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.