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Ch. 7: Business Organizations and Ch.8: Labor and Unions Section 7.1: Sole Proprietorships A sole proprietorship is a business owned and controlled by one person It’s the oldest, simplest, and most common type of business organization Examples: Plumbers, carpenters, and hairstylists are sole proprietors Advantages of Sole Proprietorships Ease of start-up Full control Exclusive rights to profits Section 7.1: Sole Proprietorships Advantages of Sole Proprietorships continued Easy Start-up Sole proprietorships require fairly small amounts of financial capital and involve few legal considerations making them easy to form Some legal and gov’t restrictions do affect sole proprietorships They must follow zoning laws that specify the areas where various types of businesses can be placed They may also need to obtain a license from the state, county, or city before they can operate Section 7.1: Sole Proprietorships Advantages of Sole Proprietorships continued Control A sole proprietor can act quickly to correct problems or take advantage of opportunities This control gives sole proprietors a high degree of personal satisfaction Profit The owner (sole proprietor) keeps all the profits Possibility of wealth is at the heart of the free enterprise system Section 7.1: Sole Proprietorships Disadvantages of Sole Proprietorships Unlimited liability Sole responsibility Limited growth potential Lack of longevity Section 7.1: Sole Proprietorships Disadvantages of Sole Proprietorships continued Unlimited liability The sole proprietor is personally responsible for all the business debt Meaning if a sole proprietor's business is in debt, his personal wealth will have to be used to repay debt if he can’t the business may have to be sold Sole responsibility The owner is responsible for all aspects of running the business These demands on the owner’s time and energy may create frustration and reduce his sense of satisfaction and accomplishment Section 7.1: Sole Proprietorships Disadvantages of Sole Proprietorships continued Limited Growth Potential To start a business, often the owner will use personal savings or burrow money from a bank To guarantee repayment, the bank can require the owner put up collateral (anything of value that a borrower agrees to give up if he can’t repay a loan) Because most owners have limited collateral, sole proprietorships often have limited ability to grow a business Lack of longevity Longevity is the length of time a business operates (a firm’s length of life) Because a sole proprietorship depends on one person, the risk of failure is very great Section 7.2: Partnerships A business owned and controlled by two or more people is a partnership Often found in free enterprise because of they require relatively little financial capital to start and operate Examples: Doctors, lawyers, and accountants may form partnerships Limited partnership Partners join as investors who provide financial capital in exchange for a share of the profits, but do not actively make business decisions Advantages of Partnerships Ease of start-up Specialization Shared decision making Shared business loans Section 7.2: Partnerships Advantages of Partnerships continued Easy start-up Few gov’t regulations apply to partnerships and costs tend to be low Partnerships begin when 2 or more people agree to operate a business together A partnership contract outlines the distribution of profits and losses among the partners; it also includes the responsibilities for each partnership and how a partner can be added or dropped or how to dissolve the partnership Specialization Specific business duties can be assigned to different partners Partners are able to specialize in areas of the business their skills and talents are best at Section 7.2: Partnerships Advantages of Partnerships continued Shared Decision Making Partners can minimize mistakes by consulting with each other on business matters This decision-making process allows partners to compare points of view, rather than relying on one person for ideas Shared business losses The sharing of losses may enable a partnership to survive a situation that would cause a sole proprietorship to fail Partnerships are better able than sole proprietorships to obtain needed financial capital as banks are more willing to loan money a group of people instead of an individual Section 7.2: Partnerships Disadvantages of Partnerships Unlimited liability Potential for conflict Lack of longevity Section 7.2: Partnerships Disadvantages of Partnerships continued Unlimited liability Each general partner has a role in the business and is responsible for debts incurred by the business Potential for conflict Partners may have personality conflicts and different management styles Partners who have opposing views may be unable to compromise, which can lower employee morale, delay business decisions, and decrease efficiency Lack of longevity The life of the business is dependent on the willingness and ability of the partners to continue working together Illness, death, partner conflict, or other issues can end the partnership Section 7.3: Corporations Corporations are legally distinct from their owners and treated