chapter 8 business oranizations. business organizations an establishment formed to carry on...
TRANSCRIPT
Chapter 8
BUSINESS ORANIZATIONS
Business Organizations
An establishment formed to carry on commercial enterprise
There are 3 Major Types of Business Organizations:
Sole Proprietorships, Partnerships, and Corporations
PercentagesPercentages
Businesses
75% Sole Proprietorships
20% Corporations
7% Partnerships
Percentages do not equal 100%
Income Earned10 % Partnerships
20% Sole Proprietorships
70% Corporations
U.S. Sales
90% Corporations
5% Partnerships
6% Sole Proprietorships
Percentages do not equal 100%
Sole Proprietorships
Sole Proprietorships
Examples:Mario’s Pizza
Definition:A business owned and managed by a single individual
Sole Proprietorships
Advantages Easiest to establish and stop Few regulations Receives all profits Full control
Disadvantages Unlimited liability (can get sued at any time) Limited access to resources Lack of permanence (can enter or exit market at any time) Little fringe benefits
Bonus:
Where was the store
“Kroope’s Cotton Shop”
located at in Northampton.
Advantages
1. Easy to establish / set-up: Minimum Requirementsa. Business license – Authorization to start a business issued by the local government
b. Site permit—so must obtain a certificate of occupancy
c. Name of the business
2. Least Regulated—relatively few regulations
Zoning Laws
Law in city or town that designates separate areas for residency and for business
Advantages
3. Sole receiver of profit (after paying income taxes)
4. Full control of business.
5. Easy to discontinue—to stop operations and do something else for a living
Disadvantages
1. The independence of a sole proprietorship come with a high degree of responsibility—the biggest disadvantage of sole proprietorships is unlimited personal liability
Liability
The legally bound obligation to pay debts
Responsibility
Disadvantages2. Limited access to Resources3. Lack of Permanence—meaning a sole
proprietorship has a limited life
* Causes can include:a. Have trouble finding and keeping good
employeesb. Can not offer the security and advancement opportunitiesc. Are not able to offer employees many fringe benefits
Fringe Benefits
Payments other than wages or salaries
Examples: Bonuses, vacation days, personal days, sick days, company cars, insurance, business trips, tickets to games
Disadvantages
d. Lack of experienced employees
Partnerships
Partnerships
Examples:Woodstone Golf Club
Definition:Business organization owned by 2 or more persons who agree on a specific division of responsibilities and profits
Partnerships
Advantages Easy to EstablishLimited Government InvolvementShared Decisions makingSpecializationNot subject to special taxes
Disadvantages Unlimited Liability (unless LLP)Potential for conflict
A. Types of Partnerships
• Each divides responsibility and liability differently
Types of Partnerships
General Partnership Limited Partnership Limited Liability Partnership
1. General Partnership
All partners have EQUAL responsibility and liability
This type is the most common
2. Limited Partnership
a. General Partners• Main disadvantage: has unlimited liability• Main advantage: full control of the
business
b. Limited Partners:• ONLY contribute money; Do NOT actively
manage the business• Can lose only the amount of their initial
investment
3. Limited Liability Partnership
All partners have a limited Liability
A person is ONLY responsible for the area that they are in charge of
Limited Liability PartnershipExample: Hillary is in charge of paying for supplies Joe is in charge of safety, such as meeting
government regulations Sam is in charge of Personnel—such as the hiring
and firing of employees
Liability
Hillary
Joe
Sam
B. Advantages of Partnerships
1. Are easy and inexpensive to establish
a. Does the law require a written partnership agreement? NO
b. Most experts advise partners to work with a(n) attorney to develop articles of partnership, which is a legal document that spells out each partner’s rights and responsibilities
Advantages of Partnerships
c. If partners do NOT establish their own articles of partnership, they will fall under the rules of the Uniform Partnership Act (UPA). Partnerships can distribute profits as they wish, as long as they abide by the partnership agreement or by the UPA
Uniform Partnership Act (UPA) Act ordering common ownership
interests, profit and loss sharing, and shared management responsibilities in partnership
Advantages of Partnerships
2. Shared decision making and specialization
3. Larger Pool of Capital
4. Not subject to any special Taxes
Assets
Money or other valuables belonging to an individual or business
Improve firms’ ability to borrow or expand Examples: Jewelry, houses,
classic cars, boats, stocks, bonds
Disadvantages
1. Unless the partnership is an LLP, at least ONE partner has unlimited liability. Any general partner can lose everything including personal property, in paying the firm’s debts. Limited partners can ONLY lose their initial investment
2. Potential for Conflict
Why are there NOT many partnerships, compared to the amount of corporations and sole proprietorships?
