BUSINESS ORGANISATION

BUSINESS ORGANIZATION
Meaning: Art of establishing effective coordination, technique of efficient operations, concerned with the study of methods and procedure, purpose of earning profits, covers different functions of business Objective: Efficiency Division of work Delegation

Functions: Production Marketing Finance Personnel Significance: Facilitates administration Ensures specialization Facilitates growth & diversification

Social Responsibility: Causes: Public opinions Trade union movement Consumerism Education Public relation Managerial resolutions Rationale: Long term self-interest of business Ensuring law & order Maintenance of free enterprise Creation of society Moral justification Profitable opportunities System interdependence

Areas: Utilization & conservation of national resource Promoting the interest of various groups in society To work within the framework of the laws Environmental planning Philosophy of the Country Responsibility Internal: Shareholders Workers External: Consumers Suppliers Government Community

PROMOTION OF BUSINESS
Meaning: Promotion begins when, an idea is conceived, preliminary & detailed investigation, feasibility of the idea, provision of funds & resources Entrepreneurial decisions: Choice of form of business Financing preposition Selection of line of business Project report Location of business Size of unit Machines & equipments Labour force

Legal Forms of Business

Sole Proprietorships

Partnerships

Corporations

General Partnership

Regular Corporation

Limited Partnership

Subchapter S Corporation (S-Corporation)

Master Limited Partnership

Sole Proprietorships
Business owned (and usually operated) by

one person Individual introduces his own capital Absolute freedom Simplest form of business ownership Most popular form of business organization 72.2% of all Most common in:

Retailing Service Agriculture

Sole Proprietorship -- Advantages

Ease of Startup

Little legal documentation No co-owners to consult

Least expensive to start Pride of Ownership Retention of profits No Business Income Tax Ease of formation & dissolution

Direct motivation & incentive

Quick decision & prompt action Secrecy

Flexibility in management

Sole Proprietorship -- Disadvantages

Unlimited Liability Limited Life Business ends when owner

leaves the business Limited Access to Start-up Capital Limited Access to Credit Limited Management Expertise Difficulty in Hiring Employees Proprietor not considered an employee

Partnership

Partnerships
Two or more owners

Least numerous form 7.7% of all

businesses Partnership Agreement

Specifies rights and obligations of partners If written, called the Articles of Partnership (Articles of Co-partnership)

Partnership -- Advantages
Greater Access to Capital

Greater Access to Credit

Retention of Profits More Management Expertise No Business Income Tax

Partnership -- Disadvantages
Shared Profits

Unlimited Liability for General Partners

Each partner has Agency power Limited Life

Business ends when any partner withdraws

Management Disagreements Frozen Investment

Types of Partners
General Partner

Unlimited Liability Assumes Management Role Liability limited to Investment May not take active managerial role

Limited Partner

Every partnership must have at least one

general partner

Types of Partners
General Partnership

All partners are general partners

One or more limited partners Owned & managed like a corporation Taxed like a partnership Shares may be sold

Limited Partnership

Master Limited Partnership

General Partnership
A partnership can be defined as an

association of 2 or more persons to carry on as co-owners a business for profit. Partnerships are quasi-legal entities: they can hold title and exercise certain property rights but partnerships cannot sue in their own name and do not pay taxes. Partnerships are regulated in all states (except Louisiana) by the Uniform Partnership Act, which controls many aspects of the partnership but allows the partners to modify some provisions.

General Partnership
The financial issues (and other aspects of

operation of the partnership) are controlled by the partnership agreement (or articles of partnership), which describes the manner in which the partnership is run and the responsibilities of the partners. The partnership agreement must provide for the formation, maintenance, and dissolution of the partnership (because all partnerships end).

General Partnership
The liability of partners is "joint and several";

each partner is considered to be the agent of the other, and thus all partners are liable for the acts of a single partner. A partnership pays no taxes; it is a conduit for tax purposes. The partnership does file a federal tax return, on Form 1065; this form reports the partnership's income, its expenses, and the partners' profit (or loss). There are distinct advantages and disadvantages to going into a partnership arrangement.

