Sole ProprietorshipsSole Proprietorships

What role do sole proprietorships play in our economy?

What are the advantages of a sole proprietorship?

What are the disadvantages of a sole proprietorship?

A sole proprietorshipsole proprietorship is a business owned and managed by a single individual.

The Role of Sole ProprietorshipsThe Role of Sole Proprietorships

A business organization is an establishment formed to carry on commercial enterprise. Sole proprietorships are the most common form of business organization.

Most sole proprietorships are small. All together, sole proprietorships generate only about 6 percent of all United States sales.

Characteristics of ProprietorshipsCharacteristics of Proprietorships Most sole proprietorships earn modest

incomes.

Many proprietors run their businesses part-time.

Advantages of Sole ProprietorshipsAdvantages of Sole Proprietorships

Ease of Start-Up

With a small amount of paperwork and legal expenses, just about anyone can start a sole proprietorship.

Relatively Few Regulations

A proprietorship is the least-regulated form of business organization.

Sole proprietorships offer their owners many advantages:

Sole Receiver of Profit

•After paying taxes, the owner of sole proprietorship keeps all the profits.

Full Control

•Owners of sole proprietorships can run their businesses as they wish.

Easy to Discontinue

•Besides paying off legal obligations, such as taxes and debt, no other legal obligations need to be met to stop doing business.

The biggest disadvantage of sole proprietorships is unlimited personal liability. LiabilityLiability is the legally bound

obligation to pay debts.

Disadvantages of Sole Disadvantages of Sole ProprietorshipsProprietorships

Sole proprietorships have limited access to resources, such as physical capital. Human capital can also be limited, because no one knows everything.

Sole proprietorships also lack permanence. Whenever an owner closes shop due to illness, retirement, or any other reason, the business ceases to exist.

Types of PartnershipsTypes of PartnershipsPartnerships fall into three categories:

General Partnership In a general partnership, partners share equally in both

responsibility and liability.

Limited Partnership In a limited partnership, only one partner is required to be a

general partner, or to have unlimited personal liability for the firm.

Limited Liability Partnership A newer type of partnership is the limited liability partnership. In

this form, all partners are limited partners.

Advantages of PartnershipsAdvantages of PartnershipsPartnerships offer entrepreneurs many benefits.

1. Ease of Start-Up

Partnerships are easy to establish. There is no required partnership agreement, but it is recommended that partners develop articles of partnership.

2. Shared Decision Making and Specialization

In a successful partnership, each partner brings different strengths and skills to the business.

3. Larger Pool of Capital

Each partner's assets, or money and other valuables, improve the firm's ability to borrow funds for operations or expansion.

4. Taxation

Individual partners are subject to taxes, but the business itself does not have to pay taxes.

Disadvantages of PartnershipsDisadvantages of PartnershipsUnless the partnership is a limited liability

partnership, at least one partner has unlimited liability.

General partners are bound by each other’s actions.

Partnerships also have the potential for conflict. Partners need to ensure that they agree about work habits, goals, management styles, ethics, and general business philosophies.

Types of CorporationsTypes of CorporationsA corporation is a legal entity, or being,

owned by individual stockholders.Stocks, or shares, represent a

stockholder’s portion of ownership of a corporation.

A corporation which issues stock to a limited a number of people is known as a closely held corporation.

A publicly held corporation, buys and sells its stock on the open market.

Advantages of IncorporationAdvantages of IncorporationAdvantages for the Stockholders

Individual investors do not carry responsibility for the corporation’s actions.

Shares of stock are transferable, which means that stockholders can sell their stock to others for money.

Advantages for the Corporation

•Corporations have potential for more growth than other business forms.

•Corporations can borrow money by selling bonds.

•Corporations can hire the best available labor to create and market the best services or goods possible.

•Corporations have long lives.

Disadvantages of IncorporationDisadvantages of Incorporation Corporations are not without their disadvantages,

including:

Difficulty and Expense of Start-Up

Corporate charters can be expensive and time consuming to establish. A state license, known as a certificate of incorporation, must be obtained.

Double Taxation

Corporations must pay taxes on their income. Owners also pay taxes on dividends, or the portion of the corporate profits paid to them.

Loss of Control

Managers and boards of directors, not owners, manage corporations.

More Regulation

Corporations face more regulations than other kinds of business organizations.

Corporate CombinationsCorporate CombinationsHorizontal mergers combine two or more firms

competing in the same market with the same good or service.

Vertical mergers combine two or more firms involved in different stages of producing the same good or service.

A conglomerate is a business combination merging more than three businesses that make unrelated products.

