business organizations title? no sample ch-8.pdf · to start a new business, a sole proprietor must...

Title? NO SAMPLEBusiness Organizations

TTaking care of business can mean workingby yourself out of your home or managing

a company with thousands of employees andoffices across the globe. It can mean being thesole owner of a company or one of thou-sands. It can also mean working for some-thing other than a for-profit business.

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List the four businesses you and yourfamily visit the most often. Are theylocal businesses or national chains?Describe each one in a fewsentences.

Economics JournalEconomics Journal

ECON_07NA_se_Ch08_CO 8/3/05 11:45 AM 84

EE ntrepreneurs must make many decisionsas they start up new businesses. One of

the first decisions they face is what form ofbusiness organization best serves theirinterests. A business organization is anestablishment formed to carry on commer-cial enterprise. In other words, a businessorganization is a company, or firm. Soleproprietorships are the most commonforms of business organization.

The Role of SoleProprietorshipsA sole proprietorship is a business ownedand managed by a single individual. Thatperson earns all of the firm’s profits and isresponsible for all of the firm’s debts. Thistype of firm is by far the most popular inthe United States. According to the InternalRevenue Service, about 75 percent of allbusinesses are sole proprietorships. Mostsole proprietorships are small, however. Alltogether they generate only about 6 percentof all United States sales.

Many types of businesses can flourish assole proprietorships. Look around yourtown. Chances are good that your localbakery, your barber shop or hair salon,your bike-repair shop, and the corner storeare all sole proprietorships.

Advantages of Sole ProprietorshipsWhile you need to do more than just hangout a sign to start your own business, a soleproprietorship is simple to establish. It alsooffers the owner numerous advantages.

business organizationan establishmentformed to carry oncommercial enterprise

sole proprietorship abusiness owned andmanaged by a singleindividual

Sole Proprietorships

Chapter 8 ■ Section 1 185

ObjectivesAfter studying this section you will be able to:1. Explain the characteristics of sole

proprietorships.2. Analyze the advantages of a sole

proprietorship.3. Analyze the disadvantages of a sole

proprietorship.

PreviewSection FocusA business is an economic institutionthat seeks a profit by allocatingresources to satisfy customers. Soleproprietorships are the most commonform of business in the United States.They are easy to establish and offerowners both the benefits anddrawbacks that come with full controlof a business.

Key Termsbusiness organizationsole proprietorshipbusiness licensezoning lawliabilityfringe benefit

� Personal pridemotivates many soleproprietors.

ECON_07NA_se_CH08_S1 8/3/05 11:48 AM Page 185

186 Business Organizations

Ease of Start-UpEasy start-up is one of the main advantagesof the sole proprietorship. With just asmall amount of paperwork and legalexpense, just about anyone can start a soleproprietorship.

To start a new business, a sole proprietormust meet a small number of governmentrequirements, which can vary from city tocity and state to state. Typically, soleproprietors must meet the followingminimum requirements:

1. Authorization Sole proprietors mustobtain a business license, which is anauthorization from the local govern-ment. Certain professionals, such asdoctors and day-care providers, may alsobe required to obtain a special licensefrom the state.

2. Site permit If not operating out of thehome, a sole proprietor must obtain acertificate of occupancy to use anotherbuilding for business.

3. Name If not using his or her own nameas the name of the business, a sole propri-etor must register a business name.

This paperwork often takes only a day ortwo to complete. The most difficult part ofstarting a new business is coming up with agood idea!

business licenseauthorization to start abusiness issued by thelocal government

Source: Statistical Abstract of the United States, 2004–2005

$1,000,000 or more

$500,000–$999,999

$100,000–$499,999

$50,000–$99,999

$25,000–$49,999

Under $25,000

Services

Real estate

Finance and insurance

Retail trade

Wholesale trade

Manufacturing

Transportation

Construction

Other

Note: Because of rounding, totals may be less or greater than 100 percent.

By TypeBy Size of Receipts

12%67%

1% 1%

5%

53%12%

10%

9%

3%

13% 2%

2%5%

5%

Figure 8.2 Characteristics of ProprietorshipsFigure 8.2 Characteristics of Proprietorships

Most sole proprietorships take in relatively small amounts of money, or receipts. Many proprietors run their businesses part-time.Specialization What percentage of sole proprietorships is engaged in retail trade? Why might more sole propri-etors be engaged in services rather than manufacturing?

It takes a certaintype of personality tostart up a business.EntrepreneursDescribe some timeswhen you exhibitedentrepreneurialspirit.

Figure 8.1 The Entrepreneurial SpiritFigure 8.1 The Entrepreneurial Spirit

Entrepreneurs . . .

★ Seek out responsibility★ Are willing to take risks★ Believe in themselves★ Desire to reach their full potentials★ Have high energy levels★ Are upbeat and optimistic★ Look toward the future rather than the past★ Value achievement over money★ Maintain flexibility as they face new challenges★ Are strongly committed to their goals

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Relatively Few RegulationsA proprietorship is the least-regulated formof business organization. Even the smallestbusiness, however, is subject to some regu-lation, especially industry-specific regula-tions. For example, a gourmet soft pretzelstand would be subject to health codes, anda furniture refinishing business would besubject to codes regarding dangerouschemicals.

Sole proprietorships may also be subjectto local zoning laws. Cities and towns oftendesignate separate areas, or zones, for resi-dential use and for business. Zoning lawsmay prohibit sole proprietors from oper-ating businesses out of their homes.

Otherwise, these small businesses facefew legal requirements. Because theyrequire little legal paperwork, sole propri-etorships are usually the least expensiveform of ownership to establish.

Sole Receiver of ProfitA major advantage of the sole proprietor-ship is that the owner gets to keep allprofits after paying income taxes. Potentialprofits motivate many people to start theirown businesses. If the business succeeds,the owner does not have to share thesuccess with anyone else.

Full ControlAnother advantage of sole proprietorship isthat sole proprietors can run their busi-nesses as they wish. This means that theycan respond quickly to changes in themarketplace. Such a degree of freedomappeals to entrepreneurs. Fast, flexibledecision making allows sole proprietor-ships to take full advantage of suddenopportunities.

Easy to DiscontinueFinally, if sole proprietors decide to stopoperations and do something else for aliving, they can do so easily. They must, ofcourse, pay all debts and other obligationslike taxes, but they do not have to meet anyother legal obligations to stop doingbusiness.

Disadvantages of Sole ProprietorshipsAs with everything else, there are trade-offswith sole proprietorships. The indepen-dence of a sole proprietorship comes with ahigh degree of responsibility.

Unlimited Personal LiabilityThe biggest disadvantage of sole propri-etorship is unlimited personal liability.Liability is the legally bound obligation topay debts. Sole proprietors are fully andpersonally responsible for all their businessdebts. If the business fails, the owner mayhave to sell personal property to cover anyoutstanding obligations.

For example, let’s say you took out aloan to buy a ride-on lawn mower as partof your landscaping business. Even if youdon’t make enough money to stay inbusiness, you must still repay the loan forthe lawn mower. Business debts can ruin asole proprietor’s personal finances.

