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Economics - Business Organizations                                 PowerPoint Ch. 8 
The Main Ideas

(Prentice Hall Economics: Principles in Action)

1- Sole proprietorships are the most common form of business in the United

    States. Owners have both full control and unlimited liability.

 

2- In partnerships, individuals pool their resources and share responsibility for 

    running a business.

 

3- Corporations are complex business organizations which offer limited liability to

    their owners, individual stockholders.

 

4- Different types of business organizations include franchises, cooperatives, and

    non-profit organizations.

Business Terms

Demographic

Target Market

 

 

 

Net Income - A company's total earnings (or profit).

Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company's income statement and is an important measure of how profitable the company is over a period of time.

 

 

 

 

 

 

 

 

 

 

Main types of business

http://www.youtube.com/watch?v=pPVkG9krOMI

 

http://www.companiesinc.com/incorporate/business-incorporation/index.asp

1- SOLE PROPRIETORSHIPS 

 

One of the first decisions entrepreneurs must make is what kind of business organization they will have.  A business organization is an establishment formed to carry on commercial enterprise. The most common form of business organization is the sole proprietorship. A sole proprietorship is a business owned and run by one person. About 75 percent of all businesses in the United States are sole proprietorships.  However, since most sole proprietorships are small, they account for only 6 percent of all United States sales. Your local bakery, barber shop, and bicycle repair shop are most likely sole proprietorships. The biggest advantage of the sole proprietorship is that the owner gets to keep all profits after paying income taxes. Another advantage is that sole proprietorships are easy to start. They can usually be opened with a small amount of paperwork and legal expense. Owners also have complete control of their businesses, and can respond quickly to changes in the marketplace. The most important disadvantage of sole proprietorships is unlimited personal liability. Liability is the legal obligation to pay debts. If the business fails, the owner may have to sell personal property to cover those debts. Another disadvantage is that it may be hard for sole proprietors to find capital to expand their businesses. It may also be hard to find good employees. That is because many small businesses cannot afford fringe benefits, or payments to employees other than wages, such as paid vacation, retirement pay, and health insurance.  (Prentice Hall Economics: Principles in Action)

 

Advantages of a Sole Proprietorship

  • A sole proprietor has complete control and decision-making power over the business.
  • Sale or transfer can take place at the discretion of the sole proprietor.
  • No corporate tax payments
  • Minimal legal costs to forming a sole proprietorship
  • Few formal business requirements

Disadvantages of a Sole Proprietorship

  • The sole proprietor of the business can be held personally liable for the debts and obligations of the business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company.
  • All responsibilities and business decisions fall on the shoulders of the sole proprietor.
  • Investors won't usually invest in sole proprietorships.

 (http://www.nytimes.com/allbusiness/AB4113314_primary.html)

Checklist: The Makings of a Sole Proprietorship

(By AllBusiness.com)

  • Ownership rules: A sole proprietorship has one business owner.
  • Personal liability of owner: Proprietor has unlimited personal liability for the obligations of the business.
  • Tax treatment: Business entity is not taxed, as the profits and losses are passed through to the sole proprietor.
  • Key documents needed for formation: DBA filing, business license
  • Management of the business: Sole proprietor manages the business.
  • Capital contributions: Sole proprietor contributes whatever capital needed.
  •  