as if they were individuals Meaning corporations can own property, hire workers, make contracts, pay taxes, sue and be sued, and make and sell products Examples: insurance companies, department store chains, or major auto manufacturing companies Section 7.3: Corporations Forming a Corporation Step 1: apply for a state license known as the articles of incorporation The application includes six pieces of information Name and purpose of the proposed corporation Address of the corporate headquarters Method of fund-raising the corporation will use Amount of money the corporation expects to raise Names and addresses of the major corporate officers Length of time the corporation is intended to exist Either indefinitely or for a specific period of time If everything is in order a license or corporate charter is granted permitting the formation of the new corporation Section 7.3: Corporations Corporate Structure Board of Directors Made up of people from inside and outside the company The corporations key decision making body Corporate Officers Chosen by the board Typically experienced, professional managers hired to make day to day decisions and advise the board on production plans Enforce policies and plans approved by the board in the corporations’ various department heads Section 7.3: Corporations Corporate Finances Stock Represents ownership of the firm Issued in portions known as shares Ownership of these portions of stock make you a shareholder Shareholders receive dividends (a portion of additional profits made by the corporations paid to shareholders) Common Stock Provides shareholders with a voice in how the company is run and a share in potential dividends Preferred Stock Provides guaranteed dividends paid before any received by holders of common stock, but holder not granted a voice in running the corporation Section 7.3: Corporations Corporate Finances continued Corporate bond A certificate issued by a corporation in exchange for money burrowed from an investor The corporation is in debt to the corporate bondholder As a moneylender, the corporate bondholder is repaid the principal (the actual amount of money that was borrowed) and interest (the amount that the borrower must pay for the use of the borrowed funds) Section 7.3: Corporations Advantages of Corporations Benefits for Stockholders Limited liability (stockholder loss if corporation fails is limited to how much stock they owned) Stockholder personnel property or funds cannot be seized to pay corporate debts At any time a stockholder can buy more stock, sell some of their stock, or sell all their stock getting out of the corporation completely Benefits for Corporations Partners who incorporated are only liable for their initial investment Relative ease to raise financial capital (increase the number of stocks being sold) Professional managers run the company directly not the board, which does not have the same level of expertise Longevity (a corporation lives on past when its original founders and board members pass on) Section 7.3: Corporations Disadvantages of Corporations Corporate Issues Corporate charters difficult and expensive to obtain Federal and State governments closely regulate corporations Slow decision making process as ideas and plans are debated by numerous managers until a consensus is found Stockholder Issues Stockholder removed from the actual running of the company Lack of control, most stockholders own a small percentage of stocks making their influence minuscule Shared Issues Corporate profits are taxed twice Once as corporate profits, then again as dividends Recap: Sections 7.1 – 7.3 Sole Proprietorships vs. Partnerships What is a Corporation? Corporations can be funny Section 7.4: Other Forms of Organization Other forms of business owners can include: Corporate combinations Franchises Cooperatives Nonprofit organizations Section 7.4: Other Forms of Organization Corporate Combinations The most common method of joining businesses is through a merger (occurs when one company joins with or absorbs another) Three types of mergers Horizontal Vertical Conglomerate Section 7.4: Other Forms of Organization Corporate Combinations continued Horizontal Combinations Vertical Combinations A merger between two or more companies producing the same good or service or the purchase of one such company by another A merger between two or more companies involved in different production phases of the same good or service Conglomerate Combinations A merger of companies producing unrelated products Subsidiaries: companies owned by a larger parent corporation that still makes products under their name not the parent’s Section 7.4: Other Forms of Organization Corporate Combinations continued Advantages of Combinations Efficiency By centralizing decision making within an industry Potential for lower costs Buying an existing business is usually less expensive than building new plants or offices or hiring new employees Easier to acquire financial capital Larger companies seen as being more successful encourages increased stockholder investment Disadvantages of Combinations Higher unemployment B/c of a merger, employees may be reassigned or fired Higher prices Mergers reduce competition Section 