CHAPTER 8Business Organizations

CHAPTER 8SECTION 1Starting a Business

Getting Started

Entrepreneurs: people who decide to start a business and are willing to take risks

Entrepreneurs should collect information about the business, the factors of production for the products, and learn about taxes and laws relating to the business.

Getting Started

Help from Government Federal and state governments offer help to small

businesses. The Federal government’s Small Business

Administration often helps finance startups, or new small businesses.

A small business incubator might also add businesses n your area. Small Business Incubator: private or government

funded agency that assists new businesses by providing advice or low-rent buildings and supplies

The Internet has a great deal of information to help entrepreneurs.

Elements of Business Operation

Expenses New equipment, wages, insurance, taxes,

electricity, telephone service, rent, supplies, inventory, etc.

At the beginning you may only buy parts as you need them but over time you will expand your business and have inventory available.

Inventory: extra supply of the items used in a business, such as raw materials or goods for sale

Elements of Business Operation

Expenses Wages are the expense paid in order to

compensate employees. Business owners should pay themselves what

they would make elsewhere because opportunity cost is important in determining what career one chooses.

Profit In order to track profit, a business should add

wages and other expenses including taxes. The expenses should be subtracted from the

business’s receipts, or income received from the sale of goods and services.

Elements of Business Operation

Advertising Advertising: information about a company and

the service / product it is selling Advertising can be purchased on radio,

television, print media, billboards, etc. Record Keeping

Businesses must track all expenses and income.

Internet programs and software will track revenues and expenses on the computer.

Business purchases can be deducted from the amount of taxes an owner owes.

Elements of Business Operation

Risk A business owner must balance the risk

against the advantages of being self-employed.

An owner might have to spend part of his/her savings in order to start a business or keep a business running.

An owner has to be able to afford expenses and advertising in order to be successful.

CHAPTER 8SECTION 2Sole Proprietorships

and Partnerships

Sole Proprietorships

The most basic type of business in the sole proprietorship. Sole Proprietorship: business owned and

operated by one person

The biggest advantage is that the owner receives all the profits and has full control of the business.

Sole Proprietorships

The biggest disadvantage is that the owner has unlimited liability. Unlimited Liability: requirement that an owner

is personally and fully responsible for all losses and debts of a business

Personal assets may be seized to pay off business debts. Assets: all items to which a business or

household holds legal claim

Partenerships

Partnership: business that two or more individuals own and operate

Partners sign a legally binding agreement describing the duties of each partner, division of profits and distribution of assets at end of partnership.

Partnerships

The biggest advantage is that partners share control and profits.

The biggest disadvantage is the partners have unlimited liability.

Partnerships

Limited Partnerships Limited Partnership: special form of partnership in

which one or more partners have limited liability but no voice in management

One partner is called the general partner. The general partner assumes all of the management

duties and has full responsibility for debts of the partnership.

Other partners are limited. They only contribute money and property and have

no voice in the partnership’s management. Limited partners have no liability for the losses

beyond what they initially invest.

Partnerships

Joint Ventures Joint Venture: partnership set up for a specific

purpose for a short period of time.

The joint venture is dissolved after it has accomplished its goal.

Joint ventures are sometimes are sometimes sold later for profit.

CHAPTER 8SECTION 3The Corporate World

and Franchises

Why Form a Corporation?

Corporation: type of business organization owned by many people but treated by law as through it were a person; it can own property, pay taxes, make contracts, and so on

The need for financial capital

Wanting financial backers who will lend funds without having a hand in the business.

What is a Corporation?

Corporations have a distinct existence from stockholders.

A major advantage is stockholders have limited liability, meaning they are not personally responsible, only the business loses money and assets.

A major disadvantage is corporations pay more taxes than other forms of business organizations.

What is a Corporation?

Stock: share of ownership in a corporation that entitles the buyer to a certain part of the future profits and assets of the corporation

Limited Liability: requirement in which an owner’s responsibility for a company's debts is limited to the size of the owner’s investment in the firm

Corporate Structure

Registering the Corporation Register the corporation in the state where it

will be headquartered. File the articles of incorporation which

includes: Name, address, and purpose of corporation Names and addresses of the initial board of

directors (the new board will be elected at the first stockholder’s meeting)

Number of shares of stock to be issued Amount of money capital to be raised through

issuing stock.

Corporate Structure

Selling stock Raise capital by selling stocks or bonds. Common stock gives stockholders right to vote

and a percentage of future profits. Preferred stock doesn’t give voting rights, but

guarantees a dividend and these stockholders have first claim on assets left over if corporation goes out of business.

Naming a Board of Directors Stockholders elect a board of directors who will

supervise and control the corporation by hiring people to run the day-to-day operations of the business.

Franchises

Franchise: contract in which one business (the franchiser) sells to another business (the franchisee) the right to use the franchiser's name and sell its products

The franchisee pays a fee that could include a percentage of all money taken in.

Franchises often have training programs to teach the franchise and to set the standards of business operations.