    --------------------------------------------------------------------------------

    2- PARTNERSHIPS A partnership is a business organization owned by two or more persons. Approximately 7% of U.S. businesses are organized as partnerships.  The partners must agree on how profits and responsibilities are divided. The most common type of partnership is a general partnership. Partners in a general partnership share equally in both responsibility and liability. Doctors, lawyers, accountants and other professionals often form general partnerships. In a limited partnership only one partner is required to be a general partner. That partner has control over the business, but unlimited personal liability for the firm’s actions. Other partners contribute only money. A newer type of partnership is the limited liability partnership (LLP). In this type of partnership all partners are limited partners and are shielded from personal liability in certain situations. One important advantage of a partnership is that the responsibility for the business may be shared. In a successful partnership, each partner brings different strengths and skills to the business. Each partner’s assets, or money and other valuables, improve the firm’s ability to borrow funds for operations or expansion. Another  advantage of partnerships is that like sole proprietorships, they are easy to start. Partnerships also have disadvantages. Each general partner is responsible for the acts of the other partners. Unless the partnership is an LLP, at least one partner has unlimited liability. Like a sole proprietor, partners can lose their own personal property in paying the firm’s debts. Another potential problem is conflict among the partners. They need to come to agreement about business goals and philosophies.  (Prentice Hall Economics: Principles in Action)

    (Prentice Hall Economics: Principles in Action)

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    3- CORPORATIONS, MERGERS, AND MULTINATIONALS  

     

    Most large businesses in the United States are corporations. A corporation is a legal entity, or being, owned by individual stockholders. Each stockholder has limited liability for the firm’s debts, and can lose only as much as he or she has invested. Stockholders own stocks, which represent their share of ownership in the corporation. Like a person, a corporation pays taxes, can enter into contracts, and can bring lawsuits in court. All corporations have the same basic structure. Stockholders elect a board of directors. The board makes the important decisions for the corporation. It also appoints corporate officers who run the corporation.

     

    The names below belong to which Board of Directors?

     

    Mark Zuckerberg     Chairman and CEO

    Mark Zuckerberg is our founder and has served as our CEO and as a member of our board of directors since July 2004. Mr. Zuckerberg has served as Chairman of our board of directors since January 2012. Mr. Zuckerberg attended Harvard University where he studied computer science.

    Sheryl Sandberg Chief Operating Officer

     

    Sheryl Sandberg is Chief Operating Officer at Facebook. She oversees the company's business operations including sales, marketing, business development, human resources, public policy and communications. Prior to Facebook, Sheryl was Vice President of Global Online Sales and Operations at Google, where she built and managed the online sales channels for advertising and publishing and operations for consumer products worldwide. She was also instrumental in launching Google.org, Google's philanthropic arm. Before Google, Sheryl served as Chief of Staff for the United States Treasury Department under President Bill Clinton where she helped lead the Treasury's work on forgiving debt in the developing world. Earlier, she was a management consultant with McKinsey & Company and an economist with the World Bank. Sheryl received a B.A. summa cum laude in Economics from Harvard University and was awarded the John H. Williams Prize for the top graduating student in economics. She received an MBA with highest distinction from the Harvard Business School. Sheryl serves on the boards of The Walt Disney Company, Women for Women International, the Center for Global Development and V-Day.

    Marc Andreessen -Marc L. Andreessen has served as a member of our board of directors since June 2008. Mr. Andreessen is a co-founder and has been a General Partner of Andreessen Horowitz, a venture capital firm, since July 2009. Previously, Mr. Andreessen co-founded and served as the Chairman of the board of directors of Opsware, Inc. (formerly known as Loudcloud Inc.), a software company. He also served as Chief Technology Officer of America Online, Inc., an Internet services company. Mr. Andreessen was a co-founder of Netscape Communications Corporation, a software company, serving in various positions, including Chief Technology Officer and Executive Vice President of Products. In addition to serving on our board of directors, Mr. Andreessen currently serves as a member of the boards of directors of eBay Inc. and the Hewlett-Packard Company. Mr. Andreessen holds a B.S. in computer science from the University of Illinois at Urbana-Champaign.

