Economics
Chapter 8
Types of Business Organizations
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Economics
Chapter 8
Chapter 8: Types of Business Organizations
KEY CONCEPT
• Most of the producers in a market economy are business organizations, commercial or
industrial enterprises and the people who work in them. The purpose of most business
organizations is to earn a profit.
WHY THE CONCEPT MATTERS
• Businesses vary in size and are organized differently. The American free enterprise system
allows producers to choose the kind of business organization that best suits their purpose.
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Economics
Chapter 8
Section-1
Sole Proprietorships
The Characteristics of Sole Proprietorships
KEY CONCEPTS
• Business organizations—produce goods, provide services
— purpose of most is to earn profit
— supply most products in market economy; provide jobs, income; pay taxes
• Sole proprietorship—owned and managed by single person
— Make up 70 percent of U.S. businesses, but generate only 5 percent of
all sales
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Economics
Chapter 8
The Characteristics of Sole Proprietorships
EXAMPLE: Bart’s Cosmic Comics
• Steps Bart followed to set up and run a new business
— raised funds to rent space, stock store through savings, loans
— obtained licenses, site permit; registered name
— ran advertisements, promotions to get customers
— paid back loans; began earning profit; expanded
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Economics
Chapter 8
Sole Proprietorships: Advantages and Disadvantages
KEY CONCEPTS
• Not governed by as many regulations as other types of businesses
• Have limited life—close if owner dies, retire, or leaves business
• Owners have unlimited liability—responsible for all losses, debts
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Economics
Chapter 8
Sole Proprietorships: Advantages and Disadvantages
Advantages: Sole Proprietorships
•
•
•
•
Easy to open or close as long as owner settles all bills
Must meet few regulations; possibly zoning, labor laws for employees
Owner makes own decisions, controls business; personal satisfaction
Owner keeps all profits
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Economics
Chapter 8
Sole Proprietorships: Advantages and Disadvantages
Disadvantages: Sole Proprietorships
• Have limited funds, especially at start-up
• Have limited life
• Have unlimited liability—owner personally responsible for all debts
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Economics
Chapter 8
Mary Kay Ash: Going It Alone
Building a Business
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•
•
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•
Ash decided to create business that would reward working women
Mary Kay, Inc. sells cosmetics, other products at in-home parties
In first year, 1964, sales exceeded $198,000
Incentives to consultants include pink Cadillacs, diamond jewelry
In 2005, 1.6 million consultants in 30 countries had $2 billion sales
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Economics
Chapter 8
Reviewing Key Concepts
Explain the relationship between the terms in each of these pairs:
• business organization and sole proprietorship
• limited life and unlimited liability
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Economics
Chapter 8
Section-2
Forms of Partnerships
The Characteristics of Sole Proprietorships
KEY CONCEPTS
• Partnership—business co-owned by two or more people
— partners agree on division of responsibilities, profits, and losses
• Found in all areas of business
— very common in professional and financial services
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Economics
Chapter 8
The Characteristics of Sole Proprietorships
Type 1: General Partnerships
• General partnership—most common type
• Partners share responsibilities, profits, debts, losses equally
— partnership agreement can specify otherwise
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Economics
Chapter 8
The Characteristics of Sole Proprietorships
Type 2: Limited Partnerships
• Limited partnership—at least one limited partner
— not involved in running business
— liable only for funds he or she invested
• Must have general partner who runs business, is liable for all debts
— money for business comes from limited partners
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Economics
Chapter 8
The Characteristics of Sole Proprietorships
Type 3: Limited Liability Partnerships
• Limited liability partnership (LLP)—all partners are limited
— not responsible for liabilities of other partners
• Not all businesses can register as LLPs
— only those in which malpractice can be an issue
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Economics
Chapter 8
Partnerships: Advantages and Disadvantages
KEY CONCEPTS
• Advantages, disadvantages similar to those of sole proprietorships
• Some differences because owners work together
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Economics
Chapter 8
Partnerships: Advantages and Disadvantages
Advantages: Partnerships
•
•
•
•
•
Easy to start up and dissolve
Few regulations: legal agreement; Uniform Partnership Act (UPA)
More funds means easier to get loans, attract employees
Joint decision making: partners bring different perspectives
Partners can specialize, promoting efficiency
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Economics
Chapter 8
Partnerships: Advantages and Disadvantages
Disadvantages: Partnerships
• Unlimited liability
— partners risk personal savings and property to cover debts
• Potential for conflict if many partners must agree on decisions
• Limited life—if partner leaves or joins new agreement must be drawn
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Economics
Chapter 8
Reviewing Key Concepts
Explain the relationship between the terms in each of these pairs:
• partnership and general partnership
• limited partnership and limited liability partnership
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Economics
Chapter 8
Section-3
Corporations, Mergers, and Multinationals
Characteristics of Corporations
KEY CONCEPTS
•
•
•
•
•
Corporation—stockholders have rights to profit, limited liability
Stock—shares of ownership in a corporation
Dividend—part of a corporation’s profit paid out to stockholders
Public company—issues stock that can be freely bought and sold
Private company—controls who can buy or sell its stock
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Economics
Chapter 8
Characteristics of Corporations
EXAMPLE: F & S Publishing, Inc.