Limited Access to ResourcesIf your landscaping business takes off andgrows quickly, you might need to expand

zoning law law in a cityor town that designatesseparate areas forresidency and forbusiness

liability the legallybound obligation to paydebts

� What are the benefits of running a business from home?



your business by buyingmore equipment. But as asole proprietor, you mayhave to expand by payingfor the equipment out ofyour own pocket. This isbecause banks are sometimesunwilling to offer financingin the early days of abusiness. Many smallbusiness owners use all oftheir available savings andother personal resources tostart up their businesses.This makes it difficult orimpossible for them toexpand quickly.

Physical capital may not be the onlyfactor resource in short supply. Humancapital may be lacking, too. A sole propri-etor, no matter how ambitious, may lacksome of the skills necessary to run abusiness successfully. All individuals havestrengths and weaknesses. Some aspects ofyour business may suffer if your skillsdon’t match the needs of the business. Forexample, you may be great at sales, but notat bookkeeping and accounting. You maylove working outdoors landscaping, buthate to call on people to drum up business.

Finally, as a sole proprietor, you mayhave to turn down work because yousimply don’t have enough hours in the dayor enough workers to keep up withdemand. A small business often presentsits owner with too many demands, andthat can be exhausting both personallyand financially.

Lack of PermanenceA sole proprietorship has a limited life. If asole proprietor dies or closes shop due toretirement, illness, loss of interest in thebusiness, or for any other reason, thebusiness simply ceases to exist.

Sole proprietorships often have troublefinding and keeping good employees. Smallbusinesses generally cannot offer thesecurity and advancement opportunitiesthat many employees look for in a job. Inaddition, many sole proprietorships areable to offer employees little in the way offringe benefits. Fringe benefits are paymentsto employees other than wages or salaries,such as paid vacation, retirement pay, andhealth insurance. Lack of experiencedemployees can hurt a business. Once again,the flip side of total control is total respon-sibility: a sole proprietor cannot count onanyone else to maintain the business.

fringe benefit paymentother than wages orsalaries

Section 1 Assessment

Key Terms and Main Ideas1. What is a business organization?2. What is a sole proprietorship?3. What role do business licenses and zoning laws play in

sole proprietorships?4. What kinds of liabilities are sole proprietors subject to?5. Why do you think many sole proprietorships are able to

offer few fringe benefits to workers?

Applying Economic Concepts6. Using the Databank Examine the graph “Fastest-

Growing Occupations” on page 537. Which of these

occupations do you think could operate successfully assole proprietorships? Explain your reasoning.

7. Try This Refer to Figure 8.1, “The Entrepreneurial Spirit,”on page 186. How many of these traits do you have?Would you like to start your own business someday?Why or why not?

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ECONOMICEconomist

Entrepreneur

JJerry erry YYangang (b. 1968)(b. 1968)

When 10-year-old Jerry Yang arrived in California from Taiwan withhis brother, mother, and grandmother, the only English word heknew was shoe. Some 15 years later he had mastered the languagewell enough to come up with “Yet Another Hierarchical OfficiousOracle!” as the name for an on-line directory of Internet addressesthat he and his friend David Filo had developed. The initials gave

the directory the name Yang really wanted: Yahoo!

The Birth of Yahoo!Yang and Filo were graduate students inengineering and shared an office atStanford University in 1993. At the time,the World Wide Web was in its infancy, andthe two office mates began to spend timeexploring the new Web. When they couldnot remember the addresses of interestingWeb sites they had visited, they decided tomake a reference list. In early 1994, theyput their list on-line for friends to use. Asthe list got longer, Filo and Yang divided itinto categories, and the Internet directoryYahoo! was born.

A Hobby Becomes a BusinessBy the end of 1994, word of a great, freecatalog of Web pages had spread wellbeyond the university. Yang and Filo’s sitewas getting a million visits a day, andStanford began to rethink letting theuniversity’s equipment be tied up in thisway. Yahoo! produced no revenue to coverexpenses, so Yang and Filo began toconsider how they might turn their hobbyinto a self-sustaining company. With thehelp of a business student friend, theydeveloped a business plan and began tolook for financing.

In April 1995, an investment firm putup $1 million to get Yahoo! Corporationstarted. America Online (AOL), theworld’s largest Internet service provider,asked Yahoo! to be its search engine.The prospect of visits from millions ofAOL subscribers convinced Filo andYang to sell advertising space on theYahoo! site.

The Yahoo! ExplosionIn 1996, Yang and Filo offered Yahoo!stock to the public for the first time. Themoney raised allowed the company togreatly expand its services. Althoughgoing public eventually reduced theirownership to 25 percent, the founders stillparticipated in the company. Yangremained involved in business operationsand Filo in technical development. Yahoo!survived the dot-com crash on thestrength of its brand and advertisingrevenues. By 2003, Yahoo! had become a$20 billion business. Except for the factthat both were now multimillionaires,little had changed since 1994 for Yangand Filo. Yahoo!’s success “hasn’tchanged my life at all,” reports Yang,“except that I think more about taxes.”

1. Source Reading Explain whyYahoo!’s agreement with AOL assuredthat Yahoo! would be a success.

2. Critical Thinking Why are Yangand Filo much wealthier today thanthey were when they owned 100 per-cent of the company?

3. Learn More Use the Internet andother sources to learn more aboutYahoo!’s legal status as a businessorganization. Has the company’s busi-ness organization changed over time?

CHECK FOR UNDERSTANDING

189

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AApartnership is a business organizationowned by two or more persons who

agree on a specific division of responsibili-ties and profits. In the United States, part-nerships account for about 7 percent of allbusinesses. They generate about 5 percentof all sales and about 10 percent of allincome.

Types of PartnershipsPartnerships fall into three categories:general partnerships, limited partnerships,and limited liability partnerships. Each divides responsibility and liabilitydifferently.

General PartnershipThe most common type of partnership isthe general partnership. Partners in a generalpartnership share equally in both responsi-bility and liability. Many of the same kindsof businesses that operate as sole propri-etorships could operate as general partner-ships. Doctors, lawyers, accountants, andother professionals often form partnershipswith colleagues. Small retail stores, farms,construction companies, and family busi-nesses often form partnerships as well.

Limited PartnershipIn a limited partnership, only one partner isrequired to be a general partner. That is,only one partner has unlimited personalliability for the firm’s actions. Theremaining partner or partners contributeonly money. They do not actively managethe business. Limited partners can lose onlythe amount of their initial investment. Alimited partnership must have at least onegeneral partner, but may have any numberof limited partners. The main advantage ofbeing a general partner is in having controlof the business. The main drawback, ofcourse, is the extent of liability.

Limited Liability PartnershipsThe limited liability partnership (LLP) is anewer type of partnership recognized by

Partnerships


Section FocusPartnerships let individuals pool theirresources and share responsibility forthe forming and running of abusiness.

ObjectivesAfter studying this section you will be able to:1. Compare and contrast the different types of

partnerships.2. Analyze the advantages of partnerships.3. Analyze the disadvantages of partnerships.

