AP Econ Test (Chapter 8)

Disadvantage #2: limited access to resources

3 possible cases: - shortage of physical capital - shortage of human capital - inability to keep up with demand

Advantage #2: management training and support

franchisers help inexperienced owners gain the experience they need to succeed

double taxation in recent years

in 2003, Congress reduced double taxation by lowering the dividend and capital gains tax rates to 15%

What are some disadvantages of a sole proprietorship?

independence & total control come with a high degree of responsibility disadvantages: - unlimited personal liability - limited access to resources - lack of permanence

How are stocks bought and sold?

stocks are bought and sold at financial markets called stock exchanges, such as the New York Stock Exchange

Disadvantage #1: unlimited personal liability

- *the biggest disadvantage of sole proprietorship is unlimited personal liability* - sole proprietors are fully and personally responsible for all their business debts - business debts can ruin a sole proprietor's personal finances --> ex: if the business fails, the owner may have to sell personal property to cover any outstanding obligations

corporation

- a legal entity (or being) owned by individual stockholders, each of whom faces limited liability for the firm's debts - this is the *most complex* form of business organization - stockholders own stock - unlike a sole proprietorship, *a corporation is defined as an "entity" because it has a legal identity separate from those of its owners* - because of the advtanages of corporations, most large business firms incorporate

Advantage #2: relatively few regulations

- a proprietorship is the *least-regulated* form of business organization - however, there are some industry-specific regulations (ex: food health codes, chemical codes) and maybe zoning laws - because these businesses require little legal paperwork, they are usually the least expensive form of ownership to establish

business franchise

- a semi-independent business that pays fees to a parent company in return for the exclusive right to sell a certain product or service in a given area - parent company = "franchiser" - the franchiser develops the products and business systems, then work with the local franchise owners to help them produce and sell their products

shortage of human capital

- a sole proprietor, no matter how ambitious, may lack some of the skills necessary to run a business successfully - everyone has different strengths and weaknesses --> ex: if the owner is great at sales, he/she may not be good at accounting

When do antitrust regulators become concerned with a vertical merger?

- if the vertical merger drives supplying firms out of business - most vertical mergers do not substantially lessen competition, so they are usually allowed

Jerry Yang

- immigrant from Taiwan - attended Stanford University - with David Filo, he developed the Internet directory called Yahoo!

What is an example of a horizontal merger?

- in 1998, two giant automakers, Chrysler Corporation and Daimler-Benz, merged to form DaimlerChrysler - these two corporations predicted that their merger would reduce costs and boost revenues as much as $3 billion annually

Advantage #2: shared decision making and specialization

- in a partnership, the responsibility for the business may be shared - in a successful partnership, each partner brings different strengths and skills to the business --> solves the sole proprietor's problem of limited human capital

statistics of corporations in the US

- in the US, corporations account for about *20%* of all businesses, yet sell about *90%* of all products in the nation - they generate about 70% of the net income earned in the US - corporations' profits are about 10% of their income

zoning law

- law in a city or town that designates separate areas for residency and for business - may prohibit sole proprietors from operating businesses out of their homes

What are some examples of sole proprietorships?

- local bakery - barber shop / hair salon - corner store

Advantage #3: sole receiver of profits

- the owner gets to keep all profits after paying income taxes - potential profits motivate many people to start their own businesses --> if the business succeeds, they don't have to share the success with anyone else

Advantage #1: ease of start-up

- this is one of the main advantages - easy and inexpensive to establish - with just a small amount of paperwork and legal expense, just about anyone can start a sole proprietorship - to start a new business, a sole proprietor must meet a small number of government requirements (can vary from city to city, and state to state) --> this paperwork only takes a couple of days to complete!

Advantage #1: limited liability for owners

- this is primary reason that entrepreneurs choose to incorporate - individual investors do not carry responsibility fr the corporation's actions - they can only lose the amount of money they have invested in the business

Uniform Partnership Act (UPA)

- uniform state law adopted by most states to establish rules of partnership - requires common ownership interests, profit and loss sharing, and shared management responsibilities in a partnership

Disadvantage #1: unlimited liability

- unless the partnership is an LLP, at least one partner has unlimited liability - any general partner could lose everything, including personal property, in paying the firm's debts - limited partners do NOT face the same threat --> they can only lose their investment - in a partnership, each general partner is bound by the acts of all other general partners - if one partner's actions cause the firm losses, then all of the general partners suffer --> ex: if one doctor in partnership is sued for malpractice, all of the doctors in the partnership sand to lose - general partners do NOT enjoy absolute control over the firm's actions like sole proprietors do - the risk from other people's actions means that people must choose their business partners carefully

types of partnerships

1.) general partnerships 2.) limited partnerships 3.) limited liability partnerships (LLPs) *each divides responsibility and liability differently*

What are typically the minimum government requirements that sole proprietors must meet?

