Sole Proprietorship and Corporations

Sole Proprietorship

• Business is owned by one person.
• Three elements are needed to start: owner must have a product/service to sell, money for start-up expenses, and owner must manage business activities or hire someone who can.

Advantages

• Ease of starting the business
• Freedom to make business decisons
• Owner keeps all the profits
• Pride of ownership

Disadvantages

• Limited sources of funds
• Long hours and hard work
• Unlimited risks
• Limited life of the business

Corporation

• Corporations account for 90% of sales in the United States, despite sole proprietorships being more common
• Corporations raise money through the sale of stock to individuals/organizations.
• Stock certificate: represents ownership in a corporation.
• Owners of a corporation: stockholders or shareholders.
• Rights of stockholders: earn dividends, vote on company policies.
• Stockholders indirectly control the company's management.
• Typically, one share of stock equals one vote.
• Stockholders vote to elect the board of directors.
• The board of directors hires managers to run the company.
• Corporations act as a legal "entity" on behalf of the owners, unlike sole proprietorships and partnerships

Advantages

• More sources of funds for operations
• Fixed Financial Liability of owners
• Specialized management available
• Unlimited life of the company

Disadvantages

• Difficult Creation Process
• Owners have limited control over management
• Double taxation

Other Forms of Organization

• Municipal corporations are local governments providing services instead of profits.
• Municipalities do international activities like partnerships & trade.
• Nonprofit corporations provide a service instead of seeking profits.
• Examples: churches, schools, charities.
• Cooperatives are owned/operated for the benefit of their members.
• These may be consumer co-ops formed by groups in a community or place of worship.

Multi National Companies (MNCs)

• MNCs or multinational corporations operate in multiple countries.
• Called global, transnational, or worldwide companies.
• MNCs have a parent company in a "home country," with divisions or companies in "host countries."

Characteristics

• Worldwide Market View: Sees the entire world as the potential market
• Focuses on securing product ideas through foreign subsidiaries and obtaining raw materials on a worldwide basis
• Standardized Product: Companies try to offer the same product across different markets whenever possible
• Culturally-Sensitive Hiring: Consistent hiring policies are employed globally, with consideration for local cultures with managers recruited internationally
• International and Local Perspective: Distributes, prices, and promotes products with consideration of international awareness and the local perspective

Methods of International Business Involvement

• Companies use 8 main ways to immerse into international business.
• As you take more of an interest, the firm has more power and control of its foreign activities, with greater gains and risks.
• A company has more influence with a joint venture than with indirect exporting. But, indirect exporting is less of a risk than a joint venture.

Indirect Exporting

• Occurs when a company sells its products in a foreign market without any special plan to do so.
• Referred to as casual or accidental exporting.
• Agents and brokers are often used in linking sellers and buyers in different countries.
• International business has minimal cost and risk and is commonly implemented to kickstart foreign business ventures.

Direct Exporting

• Occurs when a company actively seeks to conduct exporting through a dedicated exporting department.
• A company may still use agents or brokers; planning, implementation, and regulation of exported activities is handled by a manager within the company.
• Greater control overall, but also requires higher investment than indirect exporting.

Management Contracting

• A company only sells its management skills, an example being an ability to locate business opportunities, solve problems and allocate resources.
• These abilities are demanded throughout industrialized countries
• Low-risk, as managers can quickly leave if the business environment becomes too volatile
• Hotels may contract this service out .
• Variation: contract manufacturing.

Licensing

• A business permits a foreign company to implement a procedure it owns to create items in other countries without a considerable amount of involvement.
• Licensing is selling the right to use intangible property such as a production process, trademark, or brand name, for a fee or royalty.
• The Gerber Company began selling baby food products in Japan through licensing.
• The use of tv, movie, and sports team emblems are the result of licensing agreements.
• Licensing agreements provide a fee or royalty to the company according to the company's brand name, process, or trademark.
• Low monetary investment with low overall financial return and low risk from the company.

Franchising

• Like licensing, however involves usage of a business name and process.
• Organizations partner with people in other countries to make a business that looks and runs similarly to the parent company and adapts to various components of the business.
• Essential marketing elements such as food taste, packaging and advertisements must meet requirements of cultural sensitivity and legal compliance.
• Both franchising and licensing include royalty payments for the process and the company name.
• Licensing typically involves a manufacturing process and franchising involves selling a product or service.
• Widely implemented by successful fast food companies like McDonalds, Burger King, Wendy's, KFC, Domino's and Pizza Hut.

Joint Ventures

• Joint ventures and foreign direct investments give companies greater control over business activity and a larger payoff.
• Higher risks must be justified.
• A partnership can provide benefits to all owners.
• International partnerships are " joint ventures," a mutually agreed upon contract between two or more companies from different countries for sharing a business operation.
• Main benefits are sharing management, production, raw materials, and shipping facilities.
• Drawbacks include profit sharing and less control overall.
• Costs, risks, and profits can be shared in any combination, and is typically dependent on the joint venture agreement.

Foreign Direct Investment

• A company may make a direct investment in a foreign country to be more involved internationally.
• This investment (FDI), occurs when a company purchases land or sources such as real estate or any existing companies.
• Many international corporations own office buildings, malls, and hotels in the United States.
• A wholly-owned subsidiary is an independent company owned by a parent company and is a form of FDI.
• Foreign companies have successfully acquired US businesses like Burger King, Pillsbury, and Green Giant.
• In order to prevent one country from being economically influenced by another, nations may restrict how many lands or factories may be sold to foreign owners. An example restriction would be a country allowing only 49% investor acquisitions.

Importance of Importing

• Imports are services or products from businesses in other countries purchased by a company or government.
• Companies immerse themselves in international trade by importing goods and services and selling them domestically.
• Importing creates a new sale and increases sales with existing consumers due to consumer demand for products only available in foreign countries, lower costs in foreign-made goods, or foreign-made parts used in domestic businesses.

Importance of Exporting

• Companies export goods or services to businesses in other countries.
• Inidrect exporting is when a company does not look for opportunities, whereas direct exporting is actively seeking out export opportunities.
• Exporting is the alternative to importing.
• The process of exporting involves 5 steps

Process of Exporting

• The primary step is finding buyers.
• Trade leads are lists for companies looking to invest in overseas businesses
• Every business transaction includes shipping and payment protocols.
• Standardized products can be sold throughout the world
• A business determines if people see value in your product or service
• Upon reaching an agreement regarding selling terms, the goods are shipped.
• A freight forwarder coordinates to ship goods to overseas customers.
• Documentation and currency conversion are necessary parts of the process.
• Documents are prepared and payment is made.
• Free on Board (FOB) means the selling price involves the cost of loading the exported goods onto transport vessels at a location.
• Cost, insurance, and freight (CIF) is when the price involves the price of the goods, insurance and freight.
• Cost and freight (C&F) is when the price involves the price of the goods and freight, however the buyer must pay for the insurance separately.
• Companies must prepare export documents for shipping internationally.
• The bill of lading documents the exporter and the transportation and serves as a receipt for the exported items.
• A certificate of origin lists the country in which the shipped goods were made.
• Financial institutions convert currency and are usually involved in the payment step which proves the completion of a transaction