Chapter 9
Business(firm) - when the three factors of production are
brought together
(natural resources,
labor, capital)
Different Types Of Businesses
I.
Sole Proprietorship - business type where one person owns all and calls
all the shots. Eg. stores, barbershops, luncheonettes
advantage - easy beginning; less restrictions; pride; profits;
relationships; taxes.
disadvantage - limited
capital; limited managerial ability; full burden of losses; personal liability;
not permanent.
II.
Partnerships
Limited Partnership- People who invest in business with their
only responsibility being their investment. Their return is not as a full partner.
Eg. investments
General Partnerships- Each partner is liable for their firm's
debts
Advantage - Same as Proprietorship but add Greater Capital
and borrowing power; Greater managerial ability.
Dis-advantage- same as Proprietorship but add equal liability
for debts; disagreements; selling interest, division of profits
III Corporations - owned by stockholders. The Corporation is a separate legal person.
Each State requires
certain procedures and the corporation is filed by the Secretary of State in each individual State
To create a corporation, articles of incorporation must be drawn up.
1) corporation's
name and purpose
2) number of directors
3) names and addresses
of board members
4) the amount of
stock issued
5) additional information
when needed
Dividends
A part of corporate
income paid to owners of a corporation’s stock.
- stockholders elect
a board of directors
whose function is
to supervise affairs and dictate procedure.
advantages of incorporating
1) limited liability for stockholders
2) continuous in existence
3) greater capital can be generated
4) easy transfer of stock.
disadvantages -
1) Tougher to begin
(filing)
2) governmental
control and regulation
3) Federal State and Tax law
4) double taxation
of profits and shareholders.
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Note: In the US
Proprietorships-greatest number today
Corporations greatest
volume of business
The Four major sources of money for capital formation
1) sale of stock
(the majority share
holders sell off)
2)
borrowing - promissory note
1)
corporate paper
2)
bonds
3)
reinvestment - put money back into business by hiring new employees, increasing efficiency, new equipment
4)
subsidies and gifts - government gives gifts to corporations for performing an important task
Merger
The combining of
one company with another company it buys
19th Century into 20th Century
Andrew Carnegie
US Steel
Vertical Integration
(merger)
*Sale of polished steel*
*Steel Ingot Production(columns)*
*Blast Furnace Conversion*
*Natural Resources*
(lime, coke, iron-ore)
Each had been a
separate process in the steel-making industry. Carnegie bought land rich with the natural resources and built a steel making
plant in Pittsburg. He bought the railroads which linked the resources to the blast furnace.
Eventually, he merged
with the ingot production and sales.
Result:
He controlled every aspect of the steel making industry including transportation.
In doing so he eliminated waste and destroyed all competition.
Steel was produced
and distributed at the lowest possible cost.
Horizontal Integration
(merger)
John D. Rockefeller
*Gas/Oil Sales*
*Distribution Outlets*
ß------Oil Refining Industry-------à
ABC
DEF Standard Oil
GHI JKL
Refinery Refining
Refinery Refining
Refinery
*Drilling for Crude*
Rockefeller would
not drill for oil(risky business), he practiced horizontal
integration, controlling
the refining aspect
of the oil industry. (Standard Oil Trust)
Once stabilized
and controlled, he then practiced vertical integration with the buying of railroads.
Standard Oil Today
(after
the break-up)
Exxon,
Mobil, Shell, Texaco
Conglomerate
Mergers
J. P. Morgan
Morgan was the master
of the conglomerate, different companies
merging and controlled by a single,
Dominate company.
Morgan purchased
*US Steel from Carnegie,
*Purchased most
of the northern railroad lines (Northern Securities)
*Banking and Investment
House of Morgan
– (Chase Manhattan)
Today’s version:
PEPSICO
-Pepsi-Cola
-PepsiCo Wines and
Spirits
-Frito-Lay
-KFC
-Pizza Hut
-Taco Bell
-Redux Realty
Note:
Yes, they are all
owned by PepsiCo,
but they each have
their own Board of Directors and operate independently
They are not openly reducing there competition (Monopoly)
Why do businesses fail?
1) lack of capital
- very important to buy on credit and to buy right
2) lack of good
sense- proprietors should not over extend themselves. Be able to service clients
or customers properly
3) marketable item- you can't sell snow balls during the winter.
Sometimes business
can be seasonal.
Eg. Playland or
beach clubs
4) location -
Main Street USA McDonalds; Burger King; Wendy's
Taco Bell
5) changes in prices
- you start a business basing all your costs on present day prices. They may
change!
Also, your product
may devalue on the open market
6) Physical Disasters
- Acts of God can put you out of business. Seasonal business usually depends
upon the weather.
How do you prevent the above from ruining your business?
1) insurance -limiting
your liability
2) save money
- use profits to invest in capital goods
3) expand markets -
target a good cross-section of the market
4) diversify-
get involved in other businesses
5) gain experience -
learn from your mistakes and repeat or improve your successes
6) market awareness-
know what is going on with your customers and competition
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