*1.) site permit* - if not operating out of the home, a sole proprietor must obtain a certificate of occupancy to use another building for business *2.) authorization* - sole proprietors must obtain a business license - certain professionals (like doctors) may also be required to obtain a special license from the state *3.) name* - if not using his/her own name as the name of the business, a sole proprietor must register a business name

What is the basic structure of all corporations?

*corporation owners --> board of directors --> corporate officers --> managers --> employees* - corporation owners = stockholders - corporation owners elect a board of directors that makes all the major decisions of the corporation - the board of directors appoints corporate officers, who run the corporation and oversee production - corporate officers hire managers and employees, who work in various departments (like finance, sales, research, marketing, and production)

Disadvantage #3: lack of permanence

- *a sole proprietor has a limited life* - if a sole proprietor dies or closes shop due to retirement, illness, loss of interest in the business, or for any other reason, the business ceases to exist - sole proprietors often have trouble finding and keeping good employees --> lack of experienced employees can hurt a business - a sole proprietor cannot depend on anyone else to maintain the business

sole proprietorship

- a business owned and managed by a single individual - this person earns all of the firm's profits and is responsible for all of the firm's debts - even though they are the most common form of business organization, most sole proprietorships are small --> only generate about 6% of all US sales

stock

- a certificate of ownership in a corporation - if you own stock in a corporation, you are a part-owner of that corporation --> own a specific fraction

Advantage #1: established reputation

- a franchise comes with a built-in reputation - consumers may already be familiar with the product and brand of the franchise

closely held corporation

- aka "privately held corporation" - corporation that issues stock to only a few people, often family members - these stockholders rarely trade their stock, but pass it on within families

multinational corporation (MNC)

- aka "transnational corporation" - large corporation that produces and sells its goods and services throughout the world - usually has headquarters in one country and branches in other countries - must obey laws and pay taxes in each country in which they operate - many MNCs have operating budgets much bigger than most governments' budgets

business organization

- an establishment formed to carry on commercial enterprise - a company/firm

What are some disadvantages of multinational corporations?

- excessively influence the culture and politics in the countries in which they operate - operate with low wages and poor working conditions in some poorer countries

What are some disadvantages of incorporation?

- expensive and difficult start-up - double taxation - potential loss of control by the founders - more legal requirements and regulations

Advantage #6: centralized buying power

- franchisers buy materials in bulk for all of their franchise locations - they pass on the savings to their franchise owners

partnership

a business organization owned by two or more persons who agree on a specific division of responsibilities and profits

What is the Securities and Exchange Committee (SEC)?

a federal agency that regulates the stock market

bond

a formal contract to repay borrowed money with interest at fixed intervals

inability to keep up with demand

a sole proprietor may have to turn down work because he/she simply does not have enough hours in the day or enough workers to keep up with demand

legal identity of a corporation

legally, a corporation is regarded much like an individual - pays taxes - may engage in business, make contracts, sue other parties, and get sued by others

assets

money and other valuables belonging to an individual or business

Advantage #3: standardized quality

most parent companies require franchise owners to follow certain rules and processes to guarantee product quality

Advantage #4: national advertising programs

parent companies pay for far-reaching advertising campaign to establish their brand names

royalty

share of earnings given as payment

Advantage #2: transferable ownership

shares of stock are transferable --> stockholders can sell their stocks to others and get money in return

liability

the legally bound obligation to pay debts

dividend

the portion of corporate profits paid out to stockholders

What is one of the first decisions that entrepreneurs must make?

what form of business organization best serves their interests

Advantage #4: long life

- unlike a sole proprietorship, the company does not end with the death of an owner - because stock is transferable, corporations are able to exist longer than simple proprietorships - unless it has stated in advance a specific termination date, the corporation can continue doing business indefinitely

What are some disadvantages of partnerships?

