Chapter 3:

Section 1:

3 Types Sole-Proprietorships Partnerships Corporations

Sole Proprietorship Definition: a

business owned and run by one person

Easy to form; not a lot of requirements

Sole Proprietorship Advantages Easy to start up/easy to

get out Relatively easy to

manage; no consulting No sharing of profits No separate business

income tax; just personal income tax

Personal psychological satisfaction

Disadvantages Owner has unlimited

liability or fully responsible

Difficult to raise financial capital

Could be difficult to operate efficiently

Owner sometimes has limited managerial experience

Difficult to attract qualified employees

Limited life

Partnerships Definition: jointly

owned by two or more people

Two Types:

1) general: all partners are responsible for management and finances

2) limited: at least one person is not active in the daily operations

Partnerships Advantages Easy to start Easy to manage Lack of specific

taxes Easier to attract

financial capital A little more efficient Easier to attract top

talent

Disadvantages Partners are

responsible for one another; limited liability does exist, however

Limited life Potential for conflict

b/t partners

Corporations

Definition: a form of business organization recognized by law as a separate legal entity having all the rights of an individual

Forming a Corporation

Very formal Must file for permission with government If approved, a charter is granted Money from stock and shareholders is

used to set up corporation If profitable, the corp. can issue a

dividend

Corporate Structure

Stockholders’ rights depends on the type of stock bought

Common Stock: basic ownership of a corp.. One vote for each share used to elect board of directors

Preferred Stock: nonvoting ownership shares; get their dividends first and their investment back first if corp fails

Corporation Advantages Easier to raise financial

capital; can sell more stock or borrow through bonds

Directors can hire managers

Limited liability for owners

Unlimited ilfe: can exist with different owners

Easy to transfer ownership

Disadvantages Difficulty and expense of

getting charter Owners have little say in

how it’s ran Double taxation Subject to more

government regulation

Section 2:

Can grow in 2 ways:Reinvesting profitsmerger

Growth Through Investment Use revenues to invest in factories,

machinery and new technologies Can use an income statement to show

processReport that shows sales, expenses and

profits

Estimating Cash Flows 1st: figure out total sales (revenue) 2nd: find net income: subtract expenses and

taxes from total sales (loans, salaries, depreciation, capital) Depreciation is a non-cash charge b/c

money doesn’t go anywhere else 3rd: Find cash flow, the sum of net income

and non-cash chargesreal measure of profits for the business b/c it represents the total amount of new

funds

Reinvesting Cash Flows

Can be paid to owners Can reinvest in company

Growth Through Mergers

Reasons for Merging:Grow fasterBecome more efficient (both in production

and financially)Acquire or deliver a better product

Types of Mergers

Horizontal merger: Occurs when two companies that

make the same product come together (2 banks)

Vertical Merger: occurs when firms involved in different

steps of manufacturing or marketing join together (car company merging with a tire company)

Conglomerates Has at least 4

businesses, each making unrelated products, none of which are responsible for the majority of sales-don’t put all eggs in 1 basket

http://www.pg.com/en_US/brands/all_brands.shtml

Multinational Has manufacturing or

service operations in a number of countries Has to obey all laws,

pay taxes Can be helpful in

creating jobs and generating tax revenue

Can hurt by paying low wages, exporting resources or blocking local business development

Are They Always What They Seem?

http://www.youtube.com/watch?v=M5uYCWVfuPQ

https://www.youtube.com/watch?v=ysVSe8ottJU

Section 3

Non-profit: promotes the collective interests of members rather than seeking financial gain for owners

Community and Civic Organizations Types of nonprofit (schools, churches

welfare groups) Similar to profit seeking, but do not issue

stocks, pay dividends or income taxes Use profit to further work

Cooperatives Also called co-op: voluntary association

of people formed to carry on some type of econ activity that will benefit members. (type of non-profit)

3 types:Consumer (buys things in bulk to try and

offer lower prices to members)Service (offers services to members)

Ex. Credit UnionProducer (helps members promote or sell)

Labor, Professional and Business Organizations Labor Unions:

organization of workers formed to represent members interests in employment mattersParticipate in

collective bargaining: negotiation with management over issues

Can also pressure government

Are Union Needed?

http://www.youtube.com/watch?v=afgjmsaTf8A

http://www.youtube.com/watch?v=YIwcLcH5wjg

Professional Associations: Work to improve working conditions, skill levels and public perception (Ex. AMA)

Business Associations: promote interests of businessesEx. Chamber of CommerceIndustry or Trade Associations: represent

specific kinds; interested in shaping gov’t policy that affects them

Some protect consumer; Better Business Bureau

Government (non profit) Direct Role:

Supplies good or service that competes with private business (Ex. TVA, FDIC and U.S. Postal Service)

Organized as government owned and operate similar to private bus.

Profits go back into business and losses covered by Congress

Local examples: police, education, etc.

Indirect Role Acts as umpire to make

sure market economy operates smoothly

Gives people power in the market

Ex. Social Security, financial aid for college

Ex. Regulates public utilities (water/electric)○ Not a lot of competition