1. Chapter 8: Business Organizations Section 1

2. Key Terms
sole proprietorship: a business owned and managed by a single individual
business license: authorization to operate a business issued by a local government
zoning laws: laws in a city or town that designate certain areas, or zones, for residential and business use
liability: the legal obligation to pay debts
fringe benefits: payments to employees other than wages or salary.

3. The Role of Sole Proprietorships
A sole proprietorship is a business owned and managed by a single individual.
In this type of business organization the lone entrepreneur earns all of the firm’s profits and is responsible for all its debts.
More than 70 percent of all businesses in the United States are sole proprietorships but they are small, generating only 4 percent of all U.S. sales.

4. Entrepreneurs
The potential to make a profit is a big incentive for entrepreneurs to start a sole proprietorship.
Entrepreneurs must be willing to assume total responsibility and take risks.
A successful entrepreneur is:
Optimistic
Enthusiastic
Focused on the future

5. Characteristics of Proprietorships

6. Advantages Sole proprietorships have many advantages, including:
They are easy to start - there is only a small amount of paperwork and legal expense
There are minimum requirements - sole proprietors need only a business license, a state permit if not working out of their home, and a name for their business

7. Advantages, cont.
There are few regulations - sole proprietorships are the least regulated form of business organization.
However, sole proprietorships are subjected to zoning laws, which may prohibit them from operating businesses out of their homes.
They are the sole receiver of profit - the owner gets to keep all of the profits after paying income taxes.

8. Advantages, cont.
Sole proprietors have full control - a high level of freedom allows sole proprietors to run their company as they wish.

9. Disadvantages
Checkpoint: What are the disadvantages of sole proprietorships?
Unlimited liability - sole proprietorships are fully and personally responsible for all their business debts
Limited access to resources
Sole proprietorships must buy all the necessary resources they need to run their business, which can be very expensive.
They may lack in human capital.
Demands on a sole proprietorships can be personally and financially exhausting.
Checkpoint Answer: Unlimited liability, limited access to resources, lack of performance

10. Lack of Performance
Sole proprietorships often have trouble finding and keeping good employees.
Many sole proprietorships do not have the ability to offer fringe benefits.
How does this cartoon show a major disadvantage of a sole proprietorship?
Answer: There is no one to run the business when a sole proprietor takes a vacation so they often don’t get vacations or other fringe benefits.

12. Chapter 8: Business Organizations Section 2

13. Key Terms
partnership: a business organization owned by two or more persons who agree on a specific division of responsibilities and profits
general partnership: a type of partnership in which all partners share equally in both responsibility and liability
limited partnership: a type of partnership in which only one partner is required to be a general partner
limited liability partnership (LLP): a type of partnership in which all partners are limited partners

14. Key Terms, cont.
articles of partnership: a partnership agreement that spells out each partner’s rights and responsibilities
assets: the money and other valuables belonging to an individual or business
business franchise: a semi-independent business that pays fees to a parent company in return for the exclusive right to sell a certain product or service in a given area
royalties: the share of earnings given by a franchisee as a payment to the franchiser

15. Partnerships
A partnership is a business organization owned by two or more persons who agree on a specific division of responsibilities and profits.
There are three types of partnerships
General partnerships
Limited partnerships
Limited liability partnerships

16. Types of Partnerships General Partnerships Limited Partnerships
All parties share equally in both responsibility and liability
Limited Partnerships
Only one partner is required to be a general partner
Limited partners only contribute money; they are not liable for the firm’s actions

17. Types of Partnerships, cont.
Limited Liability Partnerships
This partnership acts like a general partnership, except that all partners have limited personal liability in certain situations, such as another partner’s mistakes.

