product to another business.
  • Franchisee: The business or person buying the franchise.
    • Pays a fee to the franchisor, potentially including a percentage of revenue.
  • Example: McDonald's sells franchises to individual business owners (franchisees).

Important Considerations

  • No Guaranteed Profit: Owning a franchise doesn't ensure profitability.
    • Franchisees can still lose money if the business is not managed well.
  • Training Programs: Franchises often provide training and set operational standards.
    • Franchisors may train employees and supply products.
    • This support can be an advantage for franchisees.
  • Name Recognition: Franchises benefit from established brand recognition.
    • Franchisors are expected to set up the franchisee for success, but the franchisee needs to work hard to manage the daily operations wisely.