Chapter 8
BUSINESS
ORANIZATIONS
Business Organizations
An establishment formed to carry
on commercial enterprise
There are 3 Major Types of Business Organizations:
Sole Proprietorships, Partnerships,
and Corporations
Percentages
Businesses
7% Partnerships
20%
Corporations
75% Sole
Proprietorships
Percentages do not equal 100%
Income Earned
10 % Partnerships
20% Sole
Proprietorships
70% Corporations
U.S. Sales
5% Partnerships
6% Sole
Proprietorships
90%
Corporations
Percentages do not equal 100%
Sole Proprietorships
Sole Proprietorships
Definition:
A business owned and managed
by a single individual
Examples:
Mario’s Pizza
Sole Proprietorships
Advantages
 Easiest to establish and stop
 Few regulations
 Receives all profits
 Full control
Disadvantages  Unlimited liability
(can get sued at any time)
 Limited access to resources
 Lack of permanence
(can enter or exit market at any time)
 Little fringe benefits
Bonus:
Where was the store
“Kroope’s Cotton Shop”
located at in Northampton.
Advantages
1.
Easy to establish / set-up: Minimum
Requirements
a. Business license – Authorization to
start a business issued by the local
government
b. Site permit—so must obtain a
certificate of occupancy
c. Name of the business
2. Least Regulated—relatively few regulations
Zoning Laws

Law in city or town that designates
separate areas for residency and for
business
Advantages
3. Sole receiver of profit (after paying
income taxes)
4. Full control of business.
5. Easy to discontinue—to stop
operations and do something else for a
living
Disadvantages
1. The independence of a sole
proprietorship come with a high degree
of responsibility—the biggest
disadvantage of sole proprietorships is
unlimited personal liability
Liability
The legally bound obligation to pay
debts
 Responsibility

Disadvantages
2. Limited access to Resources
3. Lack of Permanence—meaning a sole
proprietorship has a limited life
* Causes can include:
a. Have trouble finding and keeping good
employees
b. Can not offer the security and
advancement opportunities
c. Are not able to offer employees many
fringe benefits
Fringe Benefits

Payments other than wages or salaries

Examples: Bonuses, vacation days,
personal days, sick days, company
cars, insurance, business trips, tickets
to games
Disadvantages
d. Lack of experienced employees
Partnerships
Partnerships
Definition:
Business organization owned by 2 or more
persons who agree on a specific division of
responsibilities and profits
Examples:
Woodstone Golf Club
Partnerships
Advantages
Easy
Disadvantages
Unlimited
to Establish
Limited Government Involvement
Shared Decisions making
Specialization
Not subject to special taxes
Liability (unless LLP)
Potential for conflict
A. Types of Partnerships
•
Each divides responsibility and
liability differently
Types of Partnerships
General Partnership
 Limited Partnership
 Limited Liability Partnership

1. General Partnership

All partners have EQUAL responsibility
and liability

This type is the most common
2. Limited Partnership
General Partners
a.
•
•
Main disadvantage: has unlimited liability
Main advantage: full control of the
business
Limited Partners:
b.
•
•
ONLY contribute money; Do NOT actively
manage the business
Can lose only the amount of their initial
investment
3. Limited Liability Partnership

All partners have a limited Liability

A person is ONLY responsible for the
area that they are in charge of
Limited Liability Partnership
Example:

Hillary is in charge of paying for supplies
 Joe is in charge of safety, such as meeting
government regulations
 Sam is in charge of Personnel—such as the hiring
and firing of employees
Liability
Hillary
Joe
Sam
B. Advantages of Partnerships
1.
Are easy and inexpensive to establish
a. Does the law require a written
partnership agreement? NO
b. Most experts advise partners to work with
a(n) attorney to develop articles of
partnership, which is a legal document that
spells out each partner’s rights and
responsibilities
Advantages of Partnerships
c. If partners do NOT establish their own
articles of partnership, they will fall
under the rules of the Uniform
Partnership Act (UPA). Partnerships
can distribute profits as they wish, as
long as they abide by the partnership
agreement or by the UPA
Uniform Partnership Act (UPA)

Act ordering common ownership
interests, profit and loss sharing, and
shared management responsibilities in
partnership
Advantages of Partnerships
2. Shared decision making and
specialization
3. Larger Pool of Capital
4. Not subject to any special Taxes
Assets

