Forms of Business

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Chapter 3

• Forms of Business

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Advantages of Sole Proprietorships

• Sole Proprietorship- one person owns the company.
  They are the most common form of business in the
  US. They account for one fifth of the net income
  in the US
• Advantages
• They are easy to start
• Very easy to manage
• The owner does not have to share profits
• The business is only taxed once

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Disadvantages-

• Unlimited Liability
• Can be difficult to raise money
• Size and efficiency
• They carry minimum inventory
• Limited managerial experience
• Hard to attract good help
• Limited life.

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Partnerships

• Two or more people own equal parts of a business
• Limited partnerships- one or more partner is not
  active in the day to day running if the business

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Advantages

• Easy to start
• Each partner brings in certain strengths
• No special taxes
• Easier to get capital and money
• Larger size and more efficient

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Disadvantages

• Each partner is fully responsible for the acts of
  the other partners.
• Limited partners have limited liability.
• Limited life.
• Conflict between partners.
• Bankruptcy- delay paying a debt.

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Corporations

• A form of business that is a separate legal
  entity that still has the rights of an individual
• Forming a corporation- Very formal and very legal
  matter.
• Must obtain a CHARTER which is permission from
  the government to form a corporation

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Corporations Continued

• Sell STOCK or ownership certificates for the
  business.
• Stockholders or shareholders are those who invest
  money into the corporation.
• If the business makes a profit the stockholders
  are each given a DIVIDEND or share of the profit.

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Corporate Structure

• Common stock represents basic ownership in a
  company. Owners usually receive one vote for each
  share of stock they own.
• Preferred stock holders represent non- voting
  shareholder. They are paid dividends before
  common stock holders.

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Advantages of Corporations

• The ease of raising financial capital.
• Bonds are loans companies take and agree to pay
  back at a certain time
• Principal is the amount of money the company
  borrowed
• Interest is the amount over the principal the
  company agrees to pay back.
• Professional managers can run the firm
• Limited liability for the owners. Investors can
  only loose the amount of money they put into the
  company.

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Disadvantages

• Difficulty and expense of getting a charter.
• Shareholders have little say in how the company
  is run after they cast their vote.
• Double taxation of corporate profits.
• The government is more involved with corporations
  they other types of businesses.

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Types of Business Government Regulates

• Banks
• Insurance Companies
• Gas-Electric
• Phone
• Transportation

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Growth through Reinvestment

• 1. Net income- Dollar amount left over after pay
  all expenses.
• 2. Depreciations The drop in value of capital
  because of general wear and tear.
• 3. Cash flow- the sum of your net income and non
  cash charges (like depreciation)

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Types of Mergers

• Horizontal Merger- when two or more firms that
  produces the same product join together.
• Vertical Merger- when firms involved with
  different steps of the production of the same
  product join together.
• Conglomerates- when four or more firms join
  together that produces different products.
  Diversification is usually the reason.
• Multinational- large firms that have plants in
  several different countries.

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Other organization

• Non- profit organization- a company that promotes
  the interest of the employees rather than drives
  for a profit. (Schools, churches, hospitals and
  welfare groups)
• 2. Cooperative- a voluntary association of people
  formed to carry on some type of economic activity
  that will benefit the members. There are three
  types
• Consumer Cooperatives- buy bulk amount of goods
• Service Cooperative- service instead of products-
  (credits unions)
• Producer Cooperatives- help members sell their
  products

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Labor, Professional and Business Organization

• Labor Union A group of people that represent
  the interest of workers
• Collective bargaining- Negotiates with management
  on matters such as wages, working hours and
  health coverage.
• Professional Associations- a group of people in a
  special field that work to improve working
  conditions, skill level and public perception of
  their profession. AMA-American Medical
  Association, ABA American Bar Association.
• Chamber of Commerce- community organization that
  promote the welfare of its members and community.
  (City clean up programs, educational programs)
• Better Business Bureau- Works to protect the
  consumers. Business owners support it.

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The Role of Government

• The Direct Role
• The government sometimes provides goods and
  services that directly competes with businesses
• Federal Deposit Insurance Corporation (FDIC)
  insures the money that people deposit into banks.
• United States Postal Service (USPS) -distributes
  our mail but directly competes with other
  services that do the same thing.

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The Indirect Role of Government

• Public Utilities- the government regulates
  utility service so the prices will not go up
  unfairly.
• Cable
• Natural gas
• Water