Business Ownership and Operations

Chapter 6pp. 84-97

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Learning ObjectivesLearning ObjectivesAfter completing this chapter, you’ll be After completing this chapter, you’ll be able to:able to:

1.1. NameName the three forms of business ownership.

2.2. CompareCompare the types of ownership.

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Learning ObjectivesLearning ObjectivesAfter completing this chapter, you’ll be After completing this chapter, you’ll be able to:able to:

3.3. DescribeDescribe alternative ways to do business.

4.4. IdentifyIdentify the different types of businesses.

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Why It’s ImportantWhy It’s Important

You need to understand business ownerships and operations before starting a business.

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Key WordsKey Words

sole proprietorshipunlimited liabilitypartnershipcorporationstocklimited liabilityfranchise continued

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Key WordsKey Words

nonprofit organizationcooperativeproducerprocessorsmanufacturersintermediaries

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Key WordsKey Words

wholesalerretailer

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Types of Business Ownership Types of Business Ownership The three different ways you can own a business are:

• Sole proprietorship• Partnership • Incorporation

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Sole Proprietorship Sole Proprietorship A sole proprietorship is a business owned by only one person.

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Sole Proprietorship Sole Proprietorship The advantages to having your own business are:

• It’s easy to start• You get to be your own boss • You get to keep all the profits• The taxes are usually low

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Sole Proprietorship Sole Proprietorship The disadvantages to having your own business are:

• You have to pay for everything yourself

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Sole Proprietorship Sole Proprietorship

• You might have to use your personal savings or borrow money from the bank

• You might lack business skills

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Sole Proprietorship Sole Proprietorship A serious disadvantage to owning a sole proprietorship is that you have unlimited liability, or full responsibility for your company’s debts.

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Partnership Partnership A partnership is a business owned by two or more persons who share the risks and rewards.

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Partnership Partnership To start a partnership you need to draw up a partnership agreement, which is a contract that outlines the rights and responsibilities of each partner.

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Partnership Partnership The advantages to partnership are:• You might need only a license to

start and have to pay taxes only on your personal profits.

• Each of your partners can contribute money to start the business.

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Partnership Partnership

• Banks are often more willing to lend money to partnerships than sole proprietorships.

• Your partners can bring different skills to the business.

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Partnership Partnership The disadvantages to partnership are:

• You not only share the risks with your partners, you also share the profits.

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Partnership Partnership

• You might not get along with your partners.

• You share unlimited legal and financial liability with your partners.

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Graphic OrganizerGraphic OrganizerSimilarities and Differences BetweenSimilarities and Differences Between

Partnerships and Sole ProprietorshipsPartnerships and Sole Proprietorships

Increased diversity of experience

Shared losses

Combined

funds

BothBoth

Pride in owning and

running business

Easy to set up

Low taxes

Unlimited liability for debts

Huge time demands

Quicker decision making

Owner keeps all profits

Owner is own boss

Relatively easy to get credit

PartnershipsPartnerships Sole ProprietorshipsSole Proprietorships

Shared decision making

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Making an Ethical Decision

1. What are the advantages and disadvantages of “going solo” in a business venture?

2. How can having a partner help launch and grow a business? Are there any drawbacks?

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Making an Ethical Decision

3. Are you obligated to invite a person into a partnership if that person was involved in inventing a product you want to sell? What if that person decided to start the business without you?

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Corporation Corporation A corporation is a business owned by many people but treated by law as one person.

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Corporation Corporation To form a corporation, you need to get a corporate charter from the state your headquarters is in.

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Corporation Corporation To raise money, you can sell stock, or shares of ownership in your corporation.

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Corporation Corporation For each share of common stock, the stockholder gets a share of the profits and a vote on how the business is run.

You also must have a board of directors who control the corporation.

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Corporation Corporation A major advantage of a corporation is its limited liability.

If your company loses money, the stockholders lose only what they invested.

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Corporation Corporation Another advantage is that the corporation doesn’t end if the owners sell their shares.

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Corporation Corporation A disadvantage of a corporation is that you often have to pay more taxes.

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Corporation Corporation The government closely regulates corporations.

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Corporation Corporation It is more difficult to start a corporation than a sole proprietorship or a partnership and running a corporation can be much more complicated.

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Figure6.1 GENERATIONS OF FAMILY-OWNED BUSINESSES

Family-owned businesses are sometimes kept in the family for more than one generation.

What percentage of families have had their family-owned businesses for two or more generations?