Advantages

Generally higher earnings than solo optometrists

Shared overhead, less capital outlay per partner

compared to solo optometrists Office coverage during vacations, illness, personal holidays Consultation with partners for business and patient management decisions Expanded hours, convenience for patients Investment in career protected and equity established for retirement, disability, or death

Disadvantages
Loss of independence Personality conflicts with partners or the spouses

of partners Differences in professional ideas and philosophies Unequal distribution of patient load Unequal distribution of income based on productivity of the partners

Company: Promotion Incorporation or Registration Floatation or Capital Subscription Commencement of Business

Advantages: Limited liability Ease in management with a team Better reputation Disadvantages: High regulation formalities Late decisions Partnership: Combination of capital Labour & specialized skill or managerial talent Two or more persons Carry on business jointly

Advantages: Facility of formation Scope of individual ability Protection of minority interest Disadvantages: Limited resources Limitation on capital & organizing power Risks of implied authority Lack of public confidence Types: Partnership at will Particular partnership Joint venture Limited partnership

Kinds of Partners: Active or working partner Sleeping or dormant partner Nominal partner Partner in profits only Sub-partner Limited partner Partner by estoppels or holding out Rights of Partners: Take part in management Be consulted in business matters Have access to & to inspect & copy any of books of the firm Share profit & losses Entitled to get 6% interest on capital p.a. in any loan to firm To retire To act in emergency

Duties of Partners: Must observe good faith towards other partner Indemnify the firm for any loss by his fraud and willful conduct Bound to attend diligently to his duties To hold & use the property of the firm for the purpose of business only Jointly & severally liable for all debts To act within his authority

COMPANY
Complex form of business organization, permanent existence, limited liabilities, common seal to authorize Advantages: Large recourses Limited liabilities Continuity of existence Efficient management Transfer of share Democratic set up

Disadvantages: Difficult in formation Separation of ownership & management Speculation of share Lack of secrecy Fraudulent management Delay in decision making Classification : On the basis of incorporation: Incorporated Un-incorporated

On the basis of liability: Limited liability Unlimited liability Nationality: Indian Foreign On the basis of number of members: Public Private Independence: Independent Holding Subsidiary

Ownership: Government Non-Government Co-operative Organization: Limited means Profit not a motive Voluntarily Common interest Features: Voluntary Equal voting rights Democratic management Importance to service motive Sales on cash basis Distribution of dividend

Advantages: Open membership Service Motto Cheaper rates Democratic management Low management cost Surplus shared by members Disadvantages: Lack of capital Lack of unity among members Political Interference

PUBLIC ENTERPRISE
Concern owned & managed by the state or any public authority, social interests, nationalized or socialized industry, government undertaking, known as Public Sector Advantages: Growth of key & heavy industries Avoidance of uncertainty Planned progress Greater Better & cheaper products Prevents the concentration of wealth Strengthens the defense measures Helps in distribution of essential goods

 No exploitation of labour

capital or management
Preservation of national wealth

Disadvantages: Greater Better & cheaper production is a myth Top heavy administration Nepotism and favoritism Delay in decision Importance: Creation of the social basis facilitates balanced economic growth Speed up the pace of industrialization Remove regional economic imbalances Equitable distribution of wealth

SIZE OF BUSINESS UNIT

Refers to scale of its organization operations Size of Business: Scale of organization depends on nature of business & market Combination of recourses Measures of Size: Net worth Total Assets Employees Power & materials used Value of output

Industrial Location: Development of industry at specific place depends on needed means of industry Factors affecting location: Physical Factors: Availability of raw material, Power Climatic conditions Economic Factor: Labour Transport Capital Sale centers Banking

Political Factor: Peace & security Government policy Webers theory of Location: enunciated by Prof. Alfred Weber of Germany in 1909, causes influence location Primary: Cost of land Building Power labour Transport Secondary: Deviation from transport cost

Criticism: Unrealistic approach More selective than deductive Study of only transport and labour Rest factors not included More importance to technical aspects

Florences theory of Industrial Location:

