2.1.2 Sole Proprietorships
2.1.3 Partnerships
2.1.4 Corporations
2.1.5 Specialized Business Organizations
Forms of Business Ownership
Overview
Business Matters
Learning Objectives
3a Recognize the need to choose a form of business ownership.
What is the Purpose of a Business?
A business is an organization that strives for a profit by providing goods and services desired by its customers. Businesses meet the needs of consumers by providing medical care, autos, and countless other goods and services. Goods are tangible items manufactured by businesses, such as laptops. Services are intangible offerings of businesses that can’t be held, touched, or stored. Physicians, lawyers, hairstylists, car washes, and airlines all provide services. Businesses also serve other organizations, such as hospitals, retailers, and governments, by providing machinery, goods for resale, computers, and thousands of other items.
Selecting a Form of Business Ownership
The Ice Cream Men
Two ex-hippies with strong interests in social activism would end up starting one of the best-known ice cream companies in the country: Ben & Jerry’s. Ben Cohen (the “Ben” of Ben & Jerry’s) always had a fascination with ice cream. As a child, he made his own ice cream mixtures by smashing his favorite cookies and candies into his ice cream. But it wasn’t until his senior year in high school that he became an official “ice cream man,” happily driving his truck through neighborhoods filled with kids eager to buy his ice cream pops. After high school, Ben tried college. He attended Colgate University for a year and a half before he dropped out to return to his real love: being an ice cream man. He tried college again—this time at Skidmore, where he studied pottery and jewelry making—but, in spite of his selection of courses, he still didn’t prefer college to making and selling ice cream.
In the meantime, Jerry Greenfield (the “Jerry” of Ben & Jerry’s) was following a similar path. He majored in pre-med at Oberlin College and hoped to become a doctor. But he had to give up on this goal when he was not accepted into medical school. On a positive note, though, his college education steered him into a more lucrative field: the world of ice cream making. He got his first peek at the ice cream industry when he worked as a scooper in the student cafeteria at Oberlin.
So, fourteen years after they met, Ben and Jerry reunited and decided to go into ice-cream making big time. They moved to Burlington, Vermont—a college town in need of an ice cream parlor—and completed a $5 correspondence course from Penn State on making ice cream (they were practically broke at the time so they split the course). After getting an A in the course—with tests that were open book, they took the plunge: with their life savings of $8,000 (plus $4,000 of borrowed funds) they set up an ice cream scoop shop in a made-over gas station on a busy street corner in Burlington. The next big decision was which form of business ownership was best for them. On the company’s webpage they share some information (but not all) about business decisions made by the owners: Click on this link to read Ben and Jerry’s “How We Do Business” webpage.
Factors to Consider when Starting a Business
If you’re starting a new business, you have to decide which legal form of ownership is best for you and your business. Do you want to own the business yourself and operate as a sole proprietorship? Or, do you want to share ownership, operating as a partnership or a corporation? Before we discuss the pros and cons of these three types of ownership—sole proprietorship, partnership, and corporation—let’s address some of the questions that you’d probably ask yourself in choosing the appropriate legal form for your business.
- Do you want to minimize the costs of getting started?
- Do you hope to avoid complex government regulations and reporting requirements?
- How much control would you like?
- Do you want to own the company yourself, or do you want to share ownership with other people?
- Are you willing to share responsibility, decisions, and profits with others?
- Do you want to avoid special taxes?
- Do you possess the talent and skills to run the business yourself, or would the business benefit from a diverse group of owners?
- Is it important to you that the business survive you?
- Do you want to make it easy for ownership to change hands?
- How do you plan to finance your company? Will you need some investment from other people?
- How much personal liability exposure are you willing to accept?
No single form of ownership will give you everything you desire. You’ll have to make some trade-offs. Because each option has both advantages and disadvantages, your job is to decide which one offers the features that are most important to you. In the following sections we’ll compare the three ownership options (sole proprietorship, partnership, and corporation) based on the following eight dimensions: setup costs, government regulations control, profit sharing, income taxes, skills, continuity and transferability, ability to obtain financing, and liability exposure. Table 2.1.1a summarizes the advantages and disadvantages of each type of business model.
