Chapter Businesses 8

Chapter Objectives Students will learn: How firms function financially The advantages and disadvantages of different business structures.

Students will learn:

How firms function financially

The advantages and disadvantages of different business structures.

Business Firms Firm =business organization that brings together the factors of production to produce and distribute good and services. Roles of Firms: Produce good and services Buyers of goods and services

Firm =business organization that brings together the factors of production to produce and distribute good and services.

Roles of Firms:

Produce good and services

Buyers of goods and services

Risk-Taking 50% of all small businesses fail within the first four years. Entrepreneurs take risks in the hope of making a profit . Companies minimize risk of failure by controlling their expenses.

50% of all small businesses fail within the first four years.

Entrepreneurs take risks in the hope of making a profit .

Companies minimize risk of failure by controlling their expenses.

Profit-Making Profit --amount of money from sales after paying expenses. Expense --costs of using the factors of production. Income Statement --a report showing a businesses sales, expenses, and profit. Net Income --amount of money left after expenses and taxes. Interest --fees paid to lender for borrowing money. Depreciation --cost of wear and tear on capital resources. Cash Flow --net income + depreciation

Profit --amount of money from sales after paying expenses.

Expense --costs of using the factors of production.

Income Statement --a report showing a businesses sales, expenses, and profit.

Net Income --amount of money left after expenses and taxes.

Interest --fees paid to lender for borrowing money.

Depreciation --cost of wear and tear on capital resources.

Cash Flow --net income + depreciation

Growth Reinvested cash flow must be larger than depreciation in order to grow. Franchises : contract from a company for other companies & individuals to use its name and business model and sell its products and services in return for a fee. Singer Sewing Machine (1 st franchise)

Reinvested cash flow must be larger than depreciation in order to grow.

Franchises : contract from a company for other companies & individuals to use its name and business model and sell its products and services in return for a fee.

Singer Sewing Machine (1 st franchise)

Efficiency and Growth Efficient=company receives maximum output from a given amount and combination of resources How businesses improve efficiency: Licensing franchises Purchasing other companies Merging with other companies Diversification reduces risk Eliminates competitors

Efficient=company receives maximum output from a given amount and combination of resources

How businesses improve efficiency:

Licensing franchises

Purchasing other companies

Merging with other companies

Diversification reduces risk

Eliminates competitors

Sole Proprietorships Organization The Owner: Makes all decisions Has day to day responsibilities Receives all profits Is responsible for all losses Is the business Advantages Easiest and least expensive way to start a business Control Simplicity No double taxation Disadvantages Unlimited Liability Limited fund-raising ability Limited life of business Business owned by only one person 70% of all businesses in the USA

Organization

The Owner:

Makes all decisions

Has day to day responsibilities

Receives all profits

Is responsible for all losses

Is the business

Advantages

Easiest and least expensive way to start a business

Control

Simplicity

No double taxation

Disadvantages

Unlimited Liability

Limited fund-raising ability

Limited life of business

Partnerships Organization Partners: Share ownership and decision making Have shared or focused responsibilities Split profits Have written agreements Advantages Easy and inexpensive way to start a business Control Simplicity Greater ability to raise funds No double taxation Disadvantages Potential for disagreements Limited fund-raising ability Limited life of business Unlimited liability Business owned by two or more people Least common businesses organization in the USA

Organization

Partners:

Share ownership and decision making

Have shared or focused responsibilities

Split profits

Have written agreements

Advantages

Easy and inexpensive way to start a business

Control

Simplicity

Greater ability to raise funds

No double taxation

Disadvantages

Potential for disagreements

Limited fund-raising ability

Limited life of business

Unlimited liability

Corporations Organization Legal arrangement Need permission from the state Register and file articles of incorporation State grants corporate charter Can sell stock Common stockholders elect a board of directors Board hires the company’s managers to run the business Advantages Limited Liability Greater ability raise money (stocks & bonds) Professional Management Unlimited Life Able to grow rapidly Disadvantages Lack of simplicity Government oversight Double Taxation Business owned by many people but treated by the law as if it were a person.

Organization

Legal arrangement

Need permission from the state

Register and file articles of incorporation

State grants corporate charter

Can sell stock

Common stockholders elect a board of directors

Board hires the company’s managers to run the business

Advantages

Limited Liability

Greater ability raise money (stocks & bonds)

Professional Management

Unlimited Life

Able to grow rapidly

Disadvantages

Lack of simplicity

Government oversight

Double Taxation