Reading: Lesson 7 - Specialized Types of Organizations

5.7.A - Specialized Types of Organizations

1. ORGANIZATIONAL ALLIANCES

1. In addition to sole proprietorships, partnerships, and corporations, organizations can be formed as limited liability partnerships, joint ventures, or cooperatives. Each of these types are specialized alliances between companies or individuals.
   
2. A relatively new partnership form is a limited liability partnership or LLP. A limited liability partnership is a partnership in which each partner’s liability is limited to his or her investment in the partnership. Unlike a limited partnership, each partner can have an active role in the management of the partnership. Like a corporation, these partners are not responsible for the actions of their partners in the management of the business beyond their investment. Many professional partnerships, such as accounting firms and legal firms, use the LLP business form. As with corporations, rules governing LLPs can vary depending on the state where they are formed.
   
3. Sometimes businesses want to join forces in order to achieve an important objective. A joint venture is an agreement among two or more businesses to work together to provide a good or service. The legal formation of the business is not important. For example, a sole proprietorship and a corporation could agree to work together. Each partner in the joint venture is expected to bring management expertise, resources, and/or money to the venture. Many major corporations today have learned that alone they may not have all the expertise or capital they need.
   
4. An example of a joint venture is an agreement between two contractors to connect two cities by building a tunnel for a road to go under a river. In this case, neither company has the capital to build the tunnel on its own. In addition, each contractor has special equipment and skills that the other firm lacks. By forming a joint venture, they can acquire the needed capital and expertise. Joint ventures should be managed like partnerships. Clear management roles should be identified and written contracts should be developed. There are thousands of joint ventures between and among many companies. Many web-based companies rely extensively on joint ventures to build their business, as do domestic airlines that partner with international airlines.
   
5. A cooperative is a business owned and operated by its user-members for the purpose of supplying themselves with goods and services. The members, who are much like stockholders in a corporation with the protection of limited liability, usually join a cooperative by buying shares of stock. The members elect a board of directors, which appoints officers to run the cooperative. Much like a corporation, a cooperative must also obtain a charter from the state in which it is organized in order to operate. Some cooperatives need authorization from the federal government.
   
6. The approximately 30,000 cooperatives in the United States represent only a small percentage of all American businesses. This small number, however, does not reduce their importance. A common example of a cooperative is a credit union. Cooperatives are also common in agriculture for buying and selling crops. Many insurance firms were initially formed as cooperatives. Apartment buildings and condominiums may also be formed as cooperatives.
   
   

2. SPECIALIZED FORMS OF CORPORATIONS

1. Not all businesses fit easily into proprietorships, partnerships, and corporations. Some business forms are established for special purposes. These purposes can be to limit liability in small businesses, serve nonprofits, or fill roles with a combination of private business and government intervention.
   
2. Small, growing partnerships are especially attracted to the limited liability form of corporation. The limited liability corporation (LLC) is a special type of corporation that is taxed as if it were a sole proprietorship or partnership. Two factors make LLCs popular. First, a major disadvantage of a partnership is its unlimited liability, whereas a major advantage of a corporation is its limited liability. Second, a major advantage of a partnership is its lower income tax rate, whereas a disadvantage of a corporation is a higher income tax rate than that paid by partnerships. Stockholders also have to pay personal income taxes on dividends distributed by a corporation (double taxation).
   
3. A Subchapter S is a popular type of LLC that offers liability protection but allows taxation like a partnership, avoiding double taxation. To qualify, a corporation elects to be taxed under the Subchapter S corporation regulations of the U.S. Internal Revenue Service (IRS). However, not all companies are eligible for Subchapter S status. A few important rules determine eligibility. First, the firm must have no more than 100 stockholders. Second, it must be a domestic corporation and not have any nonresident aliens as stockholders. Third, it must have only one class of stock. Finally, it must meet a list of other specific limitations specified by the IRS, such as not being a bank, insurance company, or a domestic company that focuses on international sales. Large corporations and multinational firms cannot meet these qualifications.
   
4. Limited liability corporations provide an excellent solution for eligible businesses—lower taxes and limited liability. In addition, the profits from the corporation go directly to the stockholders, who then include the earnings on their individual income tax returns. Double taxation is avoided. York, Burton, and Chan, Inc., could qualify for this special tax advantage.
   
5. Close and open corporations, as discussed earlier, are businesses that operate mainly to make a profit for their owners. A nonprofit corporation, on the other hand, is an organization that does not pay taxes and does not exist to make a profit. Organizations that manage cities or operate schools are examples of nonprofit corporations. Because a nonprofit corporation is not established as a profit-making enterprise, it cannot pay dividends to shareholders. Aside from the inability to make profit, the day-to-day operations are much like a close or open corporation. Rotary International, the United Way, many private universities, and many local/regional hospitals are other examples of nonprofit organizations. Even The College Board, the company that develops the SAT, is a nonprofit organization.
   
6. In this country, nonprofit corporations provide nearly one-third of the GDP. In many other countries, nonprofit corporations contribute much more to the GDP. The principles of business and management provided in this text apply equally to managers who run profit-making as well as nonprofit corporations.
   
7. A quasi-public corporation is a business that is important to society but lacks the profit potential to attract private investors and thus is often operated by local, state, or federal governments (or a combination of the three). Government financial support (called a subsidy) may also be required. Government imposes regulatory controls over quasi-public corporations. The Tennessee Valley Authority (TVA), an electrification program started in the 1930s by the federal government, was one of the first quasi-public corporations. The organizations that run interstate highways, such as the Massachusetts and Pennsylvania Turnpike authorities, are state-owned quasi-public corporations. At the local level, examples of quasi-public organizations include water and sewer systems, many downtown parking garages, and civic and cultural facilities. The Los Angeles County Museum of Art is a government-owned cultural organization.