Chapter+8+Notes

Chapter 8.1 Notes Key Terms Business Organization: an establishment formed to carry on commercial enterprise Sole Proprietorship: a business owned and managed by a single individual Business License: authorization to start a business issued by the local government Zoning Law: law in a city or town that designates separate areas for residency and for business Liability: the legally bound obligation to pay debts Fringe Benefit: payment other than wages or salaries

The Role of Sole Proprietorships - a business owned and managed by a single individual - that person earns all the profits and is responsible for all of the debts

Advantages of Sole Proprietorship Ease of Start-Up - small amount of paper work and legal expense - meet a small number of government requirements (vary from city to city) 1. Authorization - business license 2. Site Permit - obtain certificate of occupancy to use another building if not their home 3. Name - if not their own name they much register a business name

Relatively Few Reguations

- zoning laws - cities/towns often designate separate areas, or zones, for residential use and for business

Sole Receiver of Profit - owner gets to keep all the profits after paying income taxes

Full Control - they may run the business as they wish

Easy to Discontinue - if they decide to stop operations and do something else they can do it easily

Disadvantages of sole proprietorships Unlimited Personal Liability - they are fully and personally responsible for all the debts of their business

Limited Access to Resources - if a business if becoming successful they owner may have to buy more equipment and the money would come out of their own pocket

Lack of Permanence - if the owner dies or closes shop the business ceases to exist - fringe benefits

Chapter 8.1 Assessment 1. What is a business organization? - an establishment formed to carry on commercial enterprise 2. What is a sole proprietorship? - a business owned and manages by a single individual 3. What role do business licenses and zoning laws play in sole proprietorships? - advantages and regulations 4. What kind of liabilities are sole proprietors subject to? - buying their own resources and taking responsibilities for their businesses debt 5. Why do you think many sole proprietors are able to offer few fringe benefits to workers? - the owner may need most of the profit to keep the business running and for their own profits leaving little to pay other employees

Chapter 8.2 Notes Key Terms Partnership: a business organization owned by two or more persons who agree on a specific division of responsibilities and profits General Partnership: partnership in which partners share equally in both responsibility and liability Limited Partnership: partnership in which only one partner is required to be a general partner Limited Liability Partnership: partnership in which all partners are limited partners Articles of Partnership: a partnership agreement Uniform Partnership Act: act ordering common ownership interests, profit and loss sharing, and shared management responsibilities in a partnership Assets: money and other valuables belonging to an individual or business

Types of Partnership General Partnership - share equally in both responsibility and liability - retail stores, doctors, lawyers etc.

Limited Partnership - only one partner is required to be a general partner - only one partner has unlimited personal liability for the firm's actions

Limited Liability Partnerships - newer type of partnership recognized by many states - all partners are limited partners

Advantages of Partnerships Ease of Start-Up - easy and inexpensive to establish - doesn't require a written partnership agreement - most small business experts advise partners to work with an attorney to develop articles of partnership - if partners don't establish their own articles of partnerhip they fall under the rules of the Uniform Partnership Act

Shared Decision Making and Specialization - responsibility of the business may be shared

Larger Pool of Capital - assets of each partner improve the firm's ability to borrow funds for operationg or expansion

Taxation - not subject to any special taxes

Disadvantages of Partnerships Unlimited Liability - unless the partnership is an LLP, one partner had unlimited liability - the only thing they can lose is their investment - if one partner causes the firm's losses then all the general partners suffer

Potential for Conflict - partners need to make sure they agree on ever aspect of business management, legal guidelines, goals, etc

Chapter 8.2 Assessment 1. Explain the characteristics of partnerships. - a business organization owned by two or more persons who agree on a specific division of responsibilities and profits 2. How do general partnerships, limited partnerships, and limited liability partnerships differ? - the responsibility of each partner differs from one partnership to the other 3. What issues are addressed in articles of partnership? - it spells out each partner's rights and responsibilities 4. What s the purpose of the Uniform Partnership Act? - establishes rules for partnerships that do not establish their own articles of partnerships 5. Why might accountants and physicians find limited liability partnerships attractive? - because if something happens all of the partners have to take responsibility for the business's failures 6. Do you think the advantages of partnerships outweigh the disadvantages? Why of why not? - no because if one partner ruins something that has to do with their firm the other partner loses the money or has to take responsibility to recover what ever the firm may have lost. also if the partners happen not to decide on something they will have problems later on having to deal with the management, and other agreements

