Chapter Introduction Section 1 Forms of Business Organization
Chapter Introduction Section 1: Forms of Business Organization Section 2: Business Growth and Expansion Section 3: Nonprofit Organizations Visual Summary
You have an idea for a new product and you want to set up a company to market it. You need $5, 000 to get started with production and advertising. Use what you have already learned about the factors of production to create a list of resources you will need and where to find them. Read Chapter 3 to learn about the different ways to organize a business.
1. The profit motive acts as an incentive for people to produce and sell goods and services. 2. Governments and institutions help participants in a market economy accomplish their financial goals.
Section Preview In this section, you will learn about the advantages and disadvantages of various forms of business organization.
Content Vocabulary • sole • general proprietorship partnership • proprietorship • limited partnership • unlimited liability • corporation • shareholder • dividend • common stock • preferred stock • inventory • charter • bond • limited life • stock • principal • partnership • stockholder • interest • double taxation
Academic Vocabulary • comprise • entity
What incentive is there for individuals to produce and sell goods and services? A. Low prices through competition B. Profit motive C. Private property rights A. A B. B C. C
Sole Proprietorships Sole proprietorships are easy to start, but owners have unlimited liability.
Sole Proprietorships (cont. ) • The most common form of business organization in the U. S. is the sole proprietorship or proprietorship. Business Organizations
Sole Proprietorships (cont. ) • Advantages – The easiest form of business to start— few requirements – Decisions do not require approval from “higher ups. ” – Keep all profits – Does not pay separate business income taxes; business is not a separate entity
Sole Proprietorships (cont. ) • Advantages – Psychological factor of being own boss – Easy to get out of business
Sole Proprietorships (cont. ) • Disadvantages – Owner has unlimited liability. – Difficult to raise capital – Size and efficiency – May hire several employees to stay open – Cost of carrying minimum inventory – Often has limited managerial skills
Sole Proprietorships (cont. ) • Disadvantages – Difficult to attract qualified employees – Larger employers can offer more fringe benefits. – Limited life of business Profiles in Economics: Andrea Jung
Which is not considered an advantage to being a sole proprietor? A. Retains all profits B. Unlimited liability C. Quick decision making D. Business is not recognized as a separate legal entity. A. B. C. D. A B C D
Partnerships In a partnership, each partner fully shares responsibility for the operation of the business and all profits or losses.
Partnerships (cont. ) • A partnership has many of the same advantages and disadvantages of a sole proprietor. • Partnerships are the least numerous form of business organization in the United States.
Partnerships (cont. ) • Types of partnerships – General partnership – Limited partnership
Partnerships (cont. ) • Advantages to operating a partnership – Ease of startup – Formal legal papers called articles of partnership are usually written. – Ease of management/varied expertise – Lack of special taxes – Easier to attract capital than a proprietorship
Partnerships (cont. ) • Advantages to operating a partnership – More efficient operations that come with increased size – Easier to find good employees than a proprietorship
Partnerships (cont. ) • Disadvantages to operating a partnership – In a general partnership, each partner is responsible for acts of all partners. – In a limited partnership, limited partner loses original investment. General partners must make up the rest of the loss. – Limited life – Potential for conflict between partners
In which type of partnership would you prefer to be a partner? A. General partnership B. Limited partnership A. A B. B
Corporations are one of the most important forms of business and can easily raise large amounts of financial capital.
Corporations (cont. ) • A corporation is a formal, legal entity all its own. • Individuals who wish to incorporate must file with the national government and state where the business will have its headquarters.
Corporations (cont. ) • If a corporation is approved, the government issues a charter stating the purpose of the business, specifying the number of shares of stock, and other business information. Stock Ownership
Corporations (cont. ) • Selling shares of stock to stockholders, or shareholders, is a way for a corporation to raise capital. • Corporations pay out dividends to shareholders when the corporations become profitable.
Corporations (cont. ) • There are two types of stock that corporations issue. – Common stock – Preferred stock • Type of stock purchased determines the ownership rights of the shareholder.
Corporations (cont. ) • Advantages to a corporation structure – Ease of raising capital—sell more stock or issue bonds • The amount of money borrowed on a bond is called the principal. • Corporations pay interest on this borrowed money. Corporate Structure
Corporations (cont. ) • Advantages to a corporation structure – Owners have limited liability. – Directors can hire professional managers to run daily operations. – Unlimited life – Ease of transferring ownership Corporate Structure
Corporations (cont. ) • Disadvantages to a corporation structure – Detailed records need to be kept for payment of taxes. – Double taxation of corporate profits – Difficulty and expense to get a corporate charter Corporate Structure
Corporations (cont. ) • Disadvantages to a corporation structure – Owners or shareholders have little voice in business operations. – Subject to more government regulations • Publicly held corporations must register with the federal Securities and Exchange Commission, established in 1934, to regulate the sale of stock. Corporate Structure
Some firms incorporate just to take advantage of which corporate characteristic? A. Unlimited life B. Ease of raising capital C. Limited liability D. All of the above A. B. C. D. A B C D
Section Preview In this section, you will learn how businesses grow through merging with other companies or by reinvesting profits in themselves.