Advantages and Disadvantages of Major Types of Business Organization | ||
Sole Proprietorship | Partnership | Corporation |
Advantages | ||
Owner receives all profits. | More expertise and managerial skill available. | Limited liability protects owners from losing more than they invest. |
Low organizational costs. | Relatively low organizational costs. | Can achieve large size due to marketability of stock (ownership). |
Income taxed as personal income of proprietor. | Income taxed as personal income of partners. | Receives certain tax advantages. |
Independence. | Fundraising ability is enhanced by more owners. | Greater access to financial resources allows growth. |
Secrecy. | Can attract employees with specialized skills. | |
Ease of dissolution. | Ownership is readily transferable. | |
Long life of firm (not affected by death of owners). | ||
Disadvantages | ||
Owner receives all losses. | Owners have unlimited liability; may have to cover debts of other, less financially sound partners. | Double taxation because both corporate profits and dividends paid to owners are taxed, although the dividends are taxed at a reduced rate. |
Owner has unlimited liability; total wealth can be taken to satisfy business debts. | Dissolves or must reorganize when partner dies. | More expensive and complex to form. |
Limited fundraising ability can inhibit growth. | Difficult to liquidate or terminate. | Subject to more government regulation. |
Proprietor may have limited skills and management expertise. | Potential for conflicts between partners. | Financial reporting requirements make operations public. |
Few long-range opportunities and benefits for employees. | Difficult to achieve large-scale operations. | |
Lacks continuity when owner dies. |
Attributions
Title Image: "Transaction at a Farmers' Market" by TriviaKing at English Wikipedia, via Wikimedia Commons is licensed under CC BY-SA 3.0
Description: Transaction at a Farmer's Market in 2009.
"Introduction to Business" by Lawrence J. Gitman, Carl McDaniel, Amit Shah, Monique Reece, Linda Koffel, Bethann Talsma, James C. Hyatt, OpenStax is licensed under CC BY 4.0
Access for free: https://openstax.org/books/introduction-business/pages/1-1-the-nature-of-business
"An Introduction to Business v.2.0" by Anonymous , 2012 Book Archive is licensed under CC BY-NC-SA 3.0
Sole Proprietorships
Learning Objectives
3b Summarize the implications of choosing one of the various forms of business ownership.
3c Identify and contrast the various forms of business ownership.
3d Assess the advantages and disadvantages of the various forms of business ownership relative to specific business opportunities.
Sole Proprietorship
A sole proprietorship—or sole trader—is an unincorporated business that has just one owner who pays personal income tax on profits earned from the business. A sole proprietorship is the easiest type of business to establish or take apart, due to a lack of government regulation. Most small businesses start as sole proprietorships.
Comparison of Forms of Business Organization | |||
Form | Number | Sales | Profits |
Sole Proprietorships | 72 percent | 4 percent | 15 percent |
Partnerships | 10 percent | 15 percent | 27 percent |
Corporations | 18 percent | 81 percent | 58 percent |
Proprietorship Pearl
Jeremy Shepherd was working full-time for an airline when, at the age of 22, he wandered into an exotic pearl market in China, searching for a gift for his girlfriend. The strand of pearls he handpicked by instinct was later valued by a jeweler back in the States at 20 times what he paid for it. Fluent in Mandarin Chinese, Japanese, and Spanish and immersed in Asian culture, Jeremy cashed his next paycheck and hurried back to Asia, buying every pearl he could afford. Shepherd believed the internet was the way to market his pearls. In 1996, he founded Pearl Paradise, and, in 2000, he took the company online. Shepherd chose the sole proprietorship form of business organization—a business that is established, owned, operated, and often financed by one person—because it was the easiest to set up. He did not want partners, and low liability exposure made incorporating unnecessary. Offering a wide range of pearl jewelry through 14 websites worldwide, his company sells as many as 1,000 items per day. The recent addition of an exclusive Los Angeles showroom allows celebrity customers to shop by appointment. With $20 million in sales annually, PearlParadise.com is the industry leader in terms of sales and volume.
Advantages of Sole Proprietorships
Sole proprietorships have several advantages that make them popular:
- Easy and inexpensive to form. As Jeremy Shepherd discovered, sole proprietorships have few legal requirements (such as local licenses and permits) and are not expensive to form, making them the business organization of choice for many small companies and start-ups.
