Unit 2Microeconomics

#19#19

Unit 2 Warm Ups #20

Key TermsSole proprietorship- a business owned by one person Unlimited liability -when the owner is responsible for the

company’s debtsPartnership- a business owned by two or more people who

share its risks and rewards Corporation- a company that is registered by a state and

operates apart from its ownersLimited liability- holding a firm’s owners responsible for no

more than the capital that they have invested in itCooperative- an organization that is owned and operated by

its membersNonprofit organization- a type of business that focuses on

providing service, not on making a profitFranchise- a contractual agreement to use the name and

sell the products or services of a company in a designated geographic area

Business Organizations #22

1. Sole Proprietorship—A business owned and operated by one person.

Oldest, simplest, most common type Who owns SP’s? (Internet advantages)

Advantages of Sole Proprietorships:

1.Low Cost start up

2.Full control

3.Exclusive right to all profits

Sole Proprietorships

1. Low Cost Start Up— Require small amount of money Involve few legal requirements Zoning Laws—Must observe; not all

businesses can operate in certain areas because of zoning restrictions.

May have to obtain city/county licenses

Sole Proprietorships

2. Control—You maintain complete control and can make quick decisions. Minimal paperwork, meetings, depends on

YOU!

3. Profit—The owner (YOU) keeps all the profits.

Sole Proprietorships

Disadvantages:1. Unlimited liability

2. Sole responsibility

3. Difficulty Raising Capital

4. Lack of longevity

Disadvantages of S.P.

1. Unlimited Liability—YOU are personally responsible for all business debts.

2. Sole Responsibility—YOU are responsible for ALL aspects of running your business.

3. Difficulty Raising Capital— Collateral—Anything of value you pledge as

security for a loan.

Disadvantages of SP

4. Lack of Longevity—The length of a firm’s life or the amount of time the business operates. Ex. Your health Ex. You lose interest in the business Ex. Your competence

Partnerships

Partnership—A business that is owned and controlled by two or more people.

Ex. Small retail stores, construction companies, doctors, lawyers, accountants, etc.

Two types of partnerships:1. General—Partners enjoy equal decision making

authority.They also have unlimited liability.2. Limited—Partners who provide capital($) but do

not play an active role in running the company. Liability is also limited.

Advantages of Partnerships

Advantages of Partnerships:1. Ease of start-up

2. Specialization

3. Shared decision making

4. Shared business losses

Advantages of Partnerships

1. Easy start up– Few government regulations Costs tend to be low Partners usually develop a partnership contract

2. Specialization—Specific business duties can be assigned to different partners based on expertise and individual talents. Ex. One good in sales—other good in

accounting

Advantages of Partnerships

3. Shared Decision Making—Partners can minimize mistakes by consulting with each other. Can pool each others skills

4. Shared Business Losses—The sharing of losses may enable a partnership to survive a situation that might cause a sole proprietorship to fail. Example: 2 partners: Business loss $20,000: Each

partner loses only $10,000 each. Sole Prop.=$20,000

Disadvantages of Partnerships

1. Unlimited Liability—Each partner is responsible for debts incurred by the business. If one partner refuses to pay for his share, then

the other partners are still liable for the debt. 2. Potential Conflict—Disagreements or conflicts

may arise among partners.• Different management styles• Personality conflicts

Disadvantages of Partnerships

3. Lack of Longevity—Life of the business is dependent on the willingness and ability of the partners to continue to work together. One may decide that he/she can no longer

work together as partners. Find a new partner or maybe even close

the business.

Franchise

a contractual agreement to use the name and sell the products or services of a company in a designated geographic area

Advantages of Franchise

1. Smaller than usual capital investment 2. Prior public acceptance of product 3. Better than average profit margins 4. Management assistance

Disadvantages of Franchise

1. Possible high franchiser fee2. Some loss of independence3. Possible difficulties in canceling

contract

Corporations

Corporations—Are companies that are formed as legally distinct from their owners and are treated as if they were individuals. Can: Hire workers, make contracts, pay

taxes, sue and be sued, make & sell products.

Forming a Corporation 7.3

1. Must apply for a state license known as the: articles of incorporation. Includes: name and purpose of corp. Address and headquarters Amount of $ it expects to raise Names and addresses of officers Length of time expected to exist License granted is called: corporate charter

Corporate Structure

Structure: Owners/Shareholders Board of Directors Corporate Officers Vice Presidents Department Heads Employees

Organization ChartD ia m o n d ba ck C o m pu te r S a les

A sh ley Ju ddP h on e S a les

S a ra h Je ss ica P a rkerA rizo n a S a les

B illy B o b T ho rn tonV .P . S a les

B o b B o noJu n io r B oo kkee p er

M a do n na S m ithA cco u n ta n t

B rittan y S p e a rsV .P . F ina n ce

M ich a e l Ja cksonP u rch a s in g A g e n t

L isa M a rie P re s leyV .P . P u rch a sin g a n d S u pp lies

M r. Joh n sonP re sid e n t

Corporate Finances 7.3

Stock—Shares that represent ownership of the firm.

Shares—Portions(certificates) issued.Dividends—Profits paid to shareholders.Common Stock—Allowed to votePreferred Stock—Guaranteed dividends;

paid before common stock. No vote.

Corporate Finances 7.3

Corporate Bond—Certificate issued by a corporation in exchange for money borrowed.

Principal—The actual amount of money borrowed. Ex. Buy $10,000 @5% interest Principal=$10,000 X 5%= $500 per year income

Interest—Amount borrower must pay for the use of the principal.

Advantages of Corporations

Benefits to stockholders—– 1. Limited Liability– 2. Can sell their shares at any time

Benefits for Corporations: 1. Limited liability 2. Separation of ownership from management. 3. Capital can be raised easily 4. Longevity

Disadvantages of Corporations

1. Corporate charter can be expensive and difficult to obtain.

2. Government regulation3. Slow decision making process4. For stockholders—Stockholders can

earn a profit, without working for corp.5. Corporate profits are taxed twice.

The Securities Language

Market cap = market capitalization (price per share X number of shares outstanding).

Ticker symbol = letters assigned to a particular stock. Ex. Microsoft = MSFT

Stock broker = work for firms that specialize in the buying and selling of stock. Earn a profit by collecting commission and fees for

each transaction. IPO = Initial Public Offering – when a stock

first goes public. • Google’s was $85 in 2004• As of 2009? $490

Market Capitalization

Price per share X the number of outstanding shares. (Ex. $10/share X 1,000,000 shares=$10 million market capitalization.

Large cap. Greater than 10 billion dollars in market cap.

Mid cap. Between 1 billion and 5 billion dollars market cap.

Small cap. 1 billion dollars or less in market cap.

A Few Exchange Facts

NYSE Started in 1792 with

24 brokers First stock was Bank

of New York To be listed:

company minimum worth of $60m and $2m earned per year for last 2 years

Ticker Symbols

Letters assigned to a particular stock.NYSE - generally 1 to 3 letters.NASDAQ - generally 4 letters.Examples:

T = AT&T. INTC = Intel. TXN = Texas instruments. IBM = IBM.