Chapter 6: Business Ownership and Operations

Types of Business Ownership

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.

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.
• A 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.

Types and Functions of Businesses

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.

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.

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.