Chapter 3 Economics Section 1 Business Organizations

Transcription

1 Chapter 3 Economics Section 1 Business Organizations Businesses in America are 73% sole proprietorships, but corporations account for 88.8% of the sales. Only 20% of the businesses are corporations. Types of Businesses: Sole Proprietorship: owned and run by one person Advantages *ease of start up *ease of management *one person keeps the profits *no separate business income taxes Disadvantages: *unlimited liability personal possessions are at risk *difficult to raise financial capital are you rich enough? Collateral? Bank loans? *size and efficiency can you pay enough workers and have enough inventory to survive? *limited experience can you manage your own shop? *do people want to work for you? *limited life when you die, quit or sell the business looses its life 1

2 Partnerships business jointly owned by two or more persons Types general partnership>all partners share financial and managerial responsibilities Limited partnership>at least one person is not involved in daily business activities. (silent partner) Advantages *ease of startup articles of partnership need lawyer and filing fees *ease of management each partner brings something to help *same taxes as SP, just have to file partnership info with the IRS *easier to attract financial capital *larger in size than SP Disadvantages *each partner accountable for the other>their bad decisions are yours>unlimited liability *limited partners have limited liability how much they are $involved is how much they are liable *limited life- when a partner dies, the business must be reformed *potential for conflict 2

3 Corporations A form of business that is recognized as a separate legal entity, having all the rights of an individual A corporation can do anything a person can do- buy land, sell G&S, enter into legal contracts, sue and be sued. Getting Started *very formal and legal arrangement > to incorporate>must file permission from govt. or state bus. Headquarters. If they say yes, the corporation gets a charter (approval form) The charter specifies how many shares of stock, or ownership certificates exist in the firm. The shares are sold to investors called stockholders or shareholders. IPO initial public offering The corp. then takes the $ from the stock to start the business Common stock shares in the corp. one vote per share in the company, used to elect board of directors>majority common stockholder can control the company. Proxy a way to turn your vote over to someone else, but you still keep your stock. Preferred stock shares in the corp. that get dividends> a check that is part of the profits from sales Pref. stock is nonvoting stock, but are first to receive dividend check, before common If the corp. goes under. The pref. SHolders get paid first from the liquidation sales. Common gets paid last. 3

4 Advantages of a corporation *ease of raising capital>need more, create more stock to sell, borrow from selling Bonds Bond written promise to repay amount on the bond at a later date Principle the amount borrowed Interest profit to the lender (buyer of the bond) the reason to buy the bond *can hire pros to run the company *limited liability for owners>only loose stock value, not personal assets *unlimited life>bus. Lives on even if owners die *ease of transferring ownership Disadvantages *difficulty of getting charter *owners/shareholders have little say in how business is run *double taxation dividends are taxed twice once as corporate profit, and once again as personal income *subject to more govt. regulations than other businesses. Ie.to sell stock, register with SEC 4

5 The Rest of Chapter 3 Business Growth, Expansion Mergers combination of two or more businesses into one. Horizontal: two alike companies join forces- AT&T and Cingular Vertical: bring together firms that produce one product baseball bats Conglomerate four or more businesses from Mergers and Acquisitions Multinational corp. has businesses in many countries Non Profit business like operations, but done for interests rather than profits NP*Co-op or cooperative voluntary association/business to benefit cause or interests of members/group NP*Credit Union co-op that serves financial service to members of interest group. Ie DTCU NP*Labor Unions organization of workers to benefit members interest NP*Collective bargaining used by unions to negotiate with company mgmt./owners for pay, insurance, hours, vacation time, ect Chamber of Commerce organization of businesses to promote their collective interests loop 288 roads and utilities Better Business Bureau non profit maintains records on consumer satisfaction, complaints, education and general information Public Utilities regulated by govt., investor or municipal (city) owned. Offer sewage, water, electricity services 5

6 Business Mathematics Income Statement shows a business sales, expenses and profits Net Income revenues minus expenses and taxes. Expenses inventory, wages, interest payments, and depreciation *Depreciation is a non cash charge(your capitals goods wear out and get old) Cash Flow the sum of net income and non-cash charges *it s a real measure of profits for a business Income Statement example Sales of G&S $1,000 Cost of goods sold -400 Wages and salaries -250 Interest Payments -50 Depreciation -100 Gross Income (pre-tax) $200 Less taxes 40% -80 (.40 x GI) Net Income $120 Plus non cash charges +100 Cash Flow $220 6