Business Ownership and Operations

Chapter 6

6.1 Types of Business Ownership

Sole Proprietorship Partnerships Corporations

Organizing a Business As part of a business plan,

entrepreneurs must decide which type of business best fits their situation.

During the life of a business, the form of business can change, usually when a business is growing.

Sole Proprietorships A business owned by one person. About ¾ (75%) of all businesses in

the United States are sole proprietorships.

United States Sole Proprietorships, Partnerships, and Corporations

Sole Proprietorships

Partnerships

Corportations

Others

Advantages of Sole Proprietorships

Easy to do, may only need a license or permit

Sole proprietors are in charge Make all decisions Keep all the profits Income taxes are lower than that of

corporations Income only taxed once Lower tax rate

Disadvantages of Sole Proprietorship

Unlimited liability Owner responsible for company

debts Limited access to credit, lenders are

reluctant to lend money Many fail because they run out of

money Person in charge may not have all

skills necessary Ends when owner dies

Partnerships Owned by two or more people Share the risks Partnership agreement is necessary

Rights and responsibilities of each partner

Advantages of a Partnership Easy to start Potential partners may need to obtain a

license Easier to obtain capital Each partner contributes money to start Banks are more willing to lend money Not dependent on one person Income only taxed once Each partner brings different skills

Disadvantages of Partnerships All partners share risks Partners do not get along all the time Partners decide to leave, must

reorganize Partners share unlimited legal and

financial liability All partners are responsible if the

other makes a bad decision

Corporations Registered by a state Operates apart from its owners Owners must get a corporate

charter, a license to run a corporation, from the state where their main office is located

Owners sell stocks Stocks-shares in the company Must have a board of directors

Advantages of a Corporation Limited liability Ability to raise money when people

buy stock in the company Does not end if one owner dies,

deceased owners shares are sold, business continues

Disadvantages of a Corporation Pay taxes on their income Stockholders pay taxes on profits

issued to them—double taxation S corporations and limited liability

companies don’t pay double taxation Government regulates Difficult and costly to start

Other ways to Organize a Business Cooperative- organization owned and operated

by its members, they pool their resources together, purpose is to save money on purchases of certain goods and services. (Ocean Spray)

Nonprofit Organization- focuses on providing a service, but not to make a profit. Must register with the government. Do not pay taxes.

Franchise- a contractual agreement to use the name and sell the product or service of a company in a geographic area. Have to invest money and pay a franchise fee or a share in the profits. The franchiser returns the favor by giving the product and the business plan.

6.2 Types and Functions of Businesses

Types of Businesses Producers Processors Manufacturers Intermediaries and wholesalers Retailers and Service Businesses

Functions of Businesses Production and Procurement Marketing Management Finance and Accounting

Producers Gathers raw goods Ex:

Agriculture Mining Fishing Forestry

Processors Changes raw materials into more

finished products. Ex:

Sugar cane is turned into sugar Crude oil into gasoline Iron ore into steel

Manufacturers Make finished products out of

processed goods. Ex:

Cars CDs Computers

Intermediaries and Wholesalers Moves goods from one business to

another Buys goods, stores them, and then

resells them Wholesalers distribute goods. Wholesalers divide the large

quantities into smaller ones and sells them to retailers.

Retailers and Service Businesses

Purchases goods from a wholesaler and sells them to consumers. Ex:

Service Stations Record stores Auto dealers

Service businesses performs tasks. Ex:

Medical clinics Law firms

Production and Procurement Production is process of creating,

expanding, manufacturing, or improving goods and services.

Procurement is the buying and reselling of goods that have already been produced.

Marketing The process of planning, pricing,

promoting, selling, and distributing ideas, goods, and services.

Getting consumers to buy a product or service.

Decisions based on market research.

Management The process of achieving company

goals by planning, organizing, leading, controlling, and evaluating the effective use of resources.

Finance and Accounting Finance is the business or art of

money management. Analyzing financial statements to make future decisions.

Accounting is maintaining and checking records, handling bills, and preparing financial reports.