Why are there NOT many partnerships, compared to the amount o corporations and sole proprietorships?
Conflict Arguments Agreement
Quiz1. Which type of business organization is the most common? Sole
proprietorship2. What is the minimum amount of people needed for a partnership? 23. The word that means responsibility; legal obligation to pay a debt.
Liability4. Which type of business organization has the most sales and income?
Corp.5. Give an example of a fringe benefit.6. Give an example of an asset.7. What is the only “thing” a person can lose if they own part a
corporation? Their original investments.8. What type of partnership is the most common? General partnership9. Do you necessarily have to write down any information when you have
a partnership? NO10. In a limited partnership, sometimes the limited partner(s) are also
called what? Silent partners
Corporations
Brainstorm
List as many corporations as you can think of…
Corporations
Examples:Wegmans, Microsoft
Definition:A legal entity owned by individual stockholders
CorporationsAdvantages Limited Liability for owners
Long lifeTransferable ownershipAbility to attract Capital
Disadvantages Expensive & difficult to establishMore legal requirements and regulationsPotential loss of control by founders (Spiderman)Double taxation
Corporations
A. Each stockholder faces limited liability for the firm’s debts. Stockholders own stock, also called shares.
Why do many sole proprietorships eventually incorporate, thus becoming corporations?
Why do many sole proprietorships eventually incorporate, thus becoming corporations?
Corporations have:
Less Liability (Responsibility) More Assets More Fringe Benefits Less Risk
Stock
Aka: Shares A share represents a portion of
ownership in a corporation
Stocks are also called equities
How old do you have to be own stock in your own name?
21 years old
Picking Stocks Example
“Picking stocks is a lot like trying to pick the shortest checkout line at the grocery store. Do some lines move faster than others? Absolutely, just as some stocks outperform others. Are there things that you can look for that signal how fast one line will move relative to another? Yes.”
Picking Stocks Example
“You don’t want to be behind the guy with two full shopping carts or the old woman clutching a fistful of coupons. So why is it that we seldom end up in the shortest line at the grocery store? Because everyone else is looking at the same thing we are and acting accordingly”
Picking Stocks Example
“Suppose that somewhere near the produce aisle you saw an old woman stuffing wads of coupons in her pockets when you arrive at the checkout and see her in line, you wisely steer your cart somewhere else…[and] you smugly congratulate yourself. Moments later, however, you realize the guy ahead of you forgot to weigh his avocados. Who could have predicted that? No one. It’s the things you can’t predict that matter.”
--Naked Economics, p. 129-130
a. Common Stock
Are voting owners of the company—they usually receive 1 vote for each share of stock owned to vote to elect the company’s board of directors
b. Preferred Stock
Are nonvoting owners of the company. They receive dividends before the owners of common stock. If the company goes out of business, they get their investments back before common stockholders
Types of Stock
Preferred Stock NO voting rights
Receives dividends FIRST if company fails
Price per share is usually MORE
Common Stock HAS voting rights
Receives dividends SECOND if company fails
Price per share is usually LESS
2. Diversification
To purchase a variety of stocks
Example: – Clothing (GAP Inc.)– Utility (PECO, PPL)– Technology (Dell, Microsoft)– Merchandise (Target, Walmart, K-Mart)
• It is best to diversify stocks in a variety of industries
(don’t put all of your eggs in a basket…)
Diversifying Example
If you flip one coin, you have a 50 percent chance of making money and a 50 percent chance of losing money.
If you flip several coins, the probability is greater that you will make money.
Mutual FundsA portfolio managed by someone who uses a pool of investors to purchase stocks. Investors can purchase shares of mutual fund. (You cannot buy mutual funds in our game)
STOCK
STOCK
STOCK
STOCKMUTUAL FUND
A Ticker Symbol is the code used to designate stocks on various markets. This is used to find the prices of stock
Johnson and Johnson is JNJFor example:
Microsoft is MSFT
IPO
An initial public offering of a stock
Bond
A certificate issued by a corporation Promises to repay with interest the amount the
corporation borrowed from the buyer
Takes approximately 20-30 years to mature
For Bond infroamtion:http://www.treasurydirect.gov/indiv/research/indepth/tbonds/res_tbond.htm
For social security number information:http://www.cpsr.org/prevsite/cpsr/privacy/ssn/ssn.structure.htm
Bond CD Savings Account
How long to keep?
