2. Chapter Introduction
Section 1: Forms of
Business
Organization
Section 2: Business Growth
and Expansion
Section 3: Nonprofit
Organizations
Visual Summary
3. You have an idea for a new
product and you want to set
up a company to market it.
You need $5,000 to get
started with production and
advertising. Use what you
have already learned about
the factors of production to
create a list of resources you
will need and where to find
them. Read Chapter 3 to
learn about the different ways
to organize a business.
4. 1. The profit motive acts as
an incentive for people to
produce and sell goods
and services.
2. Governments and
institutions help
participants in a market
economy accomplish their
financial goals.
6. Section Preview
In this section, you will learn about the
advantages and disadvantages of various forms
of business organization.
7. Content Vocabulary
• sole
• general
proprietorship
partnership
• proprietorship • limited
partnership
• unlimited
• corporation
liability
• shareholder
• dividend
• common stock
• preferred stock
• inventory
• charter
• bond
• limited life
• stock
• principal
• partnership
• stockholder
• interest
• double taxation
9. What incentive is there for individuals
to produce and sell goods and
services?
C. Private property rights
A
0%
0%
0%
C
B. Profit motive
A. A
B. B
C. C
B
A. Low prices through
competition
11. Sole Proprietorships (cont.)
• The most common form of business
organization in the U.S. is the sole
proprietorship or proprietorship.
Business Organizations
12. Sole Proprietorships (cont.)
• Advantages
– The easiest form of business to start—
few requirements
– Decisions do not require approval from
“higher ups.”
– Keep all profits
– Does not pay separate business income
taxes; business is not a separate entity
14. Sole Proprietorships (cont.)
• Disadvantages
– Owner has unlimited liability.
– Difficult to raise capital
– Size and efficiency
– May hire several employees to stay open
– Cost of carrying minimum inventory
– Often has limited managerial skills
15. Sole Proprietorships (cont.)
• Disadvantages
– Difficult to attract qualified employees
– Larger employers can offer more fringe
benefits.
– Limited life of business
Profiles in Economics:
Andrea Jung
16. Which is not considered an advantage
to being a sole proprietor?
A. Retains all profits
B. Unlimited liability
0%
D
0%
C
A
B
C
0%
D
B
D. Business is not recognized
as a separate legal entity.
A.
B.
C.
0%
D.
A
C. Quick decision making
17. Partnerships
In a partnership, each partner
fully shares responsibility for
the operation of the business
and all profits or losses.
18. Partnerships (cont.)
• A partnership has many of the same
advantages and disadvantages of a sole
proprietor.
• Partnerships are the least numerous
form of business organization in the
United States.
20. Partnerships (cont.)
• Advantages to operating a partnership
– Ease of startup
– Formal legal papers called articles of
partnership are usually written.
– Ease of management/varied expertise
– Lack of special taxes
– Easier to attract capital than a
proprietorship
21. Partnerships (cont.)
• Advantages to operating a partnership
– More efficient operations that come with
increased size
– Easier to find good employees than a
proprietorship
22. Partnerships (cont.)
• Disadvantages to operating a partnership
– In a general partnership, each partner is
responsible for acts of all partners.
– In a limited partnership, limited partner
loses original investment. General partners
must make up the rest of the loss.
– Limited life
– Potential for conflict between partners
23. In which type of partnership would
you prefer to be a partner?
A. General partnership
B. Limited partnership
A. A
B. B
0%
B
A
0%
25. Corporations (cont.)
• A corporation is a formal, legal entity all
its own.
• Individuals who wish to incorporate must
file with the national government and state
where the business will have its
headquarters.
26. Corporations (cont.)
• If a corporation is approved, the
government issues a charter stating the
purpose of the business, specifying the
number of shares of stock, and other
business information.
Stock Ownership
27. Corporations (cont.)
• Selling shares of stock to stockholders, or
shareholders, is a way for a corporation
to raise capital.
• Corporations pay out dividends to
shareholders when the corporations
become profitable.
28. Corporations (cont.)
• There are two types of stock that
corporations issue.
– Common stock
– Preferred stock
• Type of stock purchased determines the
ownership rights of the shareholder.
29. Corporations (cont.)
• Advantages to a corporation structure
– Ease of raising capital—sell more stock
or issue bonds
• The amount of money borrowed on a bond is
called the principal.
• Corporations pay interest on this borrowed
money.
