Business Forms & Competition

Review Answers

SOLE PROPRIETORSHIP

• A Sole Proprietorship is the most common form of business.

• It’s owned and controlled by ONE person.

• It makes up 40% of all businesses in the U.S.

Sole Proprietorship

ADVANTAGES DISADVANTAGES

• Easy to get started• Few regulations• Doesn’t have to share

any profits• Doesn’t have to pay

business income tax

Unlimited Liability Difficulty to raise

money Limited life

PARTNERSHIP:

A business jointly owned by two or more people.

Partnership

ADVANTAGES DISADVANTAGES

• They bring in different ideas and different areas of expertise.

• Access resources• Few regulations• Easy to open and

close

Each partner is responsible for each other and how well the company does.

Limited life Potential conflict

between partners

General Partnership- partnership where each partner is liable for all business debts and losses

Limited Partnership- at least one partner is not involved in the day-to-day running of a business and is only liable for the funds he or she invested

Limited Liability Partnership- partnership where all partners are limited partners and not responsible for the debts and other liabilities of the other partners

A Corporation is a business owned by stockholders and is recognized by laws as a separate entity.

You need a LICENSE to form a corporation.

Stockholders are the owners of a corporation.

CORPORATION

ADVANTAGESCorporations have a lot of money.

◦ 18.2% of all corporations profit more than $1 million/year

• Has professional leadership.– This allows for higher profits and greater

growth.Two other advantages are stable ownership

and very responsible.

Corporations

DISADVANTAGESCorporations charters are hard to obtain because of START UP COSTS

Owners DO NOT have direct control over business decisions.

Corporations are subject to DOUBLE TAXATION!

Corporations are also subject to multiple REGULATIONS that smaller businesses are not.

Corporations

• A Franchise is a business that licenses the right to SELL ITS products in a given area.

• A franchisee is when a person buys the rights to sell the parent company’s products.

Franchise

Businesses would merge for two reasons1. The desire for the business to

become bigger.2. Efficiency - Economies of Scale: the

cost of production falls as producer grows.

Business Mergers

A Horizontal Merger is combining two or more firms that produce the same kind of product or service.

A Vertical Merger is combining firms involved in different steps of manufacturing a good.

• a firm that has at least four businesses, each making unrelated products.

CONGLOMERATES

GE

– a large corporation with branches in several countries.◦Multinationals helped developing nations by…

◦Multinationals hurt workers in the U.S.

Multinational Corporations

• A COOPERATIVE is a business operated for the shared benefit or the owners, who are also its customers.

• THREE TYPES OF CO-OPS:–Associated Press (News Co-Op)

–Sunkist Growers (Farmers Co-Op)

–BJ’s (Consumer Co-Op)

Cooperative

• Non-Profit Organizations acts like a business organization.

• It’s purpose is usually to BENEFIT SOCIETY.–Amnesty International–Red Cross–UNESCO–Salvation Army

Non-Profit Organization

Government Monopoly Technological Monopoly

Natural Monopoly Geographic Monopoly

TYPES OF MONOPOLIES

When the costs of production are lowest if only one firm provides output.

i.e. Water Companies

When a firm controls a manufacturing method, invention or a type of technology.

i.e. Apple® Patents

When there are no other producers or sellers within a given region.

i.e. Buffalo Sabres

When the government either owns and runs the business or authorizes only one producer.

i.e. the Post Office

There are five conditions:1. MANY BUYERS & SELLERS - no one can dominate2. STANDARDIZED PRODUCTS - no quality

differenceINDEPENDENT BUYERS/SELLERS - competition reduces prices4. WELL INFORMED BUYERS/SELLERS - a weakness*5. FREEDOM TO ENTER/EXIT THE MARKET - anyone can enterThe closest example of perfect competition is FOOD.

Pure/Perfect Competition

• Monopolistic competition is different as it:OFFERS SIMILAR BUT NOT STANDARD PRODUCTS.

• Four ways monopolistic competition tries to gain business through non-price competition:– Many buyers and sellers– Similar but differentiated products– Limited control of prices– Freedom to enter/exit the market

• Uses DIFFERENTIATION to distinguish products.

Monopolistic Competition

• An oligopoly is where a few companies control a large portion of a market.

• Typically the four largest companies total 40% of a given industry.–Movies, Cereal, Cell Service Providers…

Oligopoly

A CARTEL is an organization of COMPANIES and COUNTRIES that agree to act together to set PRICES and limit PRODUCTION.

OPEC

Cartel

ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES

Price Maker

A business that can set prices without concern over competitors

Barrier to Entry

Keeps new businesses from entering a market