Content Vocabulary • merger • depreciation • vertical merger • income statement • cash flow • conglomerate • horizontal merger • multinational • net income Academic Vocabulary • internally • dominant
What is the best way for a company to grow? A. Invest in self B. Merge with another company C. Depends on the situation A. A B. B C. C
Business Growth and Expansion • Investing profits in new plants and equipment is one way to grow a business. A merger is another way.
Growth Through Reinvestment Business owners can use their profits to update and expand their firms.
Growth Through Reinvestment (cont. ) • Financial statements are used to keep track of a business’ operations. – Income statement—shows how a business uses the revenue it receives from sales to grow through reinvestment – An income statement shows a firm’s net income. Growth Through Reinvestment
Growth Through Reinvestment (cont. ) – Depreciation—a non-cash charge of capital goods – An increase in depreciation lowers the earnings before tax but increases cash flow. – Cash flow is the bottom line, a more comprehensive measure of profits. Growth Through Reinvestment
Growth Through Reinvestment (cont. ) • Corporations with positive cash flow may issue dividends and reinvest in new plants, equipment, or technology. • Proprietors and partnerships may keep some of the cash flow as reward for risk taking in addition to reinvesting in business.
Growth Through Reinvestment (cont. ) • Reinvesting in the business increases production and generates more sales. • Positive cash flow attracts investors.
Which of the following is included on a net income statement? A. Sales revenue B. Expenses C. Cash flow D. All of the above A. B. C. D. A B C D
Growth Through Mergers allow firms to quickly grow in size.
Growth Through Mergers (cont. ) • When two companies merge, one gives up its separate legal identity. • The name of the new company may reflect the identities of both for public recognition, however.
Growth Through Mergers (cont. ) • Two types of mergers – Horizontal merger – Vertical merger Types of Mergers
Growth Through Mergers (cont. ) • Reasons to merge – Faster growth – Become more efficient – Better product manufacturing or delivery – Eliminate competition – Change image
Growth Through Mergers (cont. ) • A corporation may become so large through mergers and acquisitions that it turns into a conglomerate. • Diversification is the reason why some businesses become conglomerates. • Isolated economic events may affect some product lines but not all of them at the same time. Conglomerate Structure
Growth Through Mergers (cont. ) • Large corporations that become international in scope are referred to as multinationals.
Growth Through Mergers (cont. ) • Multinationals – Have manufacturing or service operations in several countries – Are subject to laws in each country and may pay taxes to each – Are able to move resources, goods, services, and financial capital across national borders
Growth Through Mergers (cont. ) • Multinationals are generally welcomed in a country because they bring new technology, generate jobs and revenue, increase the standard of living, and pay taxes.
Growth Through Mergers (cont. ) • Critics argue that multinationals often pay low wages, export natural resources, interfere with local businesses, and alter traditional ways of life in the host country. • Multinationals can demand concessions by threatening to move operations out of the country.
Growth Through Mergers (cont. ) • Economists, however, welcome the lowercost production and higher-quality output that global competition brings. • Global competition raises the standard of living for everyone.
Which of the following is a conglomerate in Japan? A. Samsung B. Sony C. Daewoo D. Gold Star A. B. C. D. A B C D
Section Preview In this section, you will learn about the economic benefits that cooperatives and other nonprofit organizations bring to their members.
Content Vocabulary • nonprofit organization • cooperative • co-op • credit union • labor union • collective bargaining • professional association Academic Vocabulary • analyze • devoting • chamber of commerce • Better Business Bureau • public utility
Can you name any nonprofit organizations that exist in your community? A. Yes B. No A. A B. B
Nonprofit Organizations • Most businesses use scarce resources to produce goods and services in order to generate a profit. • Other businesses operate on “not-forprofit” basis and are called nonprofit organizations.
Community Organizations and Operatives A variety of nonprofit organizations provide a wide range of goods and services to communities and members.
Community Organizations and Operatives (cont. ) • Many community organizations such as schools, churches, hospitals, and welfare groups are legally incorporated but do not issue stock or pay income taxes. Any surplus earned is used to further their work.
Community Organizations and Operatives (cont. ) • One common type of nonprofit organization is the cooperative or co-op.
Community Organizations and Operatives (cont. ) • Three major types of cooperatives – Consumer cooperative—members keep costs down by devoting time to operation. – Service cooperative—particular company/agency employees use a credit union.
Community Organizations and Operatives (cont. ) • Three major types of cooperatives – Producer cooperative—in the United States, farmers may organize this to sell their produce. Cooperatives
Which type of cooperative would provide insurance to its members? A. Producer B. Consumer C. Service A. A B. B C. C
Labor, Professional, and Business Organizations Some nonprofit organizations are formed to promote the interests of workers and consumers.
