Business Ownership and Operations Different Forms of Ownership

Business Ownership and Operations Different Forms of Ownership and the five main functions of businesses.

Objectives • Describe the advantages and disadvantages of the three major forms of business organizations. • Describe how cooperatives and non-profits are like and unlike corporations and franchises. • Differentiate the six types of businesses. • Describe the five functions of business. • Discuss how the five functions of business relate to each other.

Types of Business Organizations Types of Business Organization s Sole Proprietorshi p Partnership Corporation

U. S. Sole Proprietorships, Partnerships, and Corporations 5 % 3 % 72%

Amount of Revenue Generated by Each Kind of Business 8% 2% 5% 85%

Organizing a Business • As part of a business plan, entrepreneurs must decide which type best fits their situation and describe their choice and reasons for it. • During the life of a business, its form can change. • Changes occur when business is growing.

Sole Proprietorship • A business owned by one person • Fail because they run out of money

Advantages • • • Easy to do License or permit to start In charge of your own business Make all the decisions Run the business as you see fit Keep all the profits Income tax lower than a corporation Income taxed once Lower tax rate

Disadvantages • • Owner had Unlimited Liability: the owner is responsible for the company’s debts. If the owner has more debt than she or he receives in income then the owner has to make up the difference Limited access to credit Lenders reluctant to offer credit Fail because they run out of money May not have all the necessary skills needed to run the business Ends when the owner dies

Partnerships • A business owned by two or more people who share its risks and rewards. • To start a partnership, you need a partnership agreement. • The agreement is a contract that outlines the rights and responsibilities of each partner

Partnership • Advantages • Easy to start • Potential partners need only to obtain a license • Easier to obtain capital • Each partner contributes money to the business • Banks are more willing to lend money • Not dependent on one person • Income of a partnership is only taxed once • Each partner brings different skills and talents

Partnership • Disadvantages • All partners share the business risk • Problems occur when partners don’t get along • A partner decides to leave • Partnership must be dissolved and the business must be reorganized • Partners share unlimited legal and financial liability • If one partner makes a bad decision, all partners are responsible

Corporation • • A company that is registered by a state and operates apart from its’ owners. To form a corporation, the owners must get a corporate charter from the state where their main office will be located. A corporate charter is a license to run a corporation. To raise money, the owners can sell stock, or shares in the company. The company also must have a board of directors, who will govern the corporation. Can be taxed twice Taxes paid on income received Stockholders pay taxes on the income received as dividends on stock

Corporation • Advantages • Limited Liability holds a firm’s owners responsible for no more than the capital that they have invested in it • Ability to raise money when people buy stock • The corporation does not end if the owner dies. If this happens, the deceased owner’s shares are sold, and the business continues.

Corporation • Disadvantages • Pay taxes on their income • Stockholders pay taxes on profits issued to them (Double taxation)* • Government regulates corporations more than other types of business • Corporations are difficult and costly to start • Regulates: to bring under control of law or constituted authority

*Double Taxation • Special types of corporations which do not have double taxation^: • • S Corporations LLC Corporations (Limited Liability Company) Other restrictions occur^

S Corporation • A corporation that elects to be treated as a pass through entity (Like a sole proprietorship or partnership) for tax purposes. • A form of corporation that meets the IRS (Internal Revenue Service) requirements to be taxed under Subchapter S of the Internal Revenue Code. This gives a corporation with 100 shareholders or less the benefit of incorporation while being taxed as a partnership. A corporation that passes-through net income or losses to shareholders.

LLC (Limited Liability Corporation) • A flexible form of enterprise that blends elements of partnership and corporate structures. An LLC is not a corporation; it is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions. • A corporate structure whereby the members of the company cannot be held personally liable for the company’s debts or liabilities.

