EconomicsEconomics

Chapter 7Chapter 7

Chapter 7Chapter 7

Section 1Section 1

ObjectivesObjectives

1.1. What are the advantages of establishing a What are the advantages of establishing a sole proprietorship?sole proprietorship?

2.2. What are the disadvantages of establishing a What are the disadvantages of establishing a sole proprietorship?sole proprietorship?

Sole ProprietorshipSole Proprietorship

Sole Proprietorship-Sole Proprietorship- A business owned by one A business owned by one person. person.

Oldest, simplest, and most common type of Oldest, simplest, and most common type of business organization. business organization.

Examples: Lawyers, plumbers, hairstylist, and Examples: Lawyers, plumbers, hairstylist, and florists. florists.

Sole ProprietorshipSole Proprietorship

Advantages of a Sole Proprietorship:Advantages of a Sole Proprietorship:

1.1. Ease of start upEase of start up: Requires little financial capital. : Requires little financial capital. There are few legal considerations, but must be There are few legal considerations, but must be aware of some restrictions such as Zoning Laws aware of some restrictions such as Zoning Laws (government restrictions where a business can be.) (government restrictions where a business can be.) Usually need a business license. Usually need a business license.

2.2. ControlControl: One person makes all the decisions such as : One person makes all the decisions such as who to hire and how much to sell their products for. who to hire and how much to sell their products for.

3.3. ProfitProfit: One person gets all the profits. : One person gets all the profits.

Sole ProprietorshipSole Proprietorship

Disadvantages of a Sole Proprietorship:Disadvantages of a Sole Proprietorship:

1.1. Unlimited Liability: Person has Unlimited Liability: Person has responsibility for all debt. You have to pay responsibility for all debt. You have to pay of your debts by yourself. of your debts by yourself.

2.2. Sole Responsibility: Responsible for Sole Responsibility: Responsible for everything-you are the boss, secretary, everything-you are the boss, secretary, janitor, and accountant. You must have a lot janitor, and accountant. You must have a lot of skills and it takes a lot of time and energy. of skills and it takes a lot of time and energy.

Sole ProprietorshipSole Proprietorship

3. 3. Limited Growth PotentialLimited Growth Potential: You only have so much : You only have so much collateralcollateral (anything of value that a borrower agrees to (anything of value that a borrower agrees to give up if he or she is not able to repay a loan.) give up if he or she is not able to repay a loan.)

-You need capital to start your business. -You need capital to start your business. -You may have to borrow from the bank, but you -You may have to borrow from the bank, but you will need collateral to do so. will need collateral to do so. -It may be hard to grow and get money if you only -It may be hard to grow and get money if you only have so much collateral.have so much collateral.

4. 4. Lack of LongevityLack of Longevity: Health, commitment, and competence : Health, commitment, and competence are needed to be successful.are needed to be successful.

- Sole Proprietorships have a shorter lifespan than - Sole Proprietorships have a shorter lifespan than most business organizations. most business organizations. -Depends on one person so the risk is great. -Depends on one person so the risk is great.

Chapter 7Chapter 7

Section 2Section 2

ObjectivesObjectives

1.1. How do general partnerships and limited How do general partnerships and limited partnerships differ?partnerships differ?

2.2. What are the advantages of organizing a What are the advantages of organizing a partnership?partnership?

3.3. What are the disadvantages of organizing a What are the disadvantages of organizing a partnership?partnership?

PartnershipPartnership

PartnershipPartnership- Business that is owned and - Business that is owned and controlled by two or more people.controlled by two or more people.

There are two types of Partnerships:There are two types of Partnerships:1.1. General Partnership-General Partnership- Partners enjoy equal Partners enjoy equal

decision making and have unlimited liability. decision making and have unlimited liability. 2.2. Limited Partnership-Limited Partnership- Involves a silent partner Involves a silent partner

who invests money into a business in return for who invests money into a business in return for a share of the profits. These silent partners a share of the profits. These silent partners usually do not make any business decisions and usually do not make any business decisions and they have limited liability. they have limited liability.

Advantages of a PartnershipAdvantages of a Partnership

1.1. Ease of start upEase of start up..

2.2. SpecializationSpecialization: We know that in a sole : We know that in a sole proprietorship the owners must have a proprietorship the owners must have a lot of skills. In a partnership, these jobs lot of skills. In a partnership, these jobs can be split up between the partners can be split up between the partners according to the job that they do best. according to the job that they do best.

Advantages of a PartnershipAdvantages of a Partnership

3. 3. Share Decision MakingShare Decision Making: Decisions can be shared by : Decisions can be shared by partners. Through communication between partners, partners. Through communication between partners, mistakes can be avoided. (Two heads are better than one!)mistakes can be avoided. (Two heads are better than one!)