18. Characteristics of Partnerships18

19. Advantages Checkpoint: What are the advantages of partnerships?
Ease of start-up - partnerships are easy and inexpensive to establish. It is a good idea, though, to sign a partnership agreement, which spells out the rights and responsibilities of each partner.
Little government regulation
More capital - with more people involved, more capital can be raised.
Checkpoint Answer: Ease of start-up, little government regulation, more capital, better employees, taxes, shared decision-making 19

20. Advantages, cont.
Better employees - partnerships can attract and keep talented employees more easily than sole proprietors can
Taxes - partnerships are not subjected to any special taxes
Shared decision-making - each partner brings different strengths and skills to the business 20

21. Disadvantages Disadvantages of partnerships include:
Unlimited liability - at least one partner has unlimited liability (unless the partnership is an LLP) which means that person could lose everything
Lack of performance - a partnership may not outlast the life of one of the general partners

22. Disadvantages, cont.
Potential for conflict - interpersonal conflicts between partnerships can lead to disagreements and, in some cases, an end to the partnership 22

23. End of 8.2

24. Chapter 8: Business Organizations Section 324

25. Key Terms
corporation: a legal entity, or being, owned by individual stockholders, each of whom has limited liability for the firm’s debts
stock: a certificate of ownership in a corporation
closely held corporation: a type of corporation that issues stock to only a few people, who are often family members
publicly held corporation: a type of corporation that sells stock on the open market
bond: a formal contract issued by a corporation or other entity that includes a promise to repay borrowed money with interest at fixed intervals

26. Key Terms, cont.
certificate of incorporation: a license to form a corporation issued by a state government
dividend: the portion of corporate profits paid out to stockholders
limited liability corporation (LLC): a type of business with limited liability for the owners, with the advantage of not paying corporate income tax
horizontal merger: the combination of two or more firms competing in the same market with the same good or service

27. Key Terms, cont.
vertical merger: two or more firms involved in different stages of producing the same good or service
conglomerate: a business combination merging more than three businesses that produce unrelated products or services
multinational corporation (MNC): a large corporation that produces and sells its goods and services in more than one country

28. Corporations
The most complex form of business organization is the corporation.
Individual stockholders own stock in a corporation and are, therefore, part-owner of the company that issues the stock.
In the United States, corporations account for about 20 percent of all businesses but more than 80 percent of all sales. 28

29. Types of Corporations Closely held corporations
Corporations that issue stock to only a few people, often family members.
Publicly held corporations
Corporations that sell stock on the open market.
Owners of a corporation elect a board of directors that makes all the major decisions. 29

30. Characteristics of Corporations30

31. Advantages
Incorporation, or forming a corporation, offers advantages to stockholders and the company itself.
Advantages for stockholders:
Unlimited liability
Flexibility with easily transferable stock 31

32. Advantages, cont. Advantages for the company:
More potential for growth and longevity
Ability to raise money by borrowing
No need for special managerial skills
Corporations have a self-interest in developing profitable products and services. For example, consumer concern about global warming has led many corporations to develop eco-friendly technology. 32

33. Disadvantages Checkpoint: What are the disadvantages of incorporation?
Difficulty and expense of start-up
Corporate charters can be difficult, expensive, and time consuming to create.
Double taxation
Corporations must pay corporate income taxes as well as taxes on the dividends paid to stockholders
Loss of control
Owners do not manage the activities of a corporation
More regulation
Checkpoint Answer: Difficulty and expense of start-up, double taxation, loss of control, and more regulation. 33

34. Corporate Combinations
Corporations can grow larger by merging with another corporation.
There are three types of mergers:
Horizontal mergers are the combination of two or more firms competing in the same market with the same good or service, such as the merger between Cingular and AT&T in 2004.
Vertical mergers join two or more firms involved in different stages of producing the same good or service.
Conglomerates occur when three or more businesses that produce unrelated products or services merge.

35. Horizontal and Vertical Mergers35

36. Multinational Corporations
Multinational corporations are the world’s largest corporations and they sell their goods and services in more than one country.
Advantages
Benefit consumers by producing jobs and products around the world.
Help poorer countries enjoy better living standards
Spread new technology across the globe

37. Disadvantages of MNCs Disadvantages
Unduly influence culture and politics in countries in which they operate.
Jobs in poorer countries are often marked by low wages and poor working conditions.

