Chapter 6
Business Ownership and Operations
Fallen Franchise
—  Blockbluster was a huge component to the video
industry however closed in recent years due to what
changes in the industry?
—  What companies have taken over the video rental
industry?
—  Three Fallen Franchises
—  Why have these Franchises not been successful?
Brainstorm
Sam noticed that a new shop called
Bart’s Bagels opened up two months
ago. The shop is a block away from
Sam’s Donut Shop. Ever since Bart’s
Bagels opened, fewer customers have
been coming into Sam’s Donut Shop.
Make an suggestion in your notes as
to what could be happening, based
on this scenario.
6.1 Objectives
—  Describe the advantages and disadvantages of the
three major forms of business organizations.
—  Describe how cooperatives and nonprofits are like and
unlike corporations and franchises.
Chapter 6.1
Types of Ownership
Three different types of
ownership:
—  Sole Proprietorship
—  Partnership
—  Corporation
Sole Proprietorship
—  A business owned by only one person.
—  About ¾ of all businesses in the United States.
—  Textbook page 95
—  Figure 6.1
—  Why do some people want to own their own business?
Respond in your notes.
Advantages
—  Easy to create
—  Free to run the business as you see fit
—  You retain the majority of the profits
Disadvantages
—  You must pay for everything yourself
—  Lack of business skills
—  Unlimited liability
—  Full responsibility for the businesses debts.
—  If you lose more money than you make, you
have to make up the difference.
Partnership
—  A business owned by two or more persons.
—  Each owner shares the risk and reward.
—  Partnership agreement needed
—  Contract outlining the rights and responsibilities of
each partner.
Advantages
—  Easy to create
—  Easier to obtain start-up money
—  Skill diversity
Disadvantages
—  Share profits
—  Unlimited legal and financial liability with your
partners
—  The actions of your partner(s) directly affects you
Corporations
—  A business (company) registered by a state
and operates separately from its owners
—  Corporate Charter
—  A license to run a corporation
—  Needed to form a corporation
—  Obtained from the state your headquarters is in
Corporations (continued)
—  To raise money you can sell stock.
—  Shares of ownership in your corporation
—  Board of Directors
—  Controls the corporation and makes major decisions
—  Hires officers to control the day-to-day operations
Advantages
—  Limited liability
—  If your company loses money, the
stockholders lose only what they invested.
—  Doesn’t end if the owner(s) die
—  Raise money rapidly by selling shares.
Disadvantages
—  Pay more taxes
—  Owners are taxed on their income from the corporation
—  Closely regulated by the government
—  Difficult to start
—  Complicated operations and management
What would you do?
— Imagine you and a friend invented a
coffee mug that keeps the coffee at a
constant temperature (so it never
gets cold). You would like to sell this
product and your friend wants to be
your partner. Since he worked with
you on the new invention, should you
form a partnership with him? Why or
why not? Identify and describe
several advantages and
disadvantages.
Chapter 6.2
Alternate Ways to Do Business
There are three other ways to do
business:
—  Franchise
—  Nonprofit Organization
—  Cooperative
Franchise
—  Contractual agreement to sell a company’s
products or services in a designated geographic
area.
—  Brainstorm! List all of the franchises you can think of that
are in your neighborhood/area.
—  Running a franchise:
—
—
—
—
Invest money
Pay the franchisor an annual fee or share the profits
You receive a well-known name and business plan
Can operate as a sole proprietorship, partnership, or even a
corporation
Advantages
—  Easy to start
—  Name of the parent company draws business
Disadvantages
—  Franchisor is often very strict on business
operations
—  Limited in what products or services you can offer
Example
—  Jim Saurbrey purchased a Subway restaurant franchise.
For the right to use the Subway name and logo, Jim
paid a franchise fee of $15,000. In addition, Jim spent
$70,000 renting restaurant space, purchasing
equipment and supplies, and obtaining legal and
accounting services. During its first year, Jim’s
franchise earned $36,000 in profits. He paid 12.5
percent, or $4,500, to Subway in royalty fees (weekly
or monthly payments made by the local owner to the
franchise’s company) 8% and advertising fees (paid to
the franchise company to support television,
magazine, or other advertising of franchise as a whole)
4.5%. During Jim’s second year in business, his
restaurant earned $51,000, and he paid $6,375 in
royalty and advertising fees.
Nonprofit Organization
—  A type of business that focuses on providing
a service rather than making a profit.
—  Examples: American Red Cross, Meals on Wheels.
Also, private hospitals, schools, and museums can be
set up this way.
—  No profit = no taxes
—  Rely heavily on government grants and
donations
Cooperative
—  An organization owned and operated by its
members for the purpose of saving money on
the purchase of certain goods and services.
—  Example: Ocean Spray – a cooperative of cranberry growers.
—  Exists as a separate entity from the individual
businesses.
—  Government Charter is needed to start one
—  Can sell stock and choose a board of directors
Cooperative (continued)
—  Used by small farmers, book dealers, or
antique merchants
—  Can pool their resources together
—  Save money by buying insurance, supplies, and
advertising as a group.
—  Pay less taxes
—  Other example: Ace Hardware
Chapter 6.3
Types of Businesses
There are many different types of businesses and different ways to
classify them. One way is to group them by the kind of products they
provide:
—  Producing raw goods
—  Processing raw goods
—  Manufacturing goods from raw or processed goods
—  Distributing goods
—  Providing services
Producers
—  A business that gathers raw products in
their natural state.
—  Raw goods – materials gathered in their
original state from natural resources such
as land or water.
—  Industries include:
—  Agriculture, mining, fishing, and forestry
Processors
—  Change the raw materials into more finished
products.
—  Example: Wheat is turned into flour, crude oil into
gasoline, and iron ore into steel.
—  May require further processing
Manufacturers
—  Businesses that make finished products out of
processed goods.
—  Turn raw or processed goods into finished goods
that require no further processing and that are
ready for the market.
—  Example: Automotive plant makes cars out of steel,
glass, and plastic.
Intermediaries
—  A business that moves goods from one business
to another.
—  It buys goods, stores them, and then resells them.
—  A wholesaler (distributor) is an intermediary.
—  Buys goods from a manufacturer in huge quantities and
resells them in smaller quantities to their customers (usually
other companies).
—  A retailer purchases goods from a wholesaler
and resells them to the consumer, or the final
buyer of the goods.
Service Business
—  Provide services rather than goods
—  Products of skill or an activity
—  Examples: Hairstyling, car repair
—  Employs about three-quarters of the
workforce and is rapidly increasing.