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Chapter Introduction
Section 1: Starting a Business
Section 2: Sole Proprietorships
and Partnerships
Section 3: The Corporate World
and Franchises
Visual Summary
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The profit motive acts as an
incentive for people to produce
and sell goods and services.
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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.
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Section Preview
In 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.
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Content Vocabulary
• entrepreneur
• startup
• small-business incubator
• inventory
• receipts
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Academic Vocabulary
• relevant
• generate
• document
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Do you have any interest in starting
your own business?
A. Definitely
B. Some interest
0%
C
A
0%
A. A
B. B
C.0%C
B
C. Not at all
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Getting Started
Businesses are started by
entrepreneurs who are willing to
take risks.
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Getting Started (cont.)
• A person who starts his or her own
business is called an entrepreneur.
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Getting Started (cont.)
• 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.
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Getting Started (cont.)
• 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
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The small business incubator’s goal
is to generate _____.
A. jobs
B. economic growth
0%
C
A
0%
A. A
B. B
C.0%C
B
C. profit
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Elements of Business Operation
There are four basic elements of
business operation: expenses,
advertising, record keeping, and risk.
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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.
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Elements of Business Operation (cont.)
– 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.
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Elements of Business Operation (cont.)
– Risks: you must balance the risks
against the advantages of being in
business for yourself.
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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
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
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Section Preview
In this section, you will learn about common
ways to organize a business.
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Content Vocabulary
• sole proprietorship
• limited partnership
• proprietor
• limited liability
company
• unlimited liability
• assets
• joint venture
• partnership
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Academic Vocabulary
• potential
• temporary
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Can you explain the difference
between a sole proprietorship and a
partnership?
A. Yes
B. Somewhat
0%
C
A
0%
B
C. Not at all
A. A
B. B
C.0%C
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Sole Proprietorship
A sole proprietorship is a business
owned and operated by one person.
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Sole Proprietorship (cont.)
• The most common form of business
organization is the sole proprietorship.
• The owner of a business is called the
proprietor.
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Sole Proprietorship (cont.)
• Advantages:
– Satisfaction from being the boss and
making the decisions.
– Receives all profits
– Low taxes
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Sole Proprietorship (cont.)
• Disadvantages:
– It can be demanding and time
consuming.
– You have unlimited liability
– Personal assets may be seized to pay
off debt.
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Partnerships
A partnership is a business owned and
operated by two or more individuals.
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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.
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Partnerships (cont.)
• 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.
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Partnerships (cont.)
• Disadvantages:
– Decision making can be slower.
– Disagreements can lead to problems.
– You must share the profits.
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Partnerships (cont.)
• Some partnerships are specialized:
– Limited partnership
– Limited liability company
– Joint venture
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Section Preview
In this section, you will learn about the
characteristics and structure of
corporations and franchises.
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Content Vocabulary
• corporation
• common stock
• stock
• dividend
• limited liability
• preferred stock
• articles of
incorporation
• bylaws
• corporate charter
• franchise
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Academic Vocabulary
• visible
• distinct
• annual
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Do you understand what a
corporation is?
A. Yes
B. Somewhat
0%
C
A
0%
A. A
B. B
C.0%C
B
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.
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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.
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Corporations and Their Structure (cont.)
• 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
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Corporations and Their Structure (cont.)
• 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.
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Corporations and Their Structure (cont.)
• 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.
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Corporations and Their Structure (cont.)
• Sell stock.
– Common stock is issued to raise funds.
Stockholders are granted voting rights.
• Common stock does not, however, guarantee a
dividend.
– 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.
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Corporations and Their Structure (cont.)
• Along with the other shareholders, they
must elect a board of directors.
– 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.
• They hire officers to run the business on a day
to day basis.
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Which type of business do you feel is
the best and why?
A. Corporation
B. Partnership
0%
C
A
0%
A. A
B. B
C.0%C
B
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.
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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.
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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.
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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.
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Do you feel that owning a franchise is
a smart way to “own” a business?
A. Yes
B. Somewhat
0%
C
A
0%
A. A
B. B
C.0%C
B
C. Not at all
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There are four main elements of business
operation: expenses, advertising, record
keeping, and risk.
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Sole proprietorships and partnerships are
two common ways that businesses are
organized.
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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.
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Economic Concepts
Transparencies
Transparency 5
Economic Institutions
& Incentives
Select a transparency to view.
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entrepreneur: person who organizes,
manages, and assumes the risks of a
business in order to gain profits
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startup: a beginning business
enterprise
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small-business incubator: private or
government-funded agency that
assists new businesses by providing
advice or low-rent buildings and
supplies
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inventory: extra supply of the items
used in a business, such as raw
materials or goods for sale
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receipts: income received from the
sale of goods and/or services; also,
slips of paper documenting a
purchase
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sole proprietorship: business
owned and operated by one person
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proprietor: owner of a business
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unlimited liability: requirement that
an owner is personally and fully
responsible for all losses and debts of
a business
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assets: all items to which a business
or household holds legal claim
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partnership: business that two or
more individuals own and operate
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limited partnership: special form of
partnership in which one or more
partners have limited liability but no
voice in management
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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
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joint venture: partnership set up for
a specific purpose for a short period
of time
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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
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stock: share of ownership in a
corporation that entitles the buyer to a
certain part of the future profits and
assets of the corporation
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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
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articles of incorporation: document
listing basic information about a
corporation that is filed with the state
where the corporation will be
headquartered
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corporate charter: license to operate
granted to a corporation by the state
where it is established
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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)
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dividend: portion of a corporation’s
profits paid to its stockholders
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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
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bylaws: a set of rules describing how
stock will be sold and dividends paid
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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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