Chapter 3

Section 1 Forms of business organization

Did You Know?  In 1997 Dun & Bradstreet reported that corporation start-ups increased by 2 percent to reach a new high of 798,917. New corporations in Florida and New York represented 25 percent of that total

Key Terms  sole proprietorship/proprietorship A business owned and run by one person  unlimited liability The owner is personally and fully responsible for all losses and debts of the business  inventory A stock of finished goods and parts in reserve  limited life A firm that legally ceases to exist when the owner dies, quits, or sells the business  partnership A business jointly owned by two or more persons  limited partnership The investor’s responsibility for the debts of the business is limited by the size of his or her investment in the firm  bankruptcy A court-granted permission to an individual or business to cease or delay debt payments

Key Terms  corporation A form of business organization recognized by law as a separate legal entity having all the rights of an individual  charter A government document that gives permission to create a corporation  stock Ownership certificates in a firm  stockholder/shareholder An investor who owns stock  dividend A check representing a portion of the corporate earnings  bond A written promise to repay a loan at a later date  principal An amount of borrowed money  interest The price paid for the use of another’s money  double taxation The taxing of stockholders’ dividends as corporate profit and again as personal income

Introduction  There are three main forms of business organizations in the economy today–the sole proprietorship, the partnership, and the corporation.  Each offers its owners significant advantages and disadvantages

Sole Proprietorship  A sole proprietorship is a business run by one person. It is the smallest type of business organization in size, yet the most numerous and profitable

Sole Proprietorship  The advantages to sole proprietorships are: ease of start-up; ease of management; owner gets all the profits; business itself pays no income taxes; taxes only on the owner’s personal income; psychological satisfaction of owning one’s business; ease of closing the business

Sole Proprietorship  The disadvantages to sole proprietorships are: the owner has unlimited liability; it is hard to raise financial capital; owner may not be able to hire enough personnel or stock enough inventory to operate efficiently; owner may have limited managerial experience; hard to attract qualified employees; business has limited life and legally stops existing when the owner dies or sell the business.

Partnerships  A partnership is a business jointly owned by two or more persons. It is the least and has the second smallest proportion of sales and net income  General partnerships are a type of business in which all partners are involved in the management and finances. In a limited partnership, at least one partner is not involved in management. This partner may have helped to finance the business

Partnerships  Articles of the partnership document spell out how the partners divide up the profits or losses  The advantages of partnerships are: the ease of start-up; ease of management; no special taxes on a partnership; easier to raise capital through bank loans or new partner; larger size aids efficient operations; easier to attract skilled employees.

Partnerships  The disadvantages of partnerships are: partners are responsible for the acts of each and every partner, except in a limited partnership where the limits are spelled out; limited life of partnerships ends if a partner leaves; potential for partner conflicts

Corporations  A corporation is a business organization recognized by law as a separate legal entity with all the rights of an individual.  Corporations receive a charter, or government permission to create a corporation, which includes details about stock ownership  Investors who buy common or preferred stock in a corporation become owners of the firm.  Preferred Stock – represents nonvoting ownership shares of the corporation  Common Stock – represents basic ownership of the corporation

Corporations  The advantages of corporations are: ease of raising capital; professionals may run the firm instead of the owners (shareholders); owners have limited liability; business’s life is unlimited; easy to transfer ownership  The disadvantages of corporations are; a charter is expensive; ownership and management are separated so shareholders have little say in running the business; corporate income is taxed twice; subject to government regulation

Corporations

AOL Stocks Mert Has $200 Rachael Has $500 Becky Becky has $1,000

Share Sales AOL has an IPO (initial public offering) Sells one stock to Mert for $30 Stock goes up to $80 Mert sells his one stock to Rachael for $80 Mert’s Initial profit is ___ Bubble bursts and Rachael sells her stock to Becky for for $15 Profit loss of _____

Final Transaction Racheal sells her share to Becky for $15 Racheal is now only down $65 Becky is down $15 but up one share If Calculations are correct the total money has to equal the total money gained and the total number of stocks lost How much does each person have and what is the net gain and loss?

Share Sells AOL has $30 (down 1 share and up $30 from initial Mert has $250 (up $50 from initial) Rachael has $420 (up one share, down $80 from initial) Becky has $1000 Has any money been created?