     

    Member of the Audit Committee

    Member of the Governance Committee

    Erskine B. Bowles

    Erskine B. Bowles has served as a member of our board of directors since September 2011. Mr. Bowles is President Emeritus of the University of North Carolina and served as President from January 2006 through December 2010. Mr. Bowles has also been a Senior Advisor of BDT Capital Partners, LLC, a private investment firm, since January 2012. From February 2010 until December 2010, he served as Co-Chair of the National Commission on Fiscal Responsibility and Reform. Mr. Bowles has been a Senior Advisor since 2001 and was Managing Director from 1999 to 2001 of Carousel Capital LLC, a private investment firm. He was also a partner of Forstmann Little & Co., an investment firm, from 1999 to 2001. Mr. Bowles began his career in corporate finance at Morgan Stanley and subsequently helped found and ultimately served as Chairman and Chief Executive Officer of Bowles Hollowell Connor & Co., an investment banking firm. He also was a founder of Kitty Hawk Capital, a venture capital firm. Mr. Bowles served as White House Chief of Staff from 1996 to 1998 and Deputy White House Chief of Staff from 1994 to 1995. In addition to serving on our board of directors, Mr. Bowles currently serves as a member of the boards of directors of Morgan Stanley, Belk, Inc., and Norfolk Southern Corporation. Mr. Bowles also served as a member of the board of directors of General Motors Company from June 2005 to April 2009 and Cousins Properties Incorporated from August 2003 to May 2012. Mr. Bowles holds a B.S. in business from the University of North Carolina at Chapel Hill and an M.B.A. from Columbia University Graduate School of Business.

    Chair of the Audit Committee

    James W. Breyer

    James W. Breyer has served as a member of our board of directors since April 2005. Mr. Breyer has been a Partner of Accel Partners, a venture capital firm, since 1987. Mr. Breyer is also the founder and has been the Chief Executive Officer of Breyer Capital, an investment firm, since July 2006. Mr. Breyer is also a co-founder and has been co-lead on the strategic investment committee since inception of the IDG-Accel China Funds. In addition to serving on our board of directors, Mr. Breyer currently serves as a member of the boards of directors of Brightcove Inc., Dell, Inc., News Corporation, Prosper Marketplace, Inc., and Wal-Mart Stores, Inc., where he is the lead/presiding independent director. Mr. Breyer previously served as a member of the board of directors of Marvel Entertainment Inc. from June 2006 to December 2009 and RealNetworks, Inc. from October 1995 to June 2008. Mr. Breyer holds a B.S. in interdisciplinary studies from Stanford University and an M.B.A. from Harvard University.

    Chair of the Compensation Committee

    Donald E. GrahamDonald E. Graham has served as a member of our board of directors since March 2009. Mr. Graham has served as the Chief Executive Officer of The Washington Post Company, an education and media company, since 1991 and as Chairman of its board of directors since 1993. Mr. Graham holds an A.B. in English history and literature from Harvard University.

    Lead Independent Director

    Chair of the Governance Committee

    Member of the Compensation Committee

    Reed Hastings,

    Reed Hastings has served as a member of our board of directors since June 2011. Mr. Hastings has served as the Chief Executive Officer and Chairman of the board of directors of Netflix, Inc., a provider of an Internet subscription service for movies and television shows, since 1999. Prior to Netflix, Mr. Hastings served as Chief Executive Officer of Technology Network, a political service organization for the technology industry. Mr. Hastings served as Chief Executive Officer of Pure Atria Software, a maker of software development tools, from 1991 until it was acquired by Rational Software Corporation, a software company, in 1997. In addition to serving on our board of directors, Mr. Hastings currently serves as a member of the board of directors of Microsoft Corporation. Mr. Hastings holds a B.A. in mathematics from Bowdoin College and an M.S.C.S. in computer science from Stanford University.

    Member of the Governance Committee

    Peter A. Thiel

     

     

    The most important advantage of the corporate structure is limiting liability. Stockholders can only lose the amount of money they have invested. Corporations can raise money by selling stock on the stock market.

     

     

     

     

    Corporations also borrow money by selling bonds. Bonds are certificates corporations issue,

    promising to repay the money they borrow with interest.

     

    As a corporation grows, it may decide to merge, or combine, with another company or companies. Horizontal mergers join two or more firms in the same market. For example, two automakers may decide to form a larger company.

