BUSINESS
OWNERSHIP AND
OPERATIONS
BUSINESS PRINCIPLES A, CHAPTER 6
SOLE PROPRIETORSHIP
• Def: business owned by only one person; about ¾ of all businesses
in the US are sole proprietoships
• Advantages
– Easy to start
– Might need a license orpermit
– Be your own boss
– You get to keep all profits
– Taxes may be lower; paid on personal profits
SOLE PROPRIETORSHIP
• Disadvantages:
– Must pay for everything yourself
– Capital may be limited or not enough
• Common cause of failure
– You may lack business Skills
– Unlimited Liability
• Full responsibility for you company’s debts
PARTNERSHIP
• Def: Business owned by two or more persons who share the risks
and reward
• Share the rewards
• Income taxed only once
• Must start with a partnership agreement
– Contract that outlines the rights and responsibilities of each partner
PARTNERSHIP
• Advantages
• Disadvantages:
– Might need a license to start
– Must share the profits
– Pay taxes only on your personal
profits
– Might not get along with your partner
– Each partner can contribute money
(capital) to start the business
– Banks often are more willing to lend
to a partnership
– Share unlimited legal and financial
responsibility
– If one partner makes a bad decision, all are
equally responsible
– All partners are responsible for debts that
result from bad decisions
CORPORATION
• Def: business owned by many people but treated by law as one person
• Can own property, pay taxes, make contracts, be sued just like a person
• Exists separate from the owners
• Must get a corporate charter from the state in which your headquarters reside
– Charter: a license to run a corporation
• Can raise money by selling stock: shares of ownership in your corporation
• Stockholders pay a set price for each share and usually get to vote on how the
business is run
• Must have a board of directors who control the corporation
• Hire officers to run the business
CORPORATION
• Advantages:
• Limited liability: if company loses money, the stockholders lose only what they invested
• Personal property or savings cannot be taken away from you
• The corporation doesn’t end if the owners sell their shares
• Shares can be resold and the company continues
• Disadvantages:
• Double taxation
– Corporate profits are taxed
– Owners are taxed on their income from the corporation
• Government closely regulates corporations
• More difficult to start a corporation than a sole proprietorship or partnership
• Running it can be more complicated
ALTERNATIVE WAYS TO DO BUSINESS
• Franchise-contractual agreement to sell a company’s products or
services in a designated geographic area
• You must invest money and pay the franchisor an annual fee or a
share of the profits
• Franchisor offers a well-known name and a business plan
• They provide management training, advertising, and a system of
operation
• Can be operated as proprietorship, partnership, or corporation
FRANCHISE
• Advantages:
• Disadvantages:
• Easy to start
• Proven methods and product
• Franchisor is often very strict
about how the business is run
• Name of parent company can be a
big draw for customers
• Business must operate like every
other franchise
• Might be limited in what products
or services you can offer your
customers
COOPERATIVE
• Def: an organization owned and operated by its members for the purpose of
saving money on the purchase of certain goods and services
• Like a corporation in that it exists as a separate entity from the individual
business
• Need a government charter to start one
• Can also sell stock and choose a board of directors to run it
• Small farmers, book dealers, or antique merchants can pool their resources
• Save money by buying insurance, supplies, and advertising as a group
• Share factory facilities and warehouse space
• Cooperatives also pay less in taxes than regular corporations do
• Examples: Ocean Spray, Ace Hardware, and Welch’s
TYPES OF BUSINESSES
• Group by the kind of products they provide:
– Producing raw goods
– Processing raw goods
– Manufacturing goods from raw or processed goods
– Distributing goods
– Providing services
TYPES OF BUSINESSES
P RO D U C E R S
P RO C E S S O R S
• Def: a business that gathers raw products in
their natural state
• Raw goods are materials gathered in their
original state from natural resources such as
land or water
• Examples:
• Def: change raw materials into more
finished products
– farmer growing wheat
– Miner digging for iron ore
– Petroleum worker drilling for crude oil
• Processing of raw goods
• Examples:
– Wheat turned into flour
– Crude oil into gasoline
– Iron ore into steel
TYPES OF BUSINESSES
M A N U FAC T U R E R S
S E RV I C E BU S I N E S S
• Def: businesses that make finished
products out of processed goods
• Def: business that provides services
rather than goods
• They turn raw or processed goods into
finished goods that require no further
processing and that are ready to market
• Services are the products of a skill or an
activity
• Examples:
– Bakery makes bread out of flour
– Automotive plant makes cars out of steel,
glass, and plastic
• Examples:
– Hairstyling
– Car repair
– Dry cleaning
– Massage
TYPES OF BUSINESSES
I NT ER M EDIARIES
• Def: business that moves goods from one business to another
• Buys goods, stores them, and then resells them
• Wholesaler: a distributor who distributes goods; buys from manufacturers in huge quantities
and resells them to companies in smaller quantities
• Examples: clothing wholesaler buys thousands of jackets and them sells them to retailers
• Retailer: purchases goods from a wholesaler and resells them to the consumer, or the final
buyer of the goods
• Examples: services stations, record stores, and auto dealers