Multinational corporations (MNCs) are large corporations headquartered in one country that have

subsidiaries throughout the world.

MultinationalsMultinationals

Advantages of MNCs

Multinationals benefit consumers by offering products worldwide. They also spread new technologies and production methods across the globe.

Disadvantages of MNCs

Some people feel that MNCs unduly influence culture and politics where they operate. Critics of multinationals are concerned about wages and working conditions provided by MNCs in foreign countries.

A business franchisebusiness franchise is 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.

Business FranchisesBusiness Franchises

Franchisers develop products and business systems, then local franchise owners help to produce and sell those products.

Franchises allow owners a degree of control, as well as support from the parent company.

Advantages and Disadvantages of Advantages and Disadvantages of Business FranchisesBusiness Franchises

Advantages of Business Franchises

• Management training and support

• Standardized quality

• National advertising programs

• Financial assistance

• Centralized buying power

Disadvantages of Business Franchises

• High franchising fees and royalties

• Strict operating standards

• Purchasing restrictions

• Limited product line

A cooperativecooperative is a business organization owned and operated by a group of individuals for their shared benefit.

CooperativesCooperatives

Consumer Cooperatives Retail outlets owned and operated by consumers are called consumer cooperatives, or purchasing

cooperatives. Consumer cooperatives sell their goods to their members at reduced prices. Service Cooperatives

Cooperatives that provide a service, rather than goods, are called service cooperatives. Producer Cooperatives

Producer cooperatives are agricultural marketing cooperatives that help members sell their products.

Nonprofit OrganizationsNonprofit Organizations

Professional OrganizationsProfessional organizations work to improve the image, working conditions, and skill levels of people in particular occupations.

Business AssociationsBusiness associations promote the business interests of a city, state, or other geographical area, or of a group of similar businesses.

Institutions that function like business organizations, but do not operate for profits are nonprofit organizations. Nonprofit organizations

are exempt from federal income taxes.

Trade AssociationsNonprofit organizations that promote the interests of particular industries are called trade associations.

Labor UnionsA labor union is an organized group of workers whose aim is to improve working conditions, hours, wages, and fringe benefits.

Economics define the labor force as all nonmilitary people who are employed or unemployed.

The United States Labor ForceThe United States Labor Force

EmploymentPeople are considered employed if they are 16 years or older and meet at

least one of the following requirements:They worked a least one hour for pay within the last week; orThey worked 15 or more hours without pay in a family business; orThe held jobs but did not work due to illness, vacations, labor disputes, or

bad weather.

Unemployment

•People are considered unemployed if they are 16 years or older and meet the following criteria:

•They do not have a job; and

•They have actively looked for work in the prior 4 weeks; and

•They are currently available for work.

Occupational TrendsOccupational TrendsA Changing Economy

The economy of the United States has transformed from a mainly agricultural economy in the 1800s, to an industrial giant in the 1900s.

The computer chip has revolutionized the economy since its introduction in the late 1900s.

Fewer Goods, More Services

Overall, the United States is shifting from a manufacturing economy to a service economy.

As service jobs increase, the nation is losing manufacturing jobs.

Demand for skilled labor is rising, and the supply of skilled workers is increasing to meet the demand.

The Changing Labor ForceThe Changing Labor ForceCollege Graduates at

Work

The learning effect is the theory that education increases productivity and results in higher wages.

The screening effect theory suggests that the completion of college indicates to employers that a job applicant is intelligent and hard-working.

Women at Work

Overall, the number of women in the work force has increased from about 38 percent of all women in 1960 to about 58 percent of all women in 1995.

Education and IncomeEducation and Income

Potential earnings increase with increased educational attainment.

Contingent employment is temporary or part-time employment.

Temporary EmploymentTemporary Employment

Temporary employees offer firms some of the following benefits:

1. Flexible work arrangements.

2. Easy discharge due to the lack of severance pay for temporary workers.

3. Temporary workers are often paid less and receive fewer benefits than their full-time counterparts.

4. Some employees prefer temporary arrangements.

Trends in Wages and BenefitsTrends in Wages and BenefitsEarnings Up for Some, Down for Others

Earnings for college graduates have increased, while earnings for workers without college degrees have decreased.

Average weekly earnings in the United States decreased from $275 in 1980 to $271 in 1999, as measured in inflation-adjusted dollars.

Cost of Benefits Rises

Benefits now make up about 28 percent of total compensation in the economy.

For employers, rising benefits costs raise the cost of doing business and decrease profits. Many firms are turning to contingent employment to curb benefits costs.

