Economics Chapter 8 Business Organizations. Chapter 8 Section 1 Sole Proprietorship.

EconomicsChapter 8

BusinessOrganizations

Chapter 8Section 1

SoleProprietorship

A business organization is an establishment formed to carry on

commercial enterprise.

One of the first decisions entrepreneurs must make is

what kind of business organization they will have.

The most common form of business organization is the sole

proprietorship.

A sole proprietorship is a business owned and run by one

person.

About 75 percent of all businesses in the United States are sole proprietorships.

However, since most sole proprietorships are small, they account for only 6 percent of all United States sales.

Your local bakery, barber shop, and bicycle repair shop are most likely sole proprietorships.

The Advantages ofSole Proprietorships

The biggest advantage of the sole proprietorship is that the owner gets to

keep all profits after paying income taxes.

Relatively Few Regulations

A proprietorship is the least-regulated form of business organization.

Sole Receiver of Profit

After paying taxes, the owner of sole proprietorship keeps all the profits.

Full Control

Owners of sole proprietorships can run their businesses as they wish.

Easy to Discontinue

Besides paying off legal obligations, such as taxes and debt, no other legal obligations need to be met to stop doing business.

The Disadvantages ofSole Proprietorships

The most important disadvantage of sole proprietorships is unlimited personal liability.

Liability is the legal obligation to pay debts.

If the business fails, the owner may have to sell personal property to cover those debts.

The owner of a sole proprietorship business may be personally liable for faults of the business.

• Sole proprietorships have limited access to resources, such as physical capital

• Human capital can also be limited, because no one knows everything.

• It may also be hard to find good employees.

• That is because many small businesses cannot afford fringe benefits.

Sole proprietorships also lackpermanence. Whenever anowner closes shop due to illness, retirement, or any other reason, the business ceases to exist.

Chapter 8Section 2

Partnerships

A partnership is a business organization owned by two or more persons.

The partners must agree on how profits and responsibilities are divided.

Types of Partnerships

General Partnership

In a general partnership,

partners share

equally in both

responsibility

and liability.

Examples of General Partnerships

Doctors, lawyers, accountants and other professionals often form general partnerships, as well as small retail stores, farms, construction companies and family businesses.

Limited Partnership

In a limited partnership, only one partner is required to be a general partner, or to have unlimited personal liability for the firm.

Limited Partnerships

Both partners:

• Contribute money to the business.

• One partner manages the business and holds unlimited liability.

Limited Liability Partnership

A newer type of partnership is the limited liability partnership. In this form, all partners are limited partners.

Limited Liability Partnerships

This partnership functions as a general partnership, except that:

• Partners are limited from personal liability is certain situations.

Legal MattersSince parnership agreements are

not required by law:

• It is wise to have an attorney draw up articles of partnership.

• This document sets legal rules that define how the business is run, to eleimate disagreement.

The Law and Partnerships

If partners do not have their own agreement:

• The Uniform Partnership Act (UPA) is used.

• Used by most States, it defines basic rules for partnerships.

Advantages of Partnerships

There are four (4)

Ease of Start-Up

Partnerships are easy to establish. There is no required partnership agreement, but it is recommended that partners develop articles of partnership.

Shared Decision Making and Specialization

In a successful partnership, each partner brings different strengths and

skills to the

business.

Larger Pool of Capital

Each partner's assets, or money and other valuables, improve the firm's pool and its ability to borrow funds for operations or expansion.

Taxation

Individual partners are subject to taxes, but the business itself does not have to pay taxes.

Disadvantages of Partnerships

Unless the partnership is a limited liability partnership, at least one partner has unlimited liability.

General partners are bound by each other’s actions.

Partnerships also have the potential for conflict. Partners need to ensure that they agree about work habits, goals, management styles, ethics, and general business philosophies.

Chapter 8Section 3

Corporations,Mergers,

And Multinationals

Most large businesses in the United States are corporations.

A corporation is a legal entity, or being, owned by individual stockholders.

Each stockholder has limited liability for the firm's debts, and can lose only as much as he or she has invested.

