Chp 9: How Are Businesses Organized?

Name: Date: Period: Chp 9: How Are Businesses Organized? Notes Chp 09: How Are Businesses Organized? 1

Objectives about How Are Businesses Organized? EPF2 The student will demonstrate knowledge of the role of producers and consumers in a market economy by d) comparing the costs and benefits of different forms of business organization including sole proprietorships, partnership, corporation, franchise and cooperative h) describing the effects of competition on producers, sellers and consumers EPF18 The student will demonstrate knowledge of investment and savings planning by f) describing how the stock market works Essential Understandings about How Are Businesses Organized? 1 Businesses may be organized as sole proprietorships, partnerships, corporations, franchises, or cooperatives 2 Each form of business has both costs and benefits 3 Competition among sellers lowers costs and prices Competition also encourages producers to produce more of what consumers are willing and able to buy 4 Competition among consumers increases prices and allocates goods and services to those who are willing and able to pay the most for them 5 The stock market provides an opportunity for firms to raise funds to grow and provides stockholders an opportunity to make gains when those companies are profitable Stockholders can also lose the money they have invested Essential Questions about How Are Businesses Organized? 1 What are the characteristics of each form of business organization? 2 What are the costs and benefits of each form of business? 3 How does competition among sellers affect consumer prices and consumer choices? 4 How does competition among consumers affect prices? 5 How does the stock market work? Notes Chp 09: How Are Businesses Organized? 2

How Are Businesses Organized? Preview Examine the timeline, which shows key events in the development of the Internet Then answer these questions 1 What interesting details do you see? 2 What other innovations to the Internet would you add to this timeline? 3 What is the next innovation that could become a new business? 4 What resources would an entrepreneur need in order to start this new business? 5 What would be the risks of starting this new business? a What might be its rewards? Notes Chp 09: How Are Businesses Organized? 3

I What Does It Take to Start a New Business? 1 Entrepreneurs play a critical role in the economy because they start businesses to meet consumer demand, create jobs, and spur economic growth 2 Running a business can bring great rewards, such as personal satisfaction and being one's own boss 3 Entrepreneurs also face challenges, such as the risk of failure a 90% of restaurants fail in their first year II What Kinds of Businesses Are Best Organized as Sole Proprietorships? 1 A sole proprietorship is a business owned and managed by one person The owner makes the profits and is responsible for the debts 2 Most businesses in the United States are organized as sole proprietorships 3 Benefits: ease of start-up and closing, few restrictions, full decision-making power and profits, individual taxation 4 Costs: The owner generally has limited financial resources and modest growth potential The owner also faces unlimited liability, which means if the company fails the owner can lose personal assets along with business assets, these businesses are usually short lived III What Kinds of Businesses Are Best Organized as Partnerships? 1 In a partnership, two or more owners own and operate a business together In most cases, they share the profits and the liability 2 Benefits: ease of start-up, few restrictions, Owners make decisions and keep the profits They share responsibilities, and each has a unique set of skills and expertise 3 Costs: Owners face unlimited liability, limited financial resources, and potential conflict with partners, keeping continuity if a partner leaves IV Why Are Large Businesses Organized as Corporations? 1 A corporation is a business owned by shareholders who have limited liability in the firm's debts It is a legal entity that can conduct business affairs in its name 2 Corporations generate the most income 3 Benefits: limited liability, greater growth potential, professional management, and long life Corporations are able to accumulate sufficient financial capital to make large-scale investments and achieve economies of scale (ie, bringing down cost of production by producing in volume) They also have limited liability, meaning shareholder risk is limited to their share of ownership in the corporation The corporation transcends the lives of those persons who created it 4 Costs: complexity of start-up, loss of owner control, greater government regulation, tax on profits at the corporate and shareholder levels Corporations face tax implications (eg, double taxation profits are taxed at the corporate level and again when distributed to shareholders as dividends) 5 A multinational corporation operates in more than one country It offers such advantages as access to global markets and diversification of operations Notes Chp 09: How Are Businesses Organized? 4

Types of Business Organizations Description Examples Advantages Disadvantages Multinational Corporation Corporation Partnership Sole Proprietorship Notes Chp 09: How Are Businesses Organized? 5

V What Purposes Are Served by Franchises, Cooperatives, and Nonprofit Organizations? 1 Cooperative a A cooperative is a business that is owned and operated by a group of individuals for their shared benefit Examples include credit unions and agricultural co-ops b Benefits: Cooperatives are member-owned and operate for members benefit Members enjoy discounted products and/or services, may receive refunds at the end of the year, face no personal liability, have a vote in how the business is run, and have interests similar to other members c Costs: Decisions made by the group may not suit all members, and the decision-making process may be more complex and slower than in other organizations 2 Franchise a In a business franchise, a parent company (franchiser) grants to an independent business owner (franchisee) the exclusive right to use its trade name and sell its products in a designated location b Benefits: Training and marketing is provided by the franchisor The franchisee gains the exclusive right to sell in an area and benefits from product development c Costs: The franchisee pays high franchise fees, enjoys a limited product line, and operates under strict guidelines and standards 3 A nonprofit organization functions mostly like a business, though it does not operate to make a profit It is established to support a particular private or public goal VI Why Do Some Corporations Sell Stock? 1 Companies that wish to raise funds for growth can borrow money or sell shares (stock) of their company To issue stock, firms generally go to investment banks that put together a prospectus with information for potential investors, help determine the market price of the offering, and issue the stocks in the primary market, where they are purchased This provides businesses with funds to finance growth 2 A stock exchange where buyers sell their shares is called the secondary market Trades here are conducted between buyers; none of the money goes to the company a This is where a stock broker tries to sell stocks and invest for individual buyers b Examples the New York Stock Exchange, NASDAQ 3 When companies make profits, they may keep the profits to help them grow or they may share the profits with shareholders in the form of dividends Shareholders can make money through dividends or through capital gains A capital gain occurs when you sell a share for more than you paid for it 4 Stock prices are determined by supply and demand based on investor expectations If a company is expected to be profitable in the future, demand for its shares rises and the price rises; when a company s future looks less-thanprofitable, demand decreases and the price falls 5 When the overall economy is robust and growing, people become optimistic about prospects for business and the stock market goes up a when investment interest rates fall, the stock market generally rises When interest rates rise, the market goes down When the overall economy is in decline, investors lose confidence and the stock market goes down Notes Chp 09: How Are Businesses Organized? 6

