Economics Chapter 8

Chapter 8 Notes – Business Organizations

Chapter 8 Section 1:  Sole Proprietorships

• Key Concepts
  • Every business begins with a person who has an idea about how to earn money and the drive to follow through on the idea and to create a business organization.
  • Business Organization:  A business that produces goods or produces services in order to make a profit.
    • Most of the goods and services available in a market economy come from business organizations.
    • The purpose of most business organizations is to earn a profit.
      • They achieve this by producing goods and services that best meet consumers’ wants and needs.
    • What else do business organizations do?
      • Meet consumer demand
      • Provide jobs
      • Pay taxes
  • The most common type of business organization in the United States is the Sole Proprietorship.
    • In fact they make up 70% of all businesses in the U.S.
    • Sole Proprietorship:  A business organization owned and controlled by on person.
    • What might motivate someone to start a business rather than work for someone else?
      • Chance of making more money.
      • Being your own boss.
• Example Sole Proprietorship:  Comics
  • A young man started collection comic books in elementary school.
  • Over the years he had a large collection of comics and comic related items like lunch boxes and action figures.
  • While collecting he began to learn about the comic book business and decided to open a store selling comic books and comic related items.
  • Raising Funds
    • He needed money to rent a store space and to buy more inventory.
    • He had some money in his savings account, but needed to get a loan for the rest.
    • Because he was not an established business owner, the banks would not give him a loan and he ended up getting a loan from family and friends for $15,000.00.
  • Preparing to Open
    • After getting enough money he needed to take care of some legal business like getting a business license and building permits.
    • He also needed to register the name of his business “Cosmic Comics”
  • Initial Difficulties
    • Business was slow at first and he worried he would be stuck with no income and no way to repay his loan.
    • He decided to spend $1,000 on advertising in local newspapers and ran a few promotions.
      • This helped his business take off.
  • Success
    • Within 18 months he had paid back his loans and was earning profit.
    • He expanded his inventory to include T-shirts and posters.
    • He was able to hire an assistant to help him run the store.
    • When he decided to expand the business he had no trouble getting a loan from the bank.
• Sole Proprietorships:  Advantages and Disadvantages
  • Key Concepts
    • Limited Life:  A situation where a business closes if the owner dies, retires, or leaves for some other reason.
    • Unlimited Liability:  A business owner is responsible for all the business’s losses and debts.
  • Advantages of Sole Proprietorships
    • Easy to Open or Close
      • Typically all you need to start a sole proprietorship is funding, a license, a permit, and a registered name.
      • If the business is not doing well leaving is easy as long as all bills are settled.
    • Few Regulations
      • Lightly regulated.
      • Store must be in a zone set aside for business.
      • Must follow labor laws.
    • Freedom and Control
      • No board of directors to answer to.
      • Decisions can be made quickly.
      • Freedom to be one’s own boss.
    • Owner Keeps Profits
      • The owner gets to keep all the money the business earns.
  • Disadvantages of Sole Proprietorships
    • Limited Funds
      • Very few ways to cover start-up costs because sole proprietorships are more likely to fail.
    • Limited Life
      • If the owner leaves the business will close.
    • Unlimited Liability.
      • Owner is responsible for all aspects of the business (the good and the bad).
      • Some sole proprietorship owners have lost their homes, cars, and savings when their business fails.
• Could you start a sole proprietorship?
  • Do you have what it takes to “go it alone” as an entrepreneur? How many of these questions can you answer with a yes?
    • Are you willing to take risks?
    • Can you live with uncertainty?
    • Are you self-confident?
    • Are you self-directed, able to set and reach goals for yourself?
    • Are you optimistic, energetic, and action orientated?

Chapter 8 Section 2:  Forms of Partnerships

• The Characteristics of Partnerships
  • Key Concepts

Partnership:  A business co-owned by two or more partners who agree on how responsibilities, profits, and losses of that business are divided.

