Imagine that you want to start a
business. You will need to decide
what your business will do, how
you would like it to be structured,
and whether you would like to
work alone or with a partner. In
this chapter, read to learn about
the different ways that businesses
are organized and what it takes to
start a business.
Getting Started
Businesses are started by
entrepreneurs who are willing to
take risks.
Getting Started (cont.)
• A person who starts his or her own
business is called an entrepreneur.
SECTION 1
Getting Started (cont.)
• An entrepreneur must:
– Gather the relevant factors of production
to produce their good or service.
– Decide on the form of business
organization that best suits their
purposes.
– Learn about the laws, regulations, and tax
codes that will apply to their business.
– Investigate their competition.
SECTION 1
Getting Started (cont.)
• The federal government’s Small Business
Administration, as well as other
government agencies, often help finance
startups.
• A small-business incubator and the
Internet also provide a wide array of
information on how to start a business.
SECTION 1
Elements of Business Operation
There are four basic elements of
business operation: expenses,
advertising, record keeping, and risk.
FIGURE 1
There are four main elements of business
operation: expenses, advertising, record
keeping, and risk.
INCOME
revenue brought in when
selling product or
service
SECTION 1
Elements of Business Operation (cont.)
• Every business must consider four basic
elements:
–
Expenses:
• Inventory and equipment
• Wages
• Taxes
• Insurance
• Utilities
• In order to find out if you will make a profit, all
expenses must be subtracted from your receipts.
SECTION 1
Elements of Business Operation (cont.)
– Advertising: notifying potential
customers you are open for business.
– Record keeping: you will need a system
to track your expenses and income.
• There are programs on the Internet or
software that can help with this.
• Net worth—the difference between what you
own and what you owe.
• You also need to file your receipts properly
for tax purposes.
PROFIT
revenue minus
expenses
SECTION 1
Elements of Business Operation (cont.)
– Risks: you must balance the risks
against the advantages of being in
business for yourself.
SECTION 2
Sole Proprietorship
A sole proprietorship is a business
owned and operated by one person.
SECTION 2
Sole Proprietorship (cont.)
• The most common form of business
organization is the sole proprietorship.
• The owner of a business is called the
proprietor.
SECTION 2
Sole Proprietorship (cont.)
• Advantages:
– Satisfaction from being the boss and
making the decisions.
– Receives all profits
– Low taxes
SECTION 2
Sole Proprietorship (cont.)
• Disadvantages:
– It can be demanding and time
consuming.
– You have unlimited liability
– Personal assets may be seized to pay
off debt.
VS 2
Sole proprietorships and partnerships are
two common ways that businesses are
organized.
SECTION 2
Partnerships
A partnership is a business owned and
operated by two or more individuals.
SECTION 2
Partnerships (cont.)
• Businesses are also operated by
partnerships. In a partnership, the
partners sign a legally binding document
describing how they will operate the
business.
SECTION 2
Partnerships (cont.)
• Advantages:
– Each partner can work in his or her area
of expertise.
– Partners may have additional funds to
use in business.
– Taxes tend to be low.
– The borrowing potential is high.
SECTION 2
Partnerships (cont.)
• Disadvantages:
– Decision making can be slower.
– Disagreements can lead to problems.
– You must share the profits.
SECTION 2
Partnerships (cont.)
• Some partnerships are specialized:
– Limited partnership
– Limited liability company
– Joint venture
limited partnership: special form of
partnership in which one or more
partners have limited liability but no
voice in management
SECTION 3
Corporations and Their Structure
Stock represents ownership rights to a
certain portion of a corporation’s
profits and assets.
SECTION 3
Corporations and Their Structure (cont.)
• A corporation is a business organization
owned by many people but treated by law
as though it were a person; it can own
property, pay taxes, make contracts, and
so on.
• Stock represents ownership rights in a
corporation that entitles the buyer to a
certain part of the future profits and assets
of the corporation.
CORPORATIONS
Articles of incorporation-documents that list basic
information, filed with state
corporate charter-license to operate a business to a
corporation by a state
common stock-ownership in a corp + voting rights-not
guaranteed profits
dividend-money return on the money invested in a
company’s stock, based on profits
preferred stock-no voting rights, but guaranteed a
certain divident
Board of Directors-supervises and controls
corporation, not day-day operations but overall
The majority of business revenues in the United
States are brought in by corporations, which
are owned by many people but treated by law
as if they were individuals.
SECTION 3
Corporations and Their Structure (cont.)