Government and Business Regulation  Federal and state governments regulate interest rates and utility rates  State governments may offer industrial development bonds to help industries relocate or tax credits to draw investments

Fortune 500 Companies Rank  Company Revenues ($ millions) Profits ($ millions) 1Exxon Mobil452, , Wal-Mart Stores446, , Chevron245, , ConocoPhillips237, , General Motors150,276.09, General Electric147, , Berkshire Hathaway143, , Fannie Mae137, , Ford Motor136, , Hewlett-Packard127,245.07, AT&T126,723.03, Valero Energy125,095.02, Bank of America Corp.115,074.01, McKesson112,084.01, Verizon Communications110,875.02, J.P. Morgan Chase & Co.110, , Apple108, , CVS Caremark107,750.03, International Business Machines106, , Citigroup102, , Cardinal Health102, UnitedHealth Group101,862.05, Kroger90, Costco Wholesale88,915.01, Freddie Mac88, ,266.0

Profiles in Economics Kenneth I. Chenault 1951

Section 2 BUISNESS GROWTH AND EXPANSION

Did You Know?  The federal government’s Bureau of Economic Analysis reported that, in contrast to the American public’s suspicions, U.S.- based multinational companies do not establish most of their manufacturing affiliates in low-wage countries. In 1996, 87 percent of U.S. multinational affiliates’ employment was reported in relatively high- wage countries, primarily in Europe

Key Terms  merger A combination of two or more businesses to form a single firm  income statement A report showing a business’s sales, expenses, and profits for a certain period  net income Revenues minus expenses and taxes  depreciation A non-cash charge the firm takes for the general wear and tear on its capital goods  cash flow The sum of net income and non-cash charges such as depreciation  horizontal merger The kind of merger in which two or more firms that produce the same kind of product join forces  vertical merger The kind of merger in which firms involved in different steps of manufacturing or marketing join together  conglomerate A firm that has at least four businesses, each making unrelated products, none of which is responsible for the majority of the firm’s sales  multinational A corporation that has manufacturing or service operations in a number of different countries

Introduction  A business can grow in one of two ways.  First it can grow by reinvesting some of its profits  A business can also expand by engaging in a merger–a combination of two or more businesses to form a single firm

Growth Through Investment  Business revenue can be used to invest in factories, machinery, or new technologies  Before reinvesting, a business must estimate its cash flow. The business first records its total sales and then subtracts all expenses, taxes, and depreciation. The result is the business’s net income

Growth Through Investment  Depreciation is added back to net income to get cash flow, or the bottom line—the real measure of business profit  Business owners then decide whether part of the cash flow should be reinvested in the business to generate additional sales and more profits

Growth Through Investment

Growth Through Mergers  When firms merge, one gives up its separate legal identity  A company may merge with another to grow faster; become more efficient; acquire or deliver a better product; eliminate a rival; or change its image  A horizontal merger is the joining of firms that make the same product. A vertical merger is the joining of firms involved in different stages of manufacturing or marketing

Growth Through Mergers  A conglomerate is composed of four or more businesses, each making unrelated products, none of which is responsible for a majority of its sales

Growth Through Mergers  A multinational is a corporation with manufacturing and service operations in several countries, which are subjected to each nation’s business regulations

Section 3 OTHER ORGANIZATIONS

Did You Know?  The National Center for Charitable Statistics reported that nearly 1.5 million organizations had registered with the federal government in 1997 as tax-exempt, private nonprofit organizations. Because some organizations do not need to register with the Internal Revenue Service, this number does not include all types of nonprofit organizations described in Section 3

Key Terms  nonprofit organization An organization that operates in a businesslike way to promote the collective interests of its members rather than to seek financial gain for its owners  cooperative/co-op A voluntary association of people formed to carry on some kind of economic activity that will benefit its members  credit union A financial organization that accepts deposits from, and makes loans to, employees from a particular company or government agency  labor union An organization of workers formed to represent its members’ interests in various employment matters  collective bargaining Union negotiations with management over issues such as pay, working hours, health care coverage, and other job-related matters