Money or other valuables belonging to an
individual or business
 Improve firms’ ability to borrow or expand
 Examples: Jewelry, houses,
classic cars, boats, stocks, bonds
Disadvantages
1.
Unless the partnership is an LLP, at
least ONE partner has unlimited
liability. Any general partner can lose
everything including personal
property, in paying the firm’s debts.
Limited partners can ONLY lose their
initial investment
2.
Potential for Conflict
Why are there NOT many
partnerships, compared to the
amount of corporations and sole
proprietorships?
Why are there NOT many partnerships, compared to
the amount o corporations and sole proprietorships?
Conflict
 Arguments
 Agreement

Quiz
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Which type of business organization is the most common?
Sole proprietorship
What is the minimum amount of people needed for a
partnership? 2
The word that means responsibility; legal obligation to pay a
debt. Liability
Which type of business organization has the most sales and
income? Corp.
Give an example of a fringe benefit.
Give an example of an asset.
What is the only “thing” a person can lose if they own part a
corporation? Their original investments.
What type of partnership is the most common? General
partnership
Do you necessarily have to write down any information when
you have a partnership? NO
In a limited partnership, sometimes the limited partner(s) are
also called what? Silent partners
Corporations
Brainstorm

List as many corporations as you can
think of…
Corporations
Definition:
A legal entity owned by
individual stockholders
Examples:
Wegmans, Microsoft
Corporations
Advantages
Limited
Disadvantages
Expensive
Liability for owners
Long life
Transferable ownership
Ability to attract Capital
& difficult to establish
More legal requirements and
regulations
Potential loss of control by
founders (Spiderman)
Double taxation
Corporations
A. Each stockholder faces limited
liability for the firm’s debts.
Stockholders own stock, also called
shares.
Why do many sole
proprietorships eventually
incorporate, thus becoming
corporations?
Why do many sole proprietorships eventually
incorporate, thus becoming corporations?
Corporations have:
Less Liability (Responsibility)
 More Assets
 More Fringe Benefits
 Less Risk

Stock
Aka: Shares
 A share represents a portion of
ownership in a corporation


Stocks are also called equities
How old do you have to be own
stock in your own name?
21 years old
Picking Stocks Example
“Picking stocks is a lot like trying to pick
the shortest checkout line at the grocery
store. Do some lines move faster than
others? Absolutely, just as some stocks
outperform others. Are there things that
you can look for that signal how fast one
line will move relative to another? Yes.”
Picking Stocks Example
“You don’t want to be behind the guy with
two full shopping carts or the old woman
clutching a fistful of coupons. So why is
it that we seldom end up in the shortest
line at the grocery store? Because
everyone else is looking at the same
thing we are and acting accordingly”
Picking Stocks Example
“Suppose that somewhere near the produce aisle
you saw an old woman stuffing wads of coupons
in her pockets when you arrive at the checkout
and see her in line, you wisely steer your cart
somewhere else…[and] you smugly congratulate
yourself. Moments later, however, you realize the
guy ahead of you forgot to weigh his avocados.
Who could have predicted that? No one. It’s the
things you can’t predict that matter.”
--Naked Economics, p. 129-130
a. Common Stock
Are voting owners of the company—
they usually receive 1 vote for each
share of stock owned to vote to elect the
company’s board of directors
b. Preferred Stock
Are nonvoting owners of the company.
They receive dividends before the
owners of common stock. If the company
goes out of business, they get their
investments back before common
stockholders
Types of Stock
Common Stock
 HAS voting rights
Preferred Stock
 NO voting rights

Receives dividends
SECOND if
company fails

Receives dividends
FIRST if company
fails

Price per share is
usually LESS

Price per share is
usually MORE
2. Diversification

To purchase a variety of stocks

Example:
– Clothing (GAP Inc.)
– Utility (PECO, PPL)
– Technology (Dell, Microsoft)
– Merchandise (Target, Walmart, K-Mart)
diversify
• It is best to
stocks in a variety of industries
(don’t put all of your eggs in a basket…)
Diversifying Example
If you flip one coin, you have a 50 percent
chance of making money and a 50
percent chance of losing money.
If you flip several coins, the probability is
greater that you will make money.
Mutual Funds
A portfolio managed by someone who uses a
pool of investors to purchase stocks. Investors
can purchase
shares of mutual fund.
(You cannot buy mutual funds in our game)
STOCK
MUTUAL FUND
STOCK
STOCK
STOCK
A Ticker Symbol is the code used to
designate
stocks on various markets. This is used to
find the prices of stock
For example: Johnson and Johnson is JNJ
Microsoft is
MSFT
IPO
An initial public offering of a stock
Bond

A certificate issued by a corporation
 Promises to repay with interest the amount the
corporation borrowed from the buyer