38. Chapter 8: Business Organizations Section 4

39. Key Terms
cooperative: a business organization owned and operated by a group of individuals for their shared benefit
consumer cooperative: a retail outlet owned and operated by consumers that sells merchandise to members at reduced rates
service cooperative: a type of cooperative that provides a service rather than a good
producer cooperative: an agricultural marketing cooperative that helps members sell their products

40. Key Terms, cont.
nonprofit organization: an institution that functions much like a business, but does not operate for the purpose of making a profit
professional organization: a nonprofit organization that works to improve the image, working conditions, and skill levels of people in particular occupations
business association: a group organized to promote the collective business interests of an area or group of similar business interests
trade association: nonprofit organizations that promote the interests of particular industries

41. Franchises
Sometimes people opt to form a business franchise instead of a partnership.
A business franchise is a semi-independent business that pays fees to a parent company.
In return, the business is granted the exclusive right to sell a certain product or service in a given area.

42. Advantages Advantages of franchises include: Built-in reputation
Management training and support
Standardized quality
National advertising programs
Financial assistance
Centralized buying power

43. Disadvantages
With their many advantages comes a few disadvantages of franchises:
High franchising fees and royalties
Strict operating standards
Purchasing restrictions
Limited product line
Checkpoint: What are the advantages and disadvantages of franchises?
Checkpoint Answer: Advantages include a built-in reputation, management training and support, standardized quality, national advertising programs, financial assistance, and centralized buying power. Disadvantages include high franchising fees and royalties, strict operating standards, purchasing restrictions, and a limited product line. 43

44. Cooperatives
A cooperative is a type of business organization owned and operated by a group of individuals for their shared benefit.
First instituted by Benjamin Franklin, cooperatives are based on the following principles:
Voluntary and open membership
Control of the organization by its members
Sharing of contributions and benefits by members

45. Cooperatives, cont.
Cooperatives do not have to pay income taxes because they are not corporations.
Cooperatives are found in many industries including farming and health care. 45

46. Consumer Cooperatives
There are three kinds of cooperatives.
Consumer cooperatives are retail outlets owned and operated by consumers.
They sell merchandise to members at reduced prices.
Examples of consumer cooperatives include discount price clubs and housing co-ops.
Some co-ops require members to work a small number of hours to maintain membership. 46

47. Service and Producer Cooperatives
Service cooperatives are co-ops that provide a service.
Some service co-ops offer discounted insurance, health care, or legal help.
Credit unions are an example of a service co-op.
Producer cooperatives are agricultural marketing co-ops that help members sell their products.
Members focus their attention on their crops or livestock while the co-op markets the goods for the highest possible price.

48. Nonprofits
Nonprofit organizations function like a business but do not operate for the purpose of generating profit.
Examples of nonprofits include museums, public schools, the American Red Cross, hospitals, churches, and many other groups and charities.
Nonprofits, like co-ops, are exempt from paying income taxes, but the nonprofit must meet certain requirements to qualify for tax-exempt status.
Nonprofits have limits on their political activity.

49. Professional Organizations
Some nonprofits provide support to particular occupations or geographical areas.
Professional organizations work to improve the image, working conditions, and skill levels of people in particular occupations such as the National Education Association for educators.
Keep members up-to-date on industry trends.
Set codes of conduct that members must follow.

50. Business Associations
Promote the collective business interests of a city, state, or other geographical area.
The Better Business Bureau (BBB), which aims to protect consumers by promoting an ethical and fair marketplace is an example of a business association. 50

51. Trade Associations
Trade associations promote the interests of particular industries.
Many trade associations hire lobbyists to work with state legislatures and Congress to try to influence laws that affect an industry.

53. Chapter 9: Labor Section 1

54. Key Terms
derived demand: a type of demand that is set by the demand for another good or service
productivity of labor: the quantity of output produced by a unit of labor
equilibrium wage: the wage rate that is set when the supply of workers meets the demand for workers in the labor market
unskilled labor: work that requires no specialized skills, education, or training
semi-skilled labor: work that requires minimal specialized skills and education

55. Key Terms, cont.
skilled labor: work that requires specialized skills and training
professional labor: work that requires advanced skills and education
glass ceiling: an unofficial barrier that sometimes prevents some women and minorities from advancing to the top ranks of organizations dominated by white men
labor union: an organization of workers that tries to improve working conditions, wages, and benefits for its members
featherbedding: the practice of negotiating labor contracts that keep unnecessary workers on a company’s payroll