- Profits all go to the owner. The owner of a sole proprietorship obtains the start-up funds and gets all the profits earned by the business. The more efficiently the firm operates, the higher the company’s profitability.
- Direct control of the business. All business decisions are made by the sole proprietorship owner without having to consult anyone else.
- Freedom from government regulation. Sole proprietorships have more freedom than other forms of business with respect to government controls.
- No special taxation. Sole proprietorships do not pay special franchise or corporate taxes. Profits are taxed as personal income as reported on the owner’s individual tax return.
- Ease of dissolution. With no co-owners or partners, the sole proprietor can sell the business or close the doors at any time, making this form of business organization an ideal way to test a new business idea.
Disadvantages of Sole Proprietorships
Along with the freedom to operate the business as they wish, sole proprietors face several disadvantages:
- Unlimited liability. From a legal standpoint, the sole proprietor and the company are one and the same; this makes the business owner personally responsible for all debts the company incurs, even if they exceed the company’s value. The owner may need to sell other personal property—their car, home, or other investments—to satisfy claims against the business.
- Difficulty raising capital. Business assets are unprotected against claims of personal creditors, so business lenders view sole proprietorships as high risk due to the owner’s unlimited liability. Owners must often use personal funds—borrowing on credit cards, second-mortgaging their homes, or selling investments—to finance their business. Expansion plans can also be affected by an inability to raise additional funding.
- Limited managerial expertise. The success of a sole proprietorship rests solely on the skills and talents of the owner, who must wear many different hats and make all decisions. Owners are often not equally skilled in all areas of running a business. A graphic designer may be a wonderful artist but not know bookkeeping, how to manage production, or how to market their work.
- Trouble finding qualified employees. Sole proprietors often cannot offer the same pay, fringe benefits, and advancement as larger companies, making them less attractive to employees seeking the most favorable employment opportunities.
- Personal time commitment. Running a sole proprietorship business requires personal sacrifices and a huge time commitment, often dominating the owner’s life with 12-hour workdays and 7-day workweeks.
- Unstable business life. The life span of a sole proprietorship can be uncertain. The owner may lose interest, experience ill health, retire, or die. The business will cease to exist unless the owner makes provisions for it to continue operating or puts it up for sale.
- Losses are the owner’s responsibility. The sole proprietor is responsible for all losses, although tax laws allow these to be deducted from other personal income.
A Temporary Choice?
The sole proprietorship may be a suitable choice for a one-person start-up operation with no employees and little risk of liability exposure. For many sole proprietors, however, this is a temporary choice. As the business grows, the owner may be unable to operate with limited financial and managerial resources. At this point, the owner may decide to take on one or more partners to ensure that the business continues to flourish, which then leads to Partnership or Corporation.
Attributions
"Introduction to Business" by Lawrence J. Gitman, Carl McDaniel, Amit Shah, Monique Reece, Linda Koffel, Bethann Talsma, James C. Hyatt, OpenStax is licensed under CC BY 4.0
Access for free https://openstax.org/books/introduction-business/pages/4-1-going-it-alone-sole-proprietorships
Partnerships
Learning Objectives
3b Summarize the implications of choosing one of the various forms of business ownership.
3c Identify and contrast the various forms of business ownership.
3d Assess the advantages and disadvantages of the various forms of business ownership relative to specific business opportunities .
Business Partnerships
For those individuals who do not like to “go it alone,” a partnership is relatively simple to set up. A partnership is an association of two or more individuals who agree to operate a business together for profit. This shared form of business ownership is a popular choice for professional-service firms, such as lawyers, accountants, architects, stockbrokers, and real estate companies.
In a partnership, the parties agree—either orally or in writing—to share in the profits and losses of a joint enterprise. A written partnership agreement—a printed or electronic text spelling out the terms and conditions of the partnership—is highly recommended to prevent later conflicts between the partners. Such agreements typically include the name of the partnership, its purpose, and the contributions of each partner (financial, asset, skill/talent). It also outlines the responsibilities and duties of each partner and their compensation structure (salary, profit sharing, etc.). And it should contain provisions for the addition of new partners, the sale of partnership interests, and procedures for resolving conflicts, dissolving the business, and distributing the assets. Partnerships can only be sustained if all partners have and maintain the same vision for the business.