Approach of theory: Localization coefficient Localization multiple

Criticism: Incapable of explaining industrial location, No significance of quantity produced No attention toward the local characteristics Difficult to calculate the tendency on the basis of multiples Plant Layout: Plan of installing of plant & machinery Objectives: Best production on minimum cost Maximum utilization of movable & immovable property Providing best services Safety against accidents

Factors affecting Plant Layout: Weight of materials & products Form of the machines Checking Prospective needs of the factory Minimum shifting Type of Plant Layout: Line (product) layout, (Process) functional Product process layout Techniques of Plant Layout: Process flow chart Process flow diagram Machine data cards Template Scale model layout

Business Combination: Combination of various units for common objects Objects: Reduction in the cost Development of mutual co-operating feeling Large scale production Regulating the market Reasonable return of investment Advantages: Economy & finance Economy in administration Economy in distribution Economy in production Maintaining selling price

Advantages: Rise of big business Over capitalization Exploitation of labour Unequal distribution Kinds of Combination: Horizontal Vertical Lateral Circular Diagonal

Cause of Combination: Elimination of competition & Price War Economics of large scale business Effects of trade cycles Rise of joint stock companies Technical progress

Professional Associations or Corporations

Corporations are artificial creations of law, endowed with certain characteristics:

right of perpetual succession
separation of ownership and management transfer of ownership through sale of shares

of stock right to hold title, sue, claim tax benefits obligation to pay income tax liability for acts or omissions of employees

Corporations enjoy certain advantages and disadvantages when compared to other types of business organizations:
Advantages Tax benefits (deductible insurance, retirement plans) Medical expenses reimbursement plans Employee insurance plans Sick pay Better administrative organization Transferability of ownership Continuity of existence Limitations on legal liability

Disadvantages
Cost of formation and operation are

comparatively greater Increased taxes (35% for PAs and PCs) Accumulated earnings tax (39.6% over $150,000) Increased retirement plan costs Greater business complexity Loss of independence Disclosure requirements comparatively greater Licensees with different degrees (OD and MD) cannot be shareholders in some states

Articles of incorporation are filed in the state by the incorporators (only one is needed) to describe the purpose of the corporation, its stockholders, and its management. In a professional association (PA) or corporation (PC) the PA or PC may be formed by one or more licensed professionals, who constitute both ownership and management. Only licensed professionals can own stock and serve on the Board of Directors; however, non-professionals can be Officers.

Structure of Corporations
Shareholders (owners) elect Board of Directors (long term management) who elect Officers (day-to-day management)

Structure of Professional Associations/Corporations

Shareholders (owners; may be one person; must be professional licensee) elect Board of Directors (long-term management; may be one person; must be professional licensee) who elect Officers (day-to-day management; may be one person; does not have to be professional licensee)

The PA or PC is responsible for its contracts, debts, and the negligence of its employees. The shareholders (owner) are not responsible for debts or liability claims, although in a one licensee PA or PC if the licensee is negligent he or she will be individually responsible and the PA or PC will also be responsible as employer.

PAs or PCs pay a federal income tax; a "double tax" is possible, if the PA or PC has a profit (35% bracket) and the shareholder-employee is paid a salary (10% to 35% bracket). PAs or PCs must file an annual tax return, on Form 1120.
Most states also charge an income tax for corporations. In Alabama, for example, the tax rate is 5% of taxable income.

A business privilege tax is also levied in Alabama against corporations and LLCs, at the rate of $1 per $1,000 of taxable income, or a minimum of $100.

Subchapter S Corporations

Subchapter S Corporations
Small corporations may elect to be taxed

under Subchapter S of the tax code. S Corporations pay no income tax, rather being taxed in the same manner as a partnership or LLC. Shareholders of an S Corporation do not have to be like-kind professional licensees; thus an optometrist may share ownership with another professional (such as an optician) or nonprofessional (such as a spouse). An S Corporation is limited by law to 100

Subchapter S Corporations
To create an S Corporation, first a

business corporation must be formed, then it must elect Subchapter S status. The election must be unanimous among the shareholders. The election must be made during the first month of the tax year (or in the month preceding).