Takes approximately 20-30 years to mature
For Bond infroamtion:
http://www.treasurydirect.gov/indiv/research/indepth/tbonds/res_tbond.htm
For social security number information:
http://www.cpsr.org/prevsite/cpsr/privacy/ssn/ssn.structure.htm
Bond
CD
Savings
Account
How long to
keep?
20-30
years
Months to
years
No specific
time
Who
investing in?
Government Bank
Bank
Money mostly
guaranteed?
Yes
Yes
Yes
Initial
Investment
½ of total
amount
Approx.
$500
Usually
$200
How much do
you make?
50%
4-7%
2-3%
Bond
a.
Bonds are basically loans, or IOUs, that represent
debt that the government or corporation must repay
to an investor
b.
Bonds typically pay the investor a fixed amount of
interest at regular intervals for a fixed amount of
time.
c.
Bonds are generally lower-risk investments.
d.
There are several different types of bonds, including
United States government bonds, which are
sometimes given to young people as gifts.
What is a Stock Split
You have 100
shares of a company
The company offers a 2 for 1 split
For each share you have,
the company gives you 1 more
The company gives you 100 shares
Result: You own 200
company
shares of the
Stock split
(When stock splits occur, the price of the
stock usually splits as well)
A company may seek to split a stock
when the price of stock becomes too
high that it discourages potential
investor from buying it.
Risks of Buying Stocks
The firm selling the stock may earn lower
profits than expected, or may lose
money. The dividends will be smaller
than expected, or nothing at all, and the
market price of the stock will probably
decrease—which can result in a capital
loss.
Types of Corporations
Closely-held Corporation
 Publicly-held Corporation

Closely-held Corporation

Issues stock to only a few people- often
family members
Mr.Robert Wegman
Publicly-held Corporation

Sells stock on the open market

Stocks are bought and sold at financial markets
called stock exchanges such as the New York Stock
Exchange.
Mr. William Gates
Structure of a Corporation

Corporate Officers

Board of Directors

Corporate Owners (Shareholders)
Corporate Owners
The (common) Stockholders—elect a
board of directors
Board of Directors
Makes all of the major decisions of the
corporation
 Appoints corporate officers

Corporate Officers

Run the corporation and oversee
production; in turn, hire managers and
employees, who work in various
departments
Structures of…
Corporations
 Corporate Officers


Board of Directors
Shareholders
School Districts
 Administration
(Superintendent &
Principals)

School Board

Taxpayers (Citizens
of School District)
D. How Stocks are Traded
1. Very few companies sell stock directly,
so instead, a person would contact a
stockbroker who works for a
brokerage firm. Both cover the costs
and earn a profit by charging a
commission, or fee, on each stock
transaction.
a. Stockbroker

A person who links buyers and sellers of
stock
b. Brokerage firms

A business that specializes in trading
stocks
2. Stock exchanges

A market for buying and selling stock
Stock Exchanges
Most newspapers publish data on transactions
in major stock exchanges. Websites also
publish this information
a. The New York Stock Exchange (NYSE) is
the country’s largest and most powerful
exchange and has the best-known companies.
It began in the year 1792.
Stock Exchanges
b. The American Stock Exchange
(AMEX) used to be the 2nd-largest
exchange but lost business when
people started trading over the Internet.
In 1998, it merged with NASDAQ. The
combined exchange (NASDAQ-AMEX)
sells slightly riskier stocks from lessestablished and smaller companies than
does the NYSE.
Measure Stock Performance
1.
When the stock market rises steadily
over a period of time, a bull market
exists. On the other hand, when the
stock market falls for a period of time,
people call it a bear market.
Measuring Stock Performance
2. The Dow Jones Industrial Average (DOW)
was established in 1896. Today, the stocks
represent 30 large companies in various
industries, such as food, entertainment, and
technology
3. The Standard & Poor’s 500 (S & P 500) give
a broader picture of stock performance than
the DOW. It tracks the price change of 500
different stocks
Portfolios