Corporate Structure
30. Corporations (cont.)
• Advantages to a corporation structure
– Owners have limited liability.
– Directors can hire professional
managers to run daily operations.
– Unlimited life
– Ease of transferring ownership
Corporate Structure
31. Corporations (cont.)
• Disadvantages to a corporation structure
– Detailed records need to be kept for
payment of taxes.
– Double taxation of corporate profits
– Difficulty and expense to get a corporate
charter
Corporate Structure
32. Corporations (cont.)
• Disadvantages to a corporation structure
– Owners or shareholders have little voice
in business operations.
– Subject to more government regulations
• Publicly held corporations must register with
the federal Securities and Exchange
Commission, established in 1934,
to regulate the sale of stock.
Corporate Structure
33. Some firms incorporate just to take
advantage of which corporate
characteristic?
A. Unlimited life
0%
D
0%
C
D. All of the above
A
B
0%
C
D
B
C. Limited liability
A.
B.
0%
C.
D.
A
B. Ease of raising capital
35. Section Preview
In this section, you will learn how businesses
grow through merging with other companies or by
reinvesting profits in themselves.
37. What is the best way for a company
to grow?
A. Invest in self
B. Merge with another company
0%
0%
C
0%
B
A. A
B. B
C. C
A
C. Depends on the situation
38. Business Growth and Expansion
• Investing profits in new plants and
equipment is one way to grow a business.
A merger is another way.
40. Growth Through Reinvestment (cont.)
• Financial statements are used to keep
track of a business’ operations.
– Income statement—shows how a
business uses the revenue it receives
from sales to grow through reinvestment
– An income statement shows a
firm’s net income.
Growth Through Reinvestment
41. Growth Through Reinvestment (cont.)
– Depreciation—a non-cash charge of
capital goods
– An increase in depreciation lowers
the earnings before tax but increases
cash flow.
– Cash flow is the bottom line,
a more comprehensive
measure of profits.
Growth Through Reinvestment
42. Growth Through Reinvestment (cont.)
• Corporations with positive cash flow may
issue dividends and reinvest in new plants,
equipment, or technology.
• Proprietors and partnerships may keep
some of the cash flow as reward for risk
taking in addition to reinvesting in
business.
43. Growth Through Reinvestment (cont.)
• Reinvesting in the business increases
production and generates more sales.
• Positive cash flow attracts investors.
44. Which of the following is included on
a net income statement?
A. Sales revenue
B. Expenses
0%
0%
D
A
B
C
0%
D
C
A
D. All of the above
A.
B.
C.
0%
D.
B
C. Cash flow
46. Growth Through Mergers (cont.)
• When two companies merge, one gives up
its separate legal identity.
• The name of the new company may reflect
the identities of both for public recognition,
however.
47. Growth Through Mergers (cont.)
• Two types of mergers
– Horizontal merger
– Vertical merger
Types of Mergers
48. Growth Through Mergers (cont.)
• Reasons to merge
– Faster growth
– Become more efficient
– Better product manufacturing or delivery
– Eliminate competition
– Change image
49. Growth Through Mergers (cont.)
• A corporation may become so large
through mergers and acquisitions that it
turns into a conglomerate.
• Diversification is the reason why some
businesses become conglomerates.
• Isolated economic events may affect
some product lines but not all of
them at the same time.
Conglomerate Structure
50. Growth Through Mergers (cont.)
• Large corporations that become
international in scope are referred to as
multinationals.
51. Growth Through Mergers (cont.)
• Multinationals
– Have manufacturing or service
operations in several countries
– Are subject to laws in each country and
may pay taxes to each
– Are able to move resources, goods,
services, and financial capital across
national borders
52. Growth Through Mergers (cont.)
• Multinationals are generally welcomed in a
country because they bring new
technology, generate jobs and revenue,
increase the standard of living, and pay
taxes.
53. Growth Through Mergers (cont.)
• Critics argue that multinationals often pay
low wages, export natural resources,
interfere with local businesses, and alter
traditional ways of life in the host country.
• Multinationals can demand concessions by
threatening to move operations out of the
country.
54. Growth Through Mergers (cont.)
• Economists, however, welcome the lowercost production and higher-quality output
that global competition brings.
• Global competition raises the standard of
living for everyone.
55. Which of the following is a
conglomerate in Japan?
A. Samsung
B. Sony
0%
D
A
0%
A
B
C
0%
D
C
D. Gold Star
A.
B.
C.
0%
D.
B
C. Daewoo
57. Section Preview
In this section, you will learn about the economic
benefits that cooperatives and other nonprofit
organizations bring to their members.
58. Content Vocabulary
• nonprofit
organization
• cooperative
• co-op
• credit union
• labor union
• collective
bargaining
• professional
association
Academic Vocabulary
• analyze
• devoting
• chamber of
commerce
• Better Business
Bureau
• public utility
59. Can you name any nonprofit
organizations that exist in your
community?
A. Yes
B. No
A. A
B. B
0%
B
A
0%
60. Nonprofit Organizations
• Most businesses use scarce resources to
produce goods and services in order to
generate a profit.
• Other businesses operate on “not-forprofit” basis and are called nonprofit
organizations.
62. Community Organizations
and Operatives (cont.)
• Many community organizations such as
schools, churches, hospitals, and welfare
groups are legally incorporated but do
not issue stock or pay income taxes.
Any surplus earned is used to further
their work.
64. Community Organizations
and Operatives (cont.)
• Three major types of cooperatives
– Consumer cooperative—members keep
costs down by devoting time to
operation.
– Service cooperative—particular
company/agency employees use a
credit union.
65. Community Organizations
and Operatives (cont.)
• Three major types of cooperatives
– Producer cooperative—in the United
States, farmers may organize this to sell
their produce.
Cooperatives
66. Which type of cooperative would
provide insurance to its members?
A. Producer
A. A
B. B
C. C
A
0%
0%
0%
C
C. Service
B
B. Consumer
67. Labor, Professional, and
Business Organizations
Some nonprofit organizations
are formed to promote the
interests of workers and
consumers.
68. Labor, Professional, and
Business Organizations (cont.)
• Many other groups besides co-ops
organize nonprofit organizations to
promote the interests of their members.
– Labor unions—use collective
bargaining when negotiating with
management
– Professional associations
69. Labor, Professional, and
Business Organizations (cont.)
• Many other groups besides co-ops
organize nonprofit organizations to
promote the interests of their members.
– Business associations—chamber of
commerce or Better Business Bureau
are examples
70. Which nonprofit organization might a
machinist belong to?
A. Labor union
B. Professional association
0%
D
0%
C
A
D. Any of the above
A. A
B. B
C. 0%
C
0%
D. D
B
C. Business association
73. Government (cont.)
• Government plays both a direct and
indirect role in the economy.
– Direct involvement—government
supplies a good or service that
competes with private businesses
• Examples: the U.S. Postal Service (USPS),
state colleges and universities, and police
protection
74. Government (cont.)
• Government plays both a direct and
indirect role in the economy.
– Indirect involvement includes the
regulation of public utilities, financial
aid to college students, rent subsidies,
and veteran’s checks.
75. How do government organized
nonprofits differ from privately held
nonprofits?
A. Limited life
0%
C
0%
B
A
B. Professional management
team is hired to oversee daily A. A
operations.
B. 0%
B
C. Congressional, state, or local C. C
funds may be necessary to
cover any losses.
78. Growth A company can reinvest its profits or merge
with another firm in order to grow.
79. Nonprofit Organizations Some organizations work
in a businesslike way to promote the interests of
their members. Unlike businesses, these nonprofit
organizations do not seek to earn a profit.
88. Andrea Jung (1958– )
• first female chief executive officer
(CEO) in Avon Products’ 118-year
history
• ranked #5 on Fortune magazine’s
“50 Most Powerful Women in
Business”
89. Economic Concepts
Transparencies
Transparency 2 Opportunity Cost &
Trade-Offs
Transparency 3 Productivity
Transparency 5 Economic
Institutions and
Incentives
Select a transparency to view.
96. sole proprietorship
business owned and run by a single
person who has the rights to all profits
and unlimited liability for all debts of
the firm
97. proprietorship
business owned and run by a single
person who has the rights to all profits
and unlimited liability for all debts of
the firm
102. general partnership
form of partnership where all partners
are equally responsible for
management and debts
103. limited partnership
form of partnership where one or
more partners are not active in the
daily running of the business and
have limited responsibility for debts
125. conglomerate
firm with four or more businesses
making unrelated products, with no
single business responsible for a
majority of its sales
126. multinational
corporation producing and selling
without regard to national boundaries
and whose business activities are
located in several different countries
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