BUSINESS OWNERSHIP AND OPERATIONS BUSINESS PRINCIPLES A, CHAPTER 6

SOLE PROPRIETORSHIP Def: business owned by only one person; about ¾ of all businesses in the US are sole proprietoships Advantages –Easy to start –Might need a license orpermit –Be your own boss –You get to keep all profits –Taxes may be lower; paid on personal profits

SOLE PROPRIETORSHIP Disadvantages: –Must pay for everything yourself –Capital may be limited or not enough Common cause of failure –You may lack business Skills –Unlimited Liability Full responsibility for you company’s debts

PARTNERSHIP Def: Business owned by two or more persons who share the risks and reward Share the rewards Income taxed only once Must start with a partnership agreement –Contract that outlines the rights and responsibilities of each partner

PARTNERSHIP Advantages –Might need a license to start –Pay taxes only on your personal profits –Each partner can contribute money (capital) to start the business –Banks often are more willing to lend to a partnership Disadvantages: –Must share the profits –Might not get along with your partner –Share unlimited legal and financial responsibility –If one partner makes a bad decision, all are equally responsible –All partners are responsible for debts that result from bad decisions

CORPORATION Def: business owned by many people but treated by law as one person Can own property, pay taxes, make contracts, be sued just like a person Exists separate from the owners Must get a corporate charter from the state in which your headquarters reside –Charter: a license to run a corporation Can raise money by selling stock: shares of ownership in your corporation Stockholders pay a set price for each share and usually get to vote on how the business is run Must have a board of directors who control the corporation Hire officers to run the business

CORPORATION Advantages: Limited liability: if company loses money, the stockholders lose only what they invested Personal property or savings cannot be taken away from you The corporation doesn’t end if the owners sell their shares Shares can be resold and the company continues Disadvantages: Double taxation –Corporate profits are taxed –Owners are taxed on their income from the corporation Government closely regulates corporations More difficult to start a corporation than a sole proprietorship or partnership Running it can be more complicated

ALTERNATIVE WAYS TO DO BUSINESS Franchise -contractual agreement to sell a company’s products or services in a designated geographic area You must invest money and pay the franchisor an annual fee or a share of the profits Franchisor offers a well-known name and a business plan They provide management training, advertising, and a system of operation Can be operated as proprietorship, partnership, or corporation

FRANCHISE Advantages: Easy to start Proven methods and product Name of parent company can be a big draw for customers Disadvantages: Franchisor is often very strict about how the business is run Business must operate like every other franchise Might be limited in what products or services you can offer your customers

COOPERATIVE Def: an organization owned and operated by its members for the purpose of saving money on the purchase of certain goods and services Like a corporation in that it exists as a separate entity from the individual business Need a government charter to start one Can also sell stock and choose a board of directors to run it Small farmers, book dealers, or antique merchants can pool their resources Save money by buying insurance, supplies, and advertising as a group Share factory facilities and warehouse space Cooperatives also pay less in taxes than regular corporations do Examples: Ocean Spray, Ace Hardware, and Welch’s

TYPES OF BUSINESSES Group by the kind of products they provide: –Producing raw goods –Processing raw goods –Manufacturing goods from raw or processed goods –Distributing goods –Providing services

TYPES OF BUSINESSES PRODUCERS Def: a business that gathers raw products in their natural state Raw goods are materials gathered in their original state from natural resources such as land or water Examples: –farmer growing wheat –Miner digging for iron ore –Petroleum worker drilling for crude oil PROCESSORS Def: change raw materials into more finished products Processing of raw goods Examples: –Wheat turned into flour –Crude oil into gasoline –Iron ore into steel

TYPES OF BUSINESSES MANUFACTURERS Def: businesses that make finished products out of processed goods They turn raw or processed goods into finished goods that require no further processing and that are ready to market Examples: –Bakery makes bread out of flour –Automotive plant makes cars out of steel, glass, and plastic SERVICE BUSINESS Def: business that provides services rather than goods Services are the products of a skill or an activity Examples: –Hairstyling –Car repair –Dry cleaning –Massage

TYPES OF BUSINESSES INTERMEDIARIES Def: business that moves goods from one business to another Buys goods, stores them, and then resells them Wholesaler: a distributor who distributes goods; buys from manufacturers in huge quantities and resells them to companies in smaller quantities Examples: clothing wholesaler buys thousands of jackets and them sells them to retailers Retailer: purchases goods from a wholesaler and resells them to the consumer, or the final buyer of the goods Examples: services stations, record stores, and auto dealers