20-30 years
Months to years
No specific time
Who
investing in?Government Bank Bank
Money mostly guaranteed?
Yes Yes Yes
Initial Investment
½ of total amount
Approx. $500
Usually $200
How much do you make?
50% 4-7% 2-3%
Bonda. Bonds are basically loans, or IOUs, that represent
debt that the government or corporation must repay to an investor
b. Bonds typically pay the investor a fixed amount of interest at regular intervals for a fixed amount of time.
c. Bonds are generally lower-risk investments.
d. There are several different types of bonds, including United States government bonds, which are sometimes given to young people as gifts.
What is a Stock Split
You have 100 shares of a company
The company offers a 2 for 1 split
For each share you have,the company gives you 1 more!
The company gives you 100 shares
Result: You own 200 shares of the company
Stock split
(When stock splits occur, the price of the stock usually splits as well)
A company may seek to split a stock when the price of stock becomes too high that it discourages potential investor from buying it.
Risks of Buying Stocks
The firm selling the stock may earn lower profits than expected, or may lose money. The dividends will be smaller than expected, or nothing at all, and the market price of the stock will probably decrease—which can result in a capital loss.
Types of Corporations
Closely-held Corporation Publicly-held Corporation
Closely-held Corporation
Issues stock to only a few people- often family members
Mr.Robert Wegman
Publicly-held Corporation
Sells stock on the open market
Stocks are bought and sold at financial markets called stock exchanges such as the New York Stock Exchange.
Mr. William Gates
Structure of a Corporation
Corporate Officers
Board of Directors
Corporate Owners (Shareholders)
Corporate Owners
The (common) Stockholders—elect a board of directors
Board of Directors
Makes all of the major decisions of the corporation
Appoints corporate officers
Corporate Officers
Run the corporation and oversee production; in turn, hire managers and employees, who work in various departments
Structures of…
Corporations Corporate Officers
Board of Directors
Shareholders
School Districts Administration
(Superintendent & Principals)
School Board
Taxpayers (Citizens of School District)
D. How Stocks are Traded
1. Very few companies sell stock directly, so instead, a person would contact a stockbroker who works for a brokerage firm. Both cover the costs and earn a profit by charging a commission, or fee, on each stock transaction.
a. Stockbroker
A person who links buyers and sellers of stock
b. Brokerage firms
A business that specializes in trading stocks
2. Stock exchanges
A market for buying and selling stock
Stock Exchanges
Most newspapers publish data on transactions in major stock exchanges. Websites also publish this information
a. The New York Stock Exchange (NYSE) is the country’s largest and most powerful exchange and has the best-known companies. It began in the year 1792.
Stock Exchanges
b. The American Stock Exchange (AMEX) used to be the 2nd-largest exchange but lost business when people started trading over the Internet. In 1998, it merged with NASDAQ. The combined exchange (NASDAQ-AMEX) sells slightly riskier stocks from less-established and smaller companies than does the NYSE.
Measure Stock Performance
1. When the stock market rises steadily over a period of time, a bull market exists. On the other hand, when the stock market falls for a period of time, people call it a bear market.
Measuring Stock Performance
2. The Dow Jones Industrial Average (DOW) was established in 1896. Today, the stocks represent 30 large companies in various industries, such as food, entertainment, and technology
3. The Standard & Poor’s 500 (S & P 500) give a broader picture of stock performance than the DOW. It tracks the price change of 500 different stocks
Portfolios
A group of stocks owned and managed by one person
Incorporation
Forming a corporation
Advantages of Corporations
1. Owners have limited liability—meaning they can only lose the amount of money they have invested in the business
2. Shares are transferable—meaning that stockholders can sell their stocks to others and get money in return
3. Ability to attract capital
4. Corporations last longer—almost indefinitely
Disadvantages of Corporations
1. Corporations can be difficult, expensive, and time consuming to establish. Firms that want to incorporate must first file for a state license—known as a certificate of incorporation
Disadvantages of Corporations
Double Taxation:
a. Corporations must pay on their income, in addition to
b. paying taxes on dividends
•
Dividends
Profits a company gives back to shareholders
Disadvantages of Corporations
3. Potential of loss of control by the founders
4. Corporations are more regulated than any other kind of business organization. Publicly held corporations are required to file reports with the Securities and Exchange Commission (SEC), the federal agency that regulates the stock market
H. Corporate Combinations
Each corporate combination can lead to larger, more efficient firms, which often can produce and sell their products at lower prices. However, their size can also give some of these combinations more monopoly power.