Key Termspartnershipgeneral partnershiplimited partnershiplimited liability

partnership (LLP)articles of partnershipUniform Partnership Act

(UPA)assets

Preview

partnership a businessorganization owned bytwo or more personswho agree on aspecific division ofresponsibilities andprofits

general partnershippartnership in whichpartners share equallyin both responsibilityand liability

limited partnershippartnership in whichonly one partner isrequired to be ageneral partner

limited liabilitypartnership (LLP)partnership in which all partners are limited partners

Sometimes three �heads are better than one.



many states. In this type of partnership, allpartners are limited partners. An LLP func-tions like a general partnership, except thatall partners are limited from personalliability in certain situations, such asanother partner’s mistakes. Not all types ofbusinesses are allowed to register as limitedliability partnerships. Most states allowprofessionals such as attorneys, physicians,dentists, and accountants to register asLLPs.

Advantages of PartnershipsPartnerships are easy to establish and aresubject to few government regulations.They provide entrepreneurs with a numberof advantages.

Ease of Start-UpLike proprietorships, partnerships are easyand inexpensive to establish. The law doesnot require a written partnership agree-ment. Most small business experts,however, advise partners to work with an

attorney to develop articles of partnership,or a partnership agreement. This legaldocument spells out each partner’s rightsand responsibilities. It outlines howpartners will share profits or losses.Partnership agreements may also addressother details, such as the ways newpartners can join the firm, duration of thepartnership, and tax responsibilities.

If partners do not establish their ownarticles of partnership, they will fall underthe rules of the Uniform Partnership Act(UPA). The Uniform Partnership Act is auniform state law adopted by most statesto establish rules for partnerships. The UPArequires common ownership interests,profit and loss sharing, and shared manage-ment responsibilities.

Like sole proprietorships, partnershipsare subject to little government regulation.The government does not dictate how part-nerships conduct business. Partners candistribute profits as they wish, as long asthey abide by the partnership agreement orby the UPA.

articles of partnershipa partnershipagreement

Uniform PartnershipAct (UPA) act orderingcommon ownershipinterests, profit and losssharing, and sharedmanagementresponsibilities in apartnership


$1,000,000 or more

$500,000–$999,999

$100,000–$499,999

$50,000–$99,999

$25,000–$49,999

Under $25,000

Services

Real estate


Retail trade

Wholesale trade

Manufacturing

Construction

Other

Agriculture, forestry, fishing services



9%

53%

7%5%

19%

44%

12%

4%

17%

9%

2%6%5%

2%

5%

Figure 8.3 Characteristics of PartnershipsFigure 8.3 Characteristics of Partnerships

Partnerships can range in size from a pair of house painters to an accounting firm withthousands of partners.Specialization Using the information in these graphs, describe partnerships in termsof industry and income.

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Shared Decision Making and SpecializationIn a sole proprietorship, theindividual owner has thesole burden of making allthe business decisions. In apartnership, the responsi-bility for the business maybe shared. A sole proprietor-ship requires the owner towear many hats, some ofwhich might not fit verywell. In a successful partner-ship, however, each partnerbrings different strengthsand skills to the business.

Larger Pool of CapitalEach partner’s assets, or money and othervaluables, improve the firm’s ability toborrow funds for operations or expansion.Partnership agreements may allow firms toadd limited partners to raise funds.

Partnerships offer more advantages toemployees, enabling them to attract andkeep talented employees more easily thanproprietorships can. Graduates from topaccounting schools, for example, oftenseek jobs with large and prestigiousaccounting LLPs, hoping to becomepartners themselves someday. Similarly,many law school graduates seek outsuccessful partnerships for employment.

TaxationPartnerships, like sole proprietorships,are not subject to any special taxes.Partners pay taxes on their share of theincome that the partnership generates.The business itself, however, does nothave to pay taxes.

Disadvantages ofPartnershipsPartnerships also present some disadvan-tages. Many of the disadvantages of soleproprietorships are present in partnerships.Limited liability partnerships have fewerdisadvantages than partnerships withgeneral partners. All partnerships, however,have the potential for conflict.

Unlimited LiabilityUnless the partnership is an LLP, at leastone partner has unlimited liability. As in asole proprietorship, any general partnercould lose everything, including personalproperty, in paying the firm’s debts.Limited partners do not face the samethreat. They can lose only their investment.

In a partnership, each general partner isbound by the acts of all other generalpartners. If one partner’s actions cause thefirm losses, then all of the general partnerssuffer. If one doctor in a partnership is

assets money andother valuablesbelonging to anindividual or business

Like sole proprietors, �partners must maintaintheir entrepreneurialspirit to stay in business.

In the News Read more about partnerships in “PartnershipPrenuptials,” an article in The Wall Street Journal Classroom Edition.

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Key Terms and Main Ideas1. Explain the characteristics of partnerships. 2. How do general partnerships, limited partnerships, and

limited liability partnerships differ?3. What issues are addressed in articles of partnership?4. What is the purpose of the Uniform Partnership Act?

Applying Economic Concepts5. Critical Thinking Why might accountants and physi-

cians find limited liability partnerships attractive?6. Critical Thinking Do you think the advantages of part-

nerships outweigh the disadvantages? Why or why not?7. Problem Solving You and your general partners are

operating under the Uniform Partnership Act, not your

own articles of partnership. Now you cannot agree whoshould be responsible for which duties. How will youresolve your conflict?

8. Try This With a partner or two, draw up articles of part-nership for a fictional business. Decide which type ofpartnership best suits your business and your personalpreferences and skills.

sued for malpractice, all of the doctors inthe partnership stand to lose. Generalpartners do not enjoy absolute controlover the firm’s actions like sole proprietorsdo. The risk from other people’s actionsmeans that people must choose theirbusiness partners carefully.

Potential for ConflictAs in any close relationship, partnershipshave the potential for conflict. Partnershipagreements address technical aspects of the

business, such as profit and loss. Manyimportant considerations exist outsidethese legal guidelines, however. Partnersneed to ensure that they agree about workhabits, goals, management styles, ethics,and general business philosophies. Still,friction between partners often arises andcan be difficult to resolve. Many partner-ships dissolve because of interpersonalconflicts. Partners must learn to communi-cate openly and find ways to resolveconflicts.

� These partners must find positive ways to deal with conflict if they want to keep their businessrunning smoothly.

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194

1. Prepare your search. American compa-nies can face ethical dilemmas overissues like pollution, safety, andworking conditions. (a) Identify two

companies that you think might faceethical issues. (b) How could you usethe Internet to find these companies?

2. Refine your search. Many searchengines offer an advanced searchoption that allows you to refine yoursearch. (a) Which words other than“ethics,” “statement,” and the com-pany name might help you find thedocuments you are looking for? (b) Based on your first set of results,what word could you exclude fromyour search to eliminate inappropri-ate listings?

3. Analyze the document. Answer the following questions using the ethicsstatement at left. (a) List three signifi-cant phrases that the company uses inits ethics statement. (b) Do you findthe company’s statement convincing?Why or why not? (c) Which words orphrases are not convincing?

Using the Internet for Research

T he Internet is a comprehensive network of computers that links busi-nesses, universities, and individuals around the world. The World Wide

Web is one part of the Internet. Because the Internet has no central orga-nization, finding a Web page with the information you need can be difficult.Search engines, databases that track thousands of Web pages by subject,can help you focus your search.