56. Key Terms
strike: an organized work stoppage intended to force an employer to address union demands
right-to-work law: a measure that bans mandatory union membership
blue-collar worker: someone who performs manual labor, often in a manufacturing job, and who earns an hourly wage
white-collar worker: someone who works in a professional or clerical job and who usually earns a weekly salary

57. Labor Demand
The demand for labor comes from private firms and government agencies that hire workers to produce goods and services.
Demand for labor is called derived demand because it is set by the demand for another good or service.
In a competitive labor market, workers are usually paid according to the value of what they produce.

58. Supply of Labor
The supply of labor comes from people willing to work for wages.
The higher the wage for a particular job, the larger the quantity of labor supplied.
According to the demand curve, if each cook works a 40-hour work week, how many cooks will be hired at $12 an hour and $16 an hour?
Answers: 6 cooks will be hired at $12 an hour and 4 cooks will be hired at $16 an hour

59. Equilibrium Wage
Checkpoint: What determines the equilibrium wage of labor?
The equilibrium wage is the wage rate, or price of labor or services, that is set when the supply of workers meets the demand for workers in the labor market.
At equilibrium there is no pressure to raise or lower wages.
Checkpoint Answer: The equilibrium wage is determined by where the supply of workers meets the demand for workers in the labor market.

60. Wage and Skill Levels
In addition to varying according to labor supply and demand, wages also vary depending on workers’ skill levels and education.
Jobs are often categorized into four skill levels:
Unskilled labor
Semi-skilled labor
Skilled labor
Professional labor

61. Wage and Skill Levels, cont.
Labor supply and demand can create a significant difference in pay scales for workers with various skills.
Doctors, for example, who have extensive training and experience enjoy a high demand for their services relative to the supply and, therefore, earn higher wages.
High levels of danger or physical or emotional stress can affect the equilibrium wage for a particular job as well.

62. Wages for High-Risk, Low-Risk Jobs
These graphs show how wages compare for similar jobs with different degrees of risk.
Write a sentence that compares the demand curves for the two graphs.
Write a sentence that compares the two supply curves.
Answers: 1. Demand is higher for workers in high-risk jobs than in low-risk jobs because there are fewer people willing to do high risk jobs. 2. The supply of labor is higher in low-risk jobs than it is in high-risk jobs because fewer people want to work in high-risk jobs.

63. Wage Discrimination
Some people are paid less not because of their skill level but because of the social group they belong to. This practice is known as wage discrimination.
Women and minority groups have both suffered wage discrimination.
Congress has passed several anti-discrimination laws to prevent wage discrimination including:
Equal Pay Act of 1963
Civil Rights Act of 1964, which established the Equal Opportunity Commission (EEOC)

64. Pay Levels for Women
Despite protections, women still earn less than men as a result of three factors:
Women’s work
Historically women have been encouraged to seek careers in teaching, nursing, and clerical work, which has led to a high supply of workers.
Human capital
Overall, women are less educated than men, making them ineligible for high-paying, male-dominated jobs.

65. Pay Levels for Women, cont.
Women’s career paths
Women are often perceived by employers as not being interested in advancement.

66. Pay Levels Across Society
Racial discrimination has led to the wage gap for minorities.
Non-discrimination laws are designed to give minorities improved access to education and job opportunities so they can close the wage gap.
Checkpoint: What groups have been hurt by wage discrimination?
Checkpoint Answer: Women and minorities

67. Other Factors Minimum wage laws and safety laws also affect wages.
Minimum wage creates a minimum hourly rate that employers must pay workers.
Workers are willing to work for lower wages when jobs are safer.

68. Employer Actions and Labor Unions
Employer actions and labor unions also affect wages.
Employer actions
A company may try to cut labor costs, which in turn, lowers wages. They often replace human capital with physical capital.
Labor unions
Labor unions can affect wages by persuading employers to increase their pay. Unions are a much disputed aspect of the labor force in today’s world.

