Current Events:
Chapter 3
Business Organizations, p. 60
Section 1 Forms of Business Organization, p. 61
Most businesses operate in search of profits. Others are organized and operate like a business, although profits are not their primary concern. There are three main forms of business organization. The first is the sole proprietorship, which is a business owned and operated by one person. The second is the partnership, which is a business jointly owned by two or more persons. The third is the corporation, which is recognized as a separate entity having all the rights of an individual. The proprietorship is the most common and most profitable form of business organization. The corporation is the largest and most visible.
One is a sole proprietorship which one individual, the sole proprietor, exercises complete control over the business. Another is a partnership in which two or more individuals combine their efforts and share the profits of the business. Under both business forms, the business is an asset owned by the owner or owner, it has no existence separate from them, and any financial or legal problems encountered by the business are their responsibility. All of the owners’ assets, even those not involved in the business, are at risk. Liability is unlimited.
Chapter Three Spotlight Video
Content Vocabulary
Some Real Examples
Some Final Basics
Why It Matters Today
Corporations and Stocks game
Cf. http://www.shmoop.com/corporations-stocks/game.html
Main types of business
Types reviewed and advantages and disadvantages
In-class assignment: what are the types reviewed, what are their respective advantages and disadvantages?
Sole Proprietorship, p. 62
Partnerships
Forming a Partnership, p. 65
Advantages
Disadvantages, p. 66
Reading Check
Contrasting
What are the differences between a general partnership and a limited partnership?
Corporations, p. 67
Main Idea
What is a Corporation?
Forming a Corporation
A corporation is a very different type of business organization. Most significantly, a corporation is a business entity legally separated from its owners. When business owners decide to incorporate they secure a charter from the state government. This charter is like a birth certificate, establishing the existence of a new and separate legal entity. Once incorporated, the corporation can buy and sell property, enter into contracts, sue, and be sued... just like a living, breathing person.
In fact, that's what a corporation is: a legal "person." (The word "incorporate" shares the same root as "corpse"; it means something like "to give it a body.") The idea is that the corporation is a fictitious person, with many of the same rights under the law as a real person.
For the sole proprietor turned corporation, there are several benefits. Most importantly, his personal assets (home, car, boat, iPod) are no longer at risk should the corporation have problems. If the corporation is sued, only its assets are at risk. If the corporation goes broke, its creditors can only go after the corporation’s assets. As there is a legal barrier separating the corporation and its owners, the owners enjoy limited liability.
There are other benefits as well. To finance expansion, corporations may sell stock. Most corporations, in fact, do not sell stock to the public; all of the stock is privately owned. But if a company decides to expand its capital base by “going public” it issues an initial public offering or IPO. People buying the stock acquire partial ownership in the corporation. And the more shares they buy, the larger percentage of the corporation they own. Of course, this also means that the original owners also have to share profits. These may be distributed to the shareholders quarterly in the form of dividends.
Corporations may also raise money by selling corporate bonds. Like governments, corporations may issue bonds that promise repayment over a specified period at a certain interest rate.
Another benefit of turning a sole proprietorship or partnership into a corporation is that the business becomes more durable—that is, it is no longer so tied to the health of the founder. If the founder dies, the corporation lives on. Similarly, a corporation is less dependent on the talents of its founders. As corporations grow, they are governed by a board of directors elected by the shareholders. This board selects a president or CEO (chief executive officer) to manage the corporation. A sole proprietorship may have a technically brilliant but, from a business point of view, inept founder. He may turn the business over to his even more incompetent children. But the governing structure of corporations allows management to be handed over to professionally trained executives.
Why It Matters Today
Are corporations people?
The common-sense answer is no. A corporation is not, to state the obvious, actually a living human being.
But in the eye of the law, the answer is essentially yes. A series of Supreme Court decisions in the 1800s expanded the rights of corporations, eventually extending to them the crucial rights to substantive due process included in the 14th Amendment. As recently as January 2010, the Court reaffirmed that corporations have most of the rights of real people, overturning a campaign finance law on the grounds that it violated corporations' (and unions') right to free speech.