     

    Vertical mergers join two or more firms involved in different stages of making the same good or service. For example, an automaker may merge with the company that supplies it with rubber tires.

     

     

     

     

    Comcast Corporation (NASDAQ: CMCSA, CMCSK) is the largest cable operator, home Internet service provider, and third largest home telephone service provider in the United States, providing cable television, broadband Internet, telephone service and in some areas home security (including burglar alarms, surveillance cameras, fire alarms and home automation) to both residential and commercial customers in 40 states and the District of Columbia.[3]

     

    The company is headquartered in Philadelphia, Pennsylvania. Comcast also has significant holding in several cable networks (including E! Entertainment Television, Style Network, G4, The Golf Channel and NBC Sports Network), distribution (ThePlatform), and related businesses. Comcast acquired a majority stake in media conglomerate NBCUniversal in January 2011. Comcast has been the subject of criticism for activities including its stance on net neutrality,[4][5] as well as poor results on customer satisfaction surveys.[6

     

     

    Conglomerates combine companies which produce completely unrelated goods or services. Multinational corporations (MNCs)  are corporations that operate. (Prentice Hall Economics: Principles in Action)

     

    The Wall Street Journal 

    The Wall Street Journal

    Wall St. Journal - April 26, 2012  - "Where the Jobs Are"

    Thirty-five big U.S.-based multinational companies added jobs much faster than other employers in the past two years, but nearly three-fourths of those jobs are overseas, according to a Wall Street Journal analysis.

     

    (Prentice Hall Economics: Principles in Action)

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    4- OTHER ORGANIZATIONS

     

     

    A business franchise is a business that is semi-independent. It pays fees to a parent company. In return, the business gets the exclusive right to sell a certain product or service in a given area. The parent company, or franchiser, develops the products and business system and helps the local franchise owners produce and sell their products. For a small business owner (franchisee), a franchise has the advantage of a built-in reputation. However, the franchise owner must give up some freedom, and must also pay fees and even a share of earnings.

    http://www.franchise.com/

     

     

     #1 Subway                                        $84,300 - $258,300

     #2 McDonald's                               $995,900 - 1,842,700

     #3 7-Eleven Inc.                                $40,500 - 775,300

     #4 Hampton Hotels                     $3,716,000 - 13,148,800

     #5 Supercuts                                   $111,000 - 239,700

     #6 H & R Block                                   $26,427 - 84,094

     #7 Dunkin' Donuts                          $537,750 - 1,765,300

     #8 Jani-King Cleaning                        $11,400 - 35,050

     #9 Servpro                                       $102,250 - 161,150

     #10 AmPm Mini Market               $1,835,823 - 7,615,065

     A cooperative is a business organization owned and operated by a group of people for their shared benefit. Consumer cooperatives sell merchandise to their members at reduced prices.

     

    Cooperatives that provide a service rather than goods are called service cooperatives. Some service cooperatives offer discounted insurance, banking services, health care, legal help, or baby-sitting services. Producer cooperatives are agricultural marketing cooperatives  that help members sell their products.

     

    Nonprofit organizations function like businesses but do not operate for profit. These nonprofit organizations are usually in the business of serving society. Nonprofit organizations include museums, public schools, and YMCAs. The government exempts nonprofit  organizations from income taxes. Many nonprofit organizations operate with partial government support. Nonprofit organizations that promote the interests of particular industries are called trade associations. (Prentice Hall Economics: Principles in Action)

     

       2012 "Best NonProfit Organizations to Work for" 

     

    • Wounded Warrior Project

    • Alzheimer's Association

    • Animal Legal Defense Fund

    • Make-A-Wish Foundation 

    • Make-A-Wish Foundation of America

    • Big Brothers Big Sisters
    • National Institute of Aerospace

    • Mayo Clinic Health System –

    • Better Business Bureau
    • Global Kids, Inc.

