Principles of Business and Personal Finance
NC Competency 001: Key Characteristics of the private enterprise system.
NC Objective 1.03: Evaluate the role of different types of business and the various forms of business ownership in the United States.
I. Sole Proprietorships: A business owned by one person
A. Advantages: control the entire business, keep all of the profits, can make decisions quickly, and usually pay fewer taxes than other forms of business ownership.
B. Disadvantages: Owner has unlimited liability for the business, may have to use personal savings and can fail if the owner becomes disabled or sick.
II. Partnerships: An association/business owned by two or more persons who operate the entity as co-owners sharing the profits/losses according to a written agreement.
A. Advantages: Allows partners to combine their talents and financial resources, share in the responsibility of running the business and making decisions, and pays less taxes than a corporation.
B. Disadvantages: Unlimited liability for business debts, disagreements among partners can arise in how the business is run.
C. Partnership Agreement (also known as Articles of Partnership): Included in the articles of partnership were the essential things they agreed upon:
1. Name of the new business
2. Amount each person is to invest in the business
3. Amount each partner is to draw in salary/profit
4. How profits/losses after salaries are paid will be shared in proportion to each partner’s investment.
5. Responsibilities of the partners in the entity
6. What will happen in the event of death of a partner(‘s).
III. Corporations: A business organization that operates as a legal entity separate from its owners and is treated by law as if it were an individual person.
A. Stockholders (Shareholder): People who own stock in a corporation
B. Board of Directors: A group of people elected by shareholders to guide a corporation.
C. Corporate Officers: are the directors and senior level management of a corporation.
D. Charter: a license to operate from that state
C. Limited Liability Company (LLC): A business that operates and is taxed as a partnership but whose owners have limited liability.
1. Advantages: Offer stockholders limited liability, share of the profits, no management responsibility, can raise money by selling stocks, and generally have an easier time getting credit over other forms of business ownership.
2. Disadvantages: Must comply with many more federal and state laws in how the business is operated, must register with a state government agency to begin a business, and they pay special taxes to the state and federal government as well as a tax on profits.
3. Voting Rights: right of a common shareholder to vote in person or by PROXY on the affairs of a company.
IV. Franchise: A contractual agreement to sell a company’s products or services in a designated geographic area.
A. Franchisee: The person or group of people who have received permission from a parent company to sell its products or services.
B. Franchisor: The parent company that grants permission to a person or group to sell its products or services.
C. Advantages: Name/brand recognition, established methods of doing business, access to centralized advertising and professional help in startup/training.
D. Disadvantages: High startup costs in purchasing rights to use the businesses name/product, can only operate in the manner established by the parent company, and inflexibility to how you operate your business by rules imposed by the parent company.
V. Types of Businesses
A. Extractors: A business that grows products or takes raw materials from nature.
B. Producers: A business that gathers raw products in their natural state.
B. Processors: Businesses that change natural materials (raw goods) into a more finished form for manufacturers to process further. Such as Paper Mills, Oil Refineries, Steel Mills, and Flour Mills
C. Manufacturers: A business that takes an extractor’s products or raw materials and changes them into a form that consumers can use.
D. Distribution:
1. Wholesalers: A middle firm that assists with distribution activities between businesses.
2. Retailers: A business firm that sells directly to the consumer.
E. Service Firms: A business that does things for you instead of making products.