Business and Market Structures What is an entrepreneur? People who start businesses are called entrepreneurs. They strike out on their own They are risk takers They give up a steady job working for someone else

Business and Market Structures Characteristics of an Entrepreneur They usually need to save or borrow money to make capital investments in Equipment Rent production space Hire workers If business fails, risk losing their investment.

Why do Entrepreneurs take these risks? To earn a profit Profit motive – Driving force behind new products and services in a market economy

Business and Market Structures Sole Proprietorships A single owner, who takes all he risks and receives all the profits Easy to start About 70% of American businesses are this type They earn only approximately 6% of all revenue

Business and Market Structures Advantages of Sole Proprietorship Owner has total control Easy to Start-Up Can make all decisions without having to consult anyone Can be flexible Able to make changes quickly Easy to dissolve

Business and Market Structures Two Major disadvantages: Sole proprietors have limited capital for making repairs and improvements Limited Access to Resources Banks reluctant to lend money to them Also, needs to invest their own profits into the business to keep it growing Unlimited liability – The owner is personally responsible for all the debts of business

Business and Market Structures Partnership Divides the risks and profits of a business among two or more people. Professionals such as doctors and lawyers often form partnerships Advantage: partners can pool their resources and invest more capital They can also offer more services by each specializing in a different area. Easy to start Disadvantage: Having to share the profits and having less control over decision making

Business and Market Structures General Partnership All partners are responsible for management and financial obligations of business Limited Partnership At least one partner is not active in daily running of business

Business and Market Structures Partnerships Silent partner – someone who invests in a business and shares its profits, but has no say in its day-to-day decisions and operation of business Majority partner – Who owns more than half of the company Minority partner – who owns less than half Partnerships share one major disadvantage with sole proprietors – Each partner is personally responsible for all debts of business

Business and Market Structures Corporations For investors to avoid unlimited liability, a firm needs to be organized as a corporation A corporation issues shares of stock to investors. Some Shareholders are paid annual dividends Shareholders elect a board of directors to run the business

Business and Market Structures Corporations The board of directors hires a chief executive officer (CEO) to make day-to-day decisions. Advantages limited liability –Shareholders are not responsible for a company’s debts. If a corporation fails, all shareholders lose is the value of their stock

Business and Market Structures Disadvantages: Corporations are complicated and not as flexible as smaller businesses Decision-making can be slow CEOs may make wasteful decisions that profit themselves, rather than the shareholders Double taxation of corporate profits

Business and Market Structures A corporation may also borrow money by issuing bonds Bond – a written promise to repay the amount borrowed at a later date. Principal – The amount borrowed Interest – The price paid for the use of another’s money OR the price a financial institution pays one to save money

Business and Market Structures Income statement – a financial statement showing a business’s sales, expenses, and profits for a certain period to illustrate the financial “health” of a company Net Income – Income minus expenses and taxes from revenue Depreciation – A non-cash charge the firm takes for the general wear and tear on its capital goods

Business and Market Structures Cash flows – The sum of net income and non-cash charges such as depreciation , Or, real profits . The cash flows represent the total amount of new funds the business generates from operations

Business and Market Structures Merger – When two or more companies come together to make one company One company gives up its separate legal identity to become one large company Reasons for mergers To become a larger company A company may not be able to grow as fast as owners would like May want to lose corporate identity – ValuJet merged with AirWays to form AirTran Holding Corporation

Business and Marketing Structures Types of Mergers Horizontal merger – When two or more firms that produce the same kind of product join forces The merger of two banks Vertical merger – When firms involved in different steps of manufacturing or marketing join together Auto company merging with a tire company

Business and Marketing Structures Conglomerate – A firm that has at least four business, each making unrelated products. None of the different divisions are responsible for a majority of its sales Diversification – one of the main reasons for conglomerate mergers

Business and Marketing Structures Multinationals – A corporation that has manufacturing or service operations in a number of different countries A citizen of several countries (subject to laws in each country and pay taxes in each country)