This Court decision figured prominently in the Justice Alito: State of the Union "Close-Up" (1/27/10), :17
Some people said they can read the Judge's lips; can you? What do you think he said?
Justice Alito saying, "(That's) not true" when Obama criticized the recent Supreme Court decision permitting corporations to buy unlimited ads to influence elections.
Corporate Structure
In Motion Corporate Structure
Advantages, p. 68
Financially, corporations benefits from being allowed to raise capital by selling stock. In purchasing stock, stockholders become partial owners of the corporation and are entitled to a share of the profits. Corporations can also raise money by selling bonds like a government. Legally, corporations benefit from limited liability. Since the corporation is a legal entity separate from its owners, the owners’ personal assets are not placed at risk by any action taken by the corporation. Should the corporation be sued or have financial problems, only corporate assets can be seized.
Disadvantages, p. 69
Through what is commonly labeled “double taxation,” corporate profits are taxed and then, if distributed in the form of dividends, these same profits are taxed again along with the rest of the shareholder’s income.
Reading Check, p. 70
Evaluating
Why do many business owners prefer corporations over other forms of business organizations?
Entrepreneur, p. 71
Profiles in Economics
Andrea Jung
On Charlie Rose - Andrea Jung (Avon), 2:20
1. p. 71, What changes did Jung make to Avon's marketing strategy?
2. p. 71, What career steps did Jung take that allowed her to move from a degree in English literature to a top management position
Proprietorship - owned and run by a single person.
Partnership - jointly owned by two or more persons.
Corporation - business organization recognized by law as a separate legal entity with all the rights of an individual.
References
Forms of Business Organizations, Tax and Insurance Issues for Small Business, 9:56
Learn: * How to Choose a Form of Business * How it can maximize your protections and future growth potential * Characteristics of a sole proprietorship, general partnership, corporation, limited liability companies and limited liability partnerships * Whether S Corporation Tax election is right for you * What tax issues are important for small business and why * What insurance coverage every small business owner should consider
Panelists
Larissa Buerano, Agent, State Farm Insurance
Rajeev Kaul, CPA, PC.
Joyce Moy, Executive Director, Asian American / Asian Research Institute - CUNY
My Own Business: A course on how to start a business
Chapter 3: Business Organizations
Self-Check Quizzes
Crossword Puzzle
Vocabulary eFlashcards
Show Business is the Federal Reserve Bank of Boston's learning activity on economics and the entertainment industry. The goal is to provide an additional tool for teaching and learning about basic economic concepts, with some economic history snuck in.
Cf. http://www.bos.frb.org/entertainment/index.htm
JA Titan
Test your skills running a business in this ultimate business simulation! As CEO, you will match wits in the competitive, technologically advanced industry of the Holo-Generator™.Cf. http://oldtitan.ja.org/home.php
Corporations and Stocks game
Cf. http://www.shmoop.com/corporations-stocks/game.html
A music video from School House Rock on investing and Wall Street.
Cf. http://www.shmoop.com/corporations-stocks/botw/resources?d=http://www.gamequarium.org/cgi-bin/search/linfo.cgi?id=3797
Preview
Ch. 3 Sec. 2 Business Growth and Expansion
Honors Business Economics Chapter 3 Section 2 Business Growth and Expansion
Guide to Reading
Section Preview
Businesses can expand in many different ways. One way is through reinvesting internally generated funds, which can also be paid out to the owners in the form of dividends. Another way is through combinations called mergers. Two kinds of mergers, horizontal mergers and vertical mergers, take place for a number of reasons. Some firms merge to become bigger or more efficient. Others merge to eliminate their rivals or to change corporate identity. Some mergers may result in a conglomerate, or even a multinational if the business has manufacturing or service operations in a number of different countries.