    • American Heart Association

    • Emerge! Center Against Domestic 

                  Abuse

    • Caring Voice Coalition, Inc

    • The Children's Home of Cincinnati

     

    (Prentice Hall Economics: Principles in Action)

     

     

     

     

     

    Practice questions - Business Organizations

    Multiple Choice

    1. Individuals who invest in a corporation by buying stock are:

        a. subsidiaries     b. conglomerates     c. cooperatives     d. proprietors    e. stockholders

     

    2. A merger between companies producing different products is a:

        a. conglomerate combination   b. vertical     c. horizontal combination

     

    3. A merger between companies that are involved in different phases of

        production of the same product(buy their suppliers) is a:

        a. vertical combination     b. conglomerate combination     c. horizontal combination

     

    4. A merger between companies that produce the same good/service is a:

        a. conglomerate combination     b. vertical combination   c. horizontal combination

     

    5. If "Burger King buys What-a-burger", it is a:

        a. conglomerate combination     b. vertical combination   c. horizontal combination

     

    6. A business that is owned by the people who use its services is a:

        a. nonprofit organization   b. partnership   c. cooperative   d. corporation

     

    7. A business that is owned and controlled by one person is a:

        a. cooperative    b. partnership     c. sole proprietorship   d. corporation

     

    8. A business that provides goods or services without seeking profits

       for distribution to individual members is a:

        a. not-for-profit organization   b. partnership    c. cooperative     d. corporation

     

    9. Business organization that is treated by law as if it were an individual

        person (can sue and be sued) is a:

        a. cooperative     b. partnership     c. sole proprietorship     d. corporation

     

    l0. Business that is owned and controlled by two or more people is a:

        a. cooperative   b. partnership     c. sole proprietorship     d. corporation

     

    11. A cooperative in which members pool their savings (get cheaper loans

         & higher interest on their savings) is a:

        a. dividend     b. credit union    c. nonprofit organization  d. sole proprietorship

     

    12. Certificates of ownerships in a corporation are called:

        a. bonds     b. dividends     c. stocks    d. interest     e. liability

     

    13. In this type of partnership, the partners enjoy equal decision-making

          authority and have unlimited liability:

        a. limited    b. general  c. conglomerate     d. horizontal     e. merger

     

    l4. The amount of money paid to an investor in return for his

         investment is the:

        a. bonds     b. dividends     c. stocks   d. liability

     

    l5. In this type of partnership, the "silent" partner invest in the company

        but remains in a non-active role:

        a. limited     b. general    c. conglomerate     d. horizontal     e. merger

     

    l6. Although they usually have no voice in how the company is run (can't vote),

        owners of this type of stock are guaranteed dividends:

        a. principal     b. liability     c. interest     d. common     e. preferred

     

    l7. Owners of this type of stock can vote on how the corporation is run

        and share in variable dividends:

         a. principal     b. liability     c. interest     d. common     e. preferred

     

    l8. The original amount of money borrowed in a loan is the:

        a. principal    b. liability      c. interest      d. common     e. preferred

     

    19. The debt, or amount of money owed by a business is the:

        a. principal     b. liability     c. interest      d. common     e. preferred

     

    20. The predetermined amount the borrower must pay for the use of

          borrowed funds  is the:

        a. principal     b. liability     c. interest      d. common      e. preferred

     

    21. When one company absorbs another, this is called a:

        a. conglomerate     b. limited     c. general     d. horizontal     e. merger

     

    22. If Compaq Computers bought Dell Computers, this is a:

         a. conglomerate merger     b. vertical merger     c. horizontal merger

     

    23. The business organization that accounts for the most total sales

          in the nation is the:

        a. sole proprietorship          b. partnership          c. corporation

     

    24. The most common form of business organization is the:

        a. sole proprietorship          b. partnership           c. corporation

     

    25. If General Motors bought Ford Motor Company, this is a:

        a. conglomerate merger          b. vertical merger         c. horizontal merger

     

     

     

    26. If KFC bought Church's Chicken, this is an example of a:

        a. conglomerate merger          b. vertical merger          c. horizontal merger

     

    27. From the business viewpoint, one disadvantage of a corporation is that:

        a. the corporation's management is separated from its ownership.

        b. stocks are issued and bonds are sold to raise capital.

        c. the decision-making process is slow.

        d. liability is limited.

