Economics Chapter 7

Section 1

Objectives 1. What are the advantages of establishing a sole proprietorship? 2. What are the disadvantages of establishing a sole proprietorship?

Sole Proprietorship Sole Proprietorship- A business owned by one person. Sole Proprietorship- A business owned by one person. Oldest, simplest, and most common type of business organization. Oldest, simplest, and most common type of business organization. Examples: Lawyers, plumbers, hairstylist, and florists. Examples: Lawyers, plumbers, hairstylist, and florists.

Sole Proprietorship Advantages of a Sole Proprietorship: Advantages of a Sole Proprietorship: 1. Ease of start up: Requires little financial capital. There are few legal considerations, but must be aware of some restrictions such as Zoning Laws (government restrictions where a business can be.) Usually need a business license. 2. Control: One person makes all the decisions such as who to hire and how much to sell their products for. 3. Profit: One person gets all the profits.

Sole Proprietorship Disadvantages of a Sole Proprietorship: Disadvantages of a Sole Proprietorship: 1. Unlimited Liability: Person has responsibility for all debt. You have to pay of your debts by yourself. 2. Sole Responsibility: Responsible for everything-you are the boss, secretary, janitor, and accountant. You must have a lot of skills and it takes a lot of time and energy.

Sole Proprietorship 3. Limited Growth Potential: You only have so much collateral (anything of value that a borrower agrees to give up if he or she is not able to repay a loan.) -You need capital to start your business. -You may have to borrow from the bank, but you will need collateral to do so. -It may be hard to grow and get money if you only have so much collateral. 4. Lack of Longevity: Health, commitment, and competence are needed to be successful. - Sole Proprietorships have a shorter lifespan than most business organizations. -Depends on one person so the risk is great.

Chapter 7 Section 2

Objectives 1. How do general partnerships and limited partnerships differ? 2. What are the advantages of organizing a partnership? 3. What are the disadvantages of organizing a partnership?

Partnership Partnership- Business that is owned and controlled by two or more people. Partnership- Business that is owned and controlled by two or more people. There are two types of Partnerships: There are two types of Partnerships: 1. General Partnership- Partners enjoy equal decision making and have unlimited liability. 2. Limited Partnership- Involves a silent partner who invests money into a business in return for a share of the profits. These silent partners usually do not make any business decisions and they have limited liability.

Advantages of a Partnership 1. Ease of start up. 2. Specialization: We know that in a sole proprietorship the owners must have a lot of skills. In a partnership, these jobs can be split up between the partners according to the job that they do best.

Advantages of a Partnership 3. Share Decision Making: Decisions can be shared by partners. Through communication between partners, mistakes can be avoided. (Two heads are better than one!) 4. Shared Business Losses: If the business does get into financial trouble, one person does not have to take on all of the burden. -If two people take on the losses, then each will still have some money left over to try and get the business back on its feet. -Also, banks are more likely to give larger loans to partnerships because the risk is share by more than one person.

Disadvantages of a Partnership 1. Unlimited Liability: Only in a general partnership. 2. Potential for Conflict: Disagreements are bound to happen when you have two or more people. People will argue over money, decisions made, or even the personalities of the partners may clash. 3. Lack of Longevity: Illness, death of one partner, or conflict may cause the partnership to end.

Chapter 7 Section 3

Objectives 1. How is a corporation formed, and what are the characteristics of a corporation? 2. How is a corporation organized? 3. How do stocks and bonds differ? 4. What are the advantages and disadvantages of organizing a corporation?

Corporations Corporation- Business in which a group of owners, called stockholders, share in the profits and losses. Corporation- Business in which a group of owners, called stockholders, share in the profits and losses. Forming a corporation is more complex than a sole proprietorship or partnership. Forming a corporation is more complex than a sole proprietorship or partnership. Two Step Process: Two Step Process: 1. Apply for a state license known as Articles of Incorporation (p. 154) 2. If everything is in order, then a license is given called the corporate charter.

Corporate Structure The corporate charter identifies the corporate officers-President, CEO, VP of Sales, VP of Production Development, etc. The corporate charter identifies the corporate officers-President, CEO, VP of Sales, VP of Production Development, etc. The structure of the corporation will vary, but most have a board of directors which is made up of people from inside or outside of the company. The structure of the corporation will vary, but most have a board of directors which is made up of people from inside or outside of the company. The board’s main duty is to make key decisions for the corporation. What kind of decisions? The board’s main duty is to make key decisions for the corporation. What kind of decisions?