A group of stocks owned and managed
by one person
Incorporation

Forming a corporation
Advantages of Corporations
1.
Owners have limited liability—meaning
they can only lose the amount of money
they have invested in the business
2.
Shares are transferable—meaning that
stockholders can sell their stocks to others
and get money in return
3.
Ability to attract capital
4.
Corporations last longer—almost indefinitely
Disadvantages of Corporations
1.
Corporations can be difficult,
expensive, and time consuming to
establish. Firms that want to
incorporate must first file for a state
license—known as a certificate of
incorporation
Disadvantages of Corporations
Double Taxation:
a. Corporations must pay on their
income, in addition to
b. paying taxes on dividends
•
Dividends
Profits a company gives back to
shareholders
Disadvantages of Corporations
3. Potential of loss of control by the founders
4. Corporations are more regulated than any
other kind of business organization. Publicly
held corporations are required to file reports
with the Securities and Exchange
Commission (SEC), the federal agency that
regulates the stock market
H. Corporate Combinations
Each corporate combination can lead to
larger, more efficient firms, which often
can produce and sell their products at
lower prices. However, their size can
also give some of these combinations
more monopoly power.
Types of Mergers
Horizontal Merger
 Vertical Merger
 Conglomerate

Horizontal Merger

Combination of 2 or more firms
competing in the SAME market with the
same good or service
Vertical Merger

Combination of 2 or more
firms involved in
DIFFERENT stages of
producing the same good
or service
Conglomerate

Business combination merging more
than 3 businesses that make unrelated
products
Conglomerate

Example: Proctor and Gamble
How do people make money
with stocks?
1. Dividends: usually paid 4 times a year
(quarterly). The size depends on the
corporation’s profits. The higher the
profits, the larger the dividend per
share of stock.
(NOT all corporations pay out
dividends!)
How do people make money
with stocks?
2. Capital Gains: The difference
between the higher selling price and the
lower purchase price. If an investor
sells a stock at a price lower than the
purchase price, however, the investor
will suffer a Capital Loss
Speculation

The practice of buying stocks when the
price is LOW, and selling stocks when
the price is HIGH
Multinational Corporation
(MNC)

A large corporation that produces and
sells its goods and services throughout
the world
Multinational Corporation (MNC)
– 1. Usually have headquarters in one country
and branches in other countries
– 2. Must obey laws and pay taxes in each
country in which they operate
– 3. Advantages of MNCs:
•
•
•
a. Benefits customers and workers worldwide by
providing jobs and products around the world.
b. Spread new technologies and production
methods across the globe
c. Provide help to poorer nations gain better
standards for their people
Multinational Corporation (MNC)
4. Disadvantages of MNCs:
a. Concern about the low wages
b. Poor working conditions in some poorer
countries
Other Organizations
Other Organizations
Business Franchise
 Cooperative Organizations (Co-ops)
 Nonprofit Organizations

Business Franchise

A semi-independent business that pays
fees to a parent company in return to
sell a certain product or service in a
given area

Examples: Dunkin’ Donuts, McDonalds
Business Franchise
Advantages
Management
Disadvantages
High
training and support
Standardized quality
National advertising
Financial assistance
Central buying powers
franchising fees and royalties
Strict operating standards
Purchasing restricting
Limited product line
Fastest growing Franchises
(2005 data in U.S. and Canada)
Name of Franchise
Subway
Pizza Hut
Quizno’s Subs
Jan-Pro (cleaning)
Curves
Jani-King (cleaning)
Jackson Hewitt Tax Services
The UPS Store
New franchises a week
28
22
19
16
15
13
10
9
Franchises
Parent companies, called franchisers
develop the products and business
systems and work with the local
franchise owners to help them produce
and sell their products.
Franchises
A. Advantages of Franchises
1. A franchise comes with a built-in reputation customers may already
be familiar with the product and brand
2. Management training and support to help inexperienced owners
gain experience
3. Standardized quality—so that everything looks the “same”
4. National advertising programs
5. Financial assistance to help franchise owners start their business.
6.
6. Centralized buying power—all of the franchises get all of their
products from the same location
Franchises
A. Disadvantages of Franchises
1. The franchise owner must sacrifice some
freedom in return for the parent company’s
guidance
2. High franchising fees and royalties are
charged to owners for the right to use the
company royalties.
Royalties

Share of earning given as payment

(This is in addition to paying for the
franchise and the products to sell)
Franchises
3. Strict operating standards—such as hours
of operations, employee dress codes, and
operating procedures. Otherwise, the owner
may lose the franchise.
4. Purchasing restrictions—must buy their
supplies from the parent company or from
approved suppliers
5. Limited product line
Cooperative Organizations
Cooperative Organizations
(Co-ops)

A business organization owned and
operated by a group of individuals for
their mutual benefit
Cooperative Organizations
(Co-ops)
Advantages

Disadvantages

Can work with other people
 Discount prices
 Mutual benefits
May include annual membership fee
 Possibility of conflict
Types of Co-ops
Consumer Cooperatives
 Service Cooperatives
 Producers Cooperatives

