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Chapter IntroductionSection 1: Starting a Business

Section 2: Sole Proprietorships and Partnerships

Section 3: The Corporate World and Franchises

Visual Summary

The profit motive acts as an incentive for people to produce and sell goods and services.

Imagine that you want to start a business. You will need to decide what your business will do, how you would like it to be structured, and whether you would like to work alone or with a partner. In this chapter, read to learn about the different ways that businesses are organized and what it takes to start a business.

Section PreviewIn this section, you will learn about what a person needs to do to start his or her own business, as well as various forms of help available for business owners.

• entrepreneur• startup• small-business incubator• inventory• receipts

Content Vocabulary

• relevant • generate • document

Academic Vocabulary

A. AB. BC. C

Do you have any interest in starting your own business?A. Definitely

B. Some interest

C. Not at all

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Getting Started Businesses are started by entrepreneurs who are willing to take risks.

Getting Started (cont.)

• A person who starts his or her own business is called an entrepreneur.

• An entrepreneur must:

– Gather the relevant factors of production to produce their good or service.

– Decide on the form of business organization that best suits their purposes.

– Learn about the laws, regulations, and tax codes that will apply to their business.

– Investigate their competition.

• The federal government’s Small Business Administration, as well as other government agencies, often help finance startups.

• A small-business incubator and the Internet also provide a wide array of information on how to start a business.

View: Sources of Help for Business Startups

A. AB. BC. C

The small business incubator’s goal is to generate _____.A. jobs

B. economic growth

C. profit

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Elements of Business Operation There are four basic elements of business operation: expenses, advertising, record keeping, and risk.

Elements of Business Operation (cont.)

• Every business must consider four basic elements:– Expenses:

• Inventory and equipment• Wages• Taxes• Insurance• Utilities• In order to find out if you will make a profit, all

expenses must be subtracted from your receipts.

– Advertising: notifying potential customers you are open for business.

– Record keeping: you will need a system to track your expenses and income.

• There are programs on the Internet or software that can help with this.

• Net worth—the difference between what you own and what you owe.

• You also need to file your receipts properly for tax purposes.

– Risks: you must balance the risks against the advantages of being in business for yourself.

A. AB. BC. CD. D A B C D

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Which one of these elements would make owning your own business the hardest for you?A. Expenses

B. Advertising

C. Record keeping

D. Risk

Section PreviewIn this section, you will learn about common ways to organize a business.

• sole proprietorship• proprietor• unlimited liability• assets• partnership

• limited partnership• limited liability

company• joint venture

Content Vocabulary

• potential• temporary

Academic Vocabulary

A. AB. BC. C

Can you explain the difference between a sole proprietorship and a partnership?A. Yes

B. Somewhat

C. Not at all

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Sole Proprietorship A sole proprietorship is a business owned and operated by one person.

Sole Proprietorship (cont.)

• The most common form of business organization is the sole proprietorship.

• The owner of a business is called the proprietor.

• Advantages:

– Satisfaction from being the boss and making the decisions.

– Receives all profits

– Low taxes

• Disadvantages:

– It can be demanding and time consuming.

– You have unlimited liability– Personal assets may be seized to pay

off debt.

Partnerships A partnership is a business owned and operated by two or more individuals.

Partnerships (cont.)

• Businesses are also operated by partnerships. In a partnership, the partners sign a legally binding document describing how they will operate the business.

• Advantages:

– Each partner can work in his or her area of expertise.

– Partners may have additional funds to use in business.

– Taxes tend to be low.

– The borrowing potential is high.

• Disadvantages:

– Decision making can be slower.

– Disagreements can lead to problems.

– You must share the profits.

• Some partnerships are specialized:

– Limited partnership– Limited liability company– Joint venture

Section PreviewIn this section, you will learn about the characteristics and structure of corporations and franchises.

• corporation • stock • limited liability • articles of

incorporation • corporate charter

• common stock • dividend • preferred stock • bylaws • franchise

Content Vocabulary

• visible • distinct• annual

Academic Vocabulary

A. AB. BC. C

Do you understand what a corporation is?A. Yes

B. Somewhat

C. Not at all

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Corporations and Their Structure Stock represents ownership rights to a certain portion of a corporation’s profits and assets.

Corporations and Their Structure (cont.)

• A corporation is a business organization owned by many people but treated by law as though it were a person; it can own property, pay taxes, make contracts, and so on.

• Stock represents ownership rights in a corporation that entitles the buyer to a certain part of the future profits and assets of the corporation.