Chapter 8.3 Notes Key Terms Corporation: a legal entity owned by individual stockholders Stock: a certificate of ownership in a corporation Closely Held Corporation: corporation that issues stock to only a few people, often family members Publicly Held Corporation: corporation that sells stock on the open market Bond: a formal contract to repay borrowed money with interest at fixed intervals Certificate of Incorporation: license to form a corporation issued by state governement Dividend: the portion of corporate profits paid out of stockholders Horizontal Merger: the combination of two or more firms competing in the same market with the same good of service Vertical Merger: the combination of two or more firms involved in different stages of producing the same good of service Conglomerate: business combination merging more than three businesses the make unrelated products Multinational Corporation: large corporation that produces and sells its goods and services throughout the world

Corporations - most complex for of business organization - owned by individual stockholders, each of whom faces limited liability for the firm's debts - stockowners own stock, part owner of a corporation

Types of Corporations - closely held corporations (privately held corporations) - publicly held corporations (many shareholders)

Corporate Stucture - corporation owners (stockholders) elect a board of directors

Advantages of Incorporation - limited liability for owners - transferable ownership - ability to attract capital - long life

Advantages for Stockholders - all they lose is the money they invested and nothing else - shares of stocks are transferable

Advantages of the Corporation - more potential for growth than other business forms - raise money to purchase capital by selling shares in the stock market - raise money by borrowing it (bond)

Disadvantages of Incorporation - expense and difficulty to start-up - double taxation - potential loss of control by the founders - more legal requirements and regulations

Chapter 8.3 Assessment 1. How does a corporation differ from a sole proprietorship or partnership? - its owned by individual stockholders 2. What is the difference between a closely held corporation and a publicly held corporation? - publicly held corporation sells stock to an open market and a closely held corporation sells only to few people or family members 3. What information is required in a certificate of incorporation? - corporate name, state of purpose, method of fundraising, rules for the corporation's management 4. What is stock? - certificate of ownership in a corporation 5. Why must stockholders pay taxes of dividends? - the portion of corporate profits paid out to stockholders 6. What is a merger? How do horizontal mergers, vertical mergers, and conglomerates differ? - how many business they are merging together differs 7. Why are some corporations called multinational corporations? - large corporations that produce and sell their goods and services throughout the world

Chapter 8.4 Notes Key Terms Business Franchise: a semi-independent business that pays fees to a parent company in return for the exclusive right to sell a certain product or service in a given area Royalty: share or earnings given as payment Cooperative: a business organization owned and operated by a group of individuals for their mutual benefit Consumer Cooperative: retail outlet owned and operated by consumers Service Cooperative: cooperative that provides a service, rather than a good Producer Cooperative: agricultural marketing cooperative that helps members sell their products Nonprofit Organization: institution that funstions much like a business, but does not operate for the purpose of generating profits Professional Organization: nonprofit organization that works to improve the image, working conditions, and skill levels of people in particular occupations Business Association: nonprofit organization that promotes collective business interests for a city, state, or for a group of similar businesses Trade Association: nonprofit organization that promotes the interests of a particular industry

Advantages of Franchises - management training and support - standardized quality - national advertising programs - financial assistance - centralized buying power

Disadvantages of Franchises - high franchise fees and royalties - strict operating standards - purchasing restrictions - limited product line

Labor Unions - organized group of workers whose aim is to improve working conditions, hours, wages, and fringe benefits

Chapter 8.4 Assessment 1. How does a business franchise work? - a business that pays fees to a parent company in return for the exclusive right to sell a certain product 2. What are royalties? - earnings given as a payment 3. What is a cooperative? - business organization owned and operated by a group of individuals for their mutual benefit 4. How do consumer cooperatives, service cooperatives, and producer cooperatives differ? - some sell goods, others sell services, and the other a=is an outlet 5. What is a nonprofit organization? - institution that functions much like a business, but does not operate for the purpose of generating profits 6. What is the purpose for professional organizations, business associations, and trade associations? - the promote businesses