VII What Rights and Responsibilities Do Businesses Have in a Free Enterprise System? 1 Competition among producers and sellers leads to more choices, improved quality, and lower prices as producers seek to attract customers away from other businesses 2 Competition among consumers leads to higher prices and allocates goods to those willing to pay the most (eg, several buyers bidding at an auction push the price up) 3 In a free enterprise system, businesses have many of the rights individuals have, such as freedom of speech They also have legal obligations, such as paying taxes 4 Business ethics are the notions of right and wrong that guide the decisions and actions of a company and its employees Studies show that consumers reward good corporate conduct and respond unfavorably to unethical behavior What is the Social Responsibility of Businesses? The idea that corporations have a responsibility beyond making money for shareholders has passionate advocates, as well as fierce critics As you read the following excerpts, think about how you would run a business if you could Which viewpoint lines up with your values and why? The Social Responsibility of Business Is to Increase Its Profits By Milton Friedman, in The New York Times Magazine, Sep 13, 1970 What does it mean to say that business has responsibilities? Only people can have responsibilities A corporation is an artificial person and in this sense may have artificial responsibilities, but business as a whole cannot be said to have responsibilities, even in this vague sense The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom Presumably, the individuals who are to be responsible are businessmen, which means individual proprietors or corporate executives Most of the discussion of social responsibility is directed at corporations, so in what follows I shall mostly speak of corporate executives In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business He has direct responsibility to his employers That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom Of course, the corporate executive is also a person in his own right As a person, he may have many other responsibilities that he recognizes or assumes voluntarily to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country He may feel impelled by these responsibilities to devote part of his income to causes he regards as worthy, to refuse to work for particular corporations, even to leave his job, for example, to join his country s armed forces If we wish, we may refer to some of these responsibilities as social responsibilities But in these respects he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes If these are social responsibilities, they are the social responsibilities of individuals, not of business The difficulty of exercising social responsibility illustrates, of course, the great virtue of private competitive enterprise it forces people to be responsible for their own actions and makes it difficult for them to exploit other people for either selfish or unselfish purposes They can do good but only at their own expense Milton Friedman (1912 2006), an American economist, received the 1976 Nobel Prize in economics Notes Chp 09: How Are Businesses Organized? 7

Rethinking the Social Responsibility of Business: Putting Customers Ahead of Investors By John Mackey, in Reason, Oct 2005 In 1970 Milton Friedman wrote that there is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud That s the orthodox view among free market economists: that the only social responsibility a law-abiding business has is to maximize profits for the shareholders I strongly disagree I believe that the enlightened corporation should try to create value for all of its constituencies From an investor s perspective, the purpose of the business is to maximize profits But that s not the purpose for other stakeholders for customers, employees, suppliers, and the community We have not achieved our tremendous increase in shareholder value by making shareholder value the primary purpose of our business The most successful businesses put the customer first, ahead of the investors At Whole Foods, we measure our success by how much value we can create for all six of our most important stakeholders: customers, team members (employees), investors, vendors, communities, and the environment Many thinking people will readily accept my arguments that caring about customers and employees is good business But they might draw the line at believing a company has any responsibility to its community and environment To donate time and capital to philanthropy, they will argue, is to steal from investors A company s assets do belong to the investors, and its management does have a duty to manage those assets responsibly In my view, the argument is not wrong so much as it is too narrow There can be little doubt that a certain amount of corporate philanthropy is simply good business and works for the long-term benefit of the investors It s a question of finding the appropriate balance and trying to create value for all of our stakeholders The business model that Whole Foods has embraced could represent a new form of capitalism, one that more consciously works for the common good instead of depending solely on the invisible hand to generate positive results for society The brand of capitalism is in terrible shape throughout the world, and corporations are widely seen as selfish, greedy, and uncaring This is both unfortunate and unnecessary, and could be changed if businesses and economists widely adopted the business model that I have outlined here John Mackey is chair, CEO, and cofounder of Whole Foods Market, which has stores in the United States, Canada, and the United Kingdom 1 According to Milton Friedman, what is the social responsibility of a business? 2 According to John Mackey, what is the social responsibility of a business? 3 As an entrepreneur, how would you run your business? Notes Chp 09: How Are Businesses Organized? 8

Glossary Unit 05 Directions: Fill in the definition for the term listed Then, in the box on the right, you have to draw a picture OR write the definition in your own words OR write a sentence using the word that demonstrates its meeting Sole Proprietorship Liability Partnership Corporation Franchise Cooperative Nonprofit Organization Notes Chp 09: How Are Businesses Organized? 9

Summary DIRECTIONS: Choose only one of the following: a) write a summary (25-75 words) of what you believe was the most important aspect of the notes/lecture b) write what you believe to be the most interesting or memorable part of the notes/lecture (25-75 words) c) draw something that symbolizes the notes/lecture to you (has to be different than your title page) Notes Chp 09: How Are Businesses Organized? 10