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Economics

Economics. Chapter 7. Chapter 7. Section 1. Objectives. What are the advantages of establishing a sole proprietorship? What are the disadvantages of establishing a sole proprietorship?. Sole Proprietorship. Sole Proprietorship- A business owned by one person.

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Economics

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  1. Economics Chapter 7

  2. Chapter 7 Section 1

  3. Objectives • What are the advantages of establishing a sole proprietorship? • What are the disadvantages of establishing a sole proprietorship?

  4. Sole Proprietorship • Sole Proprietorship- A business owned by one person. • Oldest, simplest, and most common type of business organization. • Examples: Lawyers, plumbers, hairstylist, and florists.

  5. Sole Proprietorship • Advantages of a Sole Proprietorship: • Ease of start up: Requires little financial capital. There are few legal considerations, but must be aware of some restrictions such as Zoning Laws (government restrictions where a business can be.) Usually need a business license. • Control: One person makes all the decisions such as who to hire and how much to sell their products for. • Profit: One person gets all the profits.

  6. Sole Proprietorship • Disadvantages of a Sole Proprietorship: • Unlimited Liability: Person has responsibility for all debt. You have to pay of your debts by yourself. • Sole Responsibility: Responsible for everything-you are the boss, secretary, janitor, and accountant. You must have a lot of skills and it takes a lot of time and energy.

  7. Sole Proprietorship 3. Limited Growth Potential: You only have so much collateral (anything of value that a borrower agrees to give up if he or she is not able to repay a loan.) -You need capital to start your business. -You may have to borrow from the bank, but you will need collateral to do so. -It may be hard to grow and get money if you only have so much collateral. 4. Lack of Longevity: Health, commitment, and competence are needed to be successful. - Sole Proprietorships have a shorter lifespan than most business organizations. -Depends on one person so the risk is great.

  8. Chapter 7 Section 2

  9. Objectives • How do general partnerships and limited partnerships differ? • What are the advantages of organizing a partnership? • What are the disadvantages of organizing a partnership?

  10. Partnership • Partnership- Business that is owned and controlled by two or more people. • There are two types of Partnerships: • General Partnership- Partners enjoy equal decision making and have unlimited liability. • Limited Partnership- Involves a silent partner who invests money into a business in return for a share of the profits. These silent partners usually do not make any business decisions and they have limited liability.

  11. Advantages of a Partnership • Ease of start up. • Specialization: We know that in a sole proprietorship the owners must have a lot of skills. In a partnership, these jobs can be split up between the partners according to the job that they do best.

  12. Advantages of a Partnership 3. Share Decision Making: Decisions can be shared by partners. Through communication between partners, mistakes can be avoided. (Two heads are better than one!) 4. Shared Business Losses: If the business does get into financial trouble, one person does not have to take on all of the burden. -If two people take on the losses, then each will still have some money left over to try and get the business back on its feet. -Also, banks are more likely to give larger loans to partnerships because the risk is share by more than one person.

  13. Disadvantages of a Partnership • Unlimited Liability: Only in a general partnership. • Potential for Conflict: Disagreements are bound to happen when you have two or more people. People will argue over money, decisions made, or even the personalities of the partners may clash. • Lack of Longevity: Illness, death of one partner, or conflict may cause the partnership to end.

  14. Chapter 7 Section 3

  15. Objectives • How is a corporation formed, and what are the characteristics of a corporation? • How is a corporation organized? • How do stocks and bonds differ? • What are the advantages and disadvantages of organizing a corporation?

  16. Corporations • Corporation- Business in which a group of owners, called stockholders, share in the profits and losses. • Forming a corporation is more complex than a sole proprietorship or partnership. • Two Step Process: • Apply for a state license known as Articles of Incorporation (p. 154) • If everything is in order, then a license is given called the corporate charter.

  17. Corporate Structure • The corporate charter identifies the corporate officers-President, CEO, VP of Sales, VP of Production Development, etc. • The structure of the corporation will vary, but most have a board of directors which is made up of people from inside or outside of the company. • The board’s main duty is to make key decisions for the corporation. What kind of decisions?

  18. Corporate Finances • Where do corporations get their money from? • Most common way is through the selling of stock which represents ownership in the company. • Stock is issued in the form of shares. • If the corporation issues 10,000 shares of stock and you buy 100 shares, then you own 1% of the company. • Why would you want to buy stock? -If the company makes money, then you receive some profit. These payments to you are called dividends.

  19. Corporate Finances • Two types of stock: • Common stock- Provides shareholders with a voice in how the corporation is run and they receive dividends. • Preferred Stock- Guaranteed dividends that are paid before any dividends that are received by holders of common stock, but they have no voice in the corporation. Ω Corporations may also sell corporate bonds-a certificate issued by a corporation in exchange for money. -These bond holders do not own any part of the company. -The bond is like a loan and it is repaid with interest.

  20. Advantages of Corporations • Advantages for Stockholders: • Limited Liability • Flexibility-can sell your shares at anytime. • Advantages for Corporations: • Limited Liability for the founders. • Separation of ownership from management. • Easy to raise capital. • Longevity.

  21. Disadvantages of Corporations • Disadvantages for Stockholders: • No sense of pride or satisfaction from profits. • Lack of control. • Disadvantages for Corporations: • Corporate charter can be expensive and difficult to obtain. • More government regulation to abide by. • Slow process of decision making. • Shared Disadvantages: • Corporate profits are taxed twice, once as corporate profit and a second time once dividends are paid.

  22. Chapter 7 Section 4

  23. Objectives • How do vertical combinations differ from horizontal and conglomerate combinations? • Why might a business owner decide to open a franchise? • What is the customer’s role in a cooperative? • How does a nonprofit organization differ from other types of business organizations?

  24. Corporate Combinations • Sometimes corporations choose to team up with one another. • The most common method of doing so is called a merger-occurs when one company joins or absorbs another (AOL Time Warner) • Companies can form different types of corporate combinations.

  25. Types of Corporate Combinations • Horizontal Combination- Merger between two or more companies producing the same good or service. • Vertical Combination- Merger between two or more companies involved in different production phases of the same good or service. • Conglomerate Combinations- Merger of companies producing unrelated products.

  26. Advantages of Combinations • Efficiency- Cut down on personnel. If you merge, you don’t need two people for one position. • Potential for lower costs- Don’t have to build new buildings or hire new people. • Easier to increase capital- Have more collateral, usually more stockholders who are willing to invest in a large company since these types of companies are more successful.

  27. Disadvantages of Combinations • Rise in unemployment • Decreased competition-leads to higher prices.

  28. Franchise • Franchise- One company (franchise) agrees for a fee to let another person or group set up a business in which they use the franchisor’s name to sell goods and services. • There is an agreement between franchisee (person opening up the company) and the franchisor (parent company) that the companies reputation and standards will be upheld. • Parent company pays for training and national advertising. • The company name brings in business.

  29. Cooperative • Cooperatives- Businesses that are owned collectively by their members. • Many different types of cooperatives- purchasing, marketing, services (electric), financial (credit union) • Examples: Santee-Cooper Electric, SRP Credit Union.

  30. Nonprofit Organization • Nonprofit Organization-an organization that generates revenue from product sales or donations but does not distribute the profits to any owner or trustee. • Usually tries to pursue some type of goal: improving education, healthcare, etc. (Red Cross, Boy Scouts, Booster Club • Income is not taxed by the government. • Green Bay Packers

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