Understand the nature of business.

2.01 Understand the types of business ownership.

•Why do we need to know about businesses?

Why do we need to know about businesses?

Enron- sells Energy- natural gas, etc.

http://www.nawbo.org/imageuploads/video_southwest.jpg http://www.photohome.com/pictures/texas-pictures/houston/enron-center-2a.jpg

Which company would you want

to work for?

If you chose Southwest…

• You would be happy. • They have been voted one of the best

places to work. • Employees receive bonus checks when

the company makes a profit. • They have always made a profit except

for one quarter after 9-11.

If you chose Enron…

• You would be unhappy. • They cheated their investors. • They went bankrupt.• All of their employees lost their

pensions/401ks because the company “stole” their money.

• All of the employees lost their jobs.

Why do we need to know about businesses?

The Good and The Bad

http://www.nawbo.org/imageuploads/video_southwest.jpg http://www.photohome.com/pictures/texas-pictures/houston/enron-center-2a.jpg

Businesses are important because…

• Your are going to spend most of your life working at a business– You need to understand if they are keeping

your 401k/pension safe– You need to know how what type of

businesses to invest in for your 401k/pension

Businesses are important because…

• One of our economy’s most important issues is the balance between allowing businesses to grow and how much they should be taxed.

Businesses are important because…

Starting your own business can be…

Business Ownership

• Sole Proprietorship• Partnership• Corporation• Franchise

Sole proprietorship

• A business owned and run by one person

• The business is typically managed by the owner.

• Formation varies by state.

Advantages

• Easy to start up• Complete control of the business• Owner receives all the profits• Limited taxes (one time taxation)

Disadvantages

• Limited capital (money)• Unlimited liability (responsible for ALL

debt)• The business is limited to the lifetime of

the owner

Partnership

• A business owned and controlled by two or more people who have entered into a written agreement

• The management of the company depends on the partnership agreement.

Advantages

• More capital and credit available than a sole proprietorship

• Combined resources (money, expertise)• Shared management responsibilities• Shared risk• Work load easier to manage than a sole

proprietorship

Disadvantages

• Profits are shared• Responsible for each others decisions• Potential for disagreement among

partners• Unlimited liability (depending on type)

Limited Liability Partnership

• Identifies some investors who cannot lose more than the amount of their investment

• Investors are not allowed to participate in the day-to-day business management

Types of Partnerships

• Dormant partner plays no role and is not known to the public.

• General partner plays an active role and has unlimited liability (every partnership must have at least one general partner).

• Limited participate as investors and have limited liability.

• Secret partner plays an active role but is secret from society.

• Silent partner does not have an active role but is known to the public.

Types of Partnerships

Type of

Partner

Participation in the

Business

Relationship to the Public

Degree of

Liability

Dormant

Not active Unknown Unlimited

General Active Known Unlimited

Limited Not active Known Limited

Secret Active Unknown Unlimited

Silent Not active Known Unlimited20

Corporations

• An organization owned by one or more shareholders and managed by a board of directors.

• Ownership– Determined by purchase of stock– A stockholder, or shareholder, owns a ‘piece’

of the company– One share of common stock equals one vote

Advantages

• Easier to obtain capital• Limited liability for shareholders• Life of the corporation is unlimited

Disadvantages

• Double taxation (profits and earnings)• Government regulations and legal

restrictions• Decision-making shared among

managers, board of directors, and shareholders

Specialized Corporations

• Subchapter S (S-corporation)– treats partners as individuals by taxing them

once

• Limited Liability Company– Provides limited liability protection for

owners

• Nonprofit corporation– A group of people who join to do some

activity that benefits the public

Types of Corporations

• Domestic - chartered in a specific stateExamples located in North Carolina:

• Bank of America Corporation• Lowe’s Home Improvement Store

• Foreign - chartered in one state, but doing business in another state

• Alien - chartered in another nation, but doing business in a state

Types of Corporations continued

• Public-established for a governmental purposesExamples

• National Science Foundation• Export-Import Bank of the United States

• Private-established by individuals for business or charitable purposes.Examples

• Enterprise Rent-A-Car• American Cancer Society

26

Cooperatives

• Owned by members, serves their needs, and is managed in their interest

• Purchase goods and services cheaper as a group than as individuals

• Greater bargaining power than as individuals

Franchise

• Permission to operate a business to sell products and services in a set way

• Begins with a parent company who owns the product or service and grants the right to another business

• Franchiser: the company that owns the product

• Franchisee: the company purchasing the right to run the business

Types of Franchises

• Business-format – Requires franchisee to sell products or

service in a specific format

• Product trade-name– Allows franchisee to sell specific products.

This format is usually formed by automobile, appliance, and petroleum product