Business and Market Structures What is an entrepreneur?

1. Business and Market StructuresWhat is an entrepreneur? • People who start businesses are called entrepreneurs. • They strike out on their own • They are risk takers • They give up a steady job working for someone else

2. Business and Market StructuresCharacteristics of an Entrepreneur • They usually need to save or borrow money to make capital investments in • Equipment • Rent production space • Hire workers • If business fails, risk losing their investment.

3. Why do Entrepreneurs take these risks? • To earn a profit • Profit motive – Driving force behind new products and services in a market economy

4. Business and Market Structures • Sole Proprietorships • A single owner, who takes all he risks and receives all the profits • Easy to start • About 70% of American businesses are this type • They earn only approximately 6% of all revenue

5. Business and Market Structures • Advantages of Sole Proprietorship • Owner has total control • Easy to Start-Up • Can make all decisions without having to consult anyone • Can be flexible • Able to make changes quickly • Easy to dissolve

6. Business and Market Structures • Two Major disadvantages: • Sole proprietors have limited capital for making repairs and improvements • Limited Access to Resources • Banks reluctant to lend money to them • Also, needs to invest their own profits into the business to keep it growing • Unlimited liability – The owner is personally responsible for all the debts of business

7. Business and Market Structures • Partnership • Divides the risks and profits of a business among two or more people. • Professionals such as doctors and lawyers often form partnerships • Advantage: partners can pool their resources and invest more capital • They can also offer more services by each specializing in a different area. • Easy to start • Disadvantage: Having to share the profits and having less control over decision making

8. Business and Market Structures • General Partnership • All partners are responsible for management and financial obligations of business • Limited Partnership • At least one partner is not active in daily running of business

9. Business and Market Structures • Partnerships • Silent partner – someone who invests in a business and shares its profits, but has no say in its day-to-day decisions and operation of business • Majority partner – Who owns more than half of the company • Minority partner – who owns less than half • Partnerships share one major disadvantage with sole proprietors – Each partner is personally responsible for all debts of business

10. BusinessandMarketStructures • Corporations • For investors to avoid unlimited liability, a firm needs to be organized as a corporation • A corporation issues shares of stock to investors. • Some Shareholders are paid annual dividends • Shareholders elect a board of directors to run the business

11. Business and Market Structures • Corporations • The board of directors hires a chief executive officer (CEO) to make day-to-day decisions. • Advantages • limited liability –Shareholders are not responsible for a company’s debts. • If a corporation fails, all shareholders lose is the value of their stock

12. Business and Market Structures • Disadvantages: • Corporations are complicated and not as flexible as smaller businesses • Decision-making can be slow • CEOs may make wasteful decisions that profit themselves, rather than the shareholders • Double taxation of corporate profits

13. Business and Market Structures • A corporation may also borrow money by issuing bonds • Bond – a written promise to repay the amount borrowed at a later date. • Principal – The amount borrowed • Interest – The price paid for the use of another’s money OR the price a financial institution pays one to save money

14. Business and Market Structures • Income statement – a financial statement showing a business’s sales, expenses, and profits for a certain period to illustrate the financial “health” of a company • Net Income – Income minus expenses and taxes from revenue • Depreciation – A non-cash charge the firm takes for the general wear and tear on its capital goods

15. Business and Market Structures • Cash flows – The sum of net income and non-cash charges such as depreciation , Or, real profits . • The cash flows represent the total amount of new funds the business generates from operations

16. Business and Market Structures • Merger – When two or more companies come together to make one company • One company gives up its separate legal identity to become one large company • Reasons for mergers • To become a larger company • A company may not be able to grow as fast as owners would like • May want to lose corporate identity – ValuJet merged with AirWays to form AirTran Holding Corporation

17. Business and Marketing Structures • Types of Mergers • Horizontal merger – When two or more firms that produce the same kind of product join forces • The merger of two banks • Vertical merger – When firms involved in different steps of manufacturing or marketing join together • Auto company merging with a tire company

18. Business and Marketing Structures • Conglomerate – A firm that has at least four business, each making unrelated products. • None of the different divisions are responsible for a majority of its sales • Diversification – one of the main reasons for conglomerate mergers

19. Business and Marketing Structures • Multinationals – A corporation that has manufacturing or service operations in a number of different countries • A citizen of several countries (subject to laws in each country and pay taxes in each country)