Cooperative • An organization that is owned and operated by its members • Ocean Spray is an example of this. Ocean Spray is a cooperative of cranberry growers • Groups of businesses, such as small farms, pool their resources • Purpose is to save money on certain goods and services. • Marketing of goods and services can be more efficent and profitable

Non-Profit Organization • A type of organization that focuses on providing a service, but not to make a profit. • Nonprofits must also register with the government • They do not make a profit, therefore, they do not pay taxes.

Franchise • A contractual agreement to use the name and sell the products or services of a company in a designated geographic area. • Fast Food restaurants are common franchises • To run a franchise, you have to invest money and pay franchise fees or a share of the profits • The franchiser offers a well-known name and a business plan.

Types of Business 1. Producers 2. Processors 3. Manufacturers 4. Intermediaries and Wholesalers 5. Retailers and Service Businesses

Producers • A business that gathers raw goods. • Raw goods are materials gathered in their original state from natural resources such as land or water. • Agriculture, mining, fishing, and forestry are examples of industries that produce raw goods.

Processors • Change raw materials into more finished products. • Processed goods are made from raw materials that require further processing. • Examples are; • • • Sugar cane is turned into sugar. Crude oil into gasoline. Iron into steel.

Manufacturers • A business that makes finished products out of processed goods. • Manufacturers turn raw or processed goods into finished products. • Goods are material products such as cars, Blu. Rays, and computers.

Intermediaries Intermediary • A business that moves goods from one business to another. • It buys goods, stores them, and then resells them.

Wholesaler • Distributes goods. Also known as distributors. • A clothing wholesaler, for example, may buy thousands of jackets from several manufacturers. • The wholesaler then divides the large quantities into smaller ones and sells them to retailers.

Retailers • Purchases goods from a wholesaler and sells them to consumers, final buyers of the goods. • Services stations, grocery stores, clothing stores, and auto dealers are examples of retailers.

Service Businesses • Perform tasks rather than provide goods. • Some service businesses meet needs, such as medical clinics and law firms. • Others provide conveniences, such as taxi companies and copy shops. • Service businesses employ about three quarters of the workforce and are rapidly increasing in numbers.

Functions of Business 1. Production and Procurement 2. Marketing 3. Management 4. Finance 5. Accounting

Production and Procurement • Production is the process of creating, expanding, manufacturing, or improving goods and services. • Most retailers procure goods from producers for resale. • Procurement is the buying and reselling of goods that have already been produced. • Wholesalers buy goods from producers to resell to retailers and other wholesalers.

Marketing • The process of planning, pricing, promoting, selling, and distributing ideas, goods, and services. • Marketing involves getting consumers to buy a product or service. • Marketers make decisions based on market research of trends and consumer habits.

Management • The process of achieving company goals by planning, organizing, leading, controlling, and evaluating the effective use of resources.

Finance and Accounting • Finance is the business or art of money management. • It requires analyzing financial statements to make future decisions. • Accounting involves maintaining and checking records, handling bills, and preparing financial reports for a business.

How the Functions are Interdependent • Functional areas of business depend upon each other. • Sales are decreasing. Accounting and Finance departments have identified this. If items are prices to high, management and production will have to address this. A new marketing plan may be necessary. • Accounting and Finance will monitor effectiveness of new plan.

How the Functions are Interdependent • Conflict within functions. • Management wants sales increased by 20% over three years. • Production suggests improved quality to product to attract more customers. Changing the quality will add costs. • Marketing states that an increase in marketing activities is needed. It requests more money to do increase marketing. • Accounting says “No”. Both activities would lower profits while raising costs. Accounting suggests improving production efficiency. • The final plan involves ideas from all functions of business. • Companies benefit when all functions work together.

Academic Terms • Distributes: To divide among several or many • Tasks: A usually assigned piece of work often to be finished within a certain time • Functions: The action for which a person or thing is specially fitted or used or for which a thing exists. • Involves: To engage as a participant • Sole: Having no sharer; being the only one • Income: A gain or recurrent benefit usually measured in money that derives from capital or labor • Partners: A member of a partnership, especially in a business • Regulates: To bring under the control of law or constituted authority