4. 4. Shared Business LossesShared Business Losses: If the business does get into : If the business does get into financial trouble, one person does not have to take on all financial trouble, one person does not have to take on all of the burden. of the burden.

-If two people take on the losses, then each will -If two people take on the losses, then each will still still have some money left over to try and get the have some money left over to try and get the business business back on its feet. back on its feet.

-Also, banks are more likely to give larger loans to -Also, banks are more likely to give larger loans to partnerships because the riskpartnerships because the risk is share by more than is share by more than

one one person. person.

Disadvantages of a PartnershipDisadvantages of a Partnership

1.1. Unlimited LiabilityUnlimited Liability: Only in a general : Only in a general partnership.partnership.

2.2. Potential for ConflictPotential for Conflict: Disagreements are bound : Disagreements are bound to happen when you have two or more people. to happen when you have two or more people. People will argue over money, decisions made, People will argue over money, decisions made, or even the personalities of the partners may or even the personalities of the partners may clash. clash.

3.3. Lack of LongevityLack of Longevity: Illness, death of one partner, : Illness, death of one partner, or conflict may cause the partnership to end. or conflict may cause the partnership to end.

Chapter 7Chapter 7

Section 3Section 3

ObjectivesObjectives

1.1. How is a corporation formed, and what are How is a corporation formed, and what are the characteristics of a corporation?the characteristics of a corporation?

2.2. How is a corporation organized?How is a corporation organized?

3.3. How do stocks and bonds differ?How do stocks and bonds differ?

4.4. What are the advantages and disadvantages What are the advantages and disadvantages of organizing a corporation?of organizing a corporation?

CorporationsCorporations

CorporationCorporation- Business in which a group of owners, - Business in which a group of owners, called stockholders, share in the profits and losses. called stockholders, share in the profits and losses.

Forming a corporation is more complex than a sole Forming a corporation is more complex than a sole proprietorship or partnership.proprietorship or partnership.

Two Step Process:Two Step Process:

1.1. Apply for a state license known as Apply for a state license known as Articles of Articles of IncorporationIncorporation (p. 154) (p. 154)

2.2. If everything is in order, then a license is given If everything is in order, then a license is given called the called the corporate chartercorporate charter. .

Corporate StructureCorporate Structure

The corporate charter identifies the corporate The corporate charter identifies the corporate officers-President, CEO, VP of Sales, VP of officers-President, CEO, VP of Sales, VP of Production Development, etc. Production Development, etc.

The structure of the corporation will vary, but The structure of the corporation will vary, but most have a board of directors which is made up most have a board of directors which is made up of people from inside or outside of the company. of people from inside or outside of the company.

The board’s main duty is to make key decisions The board’s main duty is to make key decisions for the corporation. What kind of decisions?for the corporation. What kind of decisions?

Corporate FinancesCorporate Finances Where do corporations get their money from?Where do corporations get their money from? Most common way is through the selling of Most common way is through the selling of stockstock

which represents ownership in the company. which represents ownership in the company. Stock is issued in the form of Stock is issued in the form of sharesshares.. If the corporation issues 10,000 shares of stock and If the corporation issues 10,000 shares of stock and

you buy 100 shares, then you own 1% of the you buy 100 shares, then you own 1% of the company.company.

Why would you want to buy stock? Why would you want to buy stock? -If the company makes money, then you -If the company makes money, then you

receive receive some profit. These payments to you are some profit. These payments to you are called called dividendsdividends. .

Corporate FinancesCorporate Finances

Two types of stock:Two types of stock:1.1. Common stock-Common stock- Provides shareholders with a voice in Provides shareholders with a voice in

how the corporation is run and they receive dividends. how the corporation is run and they receive dividends. 2.2. Preferred Stock-Preferred Stock- Guaranteed dividends that are paid Guaranteed dividends that are paid

before any dividends that are received by holders of before any dividends that are received by holders of common stock, but they have no voice in the corporation. common stock, but they have no voice in the corporation.

Ω Corporations may also sell Ω Corporations may also sell corporate bondscorporate bonds-a certificate -a certificate issued by a corporation in exchange for money.issued by a corporation in exchange for money.

-These bond holders do not own any part of the -These bond holders do not own any part of the company. company.

-The bond is like a loan and it is repaid with -The bond is like a loan and it is repaid with interest. interest.

Advantages of CorporationsAdvantages of Corporations

Advantages for Stockholders:Advantages for Stockholders:1.1. Limited LiabilityLimited Liability2.2. Flexibility-can sell your shares at anytime. Flexibility-can sell your shares at anytime. Advantages for Corporations:Advantages for Corporations:1.1. Limited Liability for the founders. Limited Liability for the founders. 2.2. Separation of ownership from management. Separation of ownership from management. 3.3. Easy to raise capital.Easy to raise capital.4.4. Longevity. Longevity.

