Business Ownership and Operations

1. Business Ownership and Operations Chapter 6

2. 6.1 Types of Business Ownership • Sole Proprietorship • Partnerships • Corporations

3. 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.

4. Sole Proprietorships • A business owned by one person. • About ¾ (75%) of all businesses in the United States are sole proprietorships.

5. United States Sole Proprietorships, Partnerships, and Corporations

6. 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

7. 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

8. Partnerships • Owned by two or more people • Share the risks • Partnership agreement is necessary • Rights and responsibilities of each partner

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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.

15. 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

16. Producers • Gathers raw goods • Ex: • Agriculture • Mining • Fishing • Forestry

17. Processors • Changes raw materials into more finished products. • Ex: • Sugar cane is turned into sugar • Crude oil into gasoline • Iron ore into steel

18. Manufacturers • Make finished products out of processed goods. • Ex: • Cars • CDs • Computers

19. 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.

20. 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

21. 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.

22. 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.

23. Management • The process of achieving company goals by planning, organizing, leading, controlling, and evaluating the effective use of resources.

24. 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.