Types of Business Organizations

Economics

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Chapter 8

Copyright © by Houghton Mifflin Harcourt Publishing Company

Types of Business Organizations


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Economics

Chapter 8

KEY CONCEPT• Most of the producers in a market economy are business organizations, commercial or

industrial enterprises and the people who work in them. The purpose of most business organizations is to earn a profit.

Chapter 8: Types of Business Organizations

WHY THE CONCEPT MATTERS• Businesses vary in size and are organized differently. The American free enterprise system

allows producers to choose the kind of business organization that best suits their purpose.


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Economics

Chapter 8

Section-1

Sole Proprietorships The Characteristics of Sole Proprietorships

KEY CONCEPTS• Business organizations—produce goods, provide services — purpose of most is to earn profit — supply most products in market economy; provide jobs, income; pay taxes• Sole proprietorship—owned and managed by single person — Make up 70 percent of U.S. businesses, but generate only 5 percent of all sales


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Economics

Chapter 8

The Characteristics of Sole Proprietorships

EXAMPLE: Bart’s Cosmic Comics• Steps Bart followed to set up and run a new business — raised funds to rent space, stock store through savings, loans — obtained licenses, site permit; registered name — ran advertisements, promotions to get customers — paid back loans; began earning profit; expanded


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Economics

Chapter 8

Sole Proprietorships: Advantages and Disadvantages

KEY CONCEPTS • Not governed by as many regulations as other types of businesses• Have limited life—close if owner dies, retire, or leaves business • Owners have unlimited liability—responsible for all losses, debts


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Economics

Chapter 8


Advantages: Sole Proprietorships • Easy to open or close as long as owner settles all bills• Must meet few regulations; possibly zoning, labor laws for employees• Owner makes own decisions, controls business; personal satisfaction• Owner keeps all profits


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Economics

Chapter 8


Disadvantages: Sole Proprietorships • Have limited funds, especially at start-up• Have limited life• Have unlimited liability—owner personally responsible for all debts


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Economics

Chapter 8

Mary Kay Ash: Going It Alone

Building a Business • Ash decided to create business that would reward working women• Mary Kay, Inc. sells cosmetics, other products at in-home parties• In first year, 1964, sales exceeded $198,000• Incentives to consultants include pink Cadillacs, diamond jewelry• In 2005, 1.6 million consultants in 30 countries had $2 billion sales


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Economics

Chapter 8

Reviewing Key Concepts

Explain the relationship between the terms in each of these pairs:• business organization and sole proprietorship• limited life and unlimited liability


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Economics

Chapter 8

Section-2

Forms of Partnerships The Characteristics of Sole Proprietorships

KEY CONCEPTS• Partnership—business co-owned by two or more people — partners agree on division of responsibilities, profits, and losses• Found in all areas of business — very common in professional and financial services


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Economics

Chapter 8


Type 1: General Partnerships• General partnership—most common type • Partners share responsibilities, profits, debts, losses equally — partnership agreement can specify otherwise


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Economics

Chapter 8


Type 2: Limited Partnerships • Limited partnership—at least one limited partner — not involved in running business — liable only for funds he or she invested • Must have general partner who runs business, is liable for all debts — money for business comes from limited partners


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Economics

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Type 3: Limited Liability Partnerships • Limited liability partnership (LLP)—all partners are limited — not responsible for liabilities of other partners • Not all businesses can register as LLPs — only those in which malpractice can be an issue


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Economics

Chapter 8

Partnerships: Advantages and Disadvantages

KEY CONCEPTS• Advantages, disadvantages similar to those of sole proprietorships• Some differences because owners work together


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Economics

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Advantages: Partnerships • Easy to start up and dissolve• Few regulations: legal agreement; Uniform Partnership Act (UPA)• More funds means easier to get loans, attract employees• Joint decision making: partners bring different perspectives• Partners can specialize, promoting efficiency



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Economics

Chapter 8

Disadvantages: Partnerships • Unlimited liability — partners risk personal savings and property to cover debts • Potential for conflict if many partners must agree on decisions• Limited life—if partner leaves or joins new agreement must be drawn



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Economics

Chapter 8


Explain the relationship between the terms in each of these pairs:• partnership and general partnership• limited partnership and limited liability partnership


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Economics

Chapter 8

Section-3

Corporations, Mergers, and Multinationals Characteristics of Corporations

KEY CONCEPTS• Corporation—stockholders have rights to profit, limited liability • Stock—shares of ownership in a corporation • Dividend—part of a corporation’s profit paid out to stockholders • Public company—issues stock that can be freely bought and sold • Private company—controls who can buy or sell its stock


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Economics

Chapter 8

EXAMPLE: F & S Publishing, Inc. • F & S owners have no personal liability; only assets of business at risk• Owners hire lawyers to file legal documents to incorporate• State government grants corporate charter: — registers name, address, purpose; specifies amount of stock can sell• Stockholders elect board of directors which hires corporate officers

Characteristics of Corporations


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Economics

Chapter 8

KEY CONCEPTS • Bond—contract issued by corporation — promises to repay borrowed money, plus interest on fixed schedule• Limited liability—owner’s liability for debts and losses is limited• Unlimited life—corporation continues to exist even if owners change

Corporations: Advantages and Disadvantages


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Economics

Chapter 8

Advantages: Corporations • Can raise money in various ways: — borrowing from banks, selling more stock, issuing bonds• Professional managers likely to produce higher profits• Limited liability—stockholders, directors, officers protected • Unlimited life—business operates as before if stockholders change



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Economics

Chapter 8

Disadvantages: Corporations • Starting up: time-consuming, difficult, expensive; paperwork, lawyers• Heavy regulation, specially for public companies — annual SEC reports, quarterly financial reports, stockholder meetings• Both profits and dividends taxed; some small corporations excluded• Decisions made by board; founders must give up some control



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Economics

Chapter 8

KEY CONCEPTS • To increase efficiency, gain new identity, keep rivals out, diversify• Horizontal merger—joins companies with same or similar product• Vertical merger—joins different steps of production, marketing• Conglomerate—combines companies with unrelated products• Multinational corporation—has branches in several countries

Business Consolidation


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Economics

Chapter 8

Mergers • In 2005, Reebok and Adidas made horizontal merger — meant to cut production, distribution costs by combining operations — purpose to undersell and take customers from Nike• In 1990s, Shell and Texaco made vertical merger — Shell had more refineries; Texaco more gas stations for distribution



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Economics

Chapter 8

Conglomerates • Theory: diversified businesses protect parent company • Practice: difficult to manage unrelated companies• 1960s Gulf and Western in communications, clothes, mines, food — eventually sold all except entertainment, publishing; became Viacom



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Economics

Chapter 8

Multinational Corporations • Multinational, or transnational, corporations increase globalization• Benefits: provide jobs, products; spread technology; pay taxes — help raise standard of living of poor countries• In countries with lax regulations, factories may cause problems — pollution, long work hours, unsafe conditions



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Economics

Chapter 8

Microsoft Corporation • With Paul Allen, developed BASIC language for personal computers• In 1975, they founded Microsoft to provide software for early PCs• Microsoft began providing operating system for IBM PCs • In 1985, released Windows, which became world’s most popular operating system• In 1994, Gates founded charitable foundation for health, education

Bill Gates: Entrepreneur and Corporate Leader


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Economics

Chapter 8


Explain the relationship between the terms in each of these pairs:• stock and bond• public company and private company• merger and conglomerate


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Economics

Chapter 8

Section-4

Franchises, Co-ops, and Nonprofits

Franchises

KEY CONCEPTS• Franchise—business that licenses the right to sell its products • Franchisee—pays fee to parent company to sell in a particular area • Fast-food restaurants are most common type of franchise


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Economics

Chapter 8

Franchises

EXAMPLE: An Almost Independent Business• After working as assistant manager, Tim wants to run own restaurant• Concerns: lacks enough experience, start-up funds• Likes organic juice and sandwich franchise; decides to apply


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Economics

Chapter 8

Franchises

Advantages: Franchises• High level of independence• Franchiser provides training in running the business• Franchiser provides products and other materials at low cost• Franchiser pays for national and regional advertising


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Economics

Chapter 8

Franchises

Disadvantages: Franchises• Franchisee must invest own money to start business• Must share some of the profits with franchiser• Does not have full control of business — must buy only franchiser’s materials — must sell only franchiser’s products


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Economics

Chapter 8

Cooperatives and Nonprofits

KEY CONCEPTS• Some businesses are not created to make a profit• Cooperative—operated for shared benefit of owners, who are customers• Nonprofit organization—acts like business but purpose is to benefit society


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Economics

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A Business Organization for Its Members• Consumer co-ops keep prices low by purchasing in large volume — members pay fee or provide labor as payment• Service co-ops, such as credit unions, provide services at low cost• Producer co-ops ensure cheaper, more efficient processing or marketing



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Economics

Chapter 8

A Purpose Other Than Profit• Purpose of many nonprofits is benefiting society — include charities, professional associations, labor unions, museums• Receive government charter; have unlimited life• Raise money from donations, grants, membership fees — some sell services, products to raise funds to support their mission• Other nonprofits are professional organizations — include professional associations, labor unions



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Economics

Chapter 8

Give an example of each of the following terms:• franchise• cooperative• nonprofit organization



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Economics

Chapter 8

Apple: The Evolution of One Company

Background• As students, Steve Jobs and Steve Wozniak created a personal computer, and in 1976 formed

Apple Computer, Inc. Through the years, Apple overcame problems and earned almost $14 billion in revenues in 2005.

What’s the Issue?• How does a company evolve from an idea into a billion-dollar enterprise?


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Economics

Chapter 8

Apple: The Evolution of One Company {continued}

Thinking Economically1. Based on information in the documents, how would you describe the evolution of Apple

Computer, Inc.?2. How did Apple’s advertising and marketing affect its success or failure? Use examples from

the documents in your answer.3. What single overriding concern has defined the evolution of Apple and determined its

success? Use information from the documents to support your answer.


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Chapter 8

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