Economic Notes

Economic Notes

Chapter 3

Types of Business OrganizationTypes of Business Organization

Single ProprietorshipSingle Proprietorship – Business owned by one – Business owned by one person, easiest to organize, most common type of person, easiest to organize, most common type of businessbusiness

Ex. Hair salons, auto shop, restaurants, etcEx. Hair salons, auto shop, restaurants, etc PartnershipPartnership – 2 or more owners, least common type of – 2 or more owners, least common type of

businessbusiness Ex. Doctor, dentist, law officesEx. Doctor, dentist, law offices CorporationCorporation – Business owned by stock holders, most – Business owned by stock holders, most

protected type of business, most difficult to organizeprotected type of business, most difficult to organize Ex. GM, Apple, Exxon, Disney, etc.Ex. GM, Apple, Exxon, Disney, etc.

Business Terms:Business Terms:

Liability Liability – financial responsibility– financial responsibility Unlimited Liability Unlimited Liability – total financial – total financial

responsibility up to and including private responsibility up to and including private property and accountsproperty and accounts

Limited Liability Limited Liability – financial responsibility – financial responsibility is limited to your investmentis limited to your investment

Limited Life Limited Life – business is limited to the – business is limited to the life of the ownerlife of the owner

Unlimited Life Unlimited Life – business continues as – business continues as long as it is making a profitlong as it is making a profit

StockStock – share of ownership in a – share of ownership in a corporationcorporation

RentRent – payment for the use of someone’s – payment for the use of someone’s propertyproperty

InterestInterest – payment for the use of – payment for the use of someone’s moneysomeone’s money

Prime Rate Prime Rate – the best interest rate, – the best interest rate, reserved for the best customersreserved for the best customers

Bond Bond – an I.O.U. , a promise to pay back – an I.O.U. , a promise to pay back the amount of the bond at a specific time the amount of the bond at a specific time with a specific rate of interestwith a specific rate of interest

DividendsDividends – a share of the corporations – a share of the corporations profit paid to stockholdersprofit paid to stockholders

Capital GainCapital Gain – investment earnings, – investment earnings, the the amount of money you made in an amount of money you made in an investmentinvestment

Ex. Purchase a house for $100,000 Ex. Purchase a house for $100,000 and sell it for $140,000 and you have and sell it for $140,000 and you have $40,000 in capital gains$40,000 in capital gains

CharterCharter – a government document that – a government document that gives permission to create a corporationgives permission to create a corporation

PrincipalPrincipal – the amount borrowed – the amount borrowed Gross Income Gross Income – total income earned– total income earned Net Income Net Income – earnings after taxes and – earnings after taxes and

expensesexpenses DepreciationDepreciation – the loss in value an item – the loss in value an item

experiences over timeexperiences over time

MergerMerger – combining two or more – combining two or more businesses to form a single firmbusinesses to form a single firm

Horizontal merger Horizontal merger – combines firms from – combines firms from the same industrythe same industry

Ex. All airlines join togetherEx. All airlines join together Vertical Merger Vertical Merger – combines firms that – combines firms that

perform different steps in the production perform different steps in the production processprocess

Ex. Farm industry, canning factory, Ex. Farm industry, canning factory, trucking company, warehouse and retail trucking company, warehouse and retail store all join togetherstore all join together

ConglomerateConglomerate – a firm that has at least four – a firm that has at least four businesses, each making unrelated productsbusinesses, each making unrelated products

Ex. R.J. Reynolds owns a shipping Ex. R.J. Reynolds owns a shipping company, Kentucky Fried Chicken, Del company, Kentucky Fried Chicken, Del Monte and a WineryMonte and a Winery

DiversificationDiversification – business interests in many – business interests in many different areasdifferent areas

Multinational Multinational – a corporation that has – a corporation that has manufacturing or service operations in a manufacturing or service operations in a number of different countriesnumber of different countries

Ex. General Motors, Union Carbide, Ex. General Motors, Union Carbide, Nabisco, Mitsubishi, Sony, etc.Nabisco, Mitsubishi, Sony, etc.

Advantages to Single Advantages to Single ProprietorshipsProprietorships

* Easy to organize* Easy to organize* Flexible* Flexible* You are the Boss* You are the Boss

* * Unlimited LiabilityUnlimited Liability* Limited Life* Limited Life* You have all of the * You have all of the

responsibilityresponsibility

Disadvantage to a Single Disadvantage to a Single ProprietorshipProprietorship

Advantages to a PartnershipAdvantages to a Partnership

* Share the work* Share the work * Share the Cost* Share the Cost * Specialization* Specialization

Disadvantages to a partnershipDisadvantages to a partnership

Unlimited liabilityUnlimited liability Limited lifeLimited life DisagreementsDisagreements Less flexibilityLess flexibility

Advantages to a CorporationAdvantages to a Corporation

Limited liabilityLimited liability Unlimited lifeUnlimited life SpecializationSpecialization Ability to sell stockAbility to sell stock

*Corporate taxes*Corporate taxes Less flexibilityLess flexibility More difficult to organizeMore difficult to organize

Disadvantages to a CorporationDisadvantages to a Corporation