Chapter 8

 Establishment formed to carry on a commercial enterprise  Sometimes called a company or a firm  Most of the time firms are formed to produce goods or services to make a profit  Typically individuals form businesses to become more productive through combined efforts

 3 Types  Sole proprietorship  Mowing lawns, babysitting  Partnerships  Doctors, lawyers  Corporations  McDonalds, Nike…

 Firms are created so that groups of individuals can become more productive  But does that activity coordinate itself?  How do we insure that everyone does their fair share?  Shirking occurs when the behavior of a worker is less than what has been agreed upon  Incentives attempt to prevent or minimize shirking  A group monitor can oversee operating activity—a boss

 Most common form  Make up 75% of businesses  Business owned and managed by one person  One person earns all profits and responsible for all debts 

 Ease of start up – business license, site permit (CO), name  Few regulations – zoning laws, health codes, etc.  Sole receiver of profits  Full control  Easy to discontinue

 Unlimited personal liability  Limited access to resources  Lack of permanence (limited life)  Lack of fringe benefits

 Owned by two or more people  General – share equally in responsibilities and liability (doctors, etc.)  Limited – one partner is the general partner, remaining partner contributes money  Limited Liability – all partners are limited but functions like a general

 Ease of start up –  articles of partnership (spells out rights and responsibilities)  Few regulations  More capital  Shared decision making and specialization  No business taxes – just on profits

 Unlimited liability – general partners are completely responsible, all partners suffer together incurring debts and suits  Potential for conflict  Hiring decisions  Goals of the firm  Operating culture  Profit sharing

 Corporations – individual legal entity  Ownership and Mgt. separated  individual stockholders own own shares  About 20% of all businesses in the U.S, but sell about 90% of all output  Famous case: Santa Clara County v. Southern Pacific Railroad Company (1886) set a precedent that allows corporations protection under the 14 th Amendment

 Section 1. All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

 Closely held corporations – privately held, rarely trade stock, pass it on to family  Public held corporations – stocks are bought and sold at financial markets  Corporate structures – board of directors, officers, managers, employees, etc.

 Limited Liabilities for owners  Stock carries no responsibility  Transferrable ownership  Can sell stock frequently  Ability to attract capital  Long life  Corporations exist “in perpetuity” ossel/free/Stossel/080216_2020_stossel_sambuck.wmv

 Expense and difficulty of start up  Requires a charter, frequent reports and gov’t. scrutiny  Double taxation  Taxed on profits and capital gains  Potential loss of control  Boardroom coup!  More legal requirements and regulations

 Horizontal mergers – two or more firms similar firms tie the knot  (in the same industry)  Vertical mergers – joining of two or more firms involved in different stages of the supply chain  Allows a firm to operate more efficiently  Control all phases of production

 Conglomerates – have more than three businesses that make unrelated products  Multinational Corporations – operate in more than one country at a time  Provide jobs worldwide, spread technology  Negative influences on culture and politics ALTRIA GROUP

 Franchises – semi- independent business that pays fees to a parent company  granted the right to sell a certain product in an area  Cooperative – owned and operated by a group for shared benefit  Consumer – sell merchandise to members at a cheaper price  Service – provide a service such as a credit union  Producer – agricultural markets, help to sell products

 Do not seek to earn a profit, benefit society  Professional organizations – help people in certain skills  Business organizations – promote business interests in a place  Trade Associations – promote industries  Labor Unions – improve working conditions