Chapter 7 Business Ownership and Organization Proprietorships Partnerships

Economic Principles Sole proprietorships Partnerships Corporations Unlimited and limited liability © 2005 Gottheil -

Economic Principles Stockholders (shareholders) Stocks and bonds International and multinational corporations © 2005 Gottheil

Business Ownership and Organization Businesses can be categorized into three main types: • Proprietorships.

Business Ownership and Organization • These types of businesses differ based on who owns

Business Ownership and Organization • There advantages and disadvantages associated with each of these

Sole Proprietorship Sole proprietorship • A firm owned by one person who alone bears

Sole Proprietorship • In order to set up a sole proprietorship, owners usually rely on their own financial means to purchase, rent, or hire physical plant, raw materials, and labor. © 2005 Gottheil - Principles of Economics, 4 e 8

Sole Proprietorship • Sole proprietorships hire principally, but not exclusively, family labor. © 2005

Sole Proprietorship • Most sole proprietorships produce for local markets. © 2005 Gottheil -

Sole Proprietorship • Sole proprietors have unlimited liability. © 2005 Gottheil - Principles of

Sole Proprietorship Unlimited liability • Personal responsibility for all debts incurred by the business. The owners’ personal wealth is subject to appropriation to pay off the firm’s debt. © 2005 Gottheil - Principles of Economics, 4 e 12

Sole Proprietorship 1. What might be some advantages of sole proprietorships? Personal independence for the proprietor. • A focus on local markets. • A lack of bureaucratic structure. • Access to familiar or even family labor. © 2005 Gottheil - Principles of Economics, 4 e 13

Sole Proprietorship 2. What is an important disadvantage of sole proprietorships? • Sole proprietors

Partnership • A firm owned by two or more persons who each bear the

Partnership • By coupling finances between two or more partners, the productive capacity of

Partnership • These increases in productive capacity may not have been possible under the

Partnership • Decisions are made jointly in a partnership. © 2005 Gottheil - Principles

Partnership • Each partner is still personally liable for all of the debts incurred

Partnership 1. What are some advantages of partnerships? • Shared responsibility among the partners. • Greater access to capital. • Potential for increases in productive capacity. © 2005 Gottheil - Principles of Economics, 4 e 20

Partnership 2. What are the disadvantages of partnerships? • Decisions are made jointly and

Partnership 3. What are the disadvantages of partnerships? • Each partner may be liable for 100 percent of the debts incurred by the business—regardless of the size of the investment in the business. © 2005 Gottheil - Principles of Economics, 4 e 22

Corporation • A firm whose legal identity is separate from the people who own

Corporation Stockholder or shareholder • A person owning stock in a corporation. © 2005

Corporation • A corporation is recognized as an independent person through a state charter.

Corporation • Like any other legal person, corporations are subject to the laws of the state, have the right to organize for business and can sue and be sued. © 2005 Gottheil - Principles of Economics, 4 e 26

Corporation • The liability of each stockowner in a corporation is limited only to

Corporation What are the major disadvantages of corporations? • One disadvantage is double taxation. Both the owners and the corporation itself pay taxes on the same corporate income. © 2005 Gottheil - Principles of Economics, 4 e 28

Corporation What are the major disadvantages of corporations? • Another disadvantage, from the stockholders’ point of view, is that stockholders exercise corporate control only theoretically. Management is in a much stronger position to actually control the corporation. © 2005 Gottheil - Principles of Economics, 4 e 29

EXHIBIT 1 U. S. CEO-TO-WORKER PAY RATIO © 2005 Gottheil - Principles of Economics,

Corporation What are the major disadvantages of corporations? • A third disadvantage is the threat of corporate takeover. An outsider may decide to buy up enough common stock to own the corporation outright. © 2005 Gottheil - Principles of Economics, 4 e 31

Corporate Stock • Ownership in a corporation represented by shares that are claims on

Corporate Stock Dividends • The part of a corporation’s net income that is paid

Corporate Stock There a variety of kinds of stock that a corporation can issue. Three examples include: • Common stock • Preferred stock • Convertible stock © 2005 Gottheil - Principles of Economics, 4 e 34