• F & S owners have no personal liability; only assets of business at risk
• Owners hire lawyers to file legal documents to incorporate
• State government grants corporate charter:
— registers name, address, purpose; specifies amount of stock can sell
• Stockholders elect board of directors which hires corporate officers
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Economics
Chapter 8
Corporations: Advantages and Disadvantages
KEY CONCEPTS
• Bond—contract issued by corporation
— promises to repay borrowed money, plus interest on fixed schedule
• Limited liability—owner’s liability for debts and losses is limited
• Unlimited life—corporation continues to exist even if owners change
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Economics
Chapter 8
Corporations: Advantages and Disadvantages
Advantages: Corporations
• Can raise money in various ways:
— borrowing from banks, selling more stock, issuing bonds
• Professional managers likely to produce higher profits
• Limited liability—stockholders, directors, officers protected
• Unlimited life—business operates as before if stockholders change
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Economics
Chapter 8
Corporations: Advantages and Disadvantages
Disadvantages: Corporations
• Starting up: time-consuming, difficult, expensive; paperwork, lawyers
• Heavy regulation, specially for public companies
— annual SEC reports, quarterly financial reports, stockholder meetings
• Both profits and dividends taxed; some small corporations excluded
• Decisions made by board; founders must give up some control
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Economics
Chapter 8
Business Consolidation
KEY CONCEPTS
•
•
•
•
•
To increase efficiency, gain new identity, keep rivals out, diversify
Horizontal merger—joins companies with same or similar product
Vertical merger—joins different steps of production, marketing
Conglomerate—combines companies with unrelated products
Multinational corporation—has branches in several countries
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Economics
Chapter 8
Business Consolidation
Mergers
• In 2005, Reebok and Adidas made horizontal merger
— meant to cut production, distribution costs by combining operations
— purpose to undersell and take customers from Nike
• In 1990s, Shell and Texaco made vertical merger
— Shell had more refineries; Texaco more gas stations for distribution
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Economics
Chapter 8
Business Consolidation
Conglomerates
• Theory: diversified businesses protect parent company
• Practice: difficult to manage unrelated companies
• 1960s Gulf and Western in communications, clothes, mines, food
— eventually sold all except entertainment, publishing; became Viacom
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Economics
Chapter 8
Business Consolidation
Multinational Corporations
• Multinational, or transnational, corporations increase globalization
• Benefits: provide jobs, products; spread technology; pay taxes
— help raise standard of living of poor countries
• In countries with lax regulations, factories may cause problems
— pollution, long work hours, unsafe conditions
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Economics
Chapter 8
Bill Gates: Entrepreneur and Corporate Leader
Microsoft Corporation
•
•
•
•
•
With Paul Allen, developed BASIC language for personal computers
In 1975, they founded Microsoft to provide software for early PCs
Microsoft began providing operating system for IBM PCs
In 1985, released Windows, which became world’s most popular operating system
In 1994, Gates founded charitable foundation for health, education
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Economics
Chapter 8
Reviewing Key Concepts
Explain the relationship between the terms in each of these pairs:
• stock and bond
• public company and private company
• merger and conglomerate
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Economics
Chapter 8
Section-4
Franchises, Co-ops, and Nonprofits
Franchises
KEY CONCEPTS
• Franchise—business that licenses the right to sell its products
• Franchisee—pays fee to parent company to sell in a particular area
• Fast-food restaurants are most common type of franchise
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Economics
Chapter 8
Franchises
EXAMPLE: An Almost Independent Business
• After working as assistant manager, Tim wants to run own restaurant
• Concerns: lacks enough experience, start-up funds
• Likes organic juice and sandwich franchise; decides to apply
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Economics
Chapter 8
Franchises
Advantages: Franchises
•
•
•
•
High level of independence
Franchiser provides training in running the business
Franchiser provides products and other materials at low cost
Franchiser pays for national and regional advertising
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Economics
Chapter 8
Franchises
Disadvantages: Franchises
• Franchisee must invest own money to start business
• Must share some of the profits with franchiser
• Does not have full control of business
— must buy only franchiser’s materials
— must sell only franchiser’s products
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Economics
Chapter 8
Cooperatives and Nonprofits
KEY CONCEPTS
• Some businesses are not created to make a profit
• Cooperative—operated for shared benefit of owners, who are customers
• Nonprofit organization—acts like business but purpose is to benefit society
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Economics
Chapter 8
Cooperatives and Nonprofits
A Business Organization for Its Members
• Consumer co-ops keep prices low by purchasing in large volume
— members pay fee or provide labor as payment
• Service co-ops, such as credit unions, provide services at low cost
• Producer co-ops ensure cheaper, more efficient processing or marketing
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Economics
Chapter 8
Cooperatives and Nonprofits
A Purpose Other Than Profit
• Purpose of many nonprofits is benefiting society
— include charities, professional associations, labor unions, museums
• Receive government charter; have unlimited life
• Raise money from donations, grants, membership fees
— some sell services, products to raise funds to support their mission
• Other nonprofits are professional organizations
— include professional associations, labor unions
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Economics
Chapter 8
Reviewing Key Concepts
Give an example of each of the following terms:
• franchise
• cooperative
• nonprofit organization
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Economics
Chapter 8
Apple: The Evolution of One Company
Background
• As students, Steve Jobs and Steve Wozniak created a personal computer, and in 1976 formed
Apple Computer, Inc. Through the years, Apple overcame problems and earned almost $14
billion in revenues in 2005.
What’s the Issue?
• How does a company evolve from an idea into a billion-dollar enterprise?
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Economics
Chapter 8
Apple: The Evolution of One Company {continued}
Thinking Economically
1. Based on information in the documents, how would you describe the evolution of Apple
Computer, Inc.?
2. How did Apple’s advertising and marketing affect its success or failure? Use examples from
the documents in your answer.
3. What single overriding concern has defined the evolution of Apple and determined its
success? Use information from the documents to support your answer.
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Economics
Chapter 8
Print Slide Show
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