Two Types of Partnerships
There are two basic types of partnerships: general and limited.
In a general partnership, all partners share in the management and profits. They co-own the assets, and each can act on behalf of the firm. Each partner also has unlimited liability for all the business obligations of the firm.
A limited partnership has two types of partners: one or more general partners, who have unlimited liability, and one or more limited partners, whose liability is limited to the amount of their investment. In return for limited liability, limited partners agree not to take part in the day-to-day management of the firm. They help to finance the business, but the general partners maintain operational control.
There are also limited liability partnerships (LLP), which are similar to a general partnership except that partners are not held responsible for the business debt and liabilities. Another type is a limited liability limited partnership (LLLP), which is basically a limited partnership with addition of limited liability, hence protecting the general partner from the debt and liabilities of the partnership.
Advantages of Partnerships
There are several advantages to partnerships:
- Ease of formation. Like sole proprietorships, partnerships are easy to form. The partners agree to do business together and draw up a partnership agreement. For most partnerships, applicable state laws are not complex.
- Availability of capital. Because two or more people contribute financial resources, partnerships can raise funds more easily for operating expenses and business expansion. The partners’ combined financial strength also increases the firm’s ability to raise funds from outside sources.
- Diversity of skills and expertise. Partners share the responsibilities of managing and operating the business. Combining partner skills to set goals, manage the overall direction of the firm, and solve problems increases the chances for the partnership’s success.
- Flexibility. General partners are actively involved in managing their firm and can respond quickly to changes in the business environment.
- No special taxes. Partnerships pay no income taxes. A partnership must file a partnership return with the Internal Revenue Service, reporting how profits or losses were divided among the partners. Each partner’s profit or loss is then reported on the partner’s personal income tax return, with any profits taxed at personal income tax rates.
- Relative freedom from government control. Except for state rules for licensing and permits, the government has little control over partnership activities.
Disadvantages of Partnerships
Business owners must consider the following disadvantages of setting up their company as a partnership:
- Unlimited liability. All general partners have unlimited liability for the debts of the business. In fact, any one partner can be held personally liable for all partnership debts and legal judgments (such as malpractice)—regardless of who caused them. As with sole proprietorships, business failure can lead to a loss of the general partners’ personal assets. To overcome this problem, many states now allow the formation of limited liability partnerships (LLPs), which protect each individual partner from responsibility for the acts of other partners and limit their liability to harm resulting from their own actions.
- Potential for conflicts between partners. Partners may have different ideas about how to run their business, which employees to hire, how to allocate responsibilities, and when to expand. Differences in personalities and work styles can cause clashes or breakdowns in communication, sometimes requiring outside intervention to save the business.
- Complexity of profit sharing. Dividing the profits is relatively easy if all partners contribute equal amounts of time, expertise, and capital. But if one partner puts in more money and others more time, it might be more difficult to arrive at a fair profit-sharing formula.
- Difficulty exiting or dissolving a partnership. As a rule, partnerships are easier to form than to leave. When one partner wants to leave, the value of their share must be calculated. If a partner who owns more than 50 percent of the entity withdraws, dies, or becomes disabled, the partnership must reorganize or end. To avoid these problems, most partnership agreements include specific guidelines for transferring partnership interests and buy–sell agreements that make provision for surviving partners to buy a deceased partner’s interest. Partners can also purchase special life insurance policies designed to fund such a purchase.
The Biggest Partnership Concern
Business partnerships are often compared to marriages. As with a marriage, choosing the right partner is crucial. To find the right partner, you must examine your own strengths and weaknesses and know what you need from a partner. Ideal partnerships bring together people with complementary backgrounds rather than those with similar experience, skills, and talents. So, those considering forming a partnership should allow plenty of time to evaluate each potential partner’s goals, personality, expertise, and working style before joining forces.