70. Chapter 9: Labor Section 2

71. Key Terms
labor force: all nonmilitary people who are employed or unemployed
outsourcing: the practice of contracting with another company to do a specific job that would otherwise be done by a company’s own workers
offshoring: the movement of some of a company’s operations to another country
learning effect: the theory that education increases efficiency of production and thus results in higher wages

72. Key Terms, cont.
screening effect: the theory that the completion of college indicates to employers that a job applicant is intelligent and hard-working
contingent employment: a temporary and part-time job
guest workers: members of the labor force from another country who are allowed to live and work in the United States only temporarily

73. Tracking the Labor Force
Each month the Bureau of Labor Statistics (BLS) assembles information on the labor force—all nonmilitary people who are employed or not employed.

74. The Labor Force
A person is considered employed if they are 16 years or older and meet at least one of the following requirements:
They worked at least one hour for pay in the past week
They worked 15 hours or more without pay in a family business
They held jobs but did not work due to illness, vacations, labor disputes, or bad weather.

75. Composition of the U.S. Labor Force
People are considered unemployed if they are either temporarily unemployed or if they are not working but are looking for jobs.
What are the parts that form the total U.S. population?
How does being unemployed differ from not being a part of the labor force?
Answers: 1. Military, Institutionalized, Labor Force, Non-labor. 2. Being outside the labor force means that people have given up looking for a job. It also includes full-time students, parents who raise kids at home, and retirees.

76. The BLS
Checkpoint: What important information can we learn from the Bureau of Labor Statistics (BLS)?
The BLS tells us how many people are in the labor force as well as how many people are employed or unemployed at a given time.
It also provides information on historical trends in the labor force and reports the unemployment rate each month.
Checkpoint Answer: how many people are in the labor force, how many people are employed and unemployed, and information on historical trends in the labor force

77. Occupational Trends The job market is constantly changing.
The United States, for example, began as an agricultural society that gave way to heavy industry in the early 1900s.
Electronics came next as a major industry in the 1950s, followed by computers opening new employment opportunities in the 1970s.

78. Occupational Trends, cont.
In the past decade, the United States has shifted from a manufacturing economy to a service economy.
Many manufacturing jobs have gone overseas through outsourcing and offshoring forcing many Americans to find work in other areas.
How many service-producing employees were added in the period shown?
Answers: About 90,000

79. The Changing Labor Force
Many people in today’s workforce seek better employment opportunities by getting a college degree.
People with advanced degrees can make more money than those with lesser degrees and they are viewed by employers as hard-workers.

80. Women in the Work Force
The number of women in the workforce has drastically changed in the last 50 years.
Women were encouraged to get an education and increase their human capital, which led to more women entering the workforce.
The increase in service sector jobs also added to the increase of women in the workforce.
Answers: the 1970s
Which decade shows the largest increase in the percentage of women entering the labor force?

81. Temporary Workers
Another trend in the workforce is the increase in temporary workers, or contingent employment.
Reasons for this trend include:
The ability of firms to easily adjust their workforce to changing demand for their output.
Temporary workers are paid less and given fewer benefits.
It’s easier to discharge temporary workers and less costly.
Some workers prefer the flexibility of temporary work

82. Foreign-Born Workers
Foreign-born workers have also influenced the labor force in recent years.
Guest workers are allowed to work for a company that can show they cannot meet their labor needs with native-born workers.
Critics of guest workers say that they hold down the wages of Americans.
Supporters claim immigrant workers do jobs that Americans are unwilling to do because the wages are low and these companies can charge less for their goods as a result.

83. Wages Economists also study trends in benefits and wages.
Americans earn higher wages than people in many other countries but in recent years the trend has been toward slow growth in earnings, as a result of outsourcing and deregulation.
What is the average salary of a worker who is employed in a retail trade or services job?
Answers: $ per week.

84. Benefits
For many workers, benefits like pensions and health insurance are a significant share of total compensation.
This share rose fairly steadily during the 1900s and early 2000s.
Employers are finding that these rising benefits costs increase the cost of doing business and thus cut into their profits.
If such costs continue to rise, companies may have to find ways to cut benefits, which may prove unpopular with workers.