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Business Ownership and Operations
Chapter 6
6.1 Types of Business Ownership
Sole Proprietorship Partnerships Corporations
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.
Sole Proprietorships
A business owned by one person. About ¾ (75%) of all businesses in
the United States are sole proprietorships.
United States Sole Proprietorships, Partnerships, and Corporations
Sole Proprietorships
Partnerships
Corportations
Others
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
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
Partnerships
Owned by two or more people Share the risks Partnership agreement is necessary
Rights and responsibilities of each partner
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
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
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
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
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
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.
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
Producers
Gathers raw goods Ex:
Agriculture Mining Fishing Forestry
Processors
Changes raw materials into more finished products.
Ex: Sugar cane is turned into sugar Crude oil into gasoline Iron ore into steel
Manufacturers
Make finished products out of processed goods.
Ex: Cars CDs Computers
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.
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
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.
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.
Management
The process of achieving company goals by planning, organizing, leading, controlling, and evaluating the effective use of resources.
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.