Attributions
"Introduction to Business" by Lawrence J. Gitman, Carl McDaniel, Amit Shah, Monique Reece, Linda Koffel, Bethann Talsma, James C. Hyatt, OpenStax is licensed under CC BY 4.0
Access for free at https://openstax.org/books/introduction-business/pages/4-2-partnerships-sharing-the-load
Corporations
Learning Objectives
3b Summarize the implications of choosing one of the various forms of business ownership.
3c Identify and contrast the various forms of business ownership.
3d Assess the advantages and disadvantages of the various forms of business ownership relative to specific business opportunities.
What is a Corporation?
When launching her company, Executive Property Management Services, Inc., 32-year-old Linda Ravden realized she needed the liability protection of the corporate form of business organization. Her company specialized in providing customized property management services to mid- and upper-level corporate executives on extended work assignments abroad, often for three to five years or longer. Taking care of substantial properties in the million-dollar range and above was no small responsibility for Ravden’s company. Therefore, the protection of a corporate business structure, along with carefully detailed contracts outlining the company’s obligations, were crucial in providing Ravden with the liability protection she needed, as well as the peace of mind to focus on running her business without constant worry.
A corporation is a legal entity subject to the laws of the state in which it is formed, where the right to operate as a business is issued by state charter. A corporation can own property, enter into contracts, sue and be sued, and engage in business operations under the terms of its charter. Unlike sole proprietorships and partnerships, corporations are taxable entities with a life separate from their owners, who are not personally liable for their debts. An LLC does not provide unlimited protection; there are still regulations for such things as mingling personal and business funds.
When people think of corporations, they typically think of major, well-known companies, such as Apple, Google (whose parent company is Alphabet), Netflix, IBM, Microsoft, Boeing, and General Electric. But corporations range in size from large multinationals—with thousands of employees and billions of dollars in sales—to midsize or even smaller firms with few employees and revenues under $25,000.
Corporations play an important role in the U.S. economy. Corporations account for only 18 percent of all businesses but generate 81 percent of all revenues and 58 percent of all profits. Company type and size vary; however, when you look at the top companies by revenue in the United States or globally, they include many familiar names that affect our daily lives.
Corporation success is evaluated differently by different entities. According to Fortune magazine, the top three United States corporations in the 2017 were (1) Walmart Stores (revenue: $485.9 B), (2) Berkshire Hathaway (revenue: $223.6 B), and (3) Apple (revenue: $215.6 B). That same year, Forbes magazine found that the top three corporations were (1) Berkshire Hathaway (revenue: $222.9B), (2) Apple (revenue: $217.5B), and (3) JPMorgan Chase (revenue: $102.5B). By comparison, the top three companies in 2017 according to the World Economic Forum were (1) Apple, (2) Alphabet (who owns Google), and (3) Microsoft. These corporations rise and fall on the various lists based on their revenue in a given year and how the organizations measure revenue and the time frames that they use.
Types of Corporations
Three types of corporate business organization provide limited liability.
The C corporation is the conventional or basic form of corporate organization.
An S corporation is a hybrid entity, allowing smaller corporations to avoid double taxation of corporate profits, as long as they meet certain size and ownership requirements. An S corporation is taxed like a partnership and is organized like a corporation with stockholders, directors, and officers. Income and losses flow through to the stockholders and are taxed as personal income. S corporations are allowed a maximum of 100 qualifying shareholders and one class of stock. The owners of an S corporation are not personally liable for the debts of the corporation.
A newer type of business entity, the limited liability company (LLC), is also a hybrid organization. Like S corporations, they appeal to small businesses because they are easy to set up and not subject to many restrictions. LLCs offer the same liability protection as corporations, as well as the option of being taxed as a partnership or a corporation. First authorized in Wyoming in 1977, LLCs became popular after a 1988 tax ruling that treats them like partnerships for tax purposes. Today all states allow the formation of LLCs.
The Corporate Structure
As Figure 2.1.4a shows, corporations have their own organizational structure with three important components: stockholders, directors, and officers.
Stockholders (or shareholders) are the owners of a corporation, holding shares of stock that provide them with certain rights. They may receive a portion of the corporation’s profits in the form of dividends, and they can sell or transfer their ownership in the corporation (represented by their shares of stock) at any time. Stockholders can attend annual meetings, elect the board of directors, and vote on matters that affect the corporation in accordance with its charter and bylaws. Each share of stock generally carries one vote.
