Chapter 9Chapter 9

Business Firms Business Firms in thein the

EconomyEconomy

Forms of Business OrganizationsProprietorships – one individual owns entire

businessAdvantages:1. easy to start - little “red tape” all that is needed is idea and willingness

to accept risk2. little gov’t regulation – only keep accurate

tax records and obey employment rules 3. keep all profits (after taxes) - no partners

or shareholders 4. pride of ownership – personal satisfaction5. complete control – make own decision6. lower taxes – no corporation taxes

Disadvantages:1. owner has unlimited liability for all debts,

claims, and losses (own home, property, and assets at risk)

2. business ends when owner dies/retires3. difficult and expensive to borrow money

– creditors see proprietorships as risky 4. major problem for small business is lack of capital

Partnerships – 2 or more people own business

2 types:- general partnership

- limited partnership (investor responsible only for their initial

investment)

Advantages:1. easy to start – partners agree to terms2. few gov’t regulations (also similar to

proprietorship)3. easier to borrow or raise money –

more than 1 person thus more assetsand easier to borrow money

4. often more efficient – 2 people→ moreskill and talent

Disadvantages:1. partners have unlimited liability for all debts. claims, and losses (personal assets at risk)2. profits must be shared according to terms of partnership, even if workload not even3. business ends when any one of partners dies or retires4. potential for disagreement among partners

Corporations – organization legally bound together by a charter (articles of incorporation) to conduct some type of business - recognized as a legal entity

- Board of Directors – runs corporation - powers and duties outlined in bylaws

Advantages:1. most effective for raising money2. limited liability – owners/stockholders

only responsible for debts, claims, or losses up to amount of their investment

3. unlimited life – a legal entity unto itself4. resources of numerous individuals

combined 5. tax advantages6. risk spread among owners/stockholders

Disadvantages:1.harder to start – must receive legal

charter from gov’t and pay fee2. owners have less direct control (more so

in larger corporations)3. double taxation corporate profits taxed

and stockholder dividends taxed4. corporations limited to activities stated in

their charters

Partnerships----→ 9%

Corporations20%

Proprietorships71%

Percentageof allFirms

Percentageof allSales

Corporations90%

Proprietorships ----→6%

Partnerships 4%

←--

other business terms:

liquidity - the act of converting stock into cash

franchise – purchasing a corporate name of a successful corporate chain

- must abide by chain’s rules for conducting business

multinational – company that conducts businessin more than one country

cartel – group that organizes to control production and prices

Financing a Business

- bank loans - promissory notes - selling bonds - selling stock (common stock gives stockholder

partial ownership of corporation)→ stockholder receives dividends if corporation turns a profit→ stock value goes up if corporation is successful

Mergers: One Way for a Business to get Bigger

merger – 1 company combines with another

horizontal merger – merger of 2 companies in the same business

vertical merger – merger of 2 companies in different stages of production

conglomerate merger – merger of 2 companies in different businesses

subsidies –financial aid from gov’t or charity