Types of Mergers
Horizontal Merger Vertical Merger Conglomerate
Horizontal Merger
Combination of 22 or more firms competing in the SAME market with the same good or service
Vertical Merger
Combination of 2 or more firms involved in DIFFERENT stages of producing the same good or service
Conglomerate
Business combination merging more than 3 businesses that make unrelated products
Conglomerate
Example: Proctor and Gamble
How do people make money with stocks?
1. Dividends: usually paid 4 times a year (quarterly). The size depends on the corporation’s profits. The higher the profits, the larger the dividend per share of stock.
(NOT all corporations pay out dividends!)
How do people make money with stocks?
2. Capital Gains: The difference between the higher selling price and the lower purchase price. If an investor sells a stock at a price lower than the purchase price, however, the investor will suffer a Capital Loss
Speculation
The practice of buying stocks when the price is LOW, and selling stocks when the price is HIGH
Multinational Corporation (MNC) A large corporation that produces and
sells its goods and services throughout the world
Multinational Corporation (MNC)
– 1. Usually have headquarters in one country and branches in other countries
– 2. Must obey laws and pay taxes in each country in which they operate
– 3. Advantages of MNCs:• a. Benefits customers and workers worldwide by
providing jobs and products around the world.• b. Spread new technologies and production
methods across the globe• c. Provide help to poorer nations gain better
standards for their people
–
Multinational Corporation (MNC)
4. Disadvantages of MNCs:
a. Concern about the low wages
b. Poor working conditions in some poorer countries
Other OrganizationsOther Organizations
Other Organizations
Business Franchise Cooperative Organizations (Co-ops) Nonprofit Organizations
Business Franchise
A semi-independent business that pays fees to a parent company in return to sell a certain product or service in a given area
Examples: Dunkin’ Donuts, McDonalds
Business Franchise
Advantages Management training and supportStandardized qualityNational advertisingFinancial assistanceCentral buying powers
Disadvantages High franchising fees and royalties Strict operating standards Purchasing restrictingLimited product line
Fastest growing Franchises(2005 data in U.S. and Canada)
Name of Franchise New franchises a week
Subway 28
Pizza Hut 22
Quizno’s Subs 19
Jan-Pro (cleaning) 16
Curves 15
Jani-King (cleaning) 13Jackson Hewitt Tax Services 10
The UPS Store 9
Entrepreneur Magazine 2/06; rewritten in Morning Call 10/25/06
Franchises
Parent companies, called franchisers develop the products and business systems and work with the local franchise owners to help them produce and sell their products.
FranchisesA. Advantages of Franchises
1. A franchise comes with a built-in reputation customers may already
be familiar with the product and brand
2. Management training and support to help inexperienced owners gain experience
3. Standardized quality—so that everything looks the “same”
4. National advertising programs
5. Financial assistance to help franchise owners start their business.
6. 6. Centralized buying power—all of the franchises get all of their products from the same location
Franchises
A. Disadvantages of Franchises
1. The franchise owner must sacrifice some freedom in return for the parent company’s guidance
2. High franchising fees and royalties are charged to owners for the right to use the company royalties.
Royalties
Share of earning given as payment
(This is in addition to paying for the franchise and the products to sell)
Franchises
3. Strict operating standards—such as hours of operations, employee dress codes, and operating procedures. Otherwise, the owner may lose the franchise.