The stockholders elect a board of directors to govern and handle the overall management of the corporation. The directors set major corporate goals and policies, hire corporate officers, and oversee the firm’s operations and finances. Small firms may have as few as 3 directors, whereas large corporations usually have 10 to 15. The boards of large corporations typically include both corporate executives and outside directors (not employed by the organization) chosen for their professional and personal expertise. Outside directors often bring a fresh view to the corporation’s activities because they are independent of the firm.
Hired by the board, the officers of a corporation are its top management and include the president and chief executive officer (CEO), vice presidents, treasurer, and secretary, who are responsible for achieving corporate goals and policies. Officers may also be board members and stockholders.
Advantages of Corporations
The corporate structure allows companies to merge financial and human resources into enterprises with great potential for growth and profits:
- Limited liability. A key advantage of corporations is that they are separate legal entities that exist apart from their owners. Owners’ (stockholders’) liability for the obligations of the firm is limited to the amount of the stock they own. If the corporation goes bankrupt, creditors can look only to the assets of the corporation for payment.
- Ease of transferring ownership. Stockholders of public corporations can sell their shares at any time without affecting the status of the corporation.
- Unlimited life. The life of a corporation is unlimited. Although corporate charters specify a life term, they also include rules for renewal. Because the corporation is an entity separate from its owners, the death or withdrawal of an owner does not affect its existence, unlike a sole proprietorship or partnership.
- Tax deductions. Corporations are allowed certain tax deductions, such as operating expenses, which reduces their taxable income.
- Ability to attract financing. Corporations can raise money by selling new shares of stock. Dividing ownership into smaller units makes it affordable to more investors, who can purchase one or several thousand shares. The large size and stability of corporations also helps them get bank financing. All these financial resources allow corporations to invest in facilities and human resources and expand beyond the scope of sole proprietorships or partnerships.
Disadvantages of Corporations
Although corporations offer companies many benefits, they have some disadvantages:
- Double taxation of profits. Corporations must pay federal and state income taxes on their profits. In addition, any profits (dividends) paid to stockholders are taxed as personal income, although at a somewhat reduced rate.
- Cost and complexity of formation. As outlined earlier, forming a corporation involves several steps, and costs can run into thousands of dollars; these costs include state filing, registration, and license fees, as well as the cost of attorneys and accountants.
- More government restrictions. Unlike sole proprietorships and partnerships, corporations are subject to many regulations and reporting requirements. For example, corporations must register in each state where they do business and must also register with the Securities and Exchange Commission (SEC) before selling stock to the public. Unless it is closely held (owned by a small group of stockholders), a firm must publish financial reports on a regular basis and file other special reports with the SEC and state and federal agencies. These reporting requirements can impose substantial costs, and published information on corporate operations may also give competitors an advantage.
Attributions
"Introduction to Business" by Lawrence J. Gitman, Carl McDaniel, Amit Shah, Monique Reece, Linda Koffel, Bethann Talsma, James C. Hyatt, OpenStax is licensed under CC BY 4.0
Access for free https://openstax.org/books/introduction-business/pages/4-3-corporations-limiting-your-liability
Specialized Business Organizations
Instructor Ideas:
Instructor could reach out to area business owners to come in for a short talk with the class about their business type choice when forming their business.
Instructor could create an assignment that requires students to research well-known or popular businesses to find out what business type they are and how they are governed.
Instructor could use the lesson information to facilitate a class discussion comparing and contrasting the types of business ownership. The students could also be ask to decide which business type they would prefer and why.
Learning Objectives
3b Summarize the implications of choosing one of the various forms of business ownership.
3c Identify and contrast the various forms of business ownership.
3d Assess the advantages and disadvantages of the various forms of business ownership relative to specific business opportunities.
