Chapter 6: Business Ownership and Operations

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Types of Business Ownership

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Organizing a Business

  • There are three main types of business organizations: sole proprietorships, partnerships, and corporations
  • About three-quarters of all businesses in the United States are sole proprietorships.
    • A sole proprietorship is a business owned by one person.
    • A sole proprietor’s personal tax rate is often lower than the corporate tax rate.
  • A major disadvantage of owning a sole proprietorship is that the owner has unlimited liability.
    • Unlimited liability means the owner is responsible for the company’s debts.
  • Limited access to credit is another disadvantage.
  • A third disadvantage is that the person in charge may not have all of the skills needed to run the business.
  • A fourth disadvantage is that the sole proprietorship ends when the owner dies.
  • A partnership is a business owned by two or more people who share its risks and rewards.
    • To start a partnership, you need a partnership agreement.
    • This agreement is a contract that outlines the rights and responsibilities of each partner.
  • Unlike a sole proprietorship, it is easier for partnerships to obtain capital.
  • Another advantage is that banks are often more willing to lend money to partnerships than to sole proprietorships.
  • Lastly, each partner brings different skills and talents to the business.
  • One disadvantage is that all the partners share the business risks.
  • Problems occur when partners do not get along or one of them decides to leave.
  • A corporation is a company that is registered by a state and operates apart from its owners.
    • To form a corporation, the owners must get a corporate charter from the state where their main office will be located.
  • A corporate charter is a license to run a corporation.
  • To raise money, the owners can sell stock, or shares in the company.
  • The company also must have a board of directors, who will govern the corporation.
  • A major advantage of a corporation is limited liability.
    • Limited liability holds a firm’s owners responsible for no more than the capital that they have invested in it.
  • Another advantage is its ability to raise money when people buy stock.
  • A third advantage is that the corporation does not end if an owner dies
  • Corporations face several disadvantages.
  • They pay taxes on their income, and stockholders pay taxes on profits issued to them. That is called double taxation.
  • The government regulates corporations more than other types of businesses.
  • Corporations are also difficult and costly to start.

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Other Ways to Organize a Business

  • A cooperative is an organization that is owned and operated by its members.
    • When groups of businesses, such as small farms, pool their resources, they form a cooperative.
  • nonprofit organization, or nonprofit, is a type of organization that focuses on providing a service, but not to make a profit.
  • A franchise is a contractual agreement to use the name and sell the products or services of a company in a designated geographic area.
    • To run a franchise, you have to invest money and pay franchise fees or a share of the profits.

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Types and Functions of Businesses

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Types of Businesses

  • A producer is a business that gathers raw goods.
  • A processor changes raw materials into more finished products.
  • A manufacturer is a business that makes finished products out of processed goods.
  • An intermediary is a business that moves goods from one business to another.
    • It buys goods, stores them, and then resells them.
  • A wholesaler distributes goods.
    • Wholesalers are also known as distributors.
  • A retailer purchases goods from a wholesaler and sells them to consumers, the final buyers of the goods.
  • Service businesses perform tasks rather than provide goods.
    • Some service businesses meet needs, such as medical clinics and law firms.

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Functions of Business

  • There are five main functions involved in the operation of all types of businesses.
    • They are production and procurement; marketing; management; finance; and accounting.
  • 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.
  • Management is the process of achieving company goals by planning, organizing, leading, controlling, and evaluating the effective use of resources.
  • Finance is the business or 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.

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How the Functions of Business Are Interdependent

  • The functional areas of business depend on each other.
  • Sometimes the functional areas conflict with each other.
  • The final plan involves ideas from all functions of business.
  • Companies benefit when all functional areas work together.

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