7.4: Other Forms of Organization Franchises Some businesses share a name even though they are separately owned In this case, one company agrees for a fee to let another person or group set up a franchise Franchise: an enterprise that uses the original company's name to sell goods and services The parent company owning the name is called the franchisor The person or group opening the franchise is called the franchisee Franchise examples: McDonalds, Holiday Inn Section 7.4: Other Forms of Organization Cooperatives (co-op businesses) Owned collectively by their members Nonprofit businesses Works in a businesslike way to provide goods and services while pursuing other goals such as providing healthcare or maintaining cultural and historical locations, financial gain is not the key motivator Examples: American Red Cross, Boy Scouts of America, and the American Heart Association Income made by nonprofits are not taxed by the government Section 8.1: The US Labor Force The labor force includes all people who are at least 16 years of age and are working or actively looking for work Salary or wage: the hourly, weekly, monthly, or yearly pay that a worker receives in exchange for his labor Entering the Labor Force Consideration when looking for work Wages Skills required Working conditions Location of employment Intrinsic rewards Market trends Section 8.1: The US Labor Force Entering the Labor Force continued Wages When an occupation has many potential workers but few available jobs, the wage rate tends to be low High wages, on the other hand occur when the number of workers who are interested in or qualified for an occupation is limited Skills Education, experience, and abilities all affect a potential workers skills & determines what jobs he is eligible for B/c businesses want to hire only qualified workers, skill level can limit the supply of workers Section 8.1: The US Labor Force Entering the Labor Force continued Working conditions In most US workplaces, federal and state laws carefully regulate health and safety concerns Some jobs and workplaces are high-risk to compensate for these dangers pay tends to be higher than jobs of low-risk Location How far removed from you home do you as a worker want to travel for employment? Section 8.1: The US Labor Force Entering the Labor Force continued Intrinsic Rewards Nonmonetary reasons for working at a particular job These include: a worker’s pride and satisfaction in the quality of work done and the status, prestige, or respect that accompanies a job Market trends Industries expand to meet increasing needs and wants of consumers, leading to an increase in the need fo workers Derived demand: consumer’s demand for a product creates a demand for labor and other resources needed to produce the product Section 8.1: The US Labor Force Changes in the labor force Capital-Intensive Economy Industrialization: the process of mechanizing all major forms of production Capital intensive: dependent on machines to produce goods Labor intensive: dependent on animals and people to produce goods The US has shifted from labor-intensive to capitalintensive due to the rapid industrialization that began in the mid-1800s Section 8.1: The US Labor Force Changes in the labor force continued Women in the workforce After taking numerous jobs in WWII as the men went off to war, the number of women in the workforce has been on the increase with 6 out of 10 women now members of the workforce Higher Levels of Education The higher your level of education the more money you will make in the labor force Section 8.1: The US Labor Force Government and Workers Antidiscrimination laws Equal Pay Act (1963): requires workers to pay women and men the same wage for equal work Civil Rights Act (1964): protects workers from employer discrimination based on race, sex, religion, or national origin Affirmative Action Making up patterns of discrimination against women and minorities in the workplace The Labor Department established a practice of relying on quotas (numerical goals) for hiring and promoting women and minorities Section 8.1: The US Labor Force Government and Workers continued Minimum-Wage Laws The government passed legislation to ensure that workers are paid a basic level of income Minimum wage: the lowest hourly wage an employer can legally pay a worker for a job Section 8.2: Growth of Labor Unions Labor union is an organization of workers that negotiate with employers for better wages, improved working conditions, and job security Developments of Unions With industrialization in the 1800s, industrialists had total control over wages and work hours Average factory wage, 10 cents an hour Average factory workday, 60 hours Child labor was also common Workplaces were noisy, unsafe, and unsanitary Craft Union: composed of skilled workers such as plumber and electricians Industrial union: includes all workers in an industry, whether a skilled, semiskilled, or unskilled Section 8.2: Growth of Labor Unions Developments of Unions continued Knight of Labor (1886-1900) Industrial union that was open to workers from nearly all trades Had nearly 700,000 members Supported an 8-hour workday, ending child labor, and replacing capitalism with socialism American