4. Purchasing restrictions—must buy their supplies from the parent company or from approved suppliers
5. Limited product line
Cooperative Organizations
Cooperative Organizations (Co-ops) A business organization owned and
operated by a group of individuals for their mutual benefit
Cooperative Organizations (Co-ops)
Advantages Can work with other people Discount prices Mutual benefits
Disadvantages May include annual membership fee Possibility of conflict
Types of Co-ops
Consumer Cooperatives Service Cooperatives Producers Cooperatives
Consumer Cooperatives
Retail outlet owned and operated by consumers
Examples: Sam’s Club, BJ’s Club
Service Cooperatives
Provides a service – NOT a good Examples: Credit Union, Discounted
insurance
Producer Cooperatives
Agricultural Marketing that helps members sell their products
Example: Allentown Farmers Market
Non-profit Organizations
Non-profit Organizations
An institution that functions like a business, but does NOT operate for profit
Examples: Girl Scouts, American Red Cross, YMCAs, Salvation Army, School districts
Non-profit Organizations
Advantages Government tax exemptions Most have partial government supportCan work with other people
Disadvantages Conflict between members Taking advantage of government supports
Types of Nonprofit Organizations Professional Organizations Business Associations Trade Associations Labor Unions
Professional Organizations
Improves image and working conditions and skill levels of people in certain occupations
Examples:
American Bar Association,
American Medical Association
Business Associations
Promotes collective business interests for a city, state and other geographical areas
Example: Better Business Bureau
Trade Associations
Promotes interests of a particular industry
Example: American Marketing Association
Labor Unions
Aims to improve working conditions, hours, wages and fringe benefits
Example:
International Brotherhood of Teamsters
Standards
6.2.12 I 6.4.12 AB 6.5.12 BCDEF
Corporate Officers
Runs corporation and oversees production
Hire managers and employees who work in various departments
Parable of the Talents
Matthew 25:14
For it is just like a man about to go on a journey, who called his own slaves and entrusted his possessions to them.
To one he gave five talents, to another, two, and to another, one, each according to his own ability; and he went on his journey.
Parable of the Talents Immediately the one who had received the five
talents went and traded with them, and gained five more talents.
In the same manner the one who had received the two talents gained two more.
But he who received the one talent went away, and dug a hole in the ground and hid his master's money.
Parable of the Talents Now after a long time the master of those slaves
came and settled accounts with them.
The one who had received the five talents came up and brought five more talents, saying, "Master, you entrusted five talents to me. See, I have gained five more talents.'
His master said to him, "Well done, good and faithful slave. You were faithful with a few things, I will put you in charge of many things; enter into the joy of your master.'
Parable of the Talents
And the one also who had received the one talent came up and said, "Master, I knew you to be a hard man, reaping where you did not sow and gathering where you scattered no seed.
And I was afraid, and went away and hid your talent in the ground. See, you have what is yours.‘
Parable of the Talents
But his master answered and said to him, "You wicked, lazy slave, you knew that I reap where I did not sow and gather where I scattered no seed.
"Then you ought to have put my money in the bank, and on my arrival I would have received my money back with interest.
Parable of the Talents "Therefore take away the talent from him, and
give it to the one who has the ten talents.
‘For to everyone who has, more shall be given, and he will have an abundance; but from the one who does not have, even what he does have shall be taken away.
Throw out the worthless slave into the outer darkness; in that place there will be weeping and gnashing of teeth. (NASB)
How do you make money with stocks? Speculation Dividends
Speculation
The practice of buying stocks when the price is LOW, and selling stocks when the price is HIGH
(Goal of the stock market game)
Speculation Example
You own 100 shares of a company XYZ. You paid $5.00 for each share.
How much did XYZ cost you?
XYZ cost you $500.
100 shares
x 5.00 cost per share
$500.00 Total cost
How much profit would you make if you sold XYZ shares at $8.00 a share?
You would profit $300.
100 shares
x $8.00 price
$800Total cost when sold
$800Amount sold for- $500Amount paid for
$300$300Total ProfitTotal Profit
A “NORMAL” Speculation:
BUY when stock prices are LOW
SELL when stock prices are HIGH
The difference between these prices, is the amount of money you make!!!!
However, However, Short SellingShort Selling and and Short BuyingShort Buying is different… is different…
Suppose…Suppose…
Spike
Jane
Bob
Spike has a CD.
Spike loans the CD to Jane.
Jane knows the CD will go on sale nextweek at Best Buy.
Bob wants the sameCD that Janeborrowed from Spike.
So, Janesells the CD to Bob for $30.
Jane goesto Best Buy and buys the same CD for $15.
Jane gives backa CD to Spike.
Jane profits $15.
When you Short SellShort Sell, , you sellwhen the price is HIGHHIGHand you hope that the price decreases.
When you think the price is asLOWLOW as it will go, you Short Short BuyBuy