Business and Market Structures What is an entrepreneur?

1
Business and Market Structures What is an
entrepreneur?

• People who start businesses are called
  entrepreneurs.
• They strike out on their own
• They are risk takers
• They give up a steady job working for someone
  else

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Business and Market StructuresCharacteristics of
an Entrepreneur

• They usually need to save or borrow money to make
  capital investments in
• Equipment
• Rent production space
• Hire workers
• If business fails, risk losing their investment.

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Why do Entrepreneurs take these risks?

• To earn a profit
• Profit motive Driving force behind new products
  and services in a market economy

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Business and Market Structures

• Sole Proprietorships
• A single owner, who takes all he risks and
  receives all the profits
• Easy to start
• About 70 of American businesses are this type
• They earn only approximately 6 of all revenue

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Business and Market Structures

• Advantages of Sole Proprietorship
• Owner has total control
• Easy to Start-Up
• Can make all decisions without having to consult
  anyone
• Can be flexible
• Able to make changes quickly
• Easy to dissolve

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Business and Market Structures

• Two Major disadvantages
• Sole proprietors have limited capital for making
  repairs and improvements
• Limited Access to Resources
• Banks reluctant to lend money to them
• Also, needs to invest their own profits into the
  business to keep it growing
• Unlimited liability The owner is personally
  responsible for all the debts of business

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Business and Market Structures

• Partnership
• Divides the risks and profits of a business among
  two or more people.
• Professionals such as doctors and lawyers often
  form partnerships
• Advantage partners can pool their resources and
  invest more capital
• They can also offer more services by each
  specializing in a different area.
• Easy to start
• Disadvantage Having to share the profits and
  having less control over decision making

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Business and Market Structures

• General Partnership
• All partners are responsible for management and
  financial obligations of business
• Limited Partnership
• At least one partner is not active in daily
  running of business

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Business and Market Structures

• Partnerships
• Silent partner someone who invests in a
  business and shares its profits, but has no say
  in its day-to-day decisions and operation of
  business
• Majority partner Who owns more than half of the
  company
• Minority partner who owns less than half
• Partnerships share one major disadvantage with
  sole proprietors Each partner is personally
  responsible for all debts of business

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Business and Market Structures

• Corporations
• For investors to avoid unlimited liability, a
  firm needs to be organized as a corporation
• A corporation issues shares of stock to
  investors.
• Some Shareholders are paid annual dividends
• Shareholders elect a board of directors to run
  the business

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Business and Market Structures

• Corporations
• The board of directors hires a chief executive
  officer (CEO) to make day-to-day decisions.
• Advantages
• limited liability Shareholders are not
  responsible for a companys debts.
• If a corporation fails, all shareholders lose is
  the value of their stock

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Business and Market Structures

• Disadvantages
• Corporations are complicated and not as flexible
  as smaller businesses
• Decision-making can be slow
• CEOs may make wasteful decisions that profit
  themselves, rather than the shareholders
• Double taxation of corporate profits

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Business and Market Structures

• A corporation may also borrow money by issuing
  bonds
• Bond a written promise to repay the amount
  borrowed at a later date.
• Principal The amount borrowed
• Interest The price paid for the use of
  anothers money OR the price a financial
  institution pays one to save money

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Business and Market Structures

• Income statement a financial statement showing
  a businesss sales, expenses, and profits for a
  certain period to illustrate the financial
  health of a company
• Net Income Income minus expenses and taxes from
  revenue
• Depreciation A non-cash charge the firm takes
  for the general wear and tear on its capital goods

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Business and Market Structures

• Cash flows The sum of net income and non-cash
  charges such as depreciation , Or, real profits .
• The cash flows represent the total amount of new
  funds the business generates from operations

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Business and Market Structures

• Merger When two or more companies come together
  to make one company
• One company gives up its separate legal identity
  to become one large company
• Reasons for mergers
• To become a larger company
• A company may not be able to grow as fast as
  owners would like
• May want to lose corporate identity ValuJet
  merged with AirWays to form AirTran Holding
  Corporation

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Business and Marketing Structures

• Types of Mergers
• Horizontal merger When two or more firms that
  produce the same kind of product join forces
• The merger of two banks
• Vertical merger When firms involved in
  different steps of manufacturing or marketing
  join together
• Auto company merging with a tire company

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Business and Marketing Structures

• Conglomerate A firm that has at least four
  business, each making unrelated products.
• None of the different divisions are responsible
  for a majority of its sales
• Diversification one of the main reasons for
  conglomerate mergers

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Business and Marketing Structures

• Multinationals A corporation that has
  manufacturing or service operations in a number
  of different countries
• A citizen of several countries (subject to laws
  in each country and pay taxes in each country)