Economics: Principles and Practices

1. Economics: Principles and Practices Chapter 3

2. Sole Proprietorships • A sole proprietorship is a business run by one person. It is the smallest type of business, yet the most numerous and profitable. • Advantages: ease of start-up, ease of management, owner gets all profits, business itself pays no income taxes, taxes paid only on the owner’s personal profits, psychological satisfaction, ease of closing business. • Disadvantages: owner has unlimited liability, hard to raise financial capital, may have insufficient funds for personnel and materials, owner may have limited managerial experience, business has limited life as business stops existing when owner dies or sells.

3. Why do you think so many business owners are sole proprietors despite the fact that they hold unlimited liability?

4. Partnerships • A partnership is a business jointly owned by 2 or more people. It is the least common business structure and has the smallest proportion of net income. • General Partnerships: all partners are involved in the management and finances. In a Limited Partnership at least 1 partner is not involved in management. This partner may have helped finance the business. Articles of the partnership document spell out how the partners divide the profits or losses.

5. Partnerships Advantages and Disadvantages • Advantages: ease of start-up, ease of management, no special taxes on a partnership; easier to raise capital through bank loans or new partner, larger size adds efficient operations, easier to attract skilled employers • Disadvantages: Partners are responsible for the acts of each and every limited partner, except in a limited partnership where the limits are spelled out; limited life of partnerships ends if a partner leaves; potential for partner conflicts.

6. What type of partnership would you favor – general or limited? Why?

7. Corporations • A corporation is a business organization recognized by lawasseparate legal entity with all the legal rights of an individual. • Corporations receive charter, or government permission to create a corporation, which includes details about the stock ownership.

8. Who are really the owners of a corporation?

9. Government & Business Regulation • Federal and state governments regulate interest rates and utility rates. • State governments may offer industrial development bonds to help industries relocate or tax credits to draw investments. • What are some recent examples of business development incentives in your state or community or in our nation?

10. Growth Through Reinvestment • Business revenue can be used to invest in factories, machinery, or new technologies. • Before reinvesting, a business must estimate its cash flow. The business first records its total sales and then subtracts all expenses, taxes, and depreciation. The result is the business’s net income. • Depreciation is added back to net income to get cash flow, or the bottom line – the real measure of business profit. • Business owners then decide whether part of the cash flow should be reinvested in the business to generate additional sales and more profits.

11. What would you expect to happen if a business has little to no cash flow?

12. Growth Through Mergers • When firms merge, one gives up its separate legal identity. • Merger goals: to grow faster, improve efficiency, acquire or deliver a better product; eliminate a rival, or change the company’s image • Horizontal merger: the joining of firms that make the same product. Vertical merger is the merging of firms involved in different stages of manufacturing or marketing • A conglomerate is composed of 4 or more businesses, each making unrelated products, non of which is responsible for a majority of its sales • A multinational corporation manufactures or sells in several countries and is subjected to each nation’s business regulations.

13. Why have some multinational companies been criticized?

14. Nonprofits The National Center for Charitable Statistics reported that nearly 1.5 million organizations had registered with the federal government in 1997 as tax-exempt, private nonprofit organizations. Because some organizations do not need to register with the Internal Revenue Service, this number does not include all types of nonprofit organizations described in the following sections.

15. Community and Civic Organizations • A nonprofit organization is in business to promote its members’ collective interests, not to seek financial gain. • Many nonprofit organizations incorporate to take advantage of a corporation’s unlimited life and limited liability. • If the nonprofit organization has money after its expenses are paid, its board of directors many apply the surplus to other projects that further the organization’s mission. • How might a hospital’s board of directors decide to spend a year’s surplus?

16. Cooperatives • A cooperative is a voluntary association of people who carry on an economic activity that benefits its members. • Consumer cooperatives buy food and other necessities in bulk. Members donate time to the co-op, and members pay lower prices for goods. • Service cooperatives, such as credit unions, offer services to its members at lower rates. • Producer cooperatives help members, such as farmers, promote or sell their products. • Why might a credit union member qualify for a car loan from a credit union in a shorter time than from a car dealer or a bank?

17. Labor, Professional, and Business Organizations • Labor unions represent workers’ interests and negotiate with management through collective bargaining. • Professional associations set standards for those in the profession and influence government policies on issues concerning members’ interests. • Business associations are industries or trade associations that represent specific kinds of businesses. Some business associations, such as the Better Business Bureau, help protect the consumer. • What might the National Council for Social Studies offer social studies teachers?

18. Government • Government plays a direct role in the economy when its agencies produce and distribute goods and services to consumers such as Denver Water and the U.S. Postal Service. • Government corporations have board of directors, but Federal or State money rather than investors’ money supports their work. • Government plays an indirect role when it regulates public utilities or when it grants money to people in the form of Social Security and student financial aid. • How do national defense and local police protection directly or indirectly impact the economy?