Corporate Finances Where do corporations get their money from? Where do corporations get their money from? Most common way is through the selling of stock which represents ownership in the company. Most common way is through the selling of stock which represents ownership in the company. Stock is issued in the form of shares. Stock is issued in the form of shares. If the corporation issues 10,000 shares of stock and you buy 100 shares, then you own 1% of the company. If the corporation issues 10,000 shares of stock and you buy 100 shares, then you own 1% of the company. Why would you want to buy stock? Why would you want to buy stock? -If the company makes money, then you receive some profit. These payments to you are called dividends.

Corporate Finances Two types of stock: Two types of stock: 1. Common stock- Provides shareholders with a voice in how the corporation is run and they receive dividends. 2. Preferred Stock- Guaranteed dividends that are paid before any dividends that are received by holders of common stock, but they have no voice in the corporation. Ω Corporations may also sell corporate bonds-a certificate issued by a corporation in exchange for money. -These bond holders do not own any part of the company. -The bond is like a loan and it is repaid with interest.

Advantages of Corporations Advantages for Stockholders: Advantages for Stockholders: 1. Limited Liability 2. Flexibility-can sell your shares at anytime. Advantages for Corporations: Advantages for Corporations: 1. Limited Liability for the founders. 2. Separation of ownership from management. 3. Easy to raise capital. 4. Longevity.

Disadvantages of Corporations Disadvantages for Stockholders: Disadvantages for Stockholders: 1. No sense of pride or satisfaction from profits. 2. Lack of control. Disadvantages for Corporations: Disadvantages for Corporations: 1. Corporate charter can be expensive and difficult to obtain. 2. More government regulation to abide by. 3. Slow process of decision making. Shared Disadvantages: Shared Disadvantages: 1. Corporate profits are taxed twice, once as corporate profit and a second time once dividends are paid.

Chapter 7 Section 4

Objectives 1. How do vertical combinations differ from horizontal and conglomerate combinations? 2. Why might a business owner decide to open a franchise? 3. What is the customer’s role in a cooperative? 4. How does a nonprofit organization differ from other types of business organizations?

Corporate Combinations Sometimes corporations choose to team up with one another. Sometimes corporations choose to team up with one another. The most common method of doing so is called a merger-occurs when one company joins or absorbs another (AOL Time Warner) The most common method of doing so is called a merger-occurs when one company joins or absorbs another (AOL Time Warner) Companies can form different types of corporate combinations. Companies can form different types of corporate combinations.

Types of Corporate Combinations 1. Horizontal Combination- Merger between two or more companies producing the same good or service. 2. Vertical Combination- Merger between two or more companies involved in different production phases of the same good or service. 3. Conglomerate Combinations- Merger of companies producing unrelated products.

Advantages of Combinations 1. Efficiency- Cut down on personnel. If you merge, you don’t need two people for one position. 2. Potential for lower costs- Don’t have to build new buildings or hire new people. 3. Easier to increase capital- Have more collateral, usually more stockholders who are willing to invest in a large company since these types of companies are more successful.

Disadvantages of Combinations 1. Rise in unemployment 2. Decreased competition-leads to higher prices.

Franchise Franchise- One company (franchise) agrees for a fee to let another person or group set up a business in which they use the franchisor’s name to sell goods and services. Franchise- One company (franchise) agrees for a fee to let another person or group set up a business in which they use the franchisor’s name to sell goods and services. There is an agreement between franchisee (person opening up the company) and the franchisor (parent company) that the companies reputation and standards will be upheld. There is an agreement between franchisee (person opening up the company) and the franchisor (parent company) that the companies reputation and standards will be upheld. Parent company pays for training and national advertising. Parent company pays for training and national advertising. The company name brings in business. The company name brings in business.

Cooperative Cooperatives- Businesses that are owned collectively by their members. Cooperatives- Businesses that are owned collectively by their members. Many different types of cooperatives- purchasing, marketing, services (electric), financial (credit union) Many different types of cooperatives- purchasing, marketing, services (electric), financial (credit union) Examples: Santee-Cooper Electric, SRP Credit Union. Examples: Santee-Cooper Electric, SRP Credit Union.

Nonprofit Organization Nonprofit Organization-an organization that generates revenue from product sales or donations but does not distribute the profits to any owner or trustee. Nonprofit Organization-an organization that generates revenue from product sales or donations but does not distribute the profits to any owner or trustee. Usually tries to pursue some type of goal: improving education, healthcare, etc. (Red Cross, Boy Scouts, Booster Club Usually tries to pursue some type of goal: improving education, healthcare, etc. (Red Cross, Boy Scouts, Booster Club Income is not taxed by the government. Income is not taxed by the government. Green Bay Packers Green Bay Packers