Chapter 5 - Forms of Business Ownership and Organization

What are the different kinds of mergers

Mergers can be classified as vertical, horizontal, or conglomerate.

home-based businesses

firm operated from the residence of the business owner.

small business

independent business with fewer than 500 employees, not dominant in its market.

What is the main characteristic of a not-for-profit corporation?

A not-for-profit organization is set up legally so that its goals do not include pursuing a profit. Most states set out specific legal provisions for organizational structures and operations of not-for-profit corporations. They are exempt from paying corporate taxes.

Discuss why most businesses are small businesses.

A small business is an independently owned business having fewer than 500 employees. Generally, it is not dominant in its field and meets industry-specific size standards for income or number of employees. A business is classified as large when it exceeds these specifications.

How does the Small Business Administration (SBA) define small business?

A small business is defined as an independent business having fewer than 500 employees. However, those bidding for government contracts or applying for government assistance may vary in size according to industry.

What percentage of small businesses remain in operation five years after starting? Ten years?

About 50% are in business after 5 years; about 70% have folded by the 10-year mark.

Discuss why small businesses fail.

About 7 of every 10 new (small) businesses survive at least two years. But by the tenth year, 70% have closed. Failure is often attributed to management shortcomings, inadequate financing, and difficulty meeting government regulations.

What is public ownership?

Public ownership occurs when a unit or agency of government owns and operates an organization.

Describe the features of a successful business plan.

A complete business plan contains an executive summary, an introduction, financial and marketing sections, and résumés of the business principals. Within this structure, an effective business plan includes the company's mission, an outline of what makes the company unique, identification of customers and competitors, financial evaluation of the industry and market, and an assessment of the risks.

What is a corporation?

A corporation is a legal organization with assets and liabilities separate from those of its owners. A corporation can be a large or small business.

Explain franchising.

A franchisor is a large firm that permits another business (the franchisee) to sell its products under its brand name in return for a fee. Benefits to the franchisor include opportunities for expansion and greater profits. Benefits to the franchisee include name recognition, quick start-up, support from the franchisor, and the freedom of small-business ownership.

What is the difference between a franchisor and a franchisee?

A franchisor permits a franchisee to market and sell its products under its brand name, in return for a fee.

What is a joint venture?

A joint venture is a partnership between organizations formed for a specific undertaking.

Outline the forms of private business ownership.

A sole proprietorship is owned and operated by one person. While sole proprietorships are easy to set up and offer great operating flexibility, the owner remains personally liable for all of the firm's debts and legal settlements. In a partnership, two or more individuals share responsibility for owning and running the business. Partnerships are relatively easy to set up, but they do not offer protection from liability. When a business is set up as a corporation, its assets and liabilities are separate from those of its owners and it is a separate legal entity. Investors receive shares of stock in the firm. Owners have no legal and financial liability beyond their individual investments. In an employee-owned business, most stockholders are also employees. Family-owned businesses may be structured legally in any of these three ways but face unique challenges, including succession and complex relationships. The legal structure of a not-for-profit corporation stipulates that its goals do not include earning a profit.

2. In what industries do small businesses play a significant role?

Agricultural, Construction. home based businesses, Real Estate, Lending & Leasing, Accommodation & Food Service, Whole Trade

What are the benefits to both parties of franchising?

Benefits to the franchisor include opportunities for expansion and greater profits. Benefits to the franchisee include name recognition, quick start-up, support and training from the franchisor, and the freedom of small-business ownership.

What are business incubators?

Business incubators are local programs organized by community agencies that provide low-cost shared business facilities, along with training, support, and networking, in an effort to help small businesses get started.

What is collective ownership? Where are cooperatives typically found, and what benefits do they provide small businesses?

Collective ownership establishes an organization referred to as a cooperative (co-op), whose owners join forces to operate all or part of the functions in their firm or industry. Cooperatives are frequently found among agricultural businesses. Cooperatives allow small firms to pool their resources, share equipment and expertise, and split discount savings among members.

