Chapter 9

Business Firms in the Economy

 

I.                   Forms of Business Organization

 

There are three major forms of business ownership: proprietorships, partnerships and corporations.  Each of these forms of ownership have advantages and disadvantages.

 

Proprietorships

A form of business in which there is one owner.  In a proprietorship the owner and the business are one and the same.  The following are the advantages of opening a proprietorship.

 

Advantages:

q       Easy to Start

q       Little government regulation

q       Profits stay with the owner

q       Pride of Ownership

q       Complete Control

q       Lower Taxes

 

Disadvantages:

q       Unlimited Liability

q       Limited Life of the business

q       Difficult to raise money

q       Risk of loss is not shared

 

Partnership – is a type of business organization in which there are two or more owners.  Each partner brings something to the business and shares in the good or bad fortune of the firm.

 

The partners in a partnership must agree on their respective responsibilities on how the profits or losses from the business will be split between them.  A partnership agreement is a legally binding agreement which states the issues of the partnership.

 

Advantages:

q       Easy to Start

q       Little Government Regulation

q       Not difficult to raise funds

q       Combination of skills

 

Disadvantages:

q       Unlimited Liability

q       Profits are Shared

q       Limited Life of the Business

q       Disagreements

 

Corporations – is an organization of people legally bound together by a charter to conduct business. 

 

In order to form a corporation the following must occur:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.

4.

Once stock is sold then:

	Stockholders elect a Board of Directors, which supervise the operation of the business but do not take an active part in running it.
			The BOD appoint Officers to run the every day operations of the business.

 

 

 

 

 

Advantages of a Corporation:

q       Easy to raise funds

q       Limited Liability

q       Unlimited Life

q       Specialized Management

q       Risks are Shared

 

Disadvantages of a Corporation:

q       Difficult to start

q       Less Direct Control

q       Double Taxation

q       Limited Activities

 

II.                Businesses Must Survive the Test of the Market

 

More than 80% of our total production in the U.S. comes from private businesses.  These businesses are guided by supply and demand in deciding what to produce and how to produce it.

 

All firms must satisfy the test of the market – is being able to provide goods that satisfy consumers’ needs and desires at prices consumers are willing to pay.

 

Each year, thousands of firms fail the test of the market and go out of business.  It is said that 1 out of every 4 businesses fail within the first year of operation. 

 

Corporations 18%

III.  Distribution of the Three Forms of Business

	Partnerships 8%
			Proprietorship 74%

 

 

Although there are many more smaller firms than larger ones, the % of sales is larger for corporations due to their size.

		Corporations 90%

 

 

Corporations account for most of the sales in the industry.  On page 226 it lists the 20 largest corporations with headquarters in the U.S.

 

IV.              Other Forms of Business Ownership

 

Multinational Businesses

 

The world of business today is the entire world.  Many large and small companies based in the United States sell and produce products in markets around the globe.  A Multinational Business is one that sells or producers products in multiple countries. 

 

Nonprofit Organizations

 

Non-profit organizations do not have profit as an objective. Examples include the American Red Cross, Museums, & educational institutions.

 

Franchises

 

A franchise is a contract between a parent company (franchisor) and some individual (franchisee) that details the terms under which the franchisee does business with products, names, or other services of the franchisor.

 

V.                Business Growth and Expansion

 

Financing a Business – start-up money for most proprietorships and partnerships comes from the savings of the people involved and some funds borrowed from banks or friends.

 

Line of Credit – sometimes businesses need additional cash to help them get through a period of low sales.  For this reason, partnerships and proprietorships try to establish a line of credit with a local bank.  A line of credit is an arrangement through which the business can access needed cash quickly.  This is similar to getting a loan.  Once the application has been approved, the business can access the money as needed without going through the process of applying for a loan each time.

 

Bonds – corporations can also issue bonds to raise funds.  A Bond is a certificate stating the amount the corporation has borrowed from the holder and the terms of repayment.  The following are common terms when it comes to issuing bonds

 

q       Maturity Date – each bond has a date when the amount of the bond must be repaid back to the buyer.

q       Face Value – the amount of the bond

q       Interest – the payment to the lender for the use of their money

 

For example:  Suppose you bought a $1,000 bond that paid 9% and had a ten year maturity.  You would get $90 each year in interest and $1000 on the tenth year.

What is the advantage to the lender?

What is the advantage to the company?

 

Stock – corporations can also sell stock.  Common Stock – is a type of stock that gives the holder partial ownership of the corporation. Owners of common stock are not guaranteed any payment.  They may receive dividends if the company is successful and the market value of the stock may go up.

 

Mergers – firms may grow by buying other businesses.  When two firms combine in some way, they have merged.  A merger is the combining of one company with another company it buys.  There are three kinds of mergers.

 

q       Horizontal Mergers – is a merger of two companies in the same industry.  The government watches these types of mergers very closely to ensure that monopolies are not controlling the market.

q       Vertical Mergers – is a merger of two companies that are at different stages in the same production process.  A merger between a company that makes motors and an automobile manufacturing company.

q       Conglomerate Mergers – is a merger of two companies that are in different businesses.  A conglomerate is a firm made up of many divisions and/or subsidiaries that may not have much in common in their lines of business.  Pepsi is considered a conglomerate because they own PepsiCo, FritoLay, KFC, Pizza Hut, and Taco Bell.   The government less actively opposes conglomerate mergers because it is not certain that they reduce competition.