- unlimited liability - potential for conflict

2 types of corporations

1.) closely held corporations 2.) publicly held corporations

business license

authorization to start a business issued by the local government

Advantage #3: ability to attract capital

corporations have more potential for growth than other business forms how do corporations attract capital? 1.) selling shares on the stock market 2.) selling bonds 3.) hiring various experts

incorporation

forming a corporation

Disadvantage #5: limited product line

franchise agreements allow stores to offer only approved products

Disadvantage #4: purchasing restrictions

franchise owners must often buy their supplies from the parent company or from approved suppliers

certificate of incorporation

- aka "corporate charter" - license to form a corporation issued by state government includes crucial information such as - the corporate name - statement of purpose - length of time the business will run - founders' names and addresses - headquarters's business address - method of raising funds - the rules for the corporation's management

articles of partnership

- aka "partnership agreement" - legal document - spells out each partner's rights and responsibilities - outlines how partners will share profits or losses - may also address other details, such as the ways new partners can join the firm, duration of the partnership, and tax responsibilities

corporate combinations

- as a corporation continues to grow, managers and owners may decide to merge (combine) the firm with one or more other companies - corporate combinations can lead to larger, more efficient firms that can produce and sell their products at lower prices - however, their size can also give some of these combinations more monopoly power 3 kinds of mergers: - horizontal mergers - vertical mergers - conglomerates

What are some advantages of multinational corporations?

- benefit consumers and workers worldwide by providing jobs and products around the world - spread new technologies and production methods across the globe - often the jobs they provide help poorer nations gain better living standards for their people

conglomerate

- business combination merging more than three businesses that make unrelated products - no one business earns the majority of the firm's profits - the government usually allows this kind of merger because it does not result in decreased competition

investment

- businesses often rely on investment to expand operations - one way for a business to increase investment is to form a corporation - a corporation can grow even larger by combining with other corporations --> some corporations are so large that they do business all over the world

How do corporations attract capital through stocks?

- by selling shares on the stock market, corporations can raise money to purchase capital - a corporation can offer as many shares of stock as its corporate charter allows - as long as investors have confidence in the firm's success, companies should be able to sell stock fairly easily

Disadvantage #1: expensive and difficult start-up

- corporate charters can be difficult, expensive, and time-consuming to establish - although most states allow people to form corporations without legal help, few experts would recommend this cheaper shortcut - applications are complex and confusing - firms that wish to incorporate must first file for a state license known as a certificate of incorporation --> once state officials review and approve the application, they grant a corporate charter --> then the corporation may organize itself to produce and sell a good/service

publicly held corporation

- corporation that sells stock on the open market - has many shareholders who can buy or sell stock on the open market

Disadvantage #4: more legal requirements and regulations

- corporations face more regulations than other kinds of business organizations - corporations must hold annual meetings for shareholders and keep careful records of all business transactions - publicly held corporations are required to file quarterly and annual reports to the Securities and Exchange Committee (SEC)

What are some examples of general partnership?

- doctors, lawyers, accountants, and other professionals often form partnerships with colleagues --> *important!* - small retail stores, farms, construction companies, and family businesses often form partnerships as well

Advantage #3: larger pool of capital

- each partner's assets improve the firm's ability to borrow funds for operations or expansion - partnership agreements may allow firms to add limited partners to raise funds - partnerships offer more advantages to employees, enabling them to attract and keep talented workers more easily than proprietorships can

What are some advantages of a sole proprietorship?

- ease of start-up - relatively few regulations - sole receiver of profit - full control - easy to discontinue

What are some advantages of partnerships?

- ease of start-up - shared decision-making and specialization - larger pool of capital - taxation

Advantage #1: ease of start-up

- easy and inexpensive to establish - partnerships are subject to little government regulation

What are some advantages of franchises?

- established reputation - management training and support - standardized quality - national advertising programs - financial assistance - centralized buying power

Disadvantage #3: strict operating standards

- franchise owners must follow all of the rules laid out in the franchising agreement for such matter as hours of operation, employee dress codes, and operating procedures - otherwise, an owner may lose the franchise

Disadvantage #2: high franchising fees and royalties

- franchisers often charge high fees for the right to use the company name - they also charge franchise owners a share of the earnings, or royalties

What are some examples of how partnerships attract and keep talented employees?

- graduates from top accounting schools often seek jobs with large and prestigious accounting LLPs, hoping to become partners themselves someday - many law school graduates seek out successful partnerships for employment

shortage of physical capital

- if business takes off very quickly, the sole proprietor may need to expand the business by paying for more equipment out of his/her own pocket --> banks are sometimes unwilling to offer financing in the early days of a business - many small business owners use all of their available savings and other personal resources to start up their businesses --> this makes it difficult or impossible for them to expand quickly

Advantage #5: easy to discontinue

- if sole proprietors decide to stop operations and do something else for a living, they can do so easily - they will have to pay all debts and other obligations (like taxes), but they do not have to meet any other legal obligations to stop doing business

Disadvantage #2: potential for conflict

- many important considerations exist outside the legal guidelines of a partnership agreement --> partners need to ensure that they agree about work habits, goals, management styles, ethics, and general business philosophies - still, friction between partners often arise and can be difficult to resolve --> many partnerships dissolve because of interpersonal conflicts - thus, partners must learn to communicate openly and find ways to resolve conflicts

How do corporations attract capital by hiring various experts?

