II Special types of business organizations

Not all business organizations fall neatly into the categories that we have described. Other types of business organizations are described below.

The S corporation – the corporation for a small business. A small business can enjoy many of the advantages of the corporation without being subject to corporate taxes if it is organized as an S corporation. S corporations take their name from a Congressional addition to the income tax law known as Subchapter S.

Unlike a regular corporation whose profits are subject to the corporation income tax and the individual income tax, S corporations are taxed like a partnership. That is, profits or losses are allocated to the stockholders in proportion to the number of shares they hold and are reported on their regular tax return.

Hurley Burleigh owns 25% of the shares of Blye’s Barley, Inc.. Blye’s is an S corporation. Last year the firm earned a profit of $60000. Since his share of the profits came to $15000, Burleigh reported that amount as income on his tax return.

In order to qualify for S corporation status, a firm must not have more than 35 stockholders and cannot own more than 80% of another corporation. As with regular corporations, the services of a lawyer are usually needed to organize an S corporation.

Non-for-profit corporations. As the name suggests, non-for-profit corporations do not seek to earn profit. Rather, they serve particular educational, social, charitable or religious purposes. Since they earn no profits, they are not subject to income taxes.

Government-owned corporations. Federal, state or local governments own and operate corporations. In most instances these were created to provide services that private enterprise was unable or unwilling to offer. The U.S. Postal Service, the Federal Deposit Insurance Corporation, some metropolitan rapid transit services and other publicity owned utilities are examples of government-owned corporations.

III

Cooperatives. Cooperatives (or co-ops) are associations of individuals or companies organized to perform business functions for their members. You may already be familiar with:

Housing co-ops, multiple dwelling units owned by their tenants.

Consumer co-ops, retail businesses owned by members who share in the profit and/or purchase goods or services at lower cost.

Producer co-ops, companies that manufacture and market products on behalf of their members. One of the largest of these is Ocean Spray Cranberries, Inc. this cooperative of neatly a thousand cranberry and citrus growers from around the country has annual sales of neatly $500 million.

Franchises. A franchise is a license to operate an individually owned business as if it were part of a large chain. Many clothing, real estate, fast food and motel chains are franchise operations.

Franchises provide advantages. Since the money to pay for a new franchise is provided by the franchisee (those who purchase the franchise), franchisors (corporations that sell their franchises to others) are able to expand their operations at little cost to themselves. Franchisors also benefit because franchisees are owners rather than employees of the business. This provides the kind of incentive that can lead to increased sales and profits.

Those who buy franchises also benefit. Many firms provide training programs, financial assistance and other kinds of help in operating and managing the business. Franchisees also benefit from the sales and name recognition generated by the company’s advertising campaign and reputation.

Franchises do have some disadvantages. Franchisors retain a great deal of control over their franchisees. They may dictate how the business is to be operated, the building decorated, even types of uniforms and signs. In addition, many franchisors require that the products must be purchased from the parent company at whatever price it chooses.