• In order to form a corporation, its founders
must do three things:
• Register their company with the
government of the state in which it will be
headquartered.
– You will have to file the articles of
incorporation with the state where the
corporation will be headquartered.
SECTION 3
Corporations and Their Structure (cont.)
• These articles include:
• Name, address, and purpose of the corporation.
• Names and addresses of the initial board of
directors.
• Number of shares of stock to be issued.
• Amount of money capital to be raised through
issuing stock.
– If approved, the state grants you a
corporate charter or license to operate in
that state.
SECTION 3
Corporations and Their Structure (cont.)
• Sell stock.
– Common stock is issued to raise funds.
Stockholders are granted voting rights.
• Common stock does not, however, guarantee a
dividend.
– Preferred stock can be issued to raise
funds. Holders have no voting rights.
• Preferred stock guarantees a dividend each year
and has first claim if corp goes out of business.
SECTION 3
Corporations and Their Structure (cont.)
• Along with the other shareholders, they
must elect a board of directors.
– The partners select the first board of
directors, and stockholders elect the
next board. The bylaws of the
corporation govern this election.
– The board is responsible for supervising
and controlling the corporation.
• They hire officers to run the business on a day
to day basis.
SECTION 3
Franchises
A franchise is an arrangement in which
a person or group obtains the right to
use the name and sell the products of
another business.
SECTION 3
Franchises (cont.)
• Many fast-food chains, gas stations and
hotels operate as a franchise. The parent
company (the franchisor) sells to another
business (the franchisee) the right to use
the franchisor’s name and sell its products.
– The franchisee pays a fee that may
include a percentage of all revenues
taken in.
– In return, the franchisor will help the
franchisee set up their business.
SECTION 3
Franchises (cont.)
• Advantages:
– Name recognition
– A proven way of doing business
– Advertising dollars largely paid by
franchisor
SECTION 3
Franchises (cont.)
• Disadvantages:
– Loss of control in running the business the
way you might like.
– Sometimes legal trouble if one of the
parties fails to hold up its side of the
agreement.
VOCAB1
entrepreneur: person who organizes,
manages, and assumes the risks of a
business in order to gain profits
VOCAB2
startup: a beginning business
enterprise
VOCAB3
small-business incubator: private or
government-funded agency that
assists new businesses by providing
advice or low-rent buildings and
supplies
VOCAB4
inventory: extra supply of the items
used in a business, such as raw
materials or goods for sale
VOCAB5
receipts: income received from the
sale of goods and/or services; also,
slips of paper documenting a
purchase
VOCAB6
sole proprietorship: business
owned and operated by one person
VOCAB7
proprietor: owner of a business
VOCAB8
unlimited liability: requirement that
an owner is personally and fully
responsible for all losses and debts of
a business
VOCAB9
assets: all items to which a business
or household holds legal claim
VOCAB10
partnership: business that two or
more individuals own and operate
VOCAB11
limited partnership: special form of
partnership in which one or more
partners have limited liability but no
voice in management
VOCAB12
limited liability company: type of
business enterprise that protects
members against losing all of their
personal wealth; members are taxed
as if they were in a partnership
VOCAB13
joint venture: partnership set up for
a specific purpose for a short period
of time
VOCAB14
corporation: type of business
organization owned by many people
but treated by law as though it were a
person; it can own property, pay
taxes, make contracts, and so on
VOCAB15
stock: share of ownership in a
corporation that entitles the buyer to a
certain part of the future profits and
assets of the corporation
VOCAB16
limited liability: requirement in which
an owner’s responsibility for a
company’s debts is limited to the size
of the owner’s investment in the firm
VOCAB17
articles of incorporation: document
listing basic information about a
corporation that is filed with the state
where the corporation will be
headquartered
VOCAB18
corporate charter: license to operate
granted to a corporation by the state
where it is established
VOCAB19
common stock: shares of ownership
in a corporation that give stockholders
voting rights and a portion of future
profits (after holders of preferred
stock are paid)
VOCAB20
dividend: portion of a corporation’s
profits paid to its stockholders
VOCAB21
preferred stock: shares of ownership
in a corporation that give stockholders
a portion of future profits (before any
profits go to holders of common
stock), but no voting rights
VOCAB22
bylaws: a set of rules describing how
stock will be sold and dividends paid
VOCAB23
franchise: contract in which one
business (the franchisor) sells to
another business (the franchisee) the
right to use the franchisor’s name and
sell its products