- ownership is separate from the running of a corporation - corporation owners (aka stockholders) do not need any special managerial skills - instead, the corporation can hire various experts (the best financial analysts, engineers, etc.) to create and market the best services or goods possible

limited liability partnership (LLP)

- partnership in which all partners are limited partners - a newer type of partnership recognized by may states - functions like a general partnership, except that all partners are limited from personal liability in certain situations, such as another partner's mistakes - not all types of businesses are allowed to register as LLPs --> most states only allow professionals such as lawyers, doctors, dentists, and accountants

limited partnership

- partnership in which only one partner is required to be a general partner - a limited partnership must have at least one general partner, but can have any number of limited partners general partner - has unlimited personal liability for the firm's actions - main advantage: having control of the business - main drawback: extent of liability limited partner - just contributes money - does NOT actively manage the business - can lose only the amount of their initial investment

general partnership

- partnership in which partners share equally in both responsibility and liability - this is the most common type of partnership - many of the same kinds of businesses that operate as sole proprietorships could operate as general partnerships

Advantage #4: taxation

- partnerships, like sole proprietorships, are not subject to any special taxes - although partners pay taxes on their share of the income that the partnership generates , the business itself does not have to pay taxes

fringe benefit

- payment other than wages or salaries - paid vacation, retirement pay, health insurance

How do corporations attract capital by selling bonds?

- selling bonds is essentially like borrowing money - by selling bonds, corporations can raise money to purchase capital

Why do sole proprietors often have trouble finding and keeping good employees?

- small businesses generally cannot offer the security and advancement opportunities that many employees look for in a job - many sole proprietorships are able to offer employees little in the way of fringe benefits

Why has franchising become popular in recent years?

- small franchise businesses allow owners a degree of control - at the same time, the owners benefit from the parent company

Advantage #4: full control

- sole proprietors can run their business as they wish - this means that they can respond quickly to changes in the marketplace --> fast, flexible decision-making allows sole proprietors to take full advantage of sudden opportunities

What are the 4 types of business organizations?

- sole proprietorship - partnership - corporation - cooperative

What are some examples of corporations?

- supermarkets - high-tech companies - machinery manufacturers

horizontal merger

- the combination of two or more firms competing in the same market with the same good or service - 2 firms might choose to merge if the newly formed firm would result in economies of scale or would otherwise improve efficiency - the federal government watches horizontal mergers carefully --> the resulting single firm might gain monopoly power in its market

vertical merger

- the combination of two or more firms involved in different stages of producing the same good or service - can allow a firm to operate more efficiently --> a vertically combined firm can control all phases of production, rather that rely on the goods/services of outside suppliers - sometimes firms combine vertically out of fear that they may otherwise lose crucial supplies --> to ensure production, these firms simply buy their suppliers

What are some disadvantages of franchises?

- the franchise owner must sacrifice some freedom in return for the parent company's guidance --> *this is the biggest disadvantage* - high franchising fees and royalties - strict operating standards - purchasing restrictions - limited product line

government regulation for partnerships

- the government does not dictate how partnerships conduct business - partners can distribute profits as they wish, as long as they abide by the partnership agreement or the UPA - the law does NOT require a written partnership agreement, but most small business experts advise partners to work with an attorney to develop articles of partnership - if partners do not establish their own articles of partnership, they fall under the rules of the Uniform Partnership Act (UPA)

Disadvantage #2: double taxation

- the law considers legal entities separate from their owners - therefore, corporations must pay taxes on their income --> profits is a form of income 2 forms of double taxation: - *dividend tax* --> when stockholders receive income from the corporation in the form of dividends, they must pay personal income tax on those dividends - *capital gains tax* --> when stockholders sell their shares, they must pay this special tax if they have made a profit

What are some examples of franchises?

- the most commonly recognized franchises are fast food restaurants - however, franchises offer a wide array of goods and services, from diamonds to day-care centers

Disadvantage #3: potential loss of control by the founders

- the original owners of a corporation often lose control of the company - managers and board of directors (NOT owners) manage corporations --> they do not always act in the founders' best interests - ex: professional managers may be more interested in protecting their own jobs/salaries today than in making difficult decisions that would benefit the firm tomorrow

What are some advantages of incorporation?

advantages for stockholders - limited liability for owners (stockholders) - transferable ownership advantages for the corporation - ability to attract capital - long life

What is the most common form of business organization?

sole proprietorship --> *75% of all businesses are sole proprietorships*

Advantage #5: financial assistance

some franchisers provide financing to help franchise owners start their business