Beyond the Sound Bites:
Paul Krugman States that the US Economy Is Not Strong And The Statistics Do Not Look Good
Comments, questions, reactions?
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.
Main types of business
Types reviewed and advantages and disadvantages
From your reading Homework on incorporation:
In-class assignment: what are the benefits of incorporation for the founder and for the shareholder?
Sole Proprietorship, p. 62
Forming a Partnership, p. 65
In-class assignment: notice how partnerships are formed by entrepreneurs and investors.
We will divide the class into small groups. You have two tasks: one, do you think the "sharks" will want to partner with the entrepreneur? If so, which one? Two, would you want to partner with the entrepreneur? Why or why not?
We will discuss as a class and students can offer their assessments.
Shark Tank - Episode 1 (Season 1)
1. Billionaire Mark Cuban, Owner & chairman of AXS TV & owner of Dallas Mavericks; 2. Real estate mogul Barbara Corcoran. 3. Queen of QVC" Lori Greiner 4. Technology innovator Robert Herjavec 5. Fashion and branding expert Daymond John 6. Venture Capitalist Kevin O'Leary.
Mr. Tod's Pie Factory
In the exciting conclusion we see the response of the two remaining sharks:
Barbara and Daymond
S1 E01 Part 2/5
The sole proprietor is confronted with cold reality. Would you give up a substantial part of your business? How much?
Disadvantages, p. 66
What are the differences between a general partnership and a limited partnership?
Corporations, p. 67
Corporations & Stocks Overview In a Nutshell
Corporations are everywhere. You probably deal with thousands of them every day They're such a critical part of the American economy that you probably don't even notice or think about it.
But this wasn't always the case. When the United States was born, corporate charters were rarely granted. The benefits gained through incorporation were considered so great, they were offered only to businesses that served a broad public interest. A ferry company might receive a corporate charter, but an ordinary factory would not. If you proposed to build a canal that would link towns and expand trade, the state might grant you charter. But if you sought to incorporate your flour mill, you would probably be turned away.
Long story short: you could only incorporate if your business was going to do something very special to serve the public interest.
By the middle of the nineteenth century, however, these views had changed. Policymakers came to realize that the corporate form served all Americans by facilitating economic growth. For business owners, the corporation offered a way to increase both their capital and the stability of their businesses. For investors, the corporation offered a relatively risk-free way of taking part in emerging commercial opportunities.
Today, corporations bring in more than 80% of all dollars earned in America. Savvy stock investors participate in a global exchange worth more than $100 trillion. Corporations are here to stay, and they provide many of the best opportunities for individuals to get ahead in the world. Yet many people are left behind simply because they do not understand how to read a financial website. Are you one of them? Read on, and you won't be.
Why Should I Care?
Lots of people think corporations are defined by their size. They assume that they are gargantuan megabusinesses with thousands of employees and millions, maybe billions, in profits. But individuals can form corporations—your neighbor the accountant, your aunt the dentist, and your couldn’t-get-a-real job “life-coach” cousin Fred could all be incorporated. A corporation is just a type of business organization with specific legal and structural characteristics. Many corporations are among America’s largest businesses, but size is not a defining feature of the corporation.
So what are the defining features of the corporation? And what benefits do business people gain by incorporating? Perhaps most important—what’s in it for you? Read on and find out.
Corporations and Stocks game
In regards to corporations, many people think that the financial websites that track the stock market are a confusing batch of secret codes. They are intimidated by the jumble of numbers and symbols clearly meant for only the most sophisticated analysts. But most of these numbers are little more than price tags—today's price tags compared with old price tags—so that you can see how the market has changed. The stock market is complex, and money can be lost—but it’s not too complex for most savvy consumers to understand what's going on... and perhaps to profit.
So what do all those numbers about the stock market really mean? And what does all the jargon—margin, short, put call—really mean? Read on and find out.
What is a corporation? What is it composed of? What sort of positions and functions are characteristic of a typical 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.
Summary and review
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.
Resources and HW
1. p. 66, Reading Check, Contrasting, What are the differences between a general partnership and a limited partnership?
2. p. 67, What is the relationship between a dividend and a stockholder?
3. p. 67, How does common stock differ from preferred stock?
Barrett Strong - Money (That's What I Want) (with lyrics), 2:39
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.
Beatles, You Never Give Me Your Money, 3:26