Federation of Labor (AFL) Loose confederation of craft unions that focused on gaining higher wages and better working conditions To fight the AFL, businesses set up open shops, in which workers did not have to join a union Unions preferred closed shops, in which workers could be hired only if they first joined a union The Great Depression increased the numbers of the AFL members Section 8.2: Growth of Labor Unions Developments of Unions continued Congress of Industrial Organizations Created within the AFL to increase unskilled worker membership, but CIO and the workers recruited were expelled by the AFL They became an independent industrial union that soon gained United Steel Workers and United Automobile Workers unions into its ranks Section 8.2: Growth of Labor Unions Union Organizations Local Unions Local unions are made up of people who work for a particular company in a particular area National Unions Local unions from different part of the country are organized into national unions Although union members are more likely to be active in their local unions, national unions often are better known to the public and hold greater political and economic power because of their size Section 8.2: Growth of Labor Unions Challenges to Labor Unions Three main reasons for the decline of unions Employer opposition Employer do not like unions because their demands cut into profits Employers move factories to the Midwest or the South were unions are weak Employers can put employees into positions of authority that make unions less necessary Changes in employment patterns Change from a manufacturing-based economy to a service-based economy Negative public opinions Many believe that union demands for higher wages and increased benefits have encouraged companies to move factories out of the country Also the corruption of national unions and union leaders has tarnished the reputation of unions Section 8.2: Growth of Labor Unions Union Responses To fight declining membership unions: Unions improved training to provide union organizers more skill in explaining the benefits of union membership Offering life and health insurance Government and Unions The government's harsh attitude toward unions in the 1800s changed in the first decades of the 1900s The Congress and state legislatures passed laws protecting the rights of workers Section 8.3: Unions and Management Labor Contract Issues In negotiations between labor and management, five major issues usually are discussed: Wages and benefits Working conditions Job security Union security Grievance procedures Section 8.3: Unions and Management Labor Contract Issues continued Wages and Fringe Benefits Wages are set by labor contracts and vary according to the type of position held and the number of years a worker has been on the job Fringe Benefits are nonwage payments commonly including paid sick days, holidays, and vacation days, health and life insurance, and savings and retirement plans Working Conditions Unions negotiate with management to ensure better working conditions Section 8.3: Unions and Management Labor Contract Issues continued Job Security Union negotiators typically seek contracts that give greater job security the seniority system Seniority is the holding of privileges based on the number of years a worker has been employed by a firm Labor contracts usually protect seniority by requiring that workers with the least seniority be the first to lose their jobs Union Security Provides workers with the right to organize and join a union enforced by the National Labor Relations Board Grievance Procedures Grievances (formal complaints) usually are resolved by committees made up of representatives of the union and the management Section 8.3: Unions and Management Contract Negotiations Collective Bargaining When negotiating a new contract w/ management, union leaders speak for all the members they represent Union and management representatives meet to discuss their goals and offer solutions and compromises Mediation Negotiators call in a neutral third party (mediator) to listen to the arguments of both sides and to suggest ways in which an agreement may be reached Arbitration Like mediation, arbitration calls for assistance of a negotiator to arrive at contract An arbitrator’s decision is legally binding Section 8.3: Unions and Management Union Tactics Strike Union members top working until contract demands are met Strikes can involve three tactics: Picketing Union members parade in front of the plant while carrying sign that explain their grievances Boycotting Primary boycott: an organized effort to stop purchases of a firm’s products Secondary boycott: refusal to buy the goods and services of any firm that does business with a company whose employees are on strike Coordinated campaigning Involves the use of picketing as well as boycotts Section 8.3: Unions and Management Management Responses How employers respond to strikes: Hiring replacement workers Introducing a lockout Lockout occurs when an employer closes a company’s doors to striking workers until negotiators reach a contract agreement that is satisfactory to management Asking for an injunction Injunction (court order) to prohibit the dispatchers from striking