• Examples of partnerships:
  • Construction companies
  • Real estate groups
  • Law firms
  • Etc.
• There are three kinds of partnerships:  general, limited, and limited liability.
• General Partnerships:  share management of the business and each one is liable for all business debts and losses.
  • This is the most common type of partnership.
  • The risky parts of the business are shared, but so are the rewards.
  • Everything is shared equally.
• Limited Partnerships:  one partner is not involved in the day-to-day running of the business and is liable only for the funds he or she had invested.
  • One partner runs the business and is liable for all debts.
  • Limited partners act as part owners and share profits.
• Limited Liability Partnerships (LLP):  all partners are limited partners and are not responsible for debts and other liabilities of other partners.
  • If one partner makes a mistake that ends up costing the business a lot of money, the other partners cannot be held liable.
  • Not all businesses can register as LLPs.
    • Those that can include medical partnerships, law firms, and accounting firms.
      • Those must subject to malpractice.
  • LLPs are still fairly new.
• Partnerships:  Advantages and Disadvantages
  • Advantages Partnerships
    • Easy to Open and Close
      • Easy to start up and dissolve.
    • Few Regulations
      • Few government regulations.
      • Partners enter into a legal agreement spelling out the rights and responsibilities as partners.
      • Partners are covered under the Uniform Partnership Act (UPA), a law that lays out the basic rules of partnerships.
    • Access to Resources
      • Easier to get loans.
      • Start-up costs coming from two people instead of one.
    • Joint Decision Making
      • Business decisions are shared and may result in better decisions because each partner brings his or her own perspective to the processes.
    • Specialization
      • Each partner brings specific skills which promotes efficiency.
  • Disadvantages Partnerships
    • Unlimited Liability
      • Both partners are responsible for the businesses debts and other liabilities.
      • Risk of losing savings, homes, etc.
    • Potential for Conflict
      • Disagreement among partners can be severe enough to close the business.
    • Limited Life
      • If a partner leaves or dies the business may suffer or dissolve.
      • If a new partner is added a new partnership arrangement must be established for the business to continue.

Notes Chapter 8 Section 3:  Corporations, Mergers, and Multinationals

• Characteristics of Corporations
  • Key Concepts
    • Corporation:  a business owned by stockholders who own the rights to the company’s debts and losses.
      • Corporations make up 20% of the number of businesses in the United States, but they produce most of the country’s goods and services and employ the majority of American workers.
      • Shareholders own the rights to the company’s profits, but they face limited liability for the company’s debts and losses.
      • They acquire ownership through stock.
        • Stock:  a share of ownership in a corporation.
          • Example – Stock
            • Suppose a large company sells a million shares in the form of stock.
            • If bought 10,000 shares you would own 1% of the company.
            • If the company ran into trouble you would not be responsible for any debt, but the value of your stock may decline.
      • If a company does well and earns a profit, you may earn a dividend.
        • Dividend:  part of a corporation’s profit that is paid out to stockholders.
    • Bond:  a contract issued by a corporation that promises to repay borrowed money, plus interest, on a fixed schedule.
    • Public Company:  issues stock that can be publically traded (freely bought and sold)
    • Private Company:  controls who can buy or sell its stock.
  • How to set up a corporation
    • Two business founders decided to turn their business into a corporation to avoid unlimited liability (business owner(s) are responsible for all the business’s losses and debts.)
    • Corporations are a formal legal entity separated from the individuals who own and run it.
    • In a corporations the financial liabilities are separate from the personal liabilities, so if the business were to fail, the assets of the business (office building, equipment, company accounts) are at risk but not the owner’s home, personal savings, etc.
    • Corporations are harder to set up.
      • A law firm must draw up file papers and the owners must file paperwork requesting permission from the state government to incorporate.
      • If the government agrees a charter must be issued..
    • Stockholders – owners of the corporation – elect a board of directors who are responsible for the smooth running of the corporation.
• Corporations Advantages and Disadvantages
  • Advantages Corporations
    • Access to Resources
      • It is easier to get the money they need to expand.
        • They can easily get loans, sell stock, or issue bonds.
      • Greater access to funds leads to greater potential for growth.
    • Professional Managers
      • The ability to have professionals in charge of their area of specialization (accounting, sales, etc.) will probably lead to higher profits.
    • Limited Liability:  a business owner’s liability for debts and losses of the business is limited.
      • Stockholders are liable only for the money they paid for their stock.
      • The board of directors and officers of the corporation are also protected from liability.
    • Unlimited Life:  a corporation that continues to exist even after an owner dies, leaves the business, or transfers his/her ownership.
  • Disadvantages Corporations
    • Start-up Costs and Effort
      • More time consuming.
      • More difficult.
      • Expensive.
      • Extensive paperwork.
      • Required legal assistance.
    • Heavy Regulation
      • Annual reports must be presented to the Securities and Exchange Commission (SEC).
      • Prepare and issue quarterly financial reports to stockholders.
      • Company must hold yearly meetings for stockholders.
      • Regulations help to ensure that corporations are run for the benefits of stockholders.
    • Double Taxation
      • Officers who own stock in the company (which is very common) are taxed on profits and their divided of income from the stocks.
      • Smaller corporations can qualify for “S” corporation status which helps them avoid double taxation.
    • Loss of Control
      • Owners have less control of running the business.
      • Owners can lose control depending on their board of directors.
• Business Consolidation
  • Key Concepts:
    • Businesses can merge (combine) into one large company.
    • Mergers and consolidations take place for several reasons:
      • Increasing efficiency
      • Gaining a new identity
      • Losing an old identity
      • Keeping rivals out of the marketplace.
      • Diversifying their product line.
  • Mergers:  the combining of two or more companies to form a single company.
    • Horizontal Merger:  the combining of two or more companies that produce the same or similar products.
    • Vertical Merger:  the combining of companies involved in different steps of producing or marketing a product.

