Monday, April 20

• Welcome back! • Bellringer: – Give two examples of American companies that

do business overseas. – Give two examples of foreign companies that do

business in the United States. – For full credit, write one sentence describing each

company and the kind of business it does (four sentences total).

Test analysis

• 28 tests included• Adjusted for 3 questions• 1st block average: 75 percent

1st block

Business organizations

• Economists categorize businesses according to the way they are organized– Where do you work?– Who is your boss?– Who are your co-workers?– Do you work for yourself?– Who are your employees?– How are the results of your efforts distributed?

Business organizations

• Entrepreneurs have to decide what kinds of business organization best suits their needs– Business organization: an establishment formed

to carry on commercial enterprise

Business organizations

Sole proprietorships

Partnerships

Corporations, mergers,

multinationalsOther organizations

Sole proprietorships

• Sole proprietorship: a business owned and managed by a single individual– Examples:

• Most common form of business in the United States– 75 percent of businesses

• But they’re small, accounting for 6 percent of sales in the U.S.

• Why is the sole proprietorship so popular?

Sole proprietorships

• Advantages– Sole receiver of profit• Owner must pay income taxes, but after that,

she keeps it all! No sharing with anyone else!– Full control• Lots of freedom; entrepreneurs can run the

business as they wish• Have flexibility to respond to market changes,

seize new opportunities

Sole proprietorships

• Advantages– Relatively few regulations• The least-regulated form of business organization–Examples of regulations on SPs?

• Zoning law: Law in a city or town that designates separate areas for residency and for business–May forbid entrepreneurs from operating out

of their homes

Sole proprietorships

• Advantages– Easy in … Almost anyone can start one up!• Authorization: Business license of some sort• Site permit: Certificate of occupancy, unless

operating out of home• Name: Business name, unless using own name

– Easy out!• Just pay debts, and move on to something else

Sole proprietorships

• Disadvantages– Unlimited personal liability: Lots of risk!• Liability: the legally bound obligation to pay

debts• In a sole proprietorship, the owner may have to

sell personal property to cover debts if the business fails• Business debts can ruin the owner’s personal

finances

Sole proprietorships

• Disadvantages– Limited access to resources• Physical capital: Banks may not loan to you when you’re

just getting started• Human capital: You may not be good at managing all of

the aspects of the business– Lack of permanence• Lots of turnover• Employees are hard to keep, because SPs have a hard

time supplying fringe benefits: payment other than wages or salaries

Sole proprietorships

• Disadvantages– Lack of permanence• Lots of turnover• Employees are hard to keep, because SPs have

a hard time supplying fringe benefits: payment other than wages or salaries

But …

• What if you can’t, or don’t want, to do it all yourself?

Partnerships

• Partnership: a business organization owned by two or more persons who agree on a specific division of responsibilities and profits

• Account for 7 percent of all businesses• Account for 5 percent of all sales

General partnership:

partners share equally

in both responsibility and liability

Limited liability

partnership (LLP): all

partners are limited

partners

Limited partnership:

only one partner is

required to be a general

partner

Partnerships

General partnership

• Most common type of partnership• Split responsibilities with someone else• Split liabilities with someone else• Many GPs could operate as SPs– Family businesses, doctors/lawyers, small

retail stores, etc.

Limited partnerships

Partner 1 Partner 2

Invests money?

Yes Yes

Has control? Yes No

Risk level Has unlimited personal

liability for business losses

Can lose only initial

investment

Limited liability partnerships

• Newer form of partnership• All partners are limited partners• All partners are shielded from personal

liability in certain situations• Mostly reserved for professional operations,

like doctors/lawyers, etc.

Partnerships

• Advantages– Ease of start-up• Articles of partnership: A partnership

agreement–Why is it important?

• Uniform Partnership Act (UPA): act ordering common ownership interests, profit and loss sharing, and shared management responsibilities in a partnership

Partnerships

• Advantages– Ease of start-up

• Like SPs this way!• But how do you know who is responsible for what jobs?

• Articles of partnership: A partnership agreement–Why is it important?

• Uniform Partnership Act (UPA): act ordering common ownership interests, profit and loss sharing, and shared management responsibilities in a partnership

Partnerships

• Advantages– Shared decision-making and specialization• You my be good at one thing (style prediction,

advertising), but not another (production efficiency, human resources)

Partnerships

• Advantages– Larger pool of capital• Each partner’s assets improve the firm’s ability to

borrow for operations or expansion–Assets: money and other valuables belonging to

an individual• Better employee retention

– Taxation• No business taxes! Partners pay tax only on their

income

Partnerships

• Disadvantages– Unlimited liability• Partners are at risk for others’ partners actions

– Potential for conflict• Profit/loss … but also:• Work habits• Goals• Management styles• Ethics • Communication is key!

Corporations

• Corporation: a legal entity owned by individual stockholders– Stock: a certificate of ownership in a corporation

• Most complex form of business organization• Legally, a corporation is like an individual:– It pays taxes– It can engage in contracts– It can sue and be sued– … and it can donate to political causes!

Corporations

• Corporations make up 20 percent of businesses

• Corporations sell 90 percent of all products sold in the U.S.

• Corporations generate about 70 percent of the net income earned in the U.S.

Corporations

• Corporations are classified by the nature of their ownership:– Closely held corporations issue stock only to a few

people, often family members• Stock generally stays within that family

– Publicly held corporations sell stock on the open market• Anyone can buy it!