Consumer Cooperatives
Retail outlet owned and operated by
consumers
 Examples: Sam’s Club, BJ’s Club

Service Cooperatives
Provides a service – NOT a good
 Examples: Credit Union, Discounted
insurance

Producer Cooperatives

Agricultural Marketing that helps
members sell their products

Example: Allentown Farmers Market
Non-profit Organizations
Non-profit Organizations

An institution that functions like a
business, but does NOT operate for
profit

Examples: Girl Scouts, American Red Cross,
YMCAs, Salvation Army, School districts
Non-profit Organizations
Advantages

Disadvantages

Government tax exemptions
 Most have partial government
support
Can work with other people
Conflict between members
 Taking advantage of government
supports
Types of Nonprofit Organizations
Professional Organizations
 Business Associations
 Trade Associations
 Labor Unions

Professional Organizations

Improves image and working conditions
and skill levels of people in certain
occupations

Examples:
American Bar Association,
American Medical Association
Business Associations

Promotes collective business interests
for a city, state and other geographical
areas

Example: Better Business Bureau
Trade Associations

Promotes interests of a particular
industry

Example: American Marketing
Association
Labor Unions

Aims to improve working conditions,
hours, wages and fringe benefits

Example:
International Brotherhood of Teamsters
Standards
6.2.12 I
 6.4.12 AB
 6.5.12 BCDEF

Corporate Officers
Runs corporation and oversees
production
 Hire managers and employees who
work in various departments

Parable of the Talents

Matthew 25:14

For it is just like a man about to go on a
journey, who called his own slaves and
entrusted his possessions to them.

To one he gave five talents, to another, two,
and to another, one, each according to his
own ability; and he went on his journey.
Parable of the Talents

Immediately the one who had received the five
talents went and traded with them, and gained
five more talents.

In the same manner the one who had received
the two talents gained two more.

But he who received the one talent went away,
and dug a hole in the ground and hid his master's
money.
Parable of the Talents

Now after a long time the master of those slaves
came and settled accounts with them.

The one who had received the five talents came
up and brought five more talents, saying, "Master,
you entrusted five talents to me. See, I have
gained five more talents.'

His master said to him, "Well done, good and
faithful slave. You were faithful with a few things, I
will put you in charge of many things; enter into
the joy of your master.'
Parable of the Talents

And the one also who had received the one
talent came up and said, "Master, I knew
you to be a hard man, reaping where you
did not sow and gathering where you
scattered no seed.

And I was afraid, and went away and hid
your talent in the ground. See, you have
what is yours.‘
Parable of the Talents

But his master answered and said to him,
"You wicked, lazy slave, you knew that I
reap where I did not sow and gather where I
scattered no seed.

"Then you ought to have put my money in
the bank, and on my arrival I would have
received my money back with interest.
Parable of the Talents

"Therefore take away the talent from him, and
give it to the one who has the ten talents.

‘For to everyone who has, more shall be given,
and he will have an abundance; but from the one
who does not have, even what he does have shall
be taken away.

Throw out the worthless slave into the outer
darkness; in that place there will be weeping and
gnashing of teeth. (NASB)
How do you make money with
stocks?
Speculation
 Dividends

Speculation

The practice of buying stocks when the
price is LOW, and selling stocks when
the price is HIGH

(Goal of the stock market game)
Speculation Example
You own 100 shares of a company XYZ.
 You paid $5.00 for each share.


How much did XYZ cost you?
XYZ cost you $500.
100 shares
x 5.00 cost per share
$500.00 Total cost
How much profit would you
make if you sold XYZ shares at
$8.00 a share?
You would profit $300.
100
x $8.00
$800
-
$800
$500
$300
shares
price
Total cost when sold
Amount sold for
Amount paid for
Total Profit
A “NORMAL” Speculation:
SELL when stock prices are HIG
The difference between these prices
is the amount of money you make!!!
BUY when stock prices are LOW
However, Short Selling and
Short Buying is different…
Suppose…
Spike
Jane
Bob
Spike has a CD.
Spike loans the CD
to Jane.
Jane knows the
CD will go on sale next
week at Best Buy.
Bob wants the same
CD that Jane
borrowed from Spike.
Jane gives back
a CD to Spike.
Jane goes
to Best Buy and buys
the same CD for $15.
So, Jane
sells the CD to
Bob for $30.
Jane profits $15.
When you Short Sell, you sell
when the price is HIGH
and you hope that the price
decreases.
When you think the price is as
LOW as it will go, you Short
Buy