     

    28. A certificate issued by a corporation in exchange for money

         borrowed from investors(an I.O.U.) is:

        a. corporate bond      b. preferred stock    c. common stock     d. market share

     

    29. Each of the following is a benefit of having a franchise except:

        a. well known trade name   b. national advertising   c. employee training   d. complete independence

     

    30. Corporations:

        a. account for less than l0% of total sales in the nation.

        b. account for around 90% of the total sales in the nation.

        c. account for nearly 70% of the business organizations in the nation

        d. account for the most business organizations & the most total sales in the nation.

     

    31. American Airlines buying Southwest Airlines would be a:

        a. horizontal merger          b. vertical merger          c. conglomerate merger

     

    32. Compaq Computers buying Purina Dog Chow would be a:

        a. horizontal merger          b. vertical merger          c. conglomerate merger

     

    33. Which of the following applies to the corporation but not to other

         business organizations? 

        a. limited liability    b. limited life    c. lower organizing costs    d. ease of organizing

     

    34. Which of the following groups own the corporation?

        a. bondholders     b. executive officers     c. board of directors   d. stockholders

     

    35. The American Red Cross (serves everyone in need, not just members)

         is an example of a:

        a. not-for-profit organization        b. cooperative           c. franchise  

     

    36. The Ocean Spray Cranberry Company is owned by the growers

          who  provide  it  with  its  cranberries  and  other  food products.

          Ocean Spray is an example of a:

        a. cooperative         b. franchise           c. not-for-profit business

     

    37. The most common form of business organization in the U.S. is the:

        a. corporation     b. cooperative     c. partnership          d. sole proprietorship

     

     

     

    Which answer (questions 38-42) does "not belong" ?

        38. Stockholders:

         a. receive interest on the amount of money that was borrowed

         b. own corporations

         c. may receive dividends

         d. have limited liability

     

    39. Three most common types of business organizations:

         a. sole proprietorships

         b. partnerships

         c. not-for-profit organizations

         d. corporations

     

    40. Corporations:

    a.       may be either publicly owned or closed.

    b.      account for around 90% of total sales in the nation.

    c.       are treated by law as if they were individual persons.

    d.      are the most common form of business organization in the nation.

     

    41. Nonprofit organizations:

    a.       are taxed heavily by the government.

    b.      put all profits back into the organization.

    c.       do not seek profits for distribution to individual members

    d.      earn revenues from the sale of products, from fees for services, or from charitable contributions

     

    42. General partners:

    a.       enjoy equal decision-making authority.

    b.      have unlimited liability.

    c.       rarely take an active role in the business.

    d.      usually formulate a partnership contract.

     

     

     

    ADVANTAGES & DISADVANTAGES:

                            Put “A” if it is an advantage.

                            Put “D” if it is a disadvantage.

     

    43. From the business viewpoint, ownership is separated from management in a    

          corporation.

     

    44. In a partnership, partners can specialize.

     

    45. From stockholder's viewpoint, stockholders have limited liability in a corporation.

     

    46. In a sole proprietorship, the owner has unlimited liability.

     

    47. In a general partnership, each partner is personally responsible for debts incurred.

     

    48. From the business viewpoint, a corporation can raise capital by issuing shares of

          stock.

       

    49. In a sole proprietorship, the owner receives the entire profit from the business.

     

    50. In a corporation, there is double taxation (on profits and then on dividends).

     

     

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    Today's Lesson

    Groups - Pick 5 franchises, describe what you see, taste, experience when you walk into any of them.

    With franchises the big advantage is name recognition.  Of the franchises that we see named at franchise.com, which names do you recognize?