Corporate structure: Know your role

• Stockholders, shareholders: They own the company, and they make money when it profits

• The board of directors: It makes all of the major decisions of the corporation; stockholders expect directors to make the corporation profitable

• Corporate officers: Run the corporation, oversee production, and hire and fire managers and other employees

Corporate structureStockholders elect a board of directors …

The board of directors appoints corporate officers …

Corporate officers hire managers and employees

Advantages of incorporation

– Incorporation: Forming a corporation• The corporation offers some advantages for

stockholders:– Limited liability for owners: Stockholders

only risk what they invest in the business– Transferable ownership: Stockholders have

flexibility to sell their shares to others

Advantages of incorporation

• Incorporation offers some advantages for the business:– Ability to attract capital• Can sell stock shares to raise money• Can sell bonds, formal contracts to repay

borrowed money with interest at fixed (regular) intervals

– Long life: Because it has its own entity, it can survive the death of its owner … it can continue on indefinitely unless otherwise limited in advance

Disadvantages to incorporation

• But incorporation also has down sides–Difficulty and expense of start-up• Corporate charters can be tough to establish• Certificate of incorporation: license issued by

state government to form a corporation

Disadvantages to incorporation

• But incorporation also has down sides–Double taxation• Shareholders have to pay personal income tax

on dividends, the portion of corporate profits paid out to stockholders• Upon the sale of the shares, stockholders must

pay capital gains tax on the profit (if any)– The founders may lose control of the corporation

to the board of directors and/or managers

Disadvantages to incorporation

• But incorporation also has down sides– More legal requirements and regulations• Government interest in accurate info for

investors• Must hold annual meetings for shareholders• Must keep careful records of all business dealings• Publicly held corporation must file quarterly and

annual reports with the Securities and Exchange Commission (SEC), the federal agency that regulates the stock market

Corporate combinations

• Sometimes it makes sense for a corporation to merge with other companies

• Three types of combinations:

Conglomerates

Vertical mergers

Horizontal mergers

• Horizontal merger: the combination of two or more firms competing in the same market with the same good or service

• Mostly desired to increase efficiency• Chrysler Corporation + Daimler-Benz =

DaimlerChrysler• Federal government watches these carefully to

prevent monopolies from forming–Rockefeller and Standard Oil

Horizontal mergers

• Vertical merger: the combination of two or more firms involved in different stages of producing the same good or service

• Allows firms to control all phases of production

• Firms buy their suppliers• Federal government generally

allows them because they don’t usually harm competition– Carnegie Steel Company: Ore mines,

furnaces and mills, shipping and railroad lines

Vertical mergers

• Conglomerate: business combination merging more than three businesses that make unrelated products

• No one business earns a majority of the firm’s profits

• Federal government generally allows them because they don’t usually harm competition

Conglomerates

Multinational corporations

• Multinational corporation (MNC): large corporation that produces and sells its goods and services throughout the world

• Also known as transnational corporations• Headquarters in one country, branches in others• Must obey laws and pay taxes in each country where

they operate• 63,000+ MNCs account for +$3 trillion in assets• Many have operating budgets larger than most

governments

Multinational corporations

Pros Cons• Provide jobs around the world

• Undue influence over culture and politics in foreign countries?• Make products available

around the world • Many foreign workers lack protections offered in U.S.• Jobs may be low wage• Working conditions may be poor

• Spread new technology and production methods around the world• Help poorer nations gain better living standards

Other organizations

• Business franchise: a semi-independent business that pays fees to a parent company in return for the exclusive right to sell a certain product or service in a given area– Examples:

Business franchises

Franchise owners produce and deliver

products to local markets

Franchisers • Develop the products

• Develop the business system• Work with local owners to support production and

sales

Business franchises

• Advantages–Management training and support– Standardized quality–National advertising programs– Financial assistance, especially financing to

start out–Centralized buying power: Raw materials

are cheaper when bought in bulk

Business franchises

• Disadvantages–High franchise fees and royalties: shares of

earnings given as payment– Strict operating standards–Purchasing restrictions: Franchise owners

are restricted to using certain suppliers– Limited product line: Stores may sell only

approved products

Cooperative organizations

• Cooperative: a business organization owned and operated by a group of individuals for their mutual benefit

Consumer cooperative:

retail outlet owned and operated by

consumers

Service cooperative:

cooperative that provides a service, rather than a good

Producer cooperative: an agricultural

marketing cooperative that helps members sell their products

Nonprofit organizations

• Nonprofit organization: institution that functions much like a business but does not operate for the purpose of generating profits

• Usually in the business of benefitting society– Examples:

• Government exempts NPs from income taxes• Many NPs operate with partial government

support• Almost all provide services instead of goods

Nonprofit organizationsProfessional organization: works to improve the image, working conditions, and skill levels of people in particular occupations

Business associations: promotes collective business interests for a city, state, or other geographic area, or for a group of similar businesses

Trade associations: promotes the interests of a particular industry

Labor unions: an organization of workers that tries to improve working conditions, wages, and benefits for its members

Homework, part 1

• Create a web diagram on the business organizations we have discussed.

• You should have 19 items added to this topic.

Business organizations

Homework, part 2• Write a paragraph spotlighting a business operating here in

Auburn.• Make at least three specific references to material we have

covered over the past two lessons. Consider:– Is the business for-profit or nonprofit?– What sort of business organization is it? How do you know?– What goods and/or services are offered? – Advertising, branches, liability, management, ownership,

etc. • This part is due Wednesday.