Chapter 6: Business Ownership and Operations

Section 6:1 Types of Business Ownership

Organizing a Business: there are three types of business organizations;

  • Sole proprietorship
  • Partnership
  • Corporation

Sole Proprietorship: a business owned by one person and makes up about ¾ of all businesses in the U.S.

Advantages of Owning a Sole Proprietorship

  • Easy form requires only a license and permits
  • Owner makes all the decisions and keeps all the profits
  • Income taxes are usually lower than that of a corporation

Disadvantages of Owning a Sole Proprietorship

  • Owner has unlimited personal liability for all business obligations
  • Limited access to credit
  • Owner may not have all the necessary skills to run a business
  • Business ends when the owner dies

Reading Check p.96

Partnerships: owned by two or more people who share the risks and rewards and consists of a partnership agreement that outlines the rights and responsibilities of each partner

Advantages of Owning a Partnership

  • Easy to start requiring only license and permits
  • Easier to obtain capital
  • Each Partner contributes money to start the business
  • Banks more willing to lend to partnerships
  • Not dependent on one person
  • Income is taxed only once
  • Each partner brings different skill and talents to the business

Disadvantages of Owning a Partnership

  • Partners share all of the risks
  • Problems occur when partners do not get along or one decides to leave
  • Partners share unlimited legal and financial liability

Corporations: registered by a state and operates apart from its owners and requires a corporate charter. To raise money the owners can sell stock, or shares in the company and must have a board of directors who will govern the corporation.

Advantages of Forming a Corporation

  • Limited liability of owners based upon their investment in the company
  • Can raise capital by selling stock
  • Corporation does not end if an owner dies

Disadvantages of Forming a Corporation

  • Owners are taxed individually and the corporation must also pay taxes on profits
  • Government regulates corporations more than the other types of businesses
  • Difficult and Costly to start

Other Ways to Organize a Business

Cooperative: owned and operated by its members and consists of groups of businesses such as small farms that pool their resources. The purpose is to save money on the purchase of certain goods and services and it makes marketing more efficient and profitable. Ocean Spray is one example of a cooperative of cranberry growers.

Nonprofit Organization: focuses on providing a service but not to make a profit. Because they do not make a profit they do not pay income taxes.

Franchise: contractual agreement to use the name and sell the products or services of a company in a designated geographic area. Taco Bell, McDonalds, and Burger King are a few examples. This requires investing money and paying a franchise fee. In exchange the franchisor offers a well-known name and a business plan.

After You Read p.98

Section 6.2 Types and Functions of Businesses

Types of Businesses

Producers: a business that gathers raw goods such as materials gathered in their original state from natural resources such as land or water. Agriculture, mining, fishing, and forestry are some examples

Processors: a business that changes raw materials into more finished products. Processed goods are made from raw goods that require further processing. Some examples are sugar cane turned into sugar, crude oil into gasoline, and iron ore into steel.

Manufacturers: a business that makes finished products out of processed goods. Cars, CDs, and computers are some examples.

Intermediaries and Wholesalers: a business that moves goods from one business to another. Usually buys large quantities of products from several manufacturers and resells them to other businesses in smaller quantities.

Retailers and Service Businesses: a retail business purchases goods from a wholesaler and sells them to consumers and final buyers of the goods. Service stations and auto dealers are some examples. A service business performs tasks rather than provides goods. Service businesses employ about ¾ of the workforce.

Functions of Business

Production and Procurement: production is the process of creating, expanding, manufacturing, or improving goods and services. Procurement is the buying and reselling of goods that have already been produced.

Marketing: is the process of planning, pricing, promoting, selling, and distributing ideas, goods, and services. This involves getting consumers to buy a product or service. Marketers make decisions based on market research of trends and consumer habits.

Management: is the process of achieving company goals by planning, organizing, controlling, and evaluating the effective use of resources.

Finance and Accounting: Finance is the art of money management. It requires analyzing financial statements to make future decisions. Accounting involves maintaining and checking records, handling bills, and preparing financial reports for a business.

Reading Check p. 101

How the Functions of Business Are Interdependent: all of the above functional areas of a business depend on each other and are sometimes in conflict.

After You Read p.103