An example of benefits would be an employer’s payments to Social Security

Effects of Wage Increases

A new restaurant opens in town, offering higher wages for cooks.

Other restaurants must raise wages for cooks in order to compete for scarce labor.

Restaurants increase the price of meals to cover their increased labor costs.

When the price of meals increases, consumer demand decreases.

As business decreases, restaurants’ demand for cooks decreases.

Supply and Demand in the Labor Supply and Demand in the Labor MarketMarketLabor Demand The higher the wage rate, the smaller the quantity of labor

demanded by firms and government.

Labor Supply As wages increase, the quantity of labor supplied also

increases.

Equilibrium Wage The wage rate that produces neither an excess supply of

workers nor an excess demand for workers in the labor market is called the equilibrium wage.

Wages and Skill LevelsWages and Skill Levels Wages vary according to workers’ skill levels and education.

Jobs are often categorized into the following four groups:

Unskilled Labor• Unskilled labor requires no

specialized skills, education, or training. Examples: waiters, messengers, janitors

Semi-Skilled Labor• Semi-skilled labor requires

minimal specialized skills and education. Example: fork-lift operator

Skilled Labor• Skilled labor requires

specialized skills and training. Examples: auto mechanics, plumbers

Professional Labor• Professional labor demands

advanced skills and education. Examples: lawyers, doctors, teachers

Wage DiscriminationWage DiscriminationLaws Against Wage Discrimination The Equal Pay Act of 1963 declared that male

and female employees in the same workplace performing the same job had to receive the same pay.

Title VII of the Civil Rights Act of 1964 forbids job discrimination on the basis of race, sex, color, religion, or nationality. The EEOC handles complaints about discrimination.

Pay Levels for Women•Despite these protections, American women today earn about 75 percent of what men earn.

Pay Levels for Minorities•As the figure to the right shows, racial minorities tend to earn lower pay than white men.

A labor union is an organization of workers that tries to improve working conditions, wages,

and benefits for its members.

Occupational TrendsOccupational Trends

Less than 14 percent of U.S. workers belong to a labor union.

Key Events in the U.S. Labor Movement

Year Event

1869 Knights of Labor founded

1911 Fire in the Triangle Shirtwaist Factory in New York kills 146, spurring action on workplace safety

1932 Norris-La Guardia Act outlaws “yellow dog” contracts, gives other protection to unions

1938 AFL splinter group becomes the independent Congress of Industrial Organizations (CIO), headed by John L. Lewis

1935 Wagner Act gives workers rights to organize

1955 AFL and CIO merge to create AFL-CIO

1970s Rise in anti-union measures by employers

1990s Increase in public-sector unions, including teaching assistants at some universities

Labor Force TrendsLabor Force Trends The union movement took shape over

the course of more than a century.

The 1935 National Labor Relations Act, also known as the Wagner Act, gave workers the right to organize and required companies to bargain in good faith with unions.

Declines in Union MembershipDeclines in Union Membership Several factors have led to

declines in union membership since the 1950s:

“Right to Work” Laws

The Taft-Harlety Act (1947) allowed states to pass right-to-work laws. These laws ban mandatory union membership at the workplace.

Economic Trends•Unions have traditionally been strongest in the manufacturing sector, representing blue-collar workers, or workers who have industrial jobs. Blue-collar jobs have been declining in number as the American economy becomes more service-oriented.

Fulfillment of Union Goals•With the government setting standards for workplace safety, and with more benefits being provided by both private and government sources, some claim that the union membership has decreased simply because their goals have been fulfilled by other organizations.

Collective bargaining is the process in which union and company representatives meet to negotiate

a new labor contract.

Collective BargainingCollective Bargaining

Wages and Benefits The Union negotiates on behalf of all members for wage rate, overtime rates, planned raises, and benefits.

Working Conditions Safety, comfort, worker responsibilities, and other workplace issues are negotiated and written into the

final contract.

Job Security One of the union’s primary goals is to secure its members’ jobs. The contract spells out the conditions

under which a worker may be fired.

Labor Strikes and SettlementsLabor Strikes and SettlementsStrikes

If no agreement is met between the union and the company, the union may ask its members to vote on a strike. A strike is an organized work stoppage intended to force an employer to address union demands. Strikes can be harmful to both the union and the firm.

Mediation

To avoid the economic losses of a strike, a third party is sometimes called in to settle the dispute. Mediation is a settlement technique in which a neutral mediator meets with each side to try and find an acceptable solution that both sides will accept.

Arbitration

If mediation fails, talks may go into arbitration, a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides.