1. Chapter 7 ENTREPRENEURSHIP AND BUSINESS OWNERSHIP Gottheil — Principles of Economics, 7e © 2013 Cengage Learning 1

2. Economic Principles © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 2 Sole proprietorships Partnerships Corporations Unlimited and limited liability

3. Economic Principles © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 3 Stockholders (shareholders) Stocks and bonds International and multinational corporations

4. Entrepreneurial traits Some of the traits entrepreneurs possess are: © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 4 creativity persistence strong work ethics innovativeness love of the pursuit

5. Entrepreneurs and Business Ownership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 5 Businesses can be categorized into three main types: Proprietorships Partnerships Corporations

6. Entrepreneurs and Business Ownership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 6 These types of businesses differ based on who owns the business and how the business is organized.

7. Entrepreneurs and Business Ownership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 7 There are advantages and disadvantages associated with each of these types of businesses.

8. Sole Proprietorship © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 8 Sole proprietorship A firm owned by one person who alone bears the responsibilities and unlimited liabilities of the firm.

9. Sole Proprietorship © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 9 In order to set up a sole proprietorship, owners usually rely on their own financial means to purchase, rent, or hire physical plant, raw materials, and labor.

10. Sole Proprietorship © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 10 Sole proprietorships hire principally, but not exclusively, family labor.

11. Sole Proprietorship © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 11 Most sole proprietorships produce for local markets.

12. Sole Proprietorship © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 12 Sole proprietors have unlimited liability.

13. Sole Proprietorship © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 13 Unlimited liability Personal responsibility for all debts incurred by the business. The owners’ personal wealth is subject to appropriation to pay off the firm’s debt.

14. Sole Proprietorship © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 14 1. What might be some advantages of sole proprietorships? Personal independence for the proprietor: A focus on local markets. A lack of bureaucratic structure. Access to familiar or even family labor.

15. Sole Proprietorship © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 15 2. What is an important dis-advantage of sole proprietorships? Sole proprietors have unlimited liability.

16. Partnership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 16 Partnership A firm owned by two or more persons who each bear the responsibilities and unlimited liabilities of the firm.

17. Partnership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 17 By coupling finances between two or more partners, the productive capacity of the business can be increased.

18. Partnership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 18 These increases in productive capacity may not have been possible under the sole proprietorship form of business.

19. Partnership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 19 Decisions are made jointly in a partnership.

20. Partnership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 20 Each partner is still personally liable for all of the debts incurred by the business.

21. Partnership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 21 1. What are some advantages of partnerships? Shared responsibility among the partners. Greater access to capital. Potential for increases in productive capacity.

22. Partnership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 22 2. What are the disadvantages of partnerships? Decisions are made jointly and may be challenged by the other partners.

23. Partnership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 23 3. What are the disadvantages of partnerships? Each partner may be liable for 100 percent of the debts incurred by the business— regardless of the size of the investment in the business.

24. Corporation © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 24 Corporation A firm whose legal identity is separate from the people who own shares of its stock.

25. Corporation © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 25 Stockholder or shareholder A person owning stock in a corporation.

26. Corporation © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 26 A corporation is recognized as an independent person through a state charter.

27. Corporation © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 27 Like any other legal person, corporations are subject to the laws of the state, have the right to organize for business and can sue and be sued.

28. Corporation © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 28 The liability of each stockowner in a corporation is limited only to what he or she has invested in the firm.

29. Corporation © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 29 What are the major disadvantages of corporations? One disadvantage is double taxation. Both the owners and the corporation itself pay taxes on the same corporate income.

30. Corporation © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 30 What are the major disadvantages of corporations? Another disadvantage, from the stockholders’ point of view, is that stockholders exercise corporate control only theoretically. Management is in a much stronger position to actually control the corporation.

31. © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 31 EXHIBIT 1U.S. CEO-TO-WORKER PAY RATIO

32. Corporation © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 32 What are the major disadvantages of corporations? A third disadvantage is the threat of corporate takeover. An outsider may decide to buy up enough stock to own the corporation outright.

33. Corporate Stock © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 33 Stock Ownership in a corporation represented by shares that are claims on the firm’s assets and earnings.

34. Corporate Bonds © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 34 Corporate bonds A corporate IOU. The corporation borrows capital for a specified period of time in exchange for this promise to repay the loan along with an agreed-upon rate of interest.

35. U.S. Business Organization © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 35 There is great diversity throughout the U.S. in terms of business organization.

36. U.S. Business Organization © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 36 One can find on almost every square inch of the economic landscape almost every form of business organization.

37. U.S. Business Organization © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 37 Each of the three forms of business organization have been growing over the years, both in terms of number of businesses and receipts (or dollars) generated by the businesses.

38. U.S. Business Organization © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 38 There is a disparity between the number of businesses, and the volume of business, however.

39. U.S. Business Organization © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 39 While partnerships dominate the current economic landscape in terms of number, corporations dominate in terms of volume of business.

40. © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 40 EXHIBIT 2PROPRIETORSHIPS, PARTNERSHIPS, AND CORPORATIONS: 1970–2007 (000s and $billions) Source: Bulletin, Statistics of Income, Summer 1992, Internal Revenue Service, Washington, D.C., pp. 161–163; Statistical Abstract of the United States, 2010, Department of Commerce, Washington, D.C.

41. Exhibit 2: Proprietorships, Partnerships, and Corporations: 1970–2007 © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 41 1. How were firms organized in terms of number in the U.S. in 2007? There were over 23 million proprietorships, representing 72 percent of the total number of operating businesses.

42. Exhibit 2: Proprietorships, Partnerships, and Corporations: 1970–2007 © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 42 1. How were firms organized in terms of number in the U.S. in 2007? Corporations came in second with about 5.9 million.

43. Exhibit 2: Proprietorships, Partnerships, and Corporations: 1970–2007 © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 43 1. How were firms organized in terms of number in the U.S. in 2007? Partnerships represented the smallest segment, with just over 3 million.

44. Exhibit 2: Proprietorships, Partnerships, and Corporations: 1970–2007 © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 44 2. How do firms compare in terms of volume of business in the U.S. in 2007? Corporations clearly dominated with over $27 trillion, or 82.3 percent of receipts.

45. Exhibit 2: Proprietorships, Partnerships, and Corporations: 1970–2007 © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 45 2. How do firms compare in terms of volume of business in the U.S. in 2007? Proprietorships came in second with over $1.3 trillion, or 4 percent of total receipts.

46. Exhibit 2: Proprietorships, Partnerships, and Corporations: 1970–2007 © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 46 2. How do firms compare in terms of volume of business in the U.S. in 2007? Partnerships brought in about $3.3 trillion.

47. © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 47 EXHIBIT 3NUMBER AND CHARACTERISTICS OF STOCKHOLDERS (millions) Source: Shareownership 2000, New York Stock Exchange, 2000, p. 12-14. Data are for 1998.

48. Exhibit 3: Numbers and Characteristics of Stockholders © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 48 Who were stockholders in the U.S. in 1998? Nearly 70 percent of stockholders had some college education.

49. Exhibit 3: Numbers and Characteristics of Stockholders © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 49 Who were stockholders in the U.S. in 1998? Nearly 60 percent of stockholders earned $50,000 or more per year.

50. Exhibit 3: Numbers and Characteristics of Stockholders © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 50 Who were stockholders in the U.S. in 1998? 50 percent of stockholders were 44 years old or younger.

51. © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 51 EXHIBIT 4SIZE DISTRIBUTION OF STOCK PORTFOLIOS Source: Shareownership 2000, New York Stock Exchange, 2000, p. 14. Data are for 1998.

52. Exhibit 4: Size Distribution of Stock Portfolios © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 52 The distribution of stock ownership is highly skewed. A small number of shareholders own a large percentage of shares.

53. Exhibit 4: Size Distribution of Stock Portfolios © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 53 25 percent of the shareholders in 1998 owned over 80 percent of the stock.

54. Indirect Stock Ownership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 54 Some people own stock indirectly through pension plans, life insurance policies, and other financial intermediaries.

55. Indirect Stock Ownership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 55 These indirect stock owners are not accounted for in regular tallies of stock owners.

56. Indirect Stock Ownership © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 56 If indirect stockowners were accounted for, it is reasonable to argue that corporate stocks are held by, or on behalf of, a vast majority of the U.S. population.

57. International and Multinational Corporations © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 57 International corporation A corporation whose production facilities are located in one country, but whose exports to other countries overshadow its domestic trade.

58. International and Multinational Corporations © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 58 Multinational corporation A corporation whose production facilities are located in two or more countries. Typically, multinational corporations are also international.

59. International and Multinational Corporations © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 59 What is a possible disadvantage of multinational corporations? It becomes increasingly difficult for individual national governments to regulate large multinational firms.

60. © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 60 EXHIBIT 5FOREIGN REVENUES AS A PERCENTAGE OF TOTAL REVENUES AND FOREIGN ASSETS AS A PERCENTAGE OF TOTAL ASSETS FOR THE TEN LARGEST U.S. MULTINATIONALS: 1985 AND 1999 Source: Forbes, July 29, 1985, and July 24, 2000. Reprinted by permission of Forbes Magazine © 2000. Forbes, 1985 and 2000.

61. Exhibit 5: Foreign Revenues as a Percentage of Total Revenue and Foreign Assets as a Percentage of Foreign Assets for the 10 Largest U.S. Multinationals © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 61 Energy-related multinationals’ foreign revenues represent 54.6 percent of total revenues, the highest among all the listed firms.

62. Exhibit 5: Foreign Revenues as a Percentage of Total Revenue and Foreign Assets as a Percentage of Foreign Assets for the 10 Largest U.S. Multinationals © 2013 Cengage Learning Gottheil — Principles of Economics, 7e 62 Information Technology firms come second, drawing 52.2 percent of their total revenues from foreign operations.