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Fast Review

1. What are some of the advantages of a sole proprietorship?

2. What is the difference between a sole proprietorship and a partnership? continued

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Fast Review

3. If a partner makes a bad business decision, what responsibility do the other partners have?

4. What are the disadvantages of a corporation?

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Alternative Ways to Do Business Alternative Ways to Do Business Franchises, cooperatives, and nonprofit organizations offer you other ways to do business.

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Franchise Franchise A franchise is a contractual agreement to sell a company’s products or services in a designated geographic area.

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Franchise Franchise To run a franchise you have to invest money and pay the franchisor an annual fee or a share of the profits.

In return, the franchisor offers a well-known name and a business plan.

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Franchise Franchise You can operate a franchise yourself, as a sole proprietor, as a partnership with someone else, or even as a corporation.

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Franchise Franchise An advantage of opening a franchise is that it’s easy to start.

The name of the parent company can be a big draw for customers.

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Franchise Franchise The disadvantage of running a franchise is that the franchisor is often very strict about how the business is run.

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Nonprofit Organization Nonprofit Organization A nonprofit organization is a type of business that focuses on providing a service rather than making a profit.

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Nonprofit Organization Nonprofit Organization Like a corporation, a nonprofit organization has to register with the government and might be run by a board of directors.

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Nonprofit Organization Nonprofit Organization Because it doesn’t make a profit, a nonprofit organization doesn’t have to pay taxes.

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Nonprofit Organization Nonprofit Organization Donors don’t receive dividends like investors, but they can deduct their donations from their taxes.

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Cooperative Cooperative A cooperative is an organization owned and operated by its members for the purpose of saving money on the purchase of certain goods and services.

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Cooperative Cooperative A cooperative is like a corporation in that it exists as a separate entity from the individual businesses.

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Cooperative Cooperative A cooperative can sell stock and choose a board of directors to run it.

Cooperatives pay less in taxes than regular corporations do.

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Cooperative Cooperative Cooperatives can save money by buying insurance, supplies, and advertising as a group.

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Fast Review

1. What are some examples of franchise businesses?

2. What types of assistance does the franchisor give a franchisee?

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Fast Review

3. How is a nonprofit organization like and unlike a corporation?

4. What are some advantages of a cooperative?

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Compaq Computers and Cisco Systems don’t build their own products anymore. These companies rely on Flextonics, a company that specializes in manufacturing electronics, to build their equipment.

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Manufacturing Products

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This allows Compaq and Cisco to focus on creating new products. Flextonics has grown into a global contractor that produces $10.5 billion a year in electronic gizmos.

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Manufacturing Products

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What do Compaq Computers and Cisco Systems give up when they rely on an outside manufacturer?

Analyze

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Types of Businesses Types of Businesses One way to classify businesses is to group them by the kind of products they provide:

• Producing raw goods• Processing raw goods

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Types of Businesses Types of Businesses

• Manufacturing goods from raw or processed goods

• Distributing goods• Providing services

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Producers Producers A producer is a business that gathers raw products in their natural state.

Raw goods are materials gathered in their original state from natural resources such as land and water.

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Processors Processors Processors change raw materials into more finished products.

Processed goods are made from raw goods and may require further processing.

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Manufacturers Manufacturers Manufacturers are businesses that make finished products out of processed goods.

The finished products need no further processing and are ready for market.

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Intermediaries Intermediaries An intermediary is a business that moves goods from one business to another.

It buys goods, stores them, and then resells them.

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Intermediaries Intermediaries A wholesaler, also known as a distributor, distributes goods.

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Intermediaries Intermediaries Wholesalers buy goods from manufacturers in huge quantities and resell them in smaller quantities to their customers, usually other companies.

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Intermediaries Intermediaries A retailer purchases goods from a wholesaler and resells them to the consumer, or the final buyer of the goods.

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Service Businesses Service Businesses Service businesses provide services rather than goods.

Services are the products of a skill or an activity, such as hairstyling and car repair.

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Service Businesses Service Businesses Some service businesses meet needs, such as medical clinics and law firms.

Some provide conveniences, such as taxi companies and copy shops.

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Fast Review

1. What is the difference between a producer and a processor?

2. What does a manufacturer do with raw or processed goods?

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Fast Review

3. What does an intermediary do?

4. Give examples of service businesses.

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What’s the aim of joining forces andstarting an organization?

What’s the benefit of going into business for yourself?

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Can a business have a contractual agreement with its customers?

End of Chapter 6Business Ownership and Operations