• In terms of the amount of business done, the corporation is the most significant type of business organization in the United States.

• A major advantage to operating as a corporation is its limited liability.

• A disadvantage is that they are taxed more heavily than other forms of business organizations.

View: Comparing Corporations, Partnerships, and Proprietorships

• In order to form a corporation, its founders must do three things:

• Register their company with the government of the state in which it will be headquartered.

– You will have to file the articles of incorporation with the state where the corporation will be headquartered.

• These articles include:

• Name, address, and purpose of the corporation.• Names and addresses of the initial board of

directors.• Number of shares of stock to be issued.• Amount of money capital to be raised through

issuing stock.

– If approved, the state grants you a corporate charter or license to operate in that state.

• Sell stock.

• Common stock does not, however, guarantee a dividend.

– Common stock is issued to raise funds. Stockholders are granted voting rights.

– Preferred stock can be issued to raise funds. Holders have no voting rights.• Preferred stock guarantees a dividend each year

and has first claim if corp goes out of business.

• Along with the other shareholders, they must elect a board of directors.

• They hire officers to run the business on a day to day basis.

– The partners select the first board of directors, and stockholders elect the next board. The bylaws of the corporation govern this election.

– The board is responsible for supervising and controlling the corporation.

A. AB. BC. C

Which type of business do you feel is the best and why?A. Corporation

B. Partnership

C. Proprietorship

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Franchises A franchise is an arrangement in which a person or group obtains the right to use the name and sell the products of another business.

Franchises (cont.)

• Many fast-food chains, gas stations and hotels operate as a franchise. The parent company (the franchisor) sells to another business (the franchisee) the right to use the franchisor’s name and sell its products.

– The franchisee pays a fee that may include a percentage of all revenues taken in.

– In return, the franchisor will help the franchisee set up their business.

Franchises (cont.)

• Advantages:

– Name recognition

– A proven way of doing business

– Advertising dollars largely paid by franchisor

– The success rate of franchises is much higher than that of independently owned businesses.

Franchises (cont.)

• Disadvantages:

– Loss of control in running the business the way you might like.

– Sometimes legal trouble if one of the parties fails to hold up its side of the agreement.

A. AB. BC. C

Do you feel that owning a franchise is a smart way to “own” a business?A. Yes

B. Somewhat

C. Not at all

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There are four main elements of business operation: expenses, advertising, record keeping, and risk.

Sole proprietorships and partnerships are two common ways that businesses are organized.

The majority of business revenues in the United States are brought in by corporations, which are owned by many people but treated by law as if they were individuals.

Economic Concepts Transparencies

Transparency 5 Economic Institutions & Incentives

Select a transparency to view.

entrepreneur: person who organizes, manages, and assumes the risks of a business in order to gain profits

startup: a beginning business enterprise

small-business incubator: private or government-funded agency that assists new businesses by providing advice or low-rent buildings and supplies

inventory: extra supply of the items used in a business, such as raw materials or goods for sale

receipts: income received from the sale of goods and/or services; also, slips of paper documenting a purchase

sole proprietorship: business owned and operated by one person

proprietor: owner of a business

unlimited liability: requirement that an owner is personally and fully responsible for all losses and debts of a business

assets: all items to which a business or household holds legal claim

partnership: business that two or more individuals own and operate

limited partnership: special form of partnership in which one or more partners have limited liability but no voice in management

limited liability company: type of business enterprise that protects members against losing all of their personal wealth; members are taxed as if they were in a partnership

joint venture: partnership set up for a specific purpose for a short period of time

corporation: type of business organization owned by many people but treated by law as though it were a person; it can own property, pay taxes, make contracts, and so on

stock: share of ownership in a corporation that entitles the buyer to a certain part of the future profits and assets of the corporation

limited liability: requirement in which an owner’s responsibility for a company’s debts is limited to the size of the owner’s investment in the firm

articles of incorporation: document listing basic information about a corporation that is filed with the state where the corporation will be headquartered

corporate charter: license to operate granted to a corporation by the state where it is established

common stock: shares of ownership in a corporation that give stockholders voting rights and a portion of future profits (after holders of preferred stock are paid)

dividend: portion of a corporation’s profits paid to its stockholders

preferred stock: shares of ownership in a corporation that give stockholders a portion of future profits (before any profits go to holders of common stock), but no voting rights

bylaws: a set of rules describing how stock will be sold and dividends paid

franchise: contract in which one business (the franchisor) sells to another business (the franchisee) the right to use the franchisor’s name and sell its products

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