In addition to advertising and product information, many corporationsuse their Internet sites to post corporate ethics statements like the onebelow. An ethics statement typically describes how the companyapproaches the law, the community in which it works, and its employees.Use the steps below to locate a corporate ethics statement on the Web.

ETHICS STATEMENT OF ALPINEINVESTMENTS, INC.

Alpine Investments, Inc., and each of itsemployees will:

• Individually and collectively maintain ahigh level of ethical conduct with clients,coworkers, members of allied professions,and the public.

• Practice a method of financial planningfounded on a legal and practical basis, notvoluntarily associating with anyone whoviolates this principle.

• Seek advice in doubtful or difficult cases,and whenever it appears that the servicesof members of other professions wouldprovide more complete and better qualityor degree of advice.

• Not reveal the private information we mayobserve in any client’s affairs, unlessrequired to do so by law.

• Obey all laws and uphold the dignity andhonor of the profession and accept theprofession’s self-imposed rules.

• Oppose, without hesitation, illegal orunethical conduct of fellow members ofour profession.

Use the Internet to find an ethicsstatement for a company that hasrecently been in the news for a con-troversial decision or action.

Additional Practice

LIFESkills for

194

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BB usinesses often rely on investment toexpand operations. One way for a

business to increase investment is to form acorporation. A corporation can grow evenlarger by combining with other corpora-tions. Some corporations are so large thatthey do business all over the world.

CorporationsThe most complex form of business organi-zation is the corporation. A corporation is alegal entity, or being, owned by individualstockholders, each of whom faces limitedliability for the firm’s debts. Stockholdersown stock, a certificate of ownership in acorporation. In other words, if you own

stock in a corporation, you are a part-ownerof that corporation. If a corporation issues1,000 shares of stock, and you purchase 1share, you own 1/1000th of the company.

Corporations differ from sole propri-etorships, which have no identity beyondthat of the owners. A corporation is definedas an “entity” because it has a legal identityseparate from those of its owners. Legally,it is regarded much like an individual. A

corporation a legalentity owned byindividual stockholders

stock a certificate ofownership in acorporation


Corporations, Mergers, andMultinationals

Section FocusCorporations are complexbusiness organizations thatcan be combined to form evenlarger businesses. Somecorporate enterprises spanthe globe.

Key TermsObjectivesAfter studying this section you will be able to:1. Explain the characteristics of corporations.2. Analyze the advantages of incorporation.3. Analyze the disadvantages of incorporation.4. Compare and contrast corporate

combinations.5. Describe the role of multinational

corporations.

Preview

corporationstockclosely held corporationpublicly held corporationbondcertificate of incorporationdividendhorizontal mergervertical mergerconglomeratemultinational corporation (MNC)

Many corporationsmake their head-quarters in large cities.�

ECON_07NA_se_CH08_S3 8/3/05 12:00 PM Page 195


corporation pays taxes, may engage inbusiness, make contracts, sue other parties,and get sued by others.

In the United States, corporations accountfor about 20 percent of all businesses, yetsell about 90 percent of all products sold inthe nation. They generate about 70 percentof the net income earned in the nation.Because of the advantages of corporations,most large business firms do incorporate.Supermarkets, high-tech companies, andmachinery manufacturers are just some ofthe types of firms that usually form corpora-tions. Corporations’ profits are about tenpercent of their income.

Types of CorporationsSome corporations issue stock to only afew people, often family members. Thesestockholders rarely trade their stock, butpass it on within families. Such corpora-tions are called closely held corporations.They are also known as privately heldcorporations.

A publicly held corporation, on the otherhand, has many shareholders who can buy

or sell stock on the open market. Stocks arebought and sold at financial markets calledstock exchanges, such as the New YorkStock Exchange. You will read about thesefinancial markets in Chapter 11.

Corporate StructureWhile the exact organization varies fromfirm to firm, all corporations have the samebasic structure. Corporation owners—thestockholders—elect a board of directors.The board of directors makes all the majordecisions of the corporation. It appointscorporate officers, who run the corporationand oversee production. Corporateofficers, in turn, hire managers andemployees, who work in various depart-ments like finance, sales, research,marketing, and production.

Advantages of IncorporationIncorporation, or forming a corporation,offers advantages to both the individualowners, or stockholders, and to the corpo-ration itself. These include

closely heldcorporationcorporation that issuesstock to only a fewpeople, often familymembers

publicly heldcorporationcorporation that sellsstock on the openmarket


$1,000,000 or more

$500,000–$999,999

$100,000–$499,999

$50,000–$99,999

$25,000–$49,999

Under $25,000

Services

Real estate


Retail trade

Wholesale trade

Manufacturing

Transportation

Construction

Other

Agriculture, forestry, fishing services



6%

24%19%

12%40%

12%

7%

3%3%

4%

30%

9%

12%

11%

3%5%

Figure 8.4 Characteristics of CorporationsFigure 8.4 Characteristics of Corporations

Notice that over 60 percent of corporations are engaged in services, manufacturing,wholesale trade, and retail trade. Incentives What incentives do businesses in these particular industries have to formcorporations?

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• limited liability for owners• transferable ownership• ability to attract capital• long life

Advantages for StockholdersThe primary reason that entrepreneurschoose to incorporate, or form a corpora-tion, is to gain the benefit of limitedliability. Individual investors do not carryresponsibility for the corporation’s actions.They can lose only the amount of moneythey have invested in the business.

Corporations usually also providestockholders with more flexibility thanother ownership forms. Shares of stock aretransferable, which means that stock-holders can sell their stocks to others andget money in return.

Advantages for the CorporationThe corporate structure also presentsadvantages for the firm itself. Corporationshave more potential for growth than otherbusiness forms. By selling shares on thestock market, corporations can raisemoney to purchase capital. A corporationcan offer as many shares of stock as itscorporate charter allows. As long asinvestors have confidence in the firm’ssuccess, companies should be able to sellstock fairly easily.

Corporations can also raise money byborrowing it. They do this by selling bonds.A bond is a formal contract to repayborrowed money with interest at fixedintervals.

Because ownership is separate from therunning of the firm, corporation owners—that is, stockholders—do not need anyspecial managerial skills. Instead, thecorporation can hire various experts—thebest financial analysts, the best engineers,and so forth—to create and market the bestservices or goods possible.

Corporations also have the advantage oflong life. Unlike a sole proprietorship, thecompany does not end with the death of anowner. Because stock is transferable, thatis, it can be bought and sold, corporations

are able to exist longer than simple propri-etorships. Unless it has stated in advance aspecific termination date, the corporationcan continue doing business indefinitely.

Disadvantages ofIncorporationCorporations are not without their disad-vantages. These include

• expense and difficulty of start-up• double taxation• potential loss of control by the founders• more legal requirements and regulations

Difficulty and Expense of Start-UpCorporate charters can be difficult, expen-sive, and time consuming to establish.Though most states allow people to formcorporations without legal help, fewexperts would recommend this cheapershortcut. Applications are complex andconfusing.