Distinguish between a merger and an acquisition.

In a merger, two or more firms combine to form one company. In an acquisition, one firm purchases the property and assumes the obligations of another. Acquisitions also occur when one firm buys a division or subsidiary from another firm

Why are small businesses good opportunities for women and minorities?

Many women feel they can achieve more as small-business owners and can balance family and work more easily if they own their own firms. Minority business owners can receive special assistance from programs such as the SBA's 8(a) Business Development program.

How are new industries created?

New industries are created when small businesses adapt to shifts in consumer interests and preferences. Innovation and new technology can play a significant role. In addition, new industries may be created when both the business world and consumers recognize a need for change.

Describe public and collective ownership of business.

Public ownership occurs when a unit or agency of government owns and operates an organization. Collective ownership establishes an organization referred to as a cooperative, whose owners join forces to operate all or part of the functions in their firm or industry.

What are the three key ways in which small businesses contribute to the economy?

Small businesses create new jobs and new industries and provide innovation.

Determine the contributions of small businesses to the economy.

Small businesses create new jobs and new industries. They often hire workers who traditionally have had difficulty finding employment at larger firms. Small firms give people the opportunity and outlet for developing new ideas, which can turn into entirely new industries. Small businesses also develop new and improved goods and services.

In what industries do small businesses play a significant role?

Small businesses provide most jobs in construction, agriculture, wholesale trade, accommodation and food services, arts, entertainment and recreation, real estate, lending, and leasing. In addition, home-based businesses make up 50% of American small businesses.

What are the key differences between sole proprietorships and partnerships?

Sole proprietorships and partnerships expose their owners to unlimited financial liability from their businesses. Sole proprietorships are more flexible and easier to dissolve than partnerships. Partnerships involve shared work load and decision making, whereas sole proprietorships are entirely the responsibility of one business owner.

What are the various ways the SBA helps small businesses?

The SBA guarantees business loans; helps small businesses compete for government set-aside programs; and provides business information, advice, and training to owners of small businesses. It also advocates for small-business interests within the federal government.

Identify the available assistance for small businesses.

The SBA guarantees loans made by private lenders, including microloans and those funded by Small Business Investment Companies (SBICs). It offers training and information resources, so business owners can improve their odds of success. The SBA also provides specific support for businesses owned by women and minorities. State and local governments also have programs designed to help small businesses get established and grow. Venture capitalists are firms that invest in small businesses in return for an ownership or equity stake.

Why is an effective business plan important to the success of a firm?

The business plan is a written document that provides an orderly statement of a company's goals, methods, and standards. It is the document that secures financing and creates a framework for the organization.

What are the potential drawbacks of franchising for both parties?

The drawbacks for the franchisor include mismanagement and failure on the part of any of its franchisees, overexpansion, and loss of absolute control over the business. Drawbacks for the franchisee include an initial outlay of expenses, problems due to failure on the part of the franchisor or other franchisees, and restrictive franchise agreements.

What are the five main sections of a business plan?

The five sections are the executive summary, introduction, financial section, marketing section, and résumés of principals.

What are the three main causes of small-business failure?

The three main causes of small-business failure are management shortcomings, inadequate financing, and difficulty complying with government regulations.

Discuss organizing a corporation.

There are three types of corporations: domestic, foreign, and alien. Stockholders, or shareholders, own a corporation. In return for their financial investments, they receive shares of stock in the company. Stockholders elect a board of directors, who set overall policy. The board hires the chief executive officer (CEO), who then hires managers.

Explain what happens when businesses join forces.

n a merger, two or more firms combine to form one company. A vertical merger combines firms operating at different levels in the production and marketing process. A horizontal merger joins firms in the same industry. A conglomerate merger combines unrelated firms. An acquisition occurs when one firm purchases another. A joint venture is a partnership between companies formed for a specific undertaking.