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Economics Chapter 8

business organization
an establishment formed to carry on commercial enterprise
sole proprietorship
a business owned and managed by a single individual; earns all of firm’s profits and is responsible for all of the firm’s debt
advantages of sole propiertorship
ease of start-up, relatively few regulations, sole receiver of profit, full control, easy to discontinue
steps to start a new business: SP
1. Authorization; business license 2. site permit 3. business name
business license
authorization to start a business issued by the local government
zoning laws
law in a city or town that designates separate areas for residency and for business (prohibit sole propietors from operating business outside of the house)
liability
the legally bound obligation to pay debts
disadvantages of sole propietorship
unlimited personal liability, limited access to resources, lack of permanence
fringe benefits
payment other than wages or salaries
partnership
a business organization owned by two or more persons who agree on a specific division of responsibilities and profits
general partnership
partnership in which partners share equally in both responsibility and liability
limited partnership
partnership in which only one partner is required to be a general partner; other partner only gives money–the only thing they lose is their original investment; advantage of being the general partner is control of business
limited liability partnership (LLP)
partnership in which all partners are limited partners; all partners are limited from personal liability in certain situations (like mistakes); attorneys, physicians, dentists, accountants
advantages of partnerships
ease of start-up, shared decision-making and specialization, larger pool of capital, taxation
disadvantages of partnerships
unlimited liability, potential for conflict
articles of partnership
a partnership agreement; spells out each partner’s rights and responsibilities, outlines how partners will share profits or losses; also can address how new partners can join the firm, duration of the partnership, and tax responsiblities
uniform partnership act (UPA)
act ordering common ownership interests, profit and loss sharing, and shared management responsibilities in a partnership
assets
money and other valuables belonging to an individual or business; improve firm’s ability to borrow funds for operations or expansion
corporation
a legal entity owned by individual stockholders
stock
a certificate of ownership in a corporation; makes you a part-owner of corporation
closely held corporation
corporation that issues stock to only a few people, often family members, aka privately held corporation
publicly held corporation
corporation that sells stock on the open market
advantages of incorporation
limited liability for owners, transferable ownership, ability to attract capital, long life
advantages for stockholders
limited liability, flexibility, stocks can be sold
advantages for the corporation
more potential for growth, can sell bonds, can hire experts, long life, stock is transferable
disadvantages of incorporation
expense and difficulty of start-up, double taxation, potential loss of control by the founders, more legal requirements and regulations
bond
a formal contract to repay borrowed money with interest at fixed intervals`
certificate of incorporation
license to form a corporation issued by state government, application includes: the corporate name, statement of purpose, length of time that the business will run, founders’ names and addresses, headquarters’ business address, method of fund-raising, the rules for the corporation’s management
double taxation
corporations must pay taxes for income
dividend
the portion of corporate profits paid out to stockholders; stockholders must pay personal income tax on these
horizontal merger
the combination of two or more firms competing in the same market with the same good or service; such as two automobile companies; companies would merge if the result would be economies of scale or improve efficiency
vertical merger
the combination of two or more firms involved in different stages of producing the same good or service; a vertical merger combined can control all phases of production; concern for antitrust regulators; can lessen competition
conglomerate
business combination merging more than three businesses that make unrelated products
multinational corporation (MNC)
large corporation that produces and sells its goods and services throughout the world; must obey laws and pay taxes in each country in which they operate
advantages of multinationals
benefit consumers and workers worldwide by providing jobs and products around the world; spread technologies and production methods across the globe; help poorer nations gain better living standards for their people
disadvantages of multinationals
influence the culture and politics in the countries in which they operate; low wages and poor working conditions
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
advantages of franchises
built-in reputation; management training and support; standardized quality; national advertising programs; financial assistance; centralized buying power
disadvantages of franchises
high franchising fees and royalties; strict operating standards; purchasing restriction; limited product line
royalty
share of earnings given as payment
cooperative
a business organization owned and operated by a group of individuals for their mutual benefit; three main categories: consumer(purchasing cooperatives), service cooperatives; produces cooperatives
consumer cooperatives
retail outlet owned and operated by consumers; sell merchandise to their members at reduced prices; price clubs, book club, housing co-ops; membership fees or members must work a small number of hours per year
service cooperatives
cooperative that provides a service, rather than a good; discounted insurance, banking services, health care, legal help, babysitting
producer cooperatives
agricultural marketing cooperative that helps member sell their products
nonprofit organization
institution that functions much like a business, but does not operate for the purpose of generating profits; museums, public schools, American Red Cross, hospitals, adoption agencies, churches, YMCA; exempted from income taxes, operate with partial government support
professional organization
nonprofit organization that works to improve the images, working conditions, and skill levels of people in particular occupations; National Education Association, American Medical Association, etc. ; helps keep up-to-date on industry trends, help identify and follow codes
business association
nonprofit organization that promotes collective business interests for a city, state, or other geographical area for a group of similar businesses; must address codes of conduct; aims to protect consumers by promoting an ethical and fair marketplace
trade associations
nonprofit organization that promotes the interests of a particular industry

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