Firms that wish to incorporate must firstfile for a state license known as a certificateof incorporation, or corporate charter. Theapplication includes crucial informationsuch as

• the corporate name• statement of purpose• length of time that the business will run

(usually “for perpetuity,” or without limit)• founders’ names and addresses• headquarters’ business address• method of fund-raising• the rules for the corporation’s

management

Once state officials review and approvethe application, they grant a corporatecharter. Then the corporation may organizeitself to produce and sell a good or service.

Double TaxationThe law considers corporations legalentities separate from their owners.Corporations, therefore, must pay taxes ontheir income.

bond a formal contractto repay borrowedmoney with interest atfixed intervals

certificate ofincorporation licenseto form a corporationissued by stategovernment


Profit is a form of income. When stock-holders receive income from the corporationin the form of dividends—the portion ofcorporate profits paid out to stockholders—the stockholders must pay personal incometax on those dividends. This double taxationkeeps many firms from incorporating.

When stockholders sell their shares, theymust pay a special tax, called a capital gainstax, if they have made a profit. In 2003,Congress reduced double taxation bylowering the dividend and capital gains taxrates to 15 percent.

Loss of ControlUnlike the owner of a sole proprietorship,the original owners of a corporation oftenlose control of the company. Managersand boards of directors, not owners,manage corporations. These professionalmanagers do not always act in the owners’

best interests. They might be more inter-ested in protecting their own jobs or salariestoday than in making difficult decisions thatwould benefit the firm tomorrow.

More RegulationCorporations also face more regulationsthan other kinds of business organizations.Corporations must hold annual meetingsfor shareholders and keep careful records ofall business transactions. Publicly heldcorporations are required to file quarterlyand annual reports to the Securities andExchange Commission (SEC). The SEC is afederal agency that regulates the stockmarket.

Corporate CombinationsAs a corporation continues to grow,managers and owners may decide it makes

Coke fields

Iron oredeposits

Steel mills

Ships

Railroads

Independent oil refineries

Horizontal Merger Vertical Merger

Figure 8.5 Horizontal Merger and Vertical MergerFigure 8.5 Horizontal Merger and Vertical Merger

Combined oil company

Combined steel

company

dividend the portion ofcorporate profits paidout to stockholders

Beginning in the 1880s, John D. Rockefeller’s Standard Oil Company combined horizontally (left) with 40 other oilrefineries. The power gained by Standard Oil and similar monopolies prompted passage of the Sherman AntitrustAct in 1890. In 1899, Andrew Carnegie established the Carnegie Steel Company. He used the vertical merger (right) topurchase ore mines, furnaces and mills, and even the shipping and railroad lines needed to move his products tomarket. Within a short time, Carnegie controlled the steel industry. Most vertical mergers, however, do not resultin monopolies. Competition Explain the difference between horizontal and vertical mergers.




sense to merge, or combine, the firm withanother company or companies. The threekinds of mergers are horizontal mergers,vertical mergers, and conglomerates.

Each of these corporate combinationscan lead to larger, more efficient firms.Often, larger firms can produce and selltheir products at lower prices. However,their size can also give some of thesecombinations more monopoly power, asdiscussed in Chapter 7.

Horizontal mergers Horizontal mergers join two or more firmscompeting in the same market with thesame good or service. For example, in late1998, two giant automakers, ChryslerCorporation and Daimler-Benz, merged toform DaimlerChrysler.

Two firms might choose to merge if thenewly resulting firm would result ineconomies of scale or would otherwiseimprove efficiency. At the time of themerger, Chrysler Corporation and Daimler-Benz predicted that their merger wouldreduce costs and boost revenues as much as$3 billion dollars annually.

As you read in Chapter 7, the federalgovernment watches horizontal mergerscarefully. The resulting single firm mightgain monopoly power in its market.

Vertical Mergers Vertical mergers join two or more firmsinvolved in different stages of producingthe same good or service. A vertical mergercan allow a firm to operate more efficiently.A vertically combined firm can control allphases of production, rather than rely onthe goods or services of outside suppliers.Sometimes firms combine vertically out offear that they may otherwise lose crucialsupplies. To ensure production, these firmssimply buy their suppliers.

Antitrust regulators become concernedwhen many firms in the same industrymerge vertically if that merger drivessupplying firms out of business. Mostvertical mergers do not substantially lessencompetition, however, so they are usuallyallowed.

ConglomeratesSometimes firms buy other companies thatproduce totally unrelated goods or services.These combinations, called conglomerates,have more than three businesses that makeunrelated products. In a conglomerate, noone business earns the majority of thefirm’s profits. The government usuallyallows this kind of merger, because it doesnot result in decreased competition.

Multinational CorporationsThe world’s largest corporations produceand sell their goods and servicesthroughout the world. They are calledmultinational corporations (MNCs). MNCsare corporations that operate in more thanone country at a time. They usually haveheadquarters in one country and branchesin other countries. Multinationals, whichare sometimes called transnational corpo-rations, must obey laws and pay taxes ineach country in which they operate. In the

horizontal merger thecombination of two ormore firms competingin the same market withthe same good orservice

vertical merger thecombination of two ormore firms involved indifferent stages ofproducing the samegood or service

conglomerate businesscombination mergingmore than threebusinesses that makeunrelated products

multinationalcorporation (MNC)large corporation thatproduces and sells itsgoods and servicesthroughout the world

Figure 8.6 A ConglomerateFigure 8.6 A Conglomerate

Conglomerate

Conglomerates combine diverse businesses.Competition Why don’t conglomerates generally decrease competition?



early 2000s, an estimated 63,000 multina-tional firms operated about 690,000foreign branches. They accounted for morethan $3 trillion of worldwide assets. Manymultinational corporations have operatingbudgets much bigger than most govern-ments’ budgets.

Corporations in the United States andGreat Britain operated the world’s largestmultinationals in the 1970s and early

1980s. The picture today shows manydifferent home countries for these giants,including Japan, South Korea, theNetherlands, and Italy.

Advantages of MultinationalsMultinationals benefit consumers andworkers worldwide by providing jobs andproducts around the world. They alsospread new technologies and productionmethods across the globe. Often the jobsthey provide help poorer nations gainbetter living standards for their people.

Disadvantages of MultinationalsOn the downside, many people feel thatmultinational firms unduly influence theculture and politics in the countries inwhich they operate. While some people feelthat MNCs provide much needed jobs,critics are concerned about the low wagesand poor working conditions provided byMNCs in some poorer countries. Whateverthe advantages and disadvantages, trendssuggest that MNCs will become increas-ingly visible and important in the worldeconomy in the years ahead.


Key Terms and Main Ideas1. How does a corporation differ from a sole proprietorship

or partnership?2. What is the difference between a closely held

corporation and a publicly held corporation?3. What information is required in a certificate of

incorporation?4. What is stock?5. Why must stockholders pay taxes on dividends?6. What is a merger? How do horizontal mergers, vertical

mergers, and conglomerates differ?7. Why are some corporations called multinational

corporations?

Applying Economic Concepts8. Critical Thinking Suppose you are deciding whether to

incorporate your house-cleaning business. Analyze theconsequences of this economic decision.