Stockholders own stocks, which represent their share of ownership in the corporation.

All corporations have the same basic structure.

Stockholders elect a board of directors.

The board makes the important decisions for the corporation and appoints officers to run the corporation.

The most important advantage of the corporate structure is limiting liability.Stockholders can only lose the amount of money they have invested.The board makes the important decisions for the corporation and appoints officers to run the corporation.

As a corporation grows, it may decide to merge, or combine, with another company or companies.

Corporate Mergers

Mergers are regulated by federal anti-trust law to prevent monopolies.

Horizontal mergers join two or more firms in the same market.

For example, two automakers may decide to form a larger company.

Vertical mergers join two or more firms involved in different stages of making the same good or service.

For example, an automaker may merge with the company that supplies it with rubber tires.

Conglomerates combine com panies which produce complete ly unrelated goods or services.

Multinational corporations (MNCs) are corporations that operate in more than one country at a time.

Advantages of Corporations

Advantages for the Stockholders

• Individual investors do not carry responsibility for the corporation’s actions.

• Shares of stock are transferable, which means that stockholders can sell their stock to others for money.

Advantages for the Corporation

• Corporations have potential for more growth than other business forms.

• Corporations can borrow money by selling bonds.

• Corporations can hire the best available labor to create and market the best services or goods possible.

• Corporations have long lives.

Disadvantages for Corporations

Difficulty and Expense of Start-Up

Corporate charters can be expensive and time consuming to establish. A state license, known as a certificate of incorporation, must be obtained.

Double Taxation

Corporations must pay taxes on their income. Owners also pay taxes on dividends, or the portion of the corporate profits paid to them.

Loss of Control

Managers and boards of directors, not owners, manage corporations.

More RegulationCorporations face more

regulations than other kinds of business organizations.

Multinational Corporations(MNCs)

Advantages of MNCs

• Multinationals benefit consumers by offering products worldwide.

• They spread new technologies

• They spread production methods across the globe.

Disadvantages of MNCs

• Some people feel that MNCs unduly influence culture and politics where they operate.

• Critics of multinationals are concerned about wages and working conditions provided by MNCs in foreign countries.

Chapter 8Section 4

OtherOrganizations

A business franchise is a business that is semi-

independent.

It pays fees to a parent company.

In return, the business gets the exclusive right to sell a certain product or service in a given area.

The parent company, or franchiser, develops the products and business system and helps the local franchise owners produce and sell their products.

For a small business owner, a franchise has the advantage of a built-in reputation.

However, the franchise owner must give up some freedom, and must also pay fees and even a share of earnings.

Advantages of Business Franchises

• Recognized brand name/reputation• Management training• Business support• Standardized quality• National advertising programs• Financial assistance from parent• Centralized buying power

Disadvantages of Business Franchises

• Submission to parental guidance• High franchising fees • High royalties (part of your profits

paid to corporation)• Strict operating standards• Purchasing restrictions• Limited product line

A cooperative is a business organization owned and operated by a group of people for their shared benefit.

Consumer cooperatives sell merchandise to their members at reduced pricesThey are retail outlets owned and

operated by consumers are called consumer cooperatives, or purchasing cooperatives. Consumer cooperatives sell their goods to their members at reduced prices.

Cooperatives that provide services only are called service cooperatives.

These are cooperatives that provide a service, or assistance, rather than goods, discounted insurance, such as banking services, health care, legal help, or baby-sitting services.

Producer cooperatives are agricultural marketing cooperatives that help members sell their products and are formed by small farmers.

Nonprofit organizations function like businesses but do not operate for profit.

These nonprofit organizations are usually in the business of serving society.

The government exempts nonprofit organizations from income taxes. Many nonprofit organizations operate with partial government support.

Trade associations are nonprofit organizations that promote the interests of particular industries.

Nonprofit organizations are usually formed to benefit society.

They mostly provide services, rather than goods.

Nonprofit organizations include museums, public schools, YMCA’s, hospitals, adoption agencies, professional organizations, business associations, trade associations, and labor unions.