Key Terms  professional association A group of people in a specialized occupation that works to improve the working conditions, skill levels, and public perceptions of the profession  chamber of commerce An organization that promotes the welfare of its members and the community  Better Business Bureau A nonprofit organization sponsored by local businesses to provide general information on companies  public utility Investor- or municipal-owned company that offers an important product, such as water or electricity, to the public

Introduction  Most businesses use scarce resources to produce goods and services in hopes of earning a profit for their owners  Other organizations operate on a “not-for- profit” basis  A nonprofit organization operates in a businesslike way to promote the collective interests of its members rather than to seek financial gain for its owners

Cooperatives  A cooperative is voluntary association of people who carry on an economic activity that benefits its members

Community and Civic Organizations  A nonprofit organizations is in business to promote its members’ collective interests, not to seek financial gain  Many nonprofit organizations incorporate to take advantage of a corporation’s unlimited life and limited liability  If the nonprofit organization has money after its expenses are paid, its board of directors may apply the surplus to other projects that further the organization’s mission

Cooperatives  Consumer cooperatives buy food and other necessities in bulk. Members donate time to the co-op, and members pay lower prices for goods  Service cooperatives, such as credit unions, offer services to its members at lower rates  Producer cooperatives help members, such as farmers, promote or sell their products

Labor, Professional, and Business Organizations  Labor unions represent workers’ interest and negotiate with management through collective bargaining  Professional associations set standards for those in the profession and influence government policies on issues concerning members’ interest  Business associations are industries or trade associations that represent specific kinds of businesses. Some business associations, such as the Better Business Bureau, help protect the consumer

Government  Government plays a direct role in the economy when its agencies produce and distribute goods and services to consumers such as the Tennessee Valley Authority (electricity), and the U.S. Postal Service (stamps and mail delivery).  Government corporations have boards of directors, but Congress’s money rather than investor’s money supports their work  Government plays an indirect role when it regulates public utilities or when it grants money to people in the form of Social Security and student financial aid

Section 1: Forms of Business Organization Sole proprietorships are small, easy-to-manage enterprises owned by one person. They are relatively numerous and profitable. Disadvantages include raising financial capital and attracting qualified employees Partnerships are owned by two or more persons. Their slightly larger size makes it easier to attract financial capital and qualified workers. Disadvantages include the unlimited liability of each general partner for the acts of the other partners, the limited life of the partnership, and the potential for conflict among partners

Section 1: Forms of Business Organization  Corporations are owned by shareholders who vote to elect the board of directors. Shareholders have limited liability and are not liable for the actions or debts of the corporation. The relatively large size of the corporation allows for specialized functions and large-scale manufacturing within the firm.  Disadvantages of corporations include the cost of obtaining charters, limited shareholder influence over corporate policies, and having to deal with some government regulations  The corporation is recognized as a separate legal entity and so must pay a separate corporate income tax not paid by proprietorships and partnerships

Section 2: Business Growth and Expansion  Businesses can grow by reinvesting their cash flows in plant, equipment, and new technology  Businesses can also expand through mergers. Most mergers take place because firms want to become bigger, more efficient, acquire a new product, catch up to or eliminate a competitor, or change its corporate identity  A horizontal merger takes place when two firms that produce similar products come together. A vertical merger is one that involves two or more firms at different stages of manufacturing or marketing.

Section 2: Business Growth and Expansion  A conglomerate is a large firm that has at least four different businesses, none of which is responsible for a majority of sales  A multinational can be an ordinary corporation or a conglomerate, but it has manufacturing or service operations in several different countries. Multinationals introduce new technology, generate jobs, and produce tax revenues for the host countries

Section 3: Other Organizations  Nonprofit organizations function like a business, but on a not-for-profit basis to further a cause or for the welfare of their members  The cooperative, or co-op, is one of the major nonprofit organizations. The co-op can be organized to provide goods and services, or to help producers Professional associations work to improve the working conditions, skill levels, and public perceptions of their profession.  Businesses often form a chamber of commerce or a Better Business Bureau to promote their collective interests

Section 3: Other Organizations  Government plays a direct role in the economy when it provides goods and services directly to consumers; it plays an indirect role when it provides Social Security, veterans’ benefits, unemployment compensation, and financial aid to college students, or when it regulates businesses