Content Vocabulary
merger
The consolidation of two separately-owned businesses under single ownership. This can be accomplished through a mutual, "friendly" agreement by both parties, or through a "hostile takeover," in which one business gets ownership without cooperation from the other. Mergers fall into one of three classes -- (1) horizontal--two competing firms in the same industry that sell the same products, (2) vertical--two firms in different stages of the production of one good, such that the output of one business is the input of the other, and (3) conglomerate--two firms that are in totally, completely separated industries.
income statement
A statement of the revenues, expenditures, and profit for a business, household, or government entity over a given period of time. An income statement also goes by the names profit and loss statement, earnings report, and operating statement. This is one of two key financial statements for an entity. The other is a balance sheet, which is a statement of assets, liabilities, and net worth at a given point in time.
net income
A common term for profit, as the difference between total revenue and total cost. When used in the real world of business wheeling and dealing, this notion of net income general refers to accounting profit rather than economic profit. The "net" aspect of net income indicates that some (that something being cost) is deducted from total or "gross" income. Other common terms used in this same context are net revenue and net earnings.
depreciation
A more or less permanent decrease in value or price. "More or less permanent" doesn't include temporary, short-term drops in price that are common in many markets. It's only those price declines that reflect a reduction in consumer satisfaction. While all sorts of stuff can depreciate in value, some of the more common ones are capital, real estate, corporate stock, and money. The depreciation of capital results from the rigors of production and affects our economy's ability to produce stuff. A sizable portion of our annual investment is thus needed to replace depreciated capital. The depreciation of a nation's money is seen as an increase in the exchange rate.
cash flow
horizontal merger
The consolidation under a single ownership of two separately-owned businesses in the same industry. An example of a horizontal merger would be two soft drink companies merging to form a single firm. A horizontal merger should be contrasted with vertical merger--two firms in different stages of the production of one good, such that the output of one business is the input of the other; and conglomerate merger--two firms in totally, completely separate industries.
vertical merger
The consolidation under a single ownership of two separately-owned businesses that have an input-output relationship, in which the output of one firm is the input of another. An example of a vertical merger would be a soft drink company merging with a sugar company to form a single firm. A vertical merger should be contrasted with horizontal merger--two competing firms in the same industry that sell the same products; and conglomerate merger--two firms in totally, completely separate industries.
conglomerate
multinational
Academic Vocabulary
Reading Strategy
Comparing
Companies in the News
Reinvesting for Monster Growth
Growth Through Reinvestment
Main Idea
Estimating Cash Flows
Reinvesting Cash Flows
Reading Check
Summarizing
What is the benefit of reinvesting cash flow in a business?
The Global Economy and You
Know Your Manners
Growth Through Mergers
Main Idea
Economics and You
Types of Mergers
Reasons for Merging
Multinationals
Reading Check
Contrasting
How do conglomerates and multinationals differ?
Case Study
7-Eleven
Figure 3.4 Growth Through Reinvestment, p. 73
Cf. http://glencoe.com/sites/common_assets/socialstudies/in_motion_08/epp/EPP_p73.swf
Corporations: warning, there is one PG-13 word in this video if you use it for reference or if you prefer not to view; it is not required viewing.
According to this video, what is a corporation? What is it composed of? What sort of characteristics are typical of a corporation?
Money (That's What I Want), 2:36
Barrett Strong recorded this in 1959 for Motown records, it reached number 2 on the R&B charts and 23rd on the US Pop charts making it Motown's first hit. Barrett Strong later went on to become one of Motown's most famous song writers.
http://www.youtube.com/watch?v=z6xkT7FMyTc
Beatles, You Never Give Me Your Money, 3:26
OK Go, This Too Shall Pass, 3:53
HW email to gmsmith@shanahan.org or hand in hard copy.
Tuesday HW
1. p. 68, Figure 3.3, Who does the president hire?
2. p. 68, Who reports directly to the vice president of production?
3. p. 68, Write a paragraph, using your own words, that explain the typical structure found in a corporation. Refer to the text and the Corporate Structure illustration.
