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.