9. Try This Identify several sole proprietorships and partnerships in your neighborhood or town. Which ofthese businesses might benefit from incorporation?Explain your reasoning.

10. Critical Thinking How might a corporation benefit bybeing multinational?

11. Problem Solving You want to incorporate your familybusiness. Will you form a closely held corporation or apublicly held corporation? Explain your reasoning.

� Multinationalcorporations maketheir presence feltthroughout theworld.

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WW hy would a person with dreams ofrunning her own business turn to a

multinational company for help? Whywould a customer pay a fee for the privilegeof shopping at a certain store? Why wouldan organization have no intention ofearning a profit at all?

There are sound answers for all of thesequestions. As you read this section, youwill discover many kinds of organizationsthat serve many kinds of interests. You areprobably already familiar with a numberof them.

Business FranchisesIn Chapter 7, you learned about franchisesissued by government authorities. Thesefranchises give only one firm the right tosell its goods within a limited market, suchas within a national park. In business, too,a franchise signals exclusive rights. Abusiness franchise is a semi-independentbusiness that pays fees to a parentcompany. In return, the business is grantedthe exclusive right to sell a certain productor service in a given area.

Parent companies are called franchisers.The franchiser develops the products andbusiness systems. They then work with the

local franchise owners to help themproduce and sell their products.

The image that leaps to mind whendiscussing franchises is the fast-foodrestaurant. However, franchises offer awide array of goods and services, fromdiamonds to day-care centers.

business franchise asemi-independentbusiness that pays feesto a parent company inreturn for the exclusiveright to sell a certainproduct or service in agiven area

Other Organizations


ObjectivesAfter studying this section you will be able to:1. Understand how a business franchise

works.2. Identify the different types of cooperative

organizations.3. Understand the purpose of nonprofit

organizations, including professional andbusiness organizations.

Preview

� Competing restaurant franchisesoften cluster togetheralong highways.

Section FocusSome organizations exist to aidbusiness owners, consumers,producers, industries, workers, orsociety at large. Many operatewithout the aim of earning a profit.

Key Termsbusiness franchiseroyaltycooperativeconsumer cooperativeservice cooperativeproducer cooperativenonprofit organizationprofessional organizationbusiness associationtrade association



Franchising has becomepopular in recent years. Thisis because small franchisebusinesses allow owners adegree of control. At the sametime, the owners benefit fromthe support of the parentcompany. As with any otherform of business organiza-tion, franchises offer both

advantages and disadvantages.

Advantages of FranchisesFor a small business owner, a franchise canprovide advantages a completely indepen-dent business cannot. A franchise comeswith a built-in reputation. Consumers mayalready be familiar with the product andbrand of the franchise. Other benefitsinclude

1. Management training and supportFranchisers help inexperienced ownersgain the experience they need to succeed.

2. Standardized quality Most parentcompanies require franchise owners tofollow certain rules and processes toguarantee product quality.

3. National advertising programs Parentcompanies pay for far-reaching adver-tising campaigns to establish their brandnames.

4. Financial assistance Some franchisersprovide financing to help franchiseowners start their businesses.

5. Centralized buying power Franchisersbuy materials in bulk for all of their fran-chise locations. They pass on the savingsto their franchise owners.

Disadvantages of FranchisesThe biggest disadvantage of a franchise isthat the franchise owner must sacrificesome freedom in return for the parentcompany’s guidance. Other disadvantagesinclude

1. High franchising fees and royaltiesFranchisers often charge high fees forthe right to use the company name. Theyalso charge franchise owners a share ofthe earnings, or royalties.

2. Strict operating standards Franchiseowners must follow all of the rules laidout in the franchising agreement forsuch matters as hours of operation,employee dress codes, and operatingprocedures. Otherwise, an owner maylose the franchise.

3. Purchasing restrictions Franchiseowners must often buy their suppliesfrom the parent company or fromapproved suppliers.

4. Limited product line Franchise agree-ments allow stores to offer onlyapproved products.

Cooperative OrganizationsA cooperative is a business organizationowned and operated by a group of indi-viduals for their shared benefit. In otherwords, working together, the individualscan provide themselves with certainadvantages. Cooperatives, or co-ops, fallinto three main categories: consumer, orpurchasing cooperatives; service coopera-tives; and producer cooperatives.

royalty share ofearnings given aspayment

cooperative a businessorganization ownedand operated by agroup of individuals fortheir mutual benefit

� What advantages do co-ops offer consumers?

Just about any type of business can be franchised. In 1988, one California entrepreneur started a mobile autopsy business. His company has been so successful that it now offers business franchises in the United States and abroad.

FAST FACT



Consumer Cooperatives Retail outlets owned and operated byconsumers are called consumer cooperatives,or purchasing cooperatives. Consumercooperatives sell merchandise to theirmembers at reduced prices. By makinglarge purchases, consumer cooperativescan obtain goods at a lower cost. They thenpass the savings on to members. Examplesof consumer cooperatives include discountprice clubs, compact disc or book clubs,some health food stores, and housing coop-eratives. Some co-ops require members towork a small number of hours per year tomaintain their memberships. Othersrequire membership fees instead. Forexample, your local health food store mayrequire you to work 20 hours per month inorder to maintain your membership. Giantdiscount price clubs, on the other hand,require annual membership fees.

Service Cooperatives Cooperatives that provide a service, ratherthan goods, are called service cooperatives.Some service co-ops offer discounted insur-ance, banking services, health care, legalhelp, or baby-sitting services. Creditunions, or financial cooperatives, lendmoney to their members at reduced rates.

Producer Cooperatives Producer cooperatives are agriculturalmarketing cooperatives that help memberssell their products. These co-ops allowmembers to focus their attention ongrowing their crops or raising their live-stock. The co-ops, meanwhile, marketthese goods for the highest prices possible.

Nonprofit OrganizationsSome institutions function much likebusiness organizations, but do not operatefor the purpose of generating profit. Thesenonprofit organizations are usually in thebusiness of benefiting society. Nonprofitorganizations include museums, publicschools, the American Red Cross, hospitals,adoption agencies, churches, synagogues,YMCAs, and many other groups.

The government exempts nonprofitorganizations from income taxes. Manynonprofit organizations operate withpartial government support. Almost all ofthem provide services rather than goods.

Other nonprofit organizations providesupport to particular occupations orgeographical areas. These include profes-sional organizations, business associations,trade associations, and labor unions.

Professional Organizations Professional organizations work to improvethe image, working conditions, and skilllevels of people in particular occupations.Examples include the National EducationAssociation for public school and college

consumer cooperativeretail outlet owned andoperated by consumers

service cooperativecooperative thatprovides a service,rather than a good

producer cooperativeagricultural marketingcooperative that helpsmembers sell theirproducts

nonprofit organizationinstitution thatfunctions much like abusiness, but does notoperate for the purposeof generating profits

professionalorganization nonprofitorganization that worksto improve the image,working conditions,and skill levels ofpeople in particularoccupations

� What might motivate these Red Cross volunteers?