Cooperatives
When you eat a Sunkist orange or spread Land O’Lakes butter on your toast, you are consuming foods produced by cooperatives. A cooperative is a legal entity with several corporate features, such as limited liability, an unlimited life span, an elected board of directors, and an administrative staff. Member-owners pay annual fees to the cooperative and share in the profits, which are distributed to members in proportion to their contributions. Because they do not retain any profits, cooperatives are not subject to taxes. In addition to Sunkist and Land O’Lakes, other familiar cooperatives are Calavo (avocados), Ocean Spray (cranberries and juices), and Blue Diamond (nuts). CHS Inc., the largest cooperative in the United States, sells energy, supply, food, and grain.
Cooperatives operate in every industry, including agriculture, childcare, energy, financial services, food retailing and distribution, health care, insurance, housing, purchasing and shared services, and telecommunications, among others. There are currently 2.6 million cooperatives with one billion members employing more than 12.5 million employees in more than 145 countries worldwide. They range in size from large enterprises, such as Fortune 500 companies, to small local storefronts. And they generally fall into four distinct categories: consumer, producer, worker, and purchasing/shared services.
Cooperatives are autonomous businesses owned and democratically controlled by their members—the people who buy their goods or use their services—not by investors. Unlike investor-owned businesses, cooperatives are organized solely to meet the needs of the member-owners, not to accumulate capital for investors. As democratically controlled businesses, many cooperatives practice the principle of “one member, one vote,” providing members with equal control over the cooperative.
Cooperatives empower people to improve their quality of life and enhance their economic opportunities through self-help. Throughout the world, cooperatives are providing members with credit and financial services, energy, consumer goods, affordable housing, telecommunications, and other services that would not otherwise be available to them.
There are two types of cooperatives: Buyer Cooperatives and Seller Cooperatives.
Buyer cooperatives combine members’ purchasing power. Pooling buying power and buying in volume increases purchasing power and efficiency, resulting in lower prices. At the end of the year, members get shares of the profits based on how much they bought.
Founded in 1924, Ace Hardware is one of the nation’s largest cooperatives and is wholly owned by its independent hardware retailer members in stores spanning all 50 states and 70 countries. In August 2017, Ace opened its 5,000th store. In 2017, the company reported its revenues in the second quarter were $1.5 billion, which was an increase of 4.6 percent from 2016’s second quarter. The net income for the second quarter of 2017 was $51.1 million. Obtaining discounts to lower costs gives the corner Ace Hardware store the chance to survive against retail giants such as Home Depot Inc. and Lowe’s.
Seller cooperatives are popular in agriculture, wherein individual producers join to compete more effectively with large producers. Member dues support market development, national advertising, and other business activities.
There are several principles that cooperatives must follow, according to San Luis Valley REC—from the International Co-operative Alliance, and Daman Prakash—author of The Principles of Cooperation:
- open membership, which means that cooperatives are open to all people to use its services;
- democratic member control, which means that organizations are controlled by their members;
- members’ economic participation, which means that members contribute equally to the capital of the cooperative;
- autonomy, which means cooperatives are self-help organizations controlled by their members;
- and education and training, which means that cooperatives provide education and training for their members while also electing representatives, managers, and employees.
Joint Ventures
In a joint venture, two or more companies form an alliance to pursue a specific project, usually for a specified period of time. There are many reasons for joint ventures. The project may be too large for one company to handle on its own, and joint ventures also afford companies access to new markets, products, or technology. Both large and small companies can benefit from joint ventures.
In 2005, South Korea’s Hyundai Motor Company announced it signed a $1.24 billion deal to form a joint venture with China’s Guangzhou Automobile Group. The arrangement gave the South Korean automaker access to the commercial vehicle market in China, where its passenger cars are already the top selling foreign brand. Each side will hold equal stakes in the new entity: Guangzhou Hyundai Motor Company. The new plant began production in 2007 with an annual capacity of 200,000 units, producing trucks, buses, and commercial vehicles. According to Reuters, Hyundai made plans to build a fifth factory in China. With five factories in operation, Hyundai’s annual Chinese production capacity will be 1.65 million vehicles.
Attributions
"Introduction to Business" by Lawrence J. Gitman, Carl McDaniel, Amit Shah, Monique Reece, Linda Koffel, Bethann Talsma, James C. Hyatt, OpenStax is licensed under CC BY 4.0
Access for free https://openstax.org/books/introduction-business/pages/4-4-specialized-forms-of-business-organization