Corporate Stock 1. What is common stock? • Stockholders vote and receive dividends in proportion to the quantity of stock they own. • Dividend returns are not fixed. © 2005 Gottheil - Principles of Economics, 4 e 35

Corporate Stock 2. What is preferred stock? • Carries no voting privileges. • Has a fixed dividend yield. • Has prior claims on dividends over common stock. © 2005 Gottheil - Principles of Economics, 4 e 36

Corporate Stock 3. What is convertible stock? • Carries no voting privileges. • Yields a fixed dividend. • Has prior claims on dividends over common and preferred stock. • Gives stockholders the privilege of converting their stock to common stock. © 2005 Gottheil - Principles of Economics, 4 e 37

Corporate Bonds Corporate bonds • A corporate IOU. The corporation borrows capital for a specified period of time in exchange for this promise to repay the loan along with an agreed-upon rate of interest. © 2005 Gottheil - Principles of Economics, 4 e 38

U. S. Business Organization • There is great diversity throughout the U. S. in

U. S. Business Organization • One can find on almost every square inch of

U. S. Business Organization • Each of the three forms of business organization have been growing over the years, both in terms of number of businesses and receipts (or dollars) generated by the businesses. © 2005 Gottheil - Principles of Economics, 4 e 41

U. S. Business Organization • There is a disparity between the number of businesses,

U. S. Business Organization • While partnerships dominate the current economic landscape in terms of number, corporations dominate in terms of volume of business. © 2005 Gottheil - Principles of Economics, 4 e 43

EXHIBIT 2 PROPRIETORSHIPS, PARTNERSHIPS, AND CORPORATIONS: 1970– 99 (000 s AND $BILLIONS) Source: Bulletin, Statistics of Income, Summer 1992, Internal Revenue Service, Washington, D. C. , pp. 161– 163; Statistical Abstract of the United States, 2002, Department of Commerce, Washington, D. C. , p. 471. © 2005 Gottheil - Principles of Economics, 4 e 44

Exhibit 2: Proprietorships, Partnerships and Corporations: 1970 -99 1. How were firms organized in terms of number in the U. S. in 1999? • There were 17 million proprietorships, representing 72 percent of the total number of operating businesses. © 2005 Gottheil - Principles of Economics, 4 e 45

Exhibit 2: Proprietorships, Partnerships and Corporations: 1970 -99 1. How were firms organized in terms of number in the U. S. in 1999? • Corporations came in second with almost 4. 9 million. © 2005 Gottheil - Principles of Economics, 4 e 46

Exhibit 2: Proprietorships, Partnerships and Corporations: 1970 -99 1. How were firms organized in terms of number in the U. S. in 1999? • Partnerships represented the smallest segment, with just over 1. 8 million. © 2005 Gottheil - Principles of Economics, 4 e 47

Exhibit 2: Proprietorships, Partnerships and Corporations: 1970 -99 2. How do firms compare in terms of volume of business in the U. S. in 1999? • Corporations clearly dominated with over $18 trillion, or 86. 5 percent of receipts. © 2005 Gottheil - Principles of Economics, 4 e 48

Exhibit 2: Proprietorships, Partnerships and Corporations: 1970 -99 2. How do firms compare in terms of volume of business in the U. S. in 1999? • Proprietorships came in second with $969 billion, or 5 percent of total receipts. © 2005 Gottheil - Principles of Economics, 4 e 49

Exhibit 2: Proprietorships, Partnerships and Corporations: 1970 -99 2. How do firms compare in terms of volume of business in the U. S. in 1999? • Partnerships brought in a little over $1 trillion. © 2005 Gottheil - Principles of Economics, 4 e 50

EXHIBIT 3 SIZE OF CORPORATION AND CORPORATE RECEIPTS, 1999 (000 s AND $BILLIONS) Source: Statistical Abstract of the United States, 1999, Department of Commerce, Washington, D. C. , p. 471. © 2005 Gottheil - Principles of Economics, 4 e 51