Disadvantages of CorporationsDisadvantages of Corporations Disadvantages for StockholdersDisadvantages for Stockholders::1.1. No sense of pride or satisfaction from profits.No sense of pride or satisfaction from profits.2.2. Lack of control. Lack of control. Disadvantages for CorporationsDisadvantages for Corporations::1.1. Corporate charter can be expensive and difficult to Corporate charter can be expensive and difficult to

obtain. obtain. 2.2. More government regulation to abide by. More government regulation to abide by. 3.3. Slow process of decision making. Slow process of decision making. Shared DisadvantagesShared Disadvantages: : 1.1. Corporate profits are taxed twice, once as corporate Corporate profits are taxed twice, once as corporate

profit and a second time once dividends are paid.profit and a second time once dividends are paid.

Chapter 7Chapter 7

Section 4Section 4

ObjectivesObjectives

1.1. How do vertical combinations differ from How do vertical combinations differ from horizontal and conglomerate combinations?horizontal and conglomerate combinations?

2.2. Why might a business owner decide to open Why might a business owner decide to open a franchise?a franchise?

3.3. What is the customer’s role in a cooperative?What is the customer’s role in a cooperative?

4.4. How does a nonprofit organization differ How does a nonprofit organization differ from other types of business organizations?from other types of business organizations?

Corporate CombinationsCorporate Combinations

Sometimes corporations choose to team up Sometimes corporations choose to team up with one another. with one another.

The most common method of doing so is The most common method of doing so is called a called a mergermerger-occurs when one company -occurs when one company joins or absorbs another (AOL Time Warner)joins or absorbs another (AOL Time Warner)

Companies can form different types of Companies can form different types of corporate combinations. corporate combinations.

Types of Corporate CombinationsTypes of Corporate Combinations

1.1. Horizontal Combination-Horizontal Combination- Merger between Merger between two or more companies producing the same two or more companies producing the same good or service. good or service.

2.2. Vertical Combination-Vertical Combination- Merger between two Merger between two or more companies involved in different or more companies involved in different production phases of the same good or production phases of the same good or service. service.

3.3. Conglomerate Combinations-Conglomerate Combinations- Merger of Merger of companies producing unrelated products. companies producing unrelated products.

Advantages of CombinationsAdvantages of Combinations

1.1. Efficiency- Cut down on personnel. If you Efficiency- Cut down on personnel. If you merge, you don’t need two people for one merge, you don’t need two people for one position. position.

2.2. Potential for lower costs- Don’t have to build Potential for lower costs- Don’t have to build new buildings or hire new people. new buildings or hire new people.

3.3. Easier to increase capital- Have more collateral, Easier to increase capital- Have more collateral, usually more stockholders who are willing to usually more stockholders who are willing to invest in a large company since these types of invest in a large company since these types of companies are more successful.companies are more successful.

Disadvantages of CombinationsDisadvantages of Combinations

1.1. Rise in unemploymentRise in unemployment

2.2. Decreased competition-leads to higher Decreased competition-leads to higher prices. prices.

FranchiseFranchise FranchiseFranchise- One company (franchise) agrees for a fee - One company (franchise) agrees for a fee

to let another person or group set up a business in to let another person or group set up a business in which they use the franchisor’s name to sell goods which they use the franchisor’s name to sell goods and services. and services.

There is an agreement between There is an agreement between franchisee franchisee (person (person opening up the company) and the opening up the company) and the franchisorfranchisor (parent (parent company) that the companies reputation and company) that the companies reputation and standards will be upheld. standards will be upheld.

Parent company pays for training and national Parent company pays for training and national advertising. advertising.

The company name brings in business. The company name brings in business.

CooperativeCooperative

Cooperatives- Businesses that are owned Cooperatives- Businesses that are owned collectively by their members. collectively by their members.

Many different types of cooperatives- Many different types of cooperatives- purchasing, marketing, services (electric), purchasing, marketing, services (electric), financial (credit union)financial (credit union)

Examples: Santee-Cooper Electric, SRP Credit Examples: Santee-Cooper Electric, SRP Credit Union. Union.

Nonprofit OrganizationNonprofit Organization

Nonprofit Organization-an organization that Nonprofit Organization-an organization that generates revenue from product sales or generates revenue from product sales or donations but does not distribute the profits to donations but does not distribute the profits to any owner or trustee. any owner or trustee.

Usually tries to pursue some type of goal: Usually tries to pursue some type of goal: improving education, healthcare, etc. (Red improving education, healthcare, etc. (Red Cross, Boy Scouts, Booster ClubCross, Boy Scouts, Booster Club

Income is not taxed by the government.Income is not taxed by the government. Green Bay PackersGreen Bay Packers