Chapter 8

Establishment formed to carry on a commercial enterprise Sometimes called a

company or a firm Most of the time firms

are formed to produce goods or services to make a profit

Typically individuals form businesses to become more productive through combined efforts

3 Types Sole proprietorship

Mowing lawns, babysitting

Partnerships Doctors, lawyers

Corporations McDonalds, Nike…

Firms are created so that groups of individuals can become more productive

But does that activity coordinate itself?

How do we insure that everyone does their fair share? Shirking occurs when the behavior of a worker

is less than what has been agreed upon Incentives attempt to prevent or minimize

shirking A group monitor can oversee operating activity

—a boss

Most common form Make up 75% of

businesses

Business owned and managed by one person

One person earns all profits and responsible for all debts

http://money.cnn.com/video/smallbusiness/2011/03/10/smb_in_milkmade_ice_cream.cnnmoney/

Ease of start up – business license, site permit (CO), name

Few regulations – zoning laws, health codes, etc.

Sole receiver of profits

Full control Easy to

discontinue

Unlimited personal liability

Limited access to resources

Lack of permanence (limited life)

Lack of fringe benefits

Owned by two or more people General – share equally

in responsibilities and liability (doctors, etc.)

Limited – one partner is the general partner, remaining partner contributes money

Limited Liability – all partners are limited but functions like a general

Ease of start up – articles of partnership

(spells out rights and responsibilities)

Few regulations More capital Shared decision making

and specialization

No business taxes – just on profits

Unlimited liability – general partners are completely responsible, all partners suffer together incurring debts and suits

Potential for conflict Hiring decisions Goals of the firm Operating culture Profit sharing

Corporations – individual legal entity

Ownership and Mgt. separated individual stockholders

own own shares About 20% of all

businesses in the U.S, but sell about 90% of all output

Famous case: Santa Clara County v. Southern Pacific Railroad Company (1886) set a precedent that allows corporations protection under the 14th Amendment

Section 1. All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

Closely held corporations – privately held, rarely trade stock, pass it on to family

Public held corporations – stocks are bought and sold at financial markets

Corporate structures – board of directors, officers, managers, employees, etc.

Limited Liabilities for owners Stock carries no responsibility

Transferrable ownership Can sell stock frequently

Ability to attract capital Long life

Corporations exist “in perpetuity”http://www.stosselintheclassroom.org/index.php?p=onsite.php&url=http://cdn.abcnews.com/

stossel/free/Stossel/080216_2020_stossel_sambuck.wmv

Expense and difficulty of start up Requires a charter, frequent

reports and gov’t. scrutiny Double taxation

Taxed on profits and capital gains

Potential loss of control Boardroom coup!

More legal requirements and regulations

Horizontal mergers – two or more firms similar firms tie the knot (in the same industry)

Vertical mergers – joining of two or more firms involved in different stages of the supply chain Allows a firm to operate more efficiently Control all phases of productionhttp://www.freepress.net/ownership/chart/main

Conglomerates – have more than three businesses that make unrelated products

Multinational Corporations – operate in more than one country at a time Provide jobs worldwide,

spread technology Negative influences on

culture and politics

ALTRIA GROUP

Franchises – semi- independent business that pays fees to a parent company granted the right to sell

a certain product in an area Cooperative – owned and

operated by a group for shared benefit Consumer – sell merchandise to members at a

cheaper price Service – provide a service such as a credit

union Producer – agricultural markets, help to sell

products

Do not seek to earn a profit, benefit society Professional

organizations – help people in certain skills

Business organizations – promote business interests in a place

Trade Associations – promote industries

Labor Unions – improve working conditions