• Example:  Horizontal Merger of Reebok and Adidas
  • In 2005 Reebok and Adidas were the second and third biggest makers of athletic shoes.
  • The two companies planned to cut production and distribution costs by combining their operations.
    • More efficient production usually leads to lower prices.
  • They hoped this would improve their ability to compete against Nike.
• Example Vertical Merger of Shell and Texaco
  • Shell Oil, which owned more refineries, joined with Texaco, which owned more gas stations.
  • This type of merger is vertical because the companies were involved in different steps of production.
• Conglomerates: A business composed of several companies, each one producing unrelated goods or services.
  • Why start a conglomerate?
    • The advantage of this form of consolidation is that with diversified businesses, the parent company is protected from isolated economic pressures, such as changing demand.
  • In practice, it can be difficult to manage companies in unrelated industries.
    • Example:  Gulf and Western
      • In the 1960s Gulf and Western formed and included diverse companies in communication, clothing, mining, and agricultural products.
      • They did not produce the desired financial gains and sold all of its companies but the entertainment and publishing ones.
        • This became known as Viacom.
• Multinational Corporations:  a large corporation with branches in several countries.
  • Examples of multinational corporations include the search engine Google, Coca-Cola, McDonald’s, Nike, and Sony.
    • They have a headquarters and many branch offices in other states and countries.
  • Multinational corporations can be beneficial in that:
    • They provide new jobs, goods, and services. 
    • They also spread technological advances.
    • They have been known to raise the standard of living.
  • Problems that multination corporations are:
    • Their factories may emit harmful waste products.
    • Workers may be overworked in unsafe working conditions.

Chapter 8 Section 4:  Franchises, Co-ops, and Nonprofits

• Franchises
  • Key Concepts
    • Franchise:  A business that licenses the rights to sell its products in a particular area.
      • This is ideal for someone who wants to run their own business, but doesn’t think they have the experience or funds to go at it alone.
      • Example:  Fast food restaurants

• Advantages Franchises
  • A level of independence
  • Franchiser provides training in running the business
  • Products and décor are provided at a relatively low cost.
  • Advertising is paid for
• Disadvantages Franchises
  • A large investment
  • Share of profits with franchiser
  • Lack of control
• Corporations and Nonprofits
  • A Business Organization for Its Members
    • Cooperative (Co-op):  a business operated for the shared benefit of the owners, who are also its customers.
    • When people who need the same goods or services band together and act as business, they can offer lower prices by reducing or eliminating profit.
    • There are three kinds of cooperatives:
      • Consumer
        • Can be small or large.
        • Usually require some kind of membership payment.
        • They keep prices low by purchasing goods in large volumes at a discount price.
        • Example:  Sam’s Club
      • Service
        • Business organizations that offer their members a service.
        • Example:  Credit Unions
      • Producer
        • Mainly owned and operated by the producers of agricultural products.
        • They join together to ensure cheaper, more efficient processing or better marketing of their products.
  • A Purpose Other Than Profit
    • Nonprofit Organization:  a business that aims to benefit society, not to make a profit.
      • Examples:  American Red Cross, Salvation Army, etc.
    • They provide goods or services for free or a minimal fee.
    • The structure of nonprofits resembles a corporation.
      • Example: They need a government charter.
    • They do not need to pay taxes because they do not generate profits and they serve society.
    • They raise their money from donations, grants, or membership fees.