1. Types of Business Organizations

2. Chapter 8: Types of Business Organizations
KEY CONCEPT
Most of the producers in a market economy are business organizations, commercial or industrial enterprises and the people who work in them. The purpose of most business organizations is to earn a profit.
WHY THE CONCEPT MATTERS
Businesses vary in size and are organized differently. The American free enterprise system allows producers to choose the kind of business organization that best suits their purpose.

3. The Characteristics of Sole Proprietorships
KEY CONCEPTS
Business organizations—produce goods, provide services
purpose of most is to earn profit
supply most products in market economy; provide jobs, income; pay taxes
Sole proprietorship—owned and managed by single person
Make up 70 percent of U.S. businesses, but generate only 5 percent of all sales

4. The Characteristics of Sole Proprietorships
EXAMPLE: Bart’s Cosmic Comics
Steps Bart followed to set up and run a new business
raised funds to rent space, stock store through savings, loans
obtained licenses, site permit; registered name
ran advertisements, promotions to get customers
paid back loans; began earning profit; expanded

5. Sole Proprietorships: Advantages and Disadvantages
KEY CONCEPTS
Not governed by as many regulations as other types of businesses
Have limited life—close if owner dies, retire, or leaves business
Owners have unlimited liability—responsible for all losses, debts

6. Sole Proprietorships: Advantages and Disadvantages
Advantages: Sole Proprietorships
Easy to open or close as long as owner settles all bills
Must meet few regulations; possibly zoning, labor laws for employees
Owner makes own decisions, controls business; personal satisfaction
Owner keeps all profits

7. Sole Proprietorships: Advantages and Disadvantages
Disadvantages: Sole Proprietorships
Have limited funds, especially at start-up
Have limited life
Have unlimited liability—owner personally responsible for all debts

8. Mary Kay Ash: Going It Alone
Building a Business
Ash decided to create business that would reward working women
Mary Kay, Inc. sells cosmetics, other products at in-home parties
In first year, 1964, sales exceeded $198,000
Incentives to consultants include pink Cadillacs, diamond jewelry
In 2005, 1.6 million consultants in 30 countries had $2 billion sales

9. Reviewing Key Concepts
Explain the relationship between the terms in each of these pairs:
business organization and sole proprietorship
limited life and unlimited liability

10. The Characteristics of Partnerships
Forms of Partnerships
The Characteristics of Partnerships
KEY CONCEPTS
Partnership—business co-owned by two or more people
partners agree on division of responsibilities, profits, and losses
Found in all areas of business
very common in professional and financial services

11. The Characteristics of Partnerships
Type 1: General Partnerships
General partnership—most common type
Partners share responsibilities, profits, debts, losses equally
partnership agreement can specify otherwise

12. The Characteristics of Partnerships
Type 2: Limited Partnerships
Limited partnership—at least one limited partner
not involved in running business
liable only for funds he or she invested
Must have general partner who runs business, is liable for all debts
money for business comes from limited partners

13. The Characteristics of Partnerships
Type 3: Limited Liability Partnerships
Limited liability partnership (LLP)—all partners are limited
not responsible for liabilities of other partners
Not all businesses can register as LLPs
only those in which malpractice can be an issue

14. Partnerships: Advantages and Disadvantages
KEY CONCEPTS
Advantages, disadvantages similar to those of sole proprietorships
Some differences because owners work together

15. Partnerships: Advantages and Disadvantages
Advantages: Partnerships
Easy to start up and dissolve
Few regulations: legal agreement; Uniform Partnership Act (UPA)
More funds means easier to get loans, attract employees
Joint decision making: partners bring different perspectives
Partners can specialize, promoting efficiency

16. Partnerships: Advantages and Disadvantages
Disadvantages: Partnerships
Unlimited liability
partners risk personal savings and property to cover debts
Potential for conflict if many partners must agree on decisions
Limited life—if partner leaves or joins new agreement must be drawn

17. Reviewing Key Concepts
Explain the relationship between the terms in each of these pairs:
partnership and general partnership
limited partnership and limited liability partnership

18. Characteristics of Corporations
Corporations, Mergers, and Multinationals
Characteristics of Corporations
KEY CONCEPTS
Corporation—stockholders have rights to profit, limited liability
Stock—shares of ownership in a corporation
Dividend—part of a corporation’s profit paid out to stockholders
Public company—issues stock that can be freely bought and sold
Private company—controls who can buy or sell its stock

19. Characteristics of Corporations
EXAMPLE: F & S Publishing, Inc.
F & S owners have no personal liability; only assets of business at risk
Owners hire lawyers to file legal documents to incorporate
State government grants corporate charter:
registers name, address, purpose; specifies amount of stock can sell
Stockholders elect board of directors which hires corporate officers

