Whether You Work for Someone Else, Own Your Own Business, Or Seek Employment, You Probably
Overview
Whether you work for someone else, own your own business, or seek employment, you probably have questions about business. What must a company do to make a profit and stay in business? What are the main functions or activities of a business? How does a business keep its employees happy and productive, and how can an employee help the company make a profit? This course presents basic information about the main functions of a business. Gaining knowledge about business functions will enable you to discuss the primary goals and functions of a business.
This course includes eight lessons. Lesson 1 discusses basic types and functions of businesses. Lessons 2 and 3 explore the management and human resources (HR) functions. Lessons 4, 5, and 6 examine the functions of production and operations, inventory and purchasing, and accounting. Finally, Lessons 7 and 8 describe the marketing and sales function and the customer service function.
This course includes special features. Each lesson contains both a practice case study and an assignment case study, giving you the opportunity to apply business concepts to realistic scenarios. Moreover, the lessons and case studies feature examples from various types of businesses. These types include manufacturing, service, distributors and retailers, financial services, utilities, real estate, and transportation.
This course uses examples of U.S. businesses. Business laws and practices are different throughout the world. If you live outside the United States, check business laws and practices in your country. If you have questions about doing this research, talk to your instructor. Also note that this course does not discuss nonprofit organizations in detail. The emphasis is on for-profit businesses.
The section reviews in each lesson are for your personal development only. Do not send your responses to your Hadley instructor. Rather, check your comprehension by comparing your answers with those provided. You can always contact your instructor, however, to clarify concepts.
You are required to submit eight assignments, one at the end of each lesson. These assignments enable your instructor to measure your understanding of the material presented in the lessons. Refer to the "Getting Started" