MIE 201 Exam 2 (Chapter 4, 5, & 8)

Sole Proprietorship

• most common form of business organizations in the U.S

• typically employs fewer than 50 people

• needs an employee identification number (EIN) to hire employees

• comprise nearly ¾ of all U.S. businesses

Advantages of sole proprietorship

• ease and cost of formation

• secrecy

• distribution and use of profits

• flexibility and control of the business

• freedom from government regulation

• taxation-personal income

• closing the business is easier

Disadvantages of sole proprietorships

• unlimited liability

• limited sources of funds

• limited skills

• lack of continuity

• lack of qualified employees (can be difficult to pay competitive wages/benefits)

• taxation

Partnerships

• least used form of business

• an association of two or more persons who carry on as co-owners of a business for profit

• typically larger than sole proprietorship

• smaller than corporations

Types of partnerships

general partnership and limited partnership

general partnership

involves a complete sharing in the management of a business, each partner has unlimited liability for debts of the business. Ex: lawyers, accountants, architects

Limited partnership

has at least one general partner (accepts risk of loss, receives larger share of profits), who assume unlimited liability and at least one limited partner, whose liability is limited to their investment in the business

Master Limited Partnership (MLP)

traded on securities exchange, have tax benefits of a limited partnership but the liquidity of a corporation. Ex: oil and gas companies

Articles of Partnership

legal documents that set forth basic agreements b/w two partners, required by most states, makes good sense for partners to draw them up

Advantages of Partnerships

• ease of organization

• availability of capital and credit

• combined knowledge and skills

• decision making

• regulatory controls — still few

Disadvantages of Partnerships

• unlimited liability for general partners

• responsibilities and conflicts

• life of the partnership — terminates when one person dies or leaves

• distribution of profits

• limited sources of funds

Quasi-taxable organizations

partners pay taxes

Corporations

• has many rights, duties, and powers of a person

• can own and transfer property

• can enter into contracts

• can sue and be sued in court

• majority of all US sales and income

Stocks

shares of a corperation that may be bought or sold

Dividends

profits of a corporation that are distributed in the form of cash payments to stockholders

Creating a corporation

• Incorporators create corporations

• each state has procedure called chartering the corporation for incorporating the business

• Articles of incorporations

• state issues a corporate charter

• owners establish bylaws and elect a board of directors

Article of incorporation

legal documents that contain basic info about the business

Corporate charter

legal document that the state issues to a company based on info the company provides in the articles of incorporation

Domestic corporation

conducts business in the state in which it is chartered

Foreign corporation

conducts business outside the state in which it is chartered

Alien corporation

conducts business outside the nation in which it is chartered

Private corporations

• owned by just one or a few people closely involved in managing the business

• no stock is sold to public

• not required to disclose financial information publicly

• may become public via initial public offering (IPO)

Public Corporation

corporation whose stock anyone may buy, sell, or trade, can be taken private

Quasi-public corporations

corporations owned and operated by the federal, state, or local government

nonprofit corporations

corporations that focus on providing a service rather than earning a profit but are not owned by a government entity

elements of a corporation

board of directors and stock ownership

board of directors

• elected by stockholders

• sets long-range objectives of the corporation

• ensures objectives are met on schedule

• hires corporate officers

• can be outside or inside directors

outside directors

people unaffiliated with the company

inside directors

employees of the company

Preferred stock

• owners do not have a say in running the company

• owners have a claim to profits before other stockholders

Common Stock

• owners do not get preferential treatment regarding dividends

• owners have voting rights can vote by proxy

• owners have a preemptive right (first right to purchase new shares)

Advantages of corporations

• limited liability

• ease of transfer of ownership

• perpetual life

• external sources of funds

• expansion potential

Disadvantages of corporations

• double taxation (income and dividends)

• forming a corporation

• disclosure of info

• employee-owner separation

Joint venture

• partnership

• specific project

• limited time

• individuals or organizations

• may be shared equally or one partner may be in control

S Corporation

• taxed as a partnership

• profits/losses pass to the owners

• no double taxation

• popular for entrepreneurs

• limited liability

• perpetual life

• ability to shift income and appreciation to others

Limited Liability Corporation (LLC)

• limited liability

• taxed like a partnership

• can be single or multimember

• flexible

• simple to run

Cooperative (co-op)

• individuals or small businesses

• band together to reap the benefits of belonging to a larger organization

• not set up to make money as an entity

• designed to support members

Horizontal merger

firms in the same industry

vertical merger

firms operating at different but related levels of an industry

conglomerate merger

companies that are merging are unrelated

acquisition

the purchase of one company by another, usually by buying its stock, great way to take advantage of innovations

Entrepreneurship

process of creating and managing a business to achieve desired objectives

Micro entrepreneurs

entrepreneurs who develop businesses with five or fewer employees, small business

social entrepreneurs

individuals who use entrepreneurship to address social problems

what is a small business?

independently owned and operated business, not dominant in its competitive area, does not employ more than 500 people

Small Business Administration (SBA)

an independent fedeal agency, offers managerial and financial assistance to small businesses

Importance of small business to our economy

• small firms represent 99.9% of all employer firms

• small firms create millions of new jobs each year

• small businesses employ 66.9% of real estate, rental, and leasing workers

• small firms with fewer than 100 employees have the largest share of small business employment

• women own 43.2% of small businesses

• small firms employ more than 80% of construction workers

the role of small business in the American economy

• job creation: 1.6 million net new jobs annually

• innovation: successful startups are often acquired, produce more than half of all innovations

industries that attract small business

retailing, services, manufacturing, technology, sharing economy, gig economy

retailing

physical stores, online, non-store retailing

direct selling

involves the marketing of products to ultimate consumers through face-to-face sales presentations at home, in the workplace, and in party environments

wholesaling

provide both goods & services to producers & retailers

Services

includes businesses that do not actually produce tangible goods, accounts for 80% of US jobs

Manufacturing

can provide unique opportunities for small business, can customize products to meet specific consumers needs

high technology

used to describe businesses that depend heavily on advanced scientific and engineering knowledge

sharing economy

economic model involving the sharing of underutilized resources, ex: Airbnb

Gig economy

independent contractors selling their services on demand, ex: Uber

Advanatges of small business ownership

• independence

• costs

• flexibility

• focus

• reputation

successful traits of young entrepreneurs

• intuitive

• productive

• resourceful

• charismatic

• innovative

• risk-taker

• persistent

• freindly

disadvantages of small business ownerhsip

• high stress level

• high failure rate

• undercapitalization

• managerial inexperience or incompetence

• inability to cope with growth

high failure rate

• poor business concept

• burdens of government regulation

• competitive from larger companies

undercapitalization

lack of funds to operate business normally

challenges in starting a new business

• underfunded (not providing adequate startup capital)

• lack of effective utilization of websites and social media

• lack of a marketing and business plan

• if operating a retail store, poor site selection

• pricing mistakes — too high or too low

• understanding the time commitment for success

• not finding complementary partners to bring in additional experience

• not hiring the right employee and/ or not training them properly

• not understanding legal and ethical responsibilities

business plan

statement of the rationale for the business, step-by-step explanation of how to achieve goals

financial resources

owner puts a significant percentage of capital needed

equity financing

use of personal assets rather than borrowing funds

venture capitalists

persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock, ex: shark tank

Debt Financing

• loans obtained from banks or SBA

• collateral

• mortgage

• line of credit

• trade credit

• bartering

Collateral

financial interest in the property or fixtures of the business, to guarantee payment of the debt

line of credit

agreement by which a financial institution promises to lend a business a predetermined sum on demand

trade credit

suppliers allow the business to take possession of the needed goods & services and pay for them at a later date

bartering

trading their own products for the goods & services offered by other businesses

advantages of buying an existing business

built in network of customers, suppliers, distributors

disadvantages of buying an existing business

inheriting any problems the business already has

franchise

a license to sell another’s products or to use another’s name in business or both

franchiser

the company that sells a franchise

franchisee

the purchaser of a franchise

advantages of franchises

• management training and support

• brand-name appeal

• standardized quality of goods & services

• national and local advertising programs

• financial assistance

• proven products/business formats

• centralized buying power

• site selection and territorial power

• greater chance for success

disadvantages of franchises

• franchise fees and profit sharing with franchiser

• strict adherence to standardized operations

• restrictions on purchasing

• limited product line

• possible market saturation

• less freedom in business decisions

help for small business managers

• small business development centers (SBDC’s)

• Service Core of Retired Executives (SCORE)

• Active Corps of Executives (ACE)

• Small Business Institutes (SBI’s)

Small Business Development Centers (SBDC’s)

business clinics, usually on college campuses, that provide counseling at no charge and training only at a nominal cost, provides react management assistance

Service Core of Retired Executives (SCORE)

volunteer agency funded by SBA to provide advice for owners of small firms, has more than 100,000 volunteers

Active Core Executives (ACE)

volunteer agency funded by SBA to provide advice for owners of small firms

Technological and economic trends

• internet

• increase in service exports

• economic turbulence provides both opportunities and threats

E-commerce

many small businesses use platforms to take their businesses online

Downsizing

a reactive, often purely financial, move to reduce physical space or costs

Rigthsizing

proactive, strategic shift to align business with current lifestyle/operational needs, focusing on value and efficiency

intrapreneurs

individuals in large firms who take responsibility for the development of innovations within the organization

Operations Management (OM)

development and administration of the activities involved in transforming resources into goods & services

Manufacturing (Production)

activities and processes used in making tangible products

Operations

activities used in making both tangible and intangible products

The transformation process

converts inputs into products

inputs

labor, money, materials, energy

Products

goods, services, ideas

Operations management in services businesses

• services require different transformation process

• services require high customer contact

• ideal service provider is high tech and high touch

• service product is generally intangible and perishable

characteristics of services

• intangibility

• inseparability of production and consumption

• perishability

• customization

• customer contact

uniformity of inputs

tend to be more customized for services

uniformity of products

each service tends to be performed differently

labor required

services are more labor intensive

measurement of productivity

services are difficult to measure