Subchapter S Corporations
Because an S Corporation pays no taxes, it

avoids the "double tax" imposed on earnings of a PA or PC. Employees of an S Corporation are paid salaries, on which individual income tax is imposed. Employees of S Corporations may participate in tax-deferred retirement plans, such as Keogh defined benefit and defined contribution plans, and 401(k) plans, thus providing tax benefits similar to those offered by PAs and PCs.

Subchapter S Corporations
Potential tax savings can be realized in an S

Corporation by the payment of dividends (a return of profit earned by the business) to the owners. If an annual dividend is paid, although the amount is subject to income tax, it is not subject to Social Security/Medicare tax. Example: after all expenses and salaries are paid, there is a profit of $20,000, which is taxable income for the 2 owners but not subject to Social Security/Medicare withholding. This represents a savings of 15.3%, which is the Social Security/Medicare tax percentage

Subchapter S Corporations
Tax writeoffs are not the same for S

Corporations as for PAs and PCs; for example, life and disability insurance premiums may be deducted by a professional association or corporation, but not by an S Corporation. Liability is similar to that of a professional association or corporation: an optometristshareholder is not personally liable for the negligence of another optometristshareholder; rather, the S Corporation is responsible.

Corporations
Generally larger than other forms (Except for

S-Corporation)

20.1% of all U.S. Businesses Account for 87.1% of all U.S. Business Income

Considered a separate legal entity Owners called Stockholders or Shareholders

Ownership evidenced by Stock Certificate

Governed by Board of Directors

Corporations -- Advantages
Limited Liability

Ease of Ownership Transfer

Unlimited Life Greater Access to Capital Specialized Management Expertise

Corporations -- Disadvantages
More difficult & costly to form

Requires a Corporate Charter

Subject to greater governmental scrutiny Diluted earnings

Double taxation

Corporations vs. Sole Proprietorships

SP Corp Income $1,000,000 $1,000,000 Expenses 500,000 500,000 EBT $500,000 $500,000 (Assume Business Tax Rate = 50%) Business Tax 0 250,000 Net Profit $500,000 $250,000 (Assume a 30% Personal Tax Rate) Personal Tax 150,000 75,000 $ to Owners $350,000 $175,000

Corporate Charter
Legal Permission to Operate as a

Corporation Issued by state May not conduct business as a corporation without a charter

Contents of a Corporate Charter

Company Name & Address

Names & addresses of Incorporators

Purpose of the Corporation Maximum amount of stock & Classes of Stock

to be issued Rights & Privileges of stockholders Length of time the corporation is to exist

Stockholder Rights
Common Stock Votes in corporate matters One vote per share owned Preferred Stock No voting rights Dividend claims are paid 1st Dividend Distribution of earnings to the stockholders of a corporation

Organizational Chart
Owners/ Stockholders/ Shareholders

Chief Executive Officer (CEO)

Board of Directors

President

Senior Vice President

Vice President Finance

Vice President Production

Vice President Marketing

Vice President Human Resources

Types of Corporations
Government-Owned Corporation aka Public Corporation Owned & operated by government Post office, NASA, FDIC Quasi-Government Corporation Aka Quasi-Public Corporation Privately owned, government controlled monopoly Public utilities, Fannie Mae, Freddie Mac, Sallie Mae Private Corporation Owned by individuals or other companies

Types of Corporations
Not-For-Profit Corporation Organized to provide a social, educational, religious, or other service Habitat for Humanity, Red Cross For-Profit Corporation Closed Corporation Stock owned by relatively few people Stock not sold to general public Open Corporation Stock is bought and sold on security exchanges Can be purchased by any individual

Types of Corporations
S-Corporation (Subchapter-S Corporation) Corporate structure designed for small business Taxed as a partnership if there are 75 or fewer stockholders No non-resident alien stockholders Only one class of stock Limited-Liability Company (LLC) Combines the benefits of a corporation & partnership Not limited to 75 stockholders

Mergers & Acquisitions

Hostile takeover Types of mergers Horizontal: Similar products / services Vertical: Different but related firms Conglomerate: Completely different industries Merger Trends Divestiture Leveraged Buyout (LBO)