Exhibit 3: Size of Corporation and Corporate Receipts • The disparity that exists between numbers of businesses and volume of business exists within the corporate ranks, as well. © 2005 Gottheil - Principles of Economics, 4 e 52

Exhibit 3: Size of Corporation and Corporate Receipts • 4 billion corporations with receipts under $1 million make up 81 percent of all of the corporations. © 2005 Gottheil - Principles of Economics, 4 e 53

Exhibit 3: Size of Corporation and Corporate Receipts • These corporations account for only

Exhibit 3: Size of Corporation and Corporate Receipts • The 25, 000 corporations with receipts over $50 million account for 71. 8 percent of total corporate receipts. © 2005 Gottheil - Principles of Economics, 4 e 55

EXHIBIT 4 NUMBER AND CHARACTERISTICS OF STOCKHOLDERS (000 s) Source: Shareownership 1997, New York

Exhibit 4: Numbers and Characteristics of Stockholders Who were stockholders in the U. S. in 1992? • 70 percent of stockholders had some college education. © 2005 Gottheil - Principles of Economics, 4 e 57

Exhibit 4: Numbers and Characteristics of Stockholders Who were stockholders in the U. S. in 1992? • Over 55 percent of stockholders earned more than $50, 000 per year. © 2005 Gottheil - Principles of Economics, 4 e 58

Exhibit 4: Numbers and Characteristics of Stockholders Who were stockholders in the U. S. in 1992? • About 50 percent of stockholders were 44 years old or younger. © 2005 Gottheil - Principles of Economics, 4 e 59

EXHIBIT 5 SIZE DISTRIBUTION OF STOCK PORTFOLIOS Source: Shareownership 1997, New York Stock Exchange,

Exhibit 5: Size Distribution of Stock Portfolios • The distribution of stock ownership is highly skewed. • A small number of shareholders own a large percentage of shares. © 2005 Gottheil - Principles of Economics, 4 e 61

Exhibit 5: Size Distribution of Stock Portfolios • 17 percent of the shareholders in

Indirect Stock Ownership • Some people own stock indirectly through pension plans, life insurance

Indirect Stock Ownership • These indirect stock owners are not accounted for in regular

Indirect Stock Ownership • If indirect stockowners were accounted for, it is reasonable to argue that corporate stocks are held by, or on behalf of, a vast majority of the U. S. population. © 2005 Gottheil - Principles of Economics, 4 e 65

International and Multinational Corporations International corporation • A corporation whose production facilities are located in one country, but whose exports to other countries overshadow its domestic trade. © 2005 Gottheil - Principles of Economics, 4 e 66

International and Multinational Corporations Multinational corporation • A corporation whose production facilities are located in two or more countries. Typically, multinational corporations are also international. © 2005 Gottheil - Principles of Economics, 4 e 67

International and Multinational Corporations What is a possible disadvantage of multinational corporations? • It becomes increasingly difficult for individual national governments to regulate large multinational firms. © 2005 Gottheil - Principles of Economics, 4 e 68

EXHIBIT 6 FOREIGN REVENUES AS A PERCENTAGE OF TOTAL REVENUES AND FOREIGN ASSETS AS A PERCENTAGE OF TOTAL ASSETS FOR THE TEN LARGEST U. S. MULTINATIONALS: 1985 AND 1999 Source: Forbes, July 29, 1985, and July 24, 2000. Reprinted by permission of Forbes Magazine © 2000. Forbes, 1985 and 2000. © 2005 Gottheil - Principles of Economics, 4 e 69

Exhibit 6: Foreign Revenues as a Percentage of Total Revenue and Foreign Assets as a Percentage of Foreign Assets for the 10 Largest U. S. Multinationals • Four of the top ten multinational corporations in 1999 were either oil or automobile corporations. © 2005 Gottheil - Principles of Economics, 4 e 70

Exhibit 6: Foreign Revenues as a Percentage of Total Revenue and Foreign Assets as a Percentage of Foreign Assets for the 10 Largest U. S. Multinationals • Exxon/Mobil draws a large percentage of its total revenues from foreign operations. © 2005 Gottheil - Principles of Economics, 4 e 71