Labor, Professional, and Business Organizations (cont. ) • Many other groups besides co-ops organize nonprofit organizations to promote the interests of their members. – Labor unions—use collective bargaining when negotiating with management – Professional associations
Labor, Professional, and Business Organizations (cont. ) • Many other groups besides co-ops organize nonprofit organizations to promote the interests of their members. – Business associations—chamber of commerce or Better Business Bureau are examples
Which nonprofit organization might a machinist belong to? A. Labor union B. Professional association C. Business association D. Any of the above A. B. C. D. A B C D
Government The government provides some goods and services while helping to make sure the economy runs smoothly.
Government (cont. ) • Local, state, and federal governments operate as nonprofit economic organizations.
Government (cont. ) • Government plays both a direct and indirect role in the economy. – Direct involvement—government supplies a good or service that competes with private businesses • Examples: the U. S. Postal Service (USPS), state colleges and universities, and police protection
Government (cont. ) • Government plays both a direct and indirect role in the economy. – Indirect involvement includes the regulation of public utilities, financial aid to college students, rent subsidies, and veteran’s checks.
How do government organized nonprofits differ from privately held nonprofits? A. Limited life B. Professional management team is hired to oversee daily A. A operations. B. B C. Congressional, state, or local C. C funds may be necessary to cover any losses.
Business Organizations Three main forms of business organizations exist in the United States today.
Growth A company can reinvest its profits or merge with another firm in order to grow.
Nonprofit Organizations Some organizations work in a businesslike way to promote the interests of their members. Unlike businesses, these nonprofit organizations do not seek to earn a profit.
Andrea Jung (1958– ) • first female chief executive officer (CEO) in Avon Products’ 118 -year history • ranked #5 on Fortune magazine’s “ 50 Most Powerful Women in Business”
Economic Concepts Transparencies Transparency 2 Opportunity Cost & Trade-Offs Transparency 3 Productivity Transparency 5 Economic Institutions and Incentives Select a transparency to view.
sole proprietorship business owned and run by a single person who has the rights to all profits and unlimited liability for all debts of the firm
proprietorship business owned and run by a single person who has the rights to all profits and unlimited liability for all debts of the firm
unlimited liability requirement that an owner is personally and fully responsible for all losses and debts of the business
inventory stock of finished goods and parts held in reserve
limited life situation in which a firm ceases to exist when an owner dies, quits, or sells the business
partnership unincorporated business owned and operated by two or more people who share the profits and responsibility for debts
general partnership form of partnership where all partners are equally responsible for management and debts
limited partnership form of partnership where one or more partners are not active in the daily running of the business and have limited responsibility for debts
corporation form of business organization recognized by law as a separate legal entity
charter written government approval to establish a corporation
stock certificate of ownership in a corporation
stockholder people who own a share or shares of stock in a corporation
shareholder people who own a share or shares of stock in a corporation
dividend check that transfers a portion of the company profits to stockholders, usually quarterly
common stock most frequently used form of corporate ownership, with one vote per share for stockholders
preferred stock form of corporate ownership without vote, in which stockholders get their investments back before common stockholders
bond formal contract to repay borrowed money with interest
principal amount borrowed when getting a loan or issuing a bond
interest payment made for the use of borrowed money
double taxation of dividends both as corporate profit and personal income
comprise to be composed of
entity unit or being
merger combination of two or more businesses to form a single firm
income statement report showing a firm’s sales, expenses, net income, and cash flows for a certain period, usually three months or a year
net income common measure of business profits determined by subtracting all expenses, including taxes, from revenues
depreciation gradual wear on capital goods
cash flow total amount of new funds a business generates from operations
horizontal merger combination of two or more firms producing the same kind of product
vertical merger combination of firms involved in different stages of manufacturing or marketing
conglomerate firm with four or more businesses making unrelated products, with no single business responsible for a majority of its sales
multinational corporation producing and selling without regard to national boundaries and whose business activities are located in several different countries
internally within
dominant possessing the most influence and control
nonprofit organization economic organization that operates like a business but does not seek financial gain
cooperative nonprofit association performing some kind of economic activity for the benefit of its members
co-op nonprofit association performing some kind of economic activity for the benefit of its members
credit union nonprofit service cooperative that accepts deposits, makes loans, and provides other financial services
labor union organization that works for its members’ interests concerning pay, working conditions, and benefits
collective bargaining negotiation between union and company representatives over pay, benefits, and other job-related matters
professional association nonprofit organization of professional or specialized workers seeking to improve working conditions, skill levels, and public perceptions of its profession
chamber of commerce nonprofit organization of local businesses formed to promote their interests
Better Business Bureau business-sponsored nonprofit organization providing information on local companies to consumers
public utility company providing an essential services such as water and electricity to consumers
analyze to break down into parts and study how each part relates to one another
devoting giving time or attention
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