Economics Chapter 3: Business Organizations 3.1

1. Economics Chapter 3: Business Organizations 3.1

2. Sole Proprietorships A. A sole proprietorship is a business run by one person. It is the most numerous and profitable of all business types.

3. B. Advantages = 1. ease of start-up 2. ease of management 3. all profits go to owner 4. business itself pays no income taxes 5. taxes paid only on the owner’s personal income 6. psychological satisfaction of owning one’s business 7. ease of closing business

4. C. Disadvantages = 1. owner has unlimited liability 2. hard to raise financial capital 3. owner may not be able to hire enough personnel or stock enough inventory to operate efficiently 4. owner may have limited managerial experience 5. hard to attract qualified employees 6. business has limited life and legally stops existing when the owner dies or sells the business

5. II. Partnership

6. A. A partnership is a business jointly owned by two or more persons 1. least numerous among business organizations 2. second smallest proportion of sales and net income 3. generally a little bigger than a sole proprietorship

7. B. General partnerships are a type of business in which all partners are involved in the management and finances. 1. in a limited partnership, at least one partner is not involved in management 2. this partner may have helped finance the business… sometimes called a “silent” partner 3. Joint Venture – a temporary partnership set up between individuals or companies for a specific purpose and for a short period of time.

8. C. Articles of the partnership document spell out how the partners divide up the profits or losses. D. Advantages= 1. ease of start-up 2. ease of management 3. no special taxes on a partnership (taxed as an individual) 4. easier to raise capital through bank loans, if established, or new partner 5. larger size aids efficient operations 6. easier to attract skilled employees

9. E. Disadvantages= 1. partners are responsible for acts of each and every partner, except in a limited liability partnership 2. limited life of partnership ends if a partner leaves 3. potential for partner conflict

10. III. Corporations

11. A. Recognized by law as a separate legal entity with all the rights of an individual; can own property, pay taxes, make contracts, and sue and be sued B. Receive charter, or government permission to create a corporation, which includes details about stock ownership Investors who buy common or preferred stock in a corporation become owners of the firm

12. D. Advantages = 1. ease of raising capital 2. professionals may run the firm instead of the owners (shareholders) 3. owners have limited liability (personal wealth is secure and not tied to business) 4. business life is unlimited 5. easy to transfer ownership

13. E. Disadvantages = 1. charter is expensive 2. ownership and management are separated so shareholders have little say in running the business 3. corporate income is taxed twice (profits taxed and income taxed) 4. subject to government regulation

14. IV. Government and 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.

15. Chapter 3.2 Business Growth and Expansion

16. Growth Through Reinvestment Business revenue can be used to invest in factories, machinery, or new technologies. B. Before reinvesting, a business must estimate its cash flow. business records total sales and then subtracts all expenses, taxes and depreciation 2. result = net income

17. C. Depreciation is added back to net income to get cash flow, or the bottom line—the real measure of business profit. D. Business owners then decide whether part of the cash flow should be reinvested in the business to generate additional sales and more profits.

18. II. Growth Through Mergers: When firms merge, one gives up its separate legal identity.

19. A. A company may merge with another to grow faster; become more efficient; acquire or deliver a better product; eliminate a rival; or change its image

20. B. A horizontal merger is the joining of two or more firms competing in the same market with the same good or service. A vertical merger is the joining of two or more firms involved in different stages of manufacturing or marketing the same product.

21. D. A conglomerate is a composed of three/four or more businesses that make unrelated products. E. A multinational (MNC) is a large corporation that produces and sells its goods and services throughout the world and are subjected to each nation’s business regulations.

22. Chapter 3.3 Government Organizations

23. Government in the US provides public goods and services, redistributes income (wealth), protects property rights, and resolves market failures Government plays a direct role in the economy when its agencies produce and distribute goods and services to consumers such as 1.TVA 2.USPS

24. B. Government corporations have boards of directors, but taxpayer money rather than voluntary individual investors’ money supports their work.

25. 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.