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TYPES AND FORMS OF BUSINESS ORGANIZATION
A business organization is frequently referred to as a business entity. A business entity is any business organization that exists as an economic unit.Business entities can be grouped according to the type of business activity they perform.
1.Service companies perform services for a fee. This group includes companies such as accounting firms, law firms, repair shops, and many others.
2.Merchandising companies purchase goods that are ready for sale and sell them to customers. They include such companies as auto dealer ships, clothing stores, and supermarkets.
3.Manufacturing companies buy materials, convert them into products, and then sell the products to the companies or to the final customer. Examples are steel miles, auto manufacturers, and so on.
The business entity concept applies to all forms of businesses -single proprietorship, a partnership, and a corporation.
A single (sole) proprietorship is business owned by an individual and often managed by that same individual. Single proprietors include physicians, lawyers, electricians, and other people who are 'in business for themselves'. In a single proprietorship, the owner is responsible for all debts of the business. Operating as a proprietorship is the easiest way to get started in a business activity. Other than the possibility of needing a local license, there are not any prerequisites to beginning operations.
A partnership is a business owned by two or more persons associated as partners. Partnerships are created by an agreement. Included in the agreement are such terms as the initial investment of each partner, the duties of each partner, the means of dividing profits or losses between thepartners each year, and the settlement to be made upon the death or withdrawal of a partner. Accountants, attorneys, and other professionals frequently operate their firms as partnerships.
A corporation is a business owned by a few persons or by thousands of persons. The owners of the corporation are called shareholders or stockholders. They buy shares of stock. If the corporation fails, the owners lose only the amount they paid for their stock. The personal assets of the owner are protected from the creditors of the corporation. The stockholders do not directly manage the corporation; they elect a board of directors to represent their interests. The board of directors select the president and vice president, who manage the corporation for the stockholders.
The capital of a business consists of the funds used to start and run the business. The funds may be either the owner's (equity capital) or creditor's (debt capital) Equity capitalconsists of those funds provided to the business by the owner(s). These funds come from the personal savings of the owner. Debt capitalconsists of borrowed funds that the business owner owes to the lender. With debt capital the entrepreneur doesn't have to share ownership, but has a legal obligation to repay the borrowed money (principal) plus interest at a future data even if the business does not make profit.
Capital is also classified, depending on it use, as fixed or working. Fixed capitalrefers to items bought once and used for a long period of time. These items include real estate, fixtures, equipment. With a grocery, for example, the real estate consists of the store itself and the land on which it is built. The fixtures include such objective as counters, refrigerators, shelves. Equipment covers such articles as cutting machines, knives, scales. Working capitalrefers to the funds used to keep a business working or operating. It pays for merchandise, inventory and operating expenses such as rent, utilities (light and heat), taxes, wages. Cash on hand and accounts receivable are also considered working capital. Therefore, working capital is cash, or anything that can easily and quickly be turned into cash.
Equity financing (obtaining owner funds) can be exemplified by the sale of corporate stock.In this type of transaction, the corporation sells units of ownership known as shares of stock.Each share entitles purchaser to a certain amount of ownership. For example, if someone buys 100 shares of stock from Ford Motor Company, that person has purchased 100 shares worth of Ford resources, material, plants, production and profits. The person who purchases shares of stock is known as a stockholderor shareholder.
All corporations, regardless of their size, receive their starting capital from issuing and selling shares of stock. The initial sales involve some risk on the part of the buyers because corporation has no record of performance. If the corporation is successful, the stockholder may profit through increased valuation of the shares of stock, as well as by receiving dividends. Dividendsare proportional amounts of profit usually paid quarterly to stockholders. However, if the corporation is not successful, the stockholder may take losses on the initial stock investment.
Often equity financing does not provide the corporation with enough capital and it must turn to debt financing, or borrowing funds. One example of debts financing is the sale of corporate bonds.In this type of agreement, the corporation borrows money from investor in return for bond. The bond has maturity date, a deadline when the corporation must repay all of the money it has borrowed. The corporation must also make periodic interest payment to the bondholderduring the time the money is borrowed. If these obligations are not met, the corporation can be forced to sell its assets in order to make payments to the bondholders.
All businesses need financial support. Equity financing (as in the sale of stock) and debt financing (as in the sale of bonds) provide important means by which a corporation may obtain its capital.
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