Nonprofits on a Global Scale Some nonprofit organizationsfocus on both local and global concerns. Recently, a global nonprofit organiza-tion, the Conservation International Foundation, joined efforts with one of thenation’s largest coffee retailers to promote and sell “shade-grown coffee,”which is currently grown in the Americas and other parts of the globe. Inconjunction with the coffee retailer, this nonprofit organization is supporting astyle of growing coffee that reduces the environmental impact of coffeegrowing in biologically sensitive regions. The foundation is also helping coffeegrowers sell directly to retailers, rather than through a third party. Thisarrangement brings greater profits to the coffee growers. What are the localbenefits of this program? What are the global benefits?

Global Connection

ECON_07NA_se_CH08_S4 8/3/05 12:03 PM 3

and university workers, AmericanVeterinary Medical Association for veteri-nary professionals, the American BarAssociation for lawyers, and the AmericanManagement Association for businessprofessionals.

Professional organizations keep theirmembers up-to-date on industry trends.They help them identify and follow codesof conduct. For example, the AmericanMedical Association opposes advertising. Itbelieves that doctors present a less profes-sional, authoritative, and caring image ifthey advertise for patients. Likewise, theAmerican Bar Association frowns uponlaw firms that advertise their services forpersonal injury complaints.

Business Associations Business associations promote the collec-tive business interests of a city, state, orother geographical area, or of a group ofsimilar businesses. They may also addresscodes of conduct, just as professionalassociations do.

Your local Better Business Bureau, spon-sored by local businesses, is a nonprofitgroup. It aims to protect consumers bypromoting an ethical and fair marketplace.Your state’s or city’s chamber of commerceworks to attract new businesses to yourarea.

Trade AssociationsNonprofit organizations that promotethe interests of particular industries arecalled trade associations. The AmericanMarketing Association, for example, aimsto improve marketers’ and marketingfirms’ images. All kinds of industries, frompublishing to food processing, enjoy thesupport of trade associations.

Labor UnionsA labor union is an organized group ofworkers whose aim is to improve workingconditions, hours, wages, and fringebenefits. In the next chapter, you will readabout the history and role of labor unions.


business associationnonprofit organizationthat promotescollective businessinterests for a city,state, or othergeographical area, orfor a group of similarbusinesses

trade associationnonprofit organizationthat promotes theinterests of a particularindustry


Key Terms and Main Ideas1. How does a business franchise work?2. What are royalties?3. What is a cooperative?4. How do consumer cooperatives, service cooperatives,

and producer cooperatives differ?5. What is a nonprofit organization?6. What is the purpose of professional organizations,

business associations, and trade associations?

Applying Economic Concepts7. Critical Thinking Do you think the advantages of

owning a franchise outweigh the disadvantages? Explain your reasoning.

8. Critical Thinking Do you think professional andbusiness associations benefit consumers? Explain yourreasoning.

9. Try This Make a list of the types of organizationsdescribed in this section. Next to each type, write downan example with which you are familiar.

Many nonprofit �organizations serve business interests.

R

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205

Business and EthicsWhen George Abbot Morison retired to the

family farm in Peterborough, NewHampshire, in the 1940s, the state had highunemployment and very little industry. Morisondecided to do something that would create newjobs and help revitalize the state’s industrialbase. He had read about HitchinerManufacturing Company, Inc., a small companythat specialized in producing metal parts.Morison saw a growing need for precision metal parts and realized thatHitchiner’s metal casting process had great commercial potential. In 1949, he andhis son John H. Morison bought the company, and John became president.

Rights and Responsibilities For the Morisons’ investment to pay off, they had todevelop the company so that it would make money. To do so, they benefited fromtheir rights to enter into contracts, to use the courts to enforce their contractualrights, and to receive equal protection of law.

Hitchiner also had responsibilities. It had to comply with health and safetylaws to reduce the chances of on-the-job injuries. The company had to payemployees at least minimum wage and had to make contributions to the stateworkers compensation fund. It also had to pay taxes on its profits.

Most importantly, the company strove to maintain “the highest standards ofethical and good-spirited conduct.” Key points of its ethics policy appear in theStatement of Principles and Code of Conduct on this page.

Helping Employees Morison realized that the company’s success depended on hav-ing an educated and trained work force. Hitchiner began sending employees forcourses in many disciplines, from basic literacy and mathematics to statisticalprocess control, for apprenticeships in specialized technical fields, and for busi-ness-management seminars. In 1953, Hitchiner became one of the firstAmerican companies to give its employees an ownership interest in thecompany.

Continued Success Today, Hitchiner markets its metal castings andlicenses its technology and processes worldwide. Its current sales totalabout $200 million a year.

Applying Economic Ideas1. (a) How were the Morisons able to help themselves and help their

community at the same time? (b) What were their rights and responsi-bilities?

2. Analyze Hitchiner’s ethics policy. Why was this policy an importantpart of its business success?

Entrepreneurs

Statement of Principles and Code of Conduct

We embrace responsibility.

We act in good faith, honestly and fairly.

We honor the law.

We nurture achievement.

We deliver quality and value.

We Respect the Earth.

We advance technology.

We are good citizens.

We guard our integrity.

� Hitchiner uses the latest tech-nologies in metal casting.

ECON_07NA_se_CH08_CS 6/20/05 1:21 PM Page 205

206

Chapter SummaryChapter Summary

AA summary of major ideas in Chapter 8 appearsbelow. See also the Guide to the Essentials

of Economics, which provides additional review andtest practice of key concepts in Chapter 8.

Section 1 Sole Proprietorships (pp. 185–188) Sole proprietorships are the most common form ofbusiness in the United States. They are easy to estab-lish and offer owners both the benefits and draw-backs that come with full control of the business.

Section 2 Partnerships (pp. 190–193) Partnerships let individuals pool their resources andshare responsibility in the forming and running of abusiness. Three types of partnerships are the generalpartnership, the limited partnership, and the limited liability partnership.

Section 3 Corporations, Mergers, and Multinationals (pp. 195–200)

Corporations are complex business organizations thatcan be owned by a few or a great many individuals.Mergers combine corporations in various ways toform even larger businesses. Some corporate enter-prises, the multinationals, span the globe.

Section 4 Other Organizations (pp. 201–204) Business franchises are business organizations thatgive business owners support from a parent compa-ny. Other types of organizations serve to aid busi-ness owners, consumers, producers, industries,workers, or society at large. Many operate as non-profit organizations.

Key TKey TermsermsMatch the following definitions with the termslisted below. You will not use all of the terms.

1. the combination of two or more firmsinvolved in different stages of producingthe same good or service

2. the legally bound obligation to pay debts3. a legal entity owned by individual stock-

holders4. a business owned and managed by a single

individual5. a retail outlet owned and operated by

consumers6. a business combination merging more

than three businesses that make unrelatedproducts

7. share of earnings given as payment8. a form of partnership in which only one

partner is required to be a general partner

Using Graphic OrganizersUsing Graphic Organizers9. On a separate sheet of paper, copy the

flowchart below. Use the flowchart toorganize information about how a businessmight grow. Complete the flowchart bywriting descriptions and examples for eachcell in the chart. You may add cells to thechart.

liabilitycorporationconglomerategeneral partnershipsole proprietorshipvertical merger

limited partnershiproyaltiesnonprofit organization

consumer cooperative

Sole

proprietorship

Conglomerate

Decision to

incorporate

ECON_07NA_se_CH08_CA 8/3/05 12:06 PM Page 206

207

Reviewing Main IdeasReviewing Main Ideas10. List three trade-offs of running a sole proprietorship.11. What are the advantages of forming a partnership

when creating a new business?12. What benefits do corporations bring to their

stockholders?13. Compare the advantages and disadvantages of

opening a business franchise. 14. Describe the difference between vertical mergers,

horizontal mergers, and conglomerates.15. What are multinational corporations?16. What are the advantages of cooperatives?17. Identify and evaluate the ordinances and regula-

tions that apply to the various types of businessesdescribed in the chapter.

Critical ThinkingCritical Thinking18. Drawing Conclusions Suppose you are opening a

new business. List three choices that you wouldneed to make to decide what style of businessorganization to form.

19. Analyzing Information How are the three types ofcorporate combinations usually affected byantitrust policy?

20. Making Comparisons Compare the different lev-els of individual liability among the three maintypes of business organizations: sole proprietor-ships, partnerships, and corporations.

21. Drawing Inferences How can stockholders influ-ence the actions of the corporation they own?

Problem-Solving ActivityProblem-Solving Activity22. Recommend a cooperative for your community.

Describe the type of cooperative it would be(consumer, service, or producer) and how yourcommunity could benefit from it.

Skills for LifeSkills for LifeUsing the Internet for Research Review the stepsshown on page 194. Then complete the followingactivity.

Mergers lead to the formation of new businessorganizations. Corporate mergers sometimes havefar-reaching effects on the companies and employeesinvolved. Use the steps below to prepare a summaryof one recent corporate merger and its effects on theemployees of the companies involved.

23. Prepare your search. Identify one recent mergerthat has taken place. The Federal TradeCommission (FTC) oversees all mergers to makesure that they do not interfere with competition.Begin by visiting the FTC Web site. (a) How canyou use the Internet to obtain information aboutthese mergers? (b) List three key terms you mightuse in your search.

24. Refine your search. Once you have identified onemerger to research, you need to refine yoursearch. (a) How can you refine your search? (b) Identify two Internet sources that containspecific information about the merger.

25. Analyze your results. After you have located spe-cific documents referring to the merger you haveselected, you can begin to analyze the informa-tion. Print the documents if possible. (a) Look atthe source of your documents. Could the sourcebe biased? (b) What effect has the merger had onemployees?

Identifying Alternatives Revisit your list oflocal businesses. Pick one and recommend a particular business form for it. Draft a proposaloutlining why you think the business or theowner(s) would benefit from your plan.

Economics JournalProgress Monitoring Online

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Many people dream of starting their own businesses. Here’syour chance to practice doing just that. In this simula-tion, you and your classmates will form a partnership to

run a small business. You plan to sell a line of souvenir baseballcaps out of a rented vendor’s cart in a nearby shopping mall.

Each partnership group will workindependently. First, you will calculateyour monthly costs. Then, you will priceyour product. Next, you will try to pro-ject how you would do in the first monthof business. At the end of the simulation,all the partnerships will compare results.

MaterialsPaperCalculator

Preparing the SimulationStep 1: Form groups of four to six people.Each group will be a separate businesspartnership.

Step 2: Choose a name for your company.

Conducting the Simulation Step 1: Now, get started with your businessplan! You and your partners already have$3,000 in start-up capital. Before you spendany of it, you need to figure out what yourexpenses will be. On a piece of paper, makea monthly expenses chart like the one onthe next page. As you figure out eachmonthly expense, record it on the chart.

Business Loan Should you work withinyour $3,000 budget, or should you borrowmoney? You have learned that the bestsmall-business loan that you qualify forcharges an interest rate of 10% andrequires monthly payments over 5 years:

$5,000 loan: $106 per month$10,000 loan: $212 per month

Vendor License Your community requiresyou to get a vendor license. This will costyou $60 per year.

Banking Costs You need a business check-ing account. This will cost $12 per month.

Business Space The monthly rental costsfor the vendor’s cart depend on size andlocation:

Cart in well-traveled, central location: $2,000 per month

Cart in low-traffic area: $600 per month

Advertising Should you advertise? If youthink you’ll get enough “walk-in” traffic in themall, you may not need to. Or, you may wantto be more aggressive and use advertising tobring people directly to you:

Medium-sized ad in the major city newspaper: $400 per week

Small ad in neighborhood newspaper:$40 per week

Labor Should you and your partners workthe cart, or should you hire a salesperson?Your vendor’s cart will need to be staffed

� Careful planning will improve your business’s chances of success.

EconomicsSimulation Be an Entrepreneur!Be an Entrepreneur!

208

ECON_05_se_SIM_Un03 6/20/05 8:20 AM Page 208

from 9:30 A.M. to 9:30 P.M. If you hire a salesperson, youwill need to pay wages plus another 25 percent forbenefits and taxes. Use the following formula:

Number of hours per month ✕ hourly wage ✕ 1.25 =total monthly labor cost

Step 2: Now you need to make decisions about yourinventory. How many caps will you order from themanufacturer? Refer to the catalog page at right todetermine which kind you’ll order. Make an order/pric-ing form like the one on this page, and record thequantities and costs of the caps you want to buy.

Step 3: Next, you need to set a price for your caps.Keep in mind what the caps cost you and what youthink people will pay for them. Add the prices to theorder/pricing form and calculate your profit per cap.

Step 4: Finally, you need to determine how many capsyou need to sell in order to make a profit after havingpaid your monthly expenses. Assume, for the moment,that you sell equal numbers of each cap. How manycaps do you need to sell each month to break even?

How many do you need to sell to make a profit largeenough to pay salaries to you and your partners?

Step 5: Present your business plan to the rest of yourclass.

209

After all the partnerships in your class havepresented their business plans, answer the following questions.

1. Which business plan was the most cautious?Which group took the most chances?

2. Where do you get the greatest savings foradditional quantities—the least-expensive ormost-expensive caps?

3. Suppose that you began the first month withequal numbers of silk-screened and embroi-dered caps. At the end of the month, you soldout of caps with silk-screened designs but had20 embroidered caps left. What would this tellyou about your market?

4. Formulating Questions What other informa-tion would you need if you were actually goingto set up a small business?

Simulation AnalysisSimulation Analysis

Item Number Quantity Price per cap

Style 202 100 $6.05Embroidered 500 $5.601 1,000 $5.40

Good Quality! Cotton caps with plastic snap tabsColors: khaki, green, blue, charcoal, red

Item Number Quantity Price per cap

Style 101 100 $2.53Silk Screened 500 $2.371 1,000 $2.09

Style 102 100 $5.20Embroidered 500 $4.821 1,000 $4.60

Best Quality! Cotton twill caps with adjustableleather strap and brass buckleColors: black, white, navy blue, pine green

ExpenseMonthly Expense

Banking Costs $

Loan Repayment $

Vendor’s License $

Business Space $

Advertising$

Labor$

Total Monthly Expenses $

Monthly Expenses

for Cap Business

ECON_05_se_SIM_Un03 6/20/05 8:20 AM Page 209

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