20. Corporations: Advantages and Disadvantages
KEY CONCEPTS
Bond—contract issued by corporation
promises to repay borrowed money, plus interest on fixed schedule
Limited liability—owner’s liability for debts and losses is limited
Unlimited life—corporation continues to exist even if owners change

21. Corporations: Advantages and Disadvantages
Advantages: Corporations
Can raise money in various ways:
borrowing from banks, selling more stock, issuing bonds
Professional managers likely to produce higher profits
Limited liability—stockholders, directors, officers protected
Unlimited life—business operates as before if stockholders change

22. Corporations: Advantages and Disadvantages
Disadvantages: Corporations
Starting up: time-consuming, difficult, expensive; paperwork, lawyers
Heavy regulation, specially for public companies
annual SEC reports, quarterly financial reports, stockholder meetings
Both profits and dividends taxed; some small corporations excluded
Decisions made by board; founders must give up some control

23. Business Consolidation
KEY CONCEPTS
To increase efficiency, gain new identity, keep rivals out, diversify
Horizontal merger—joins companies with same or similar product
Vertical merger—joins different steps of production, marketing
Conglomerate—combines companies with unrelated products
Multinational corporation—has branches in several countries

24. Business Consolidation
Mergers
In 2005, Reebok and Adidas made horizontal merger
meant to cut production, distribution costs by combining operations
purpose to undersell and take customers from Nike
In 1990s, Shell and Texaco made vertical merger
Shell had more refineries; Texaco more gas stations for distribution

25. Business Consolidation
Conglomerates
Theory: diversified businesses protect parent company
Practice: difficult to manage unrelated companies
1960s Gulf and Western in communications, clothes, mines, food
eventually sold all except entertainment, publishing; became Viacom

26. Business Consolidation
Multinational Corporations
Multinational, or transnational, corporations increase globalization
Benefits: provide jobs, products; spread technology; pay taxes
help raise standard of living of poor countries
In countries with lax regulations, factories may cause problems
pollution, long work hours, unsafe conditions

27. Bill Gates: Entrepreneur and Corporate Leader
Microsoft Corporation
With Paul Allen, developed BASIC language for personal computers
In 1975, they founded Microsoft to provide software for early PCs
Microsoft began providing operating system for IBM PCs
In 1985, released Windows, which became world’s most popular operating system
In 1994, Gates founded charitable foundation for health, education

28. Reviewing Key Concepts
Explain the relationship between the terms in each of these pairs:
stock and bond
public company and private company
merger and conglomerate

29. Franchises, Co-ops, and Nonprofits
KEY CONCEPTS
Franchise—business that licenses the right to sell its products
Franchisee—pays fee to parent company to sell in a particular area
Fast-food restaurants are most common type of franchise

30. Franchises EXAMPLE: An Almost Independent Business
After working as assistant manager, Tim wants to run own restaurant
Concerns: lacks enough experience, start-up funds
Likes organic juice and sandwich franchise; decides to apply

31. Franchises Advantages: Franchises High level of independence
Franchiser provides training in running the business
Franchiser provides products and other materials at low cost
Franchiser pays for national and regional advertising

32. Franchises Disadvantages: Franchises
Franchisee must invest own money to start business
Must share some of the profits with franchiser
Does not have full control of business
must buy only franchiser’s materials
must sell only franchiser’s products

33. Cooperatives and Nonprofits
KEY CONCEPTS
Some businesses are not created to make a profit
Cooperative—operated for shared benefit of owners, who are customers
Nonprofit organization—acts like business but purpose is to benefit society

34. Cooperatives and Nonprofits
A Business Organization for Its Members
Consumer co-ops keep prices low by purchasing in large volume
members pay fee or provide labor as payment
Service co-ops, such as credit unions, provide services at low cost
Producer co-ops ensure cheaper, more efficient processing or marketing

35. Cooperatives and Nonprofits
A Purpose Other Than Profit
Purpose of many nonprofits is benefiting society
include charities, professional associations, labor unions, museums
Receive government charter; have unlimited life
Raise money from donations, grants, membership fees
some sell services, products to raise funds to support their mission
Other nonprofits are professional organizations
include professional associations, labor unions

36. Reviewing Key Concepts
Give an example of each of the following terms:
franchise
cooperative
nonprofit organization

37. Apple: The Evolution of One Company
Background
As students, Steve Jobs and Steve Wozniak created a personal computer, and in 1976 formed Apple Computer, Inc. Through the years, Apple overcame problems and earned almost $14 billion in revenues in 2005.
What’s the Issue?
How does a company evolve from an idea into a billion-dollar enterprise?

38. Apple: The Evolution of One Company {continued}
Thinking Economically
Based on information in the documents, how would you describe the evolution of Apple Computer, Inc.?
How did Apple’s advertising and marketing affect its success or failure? Use examples from the documents in your answer.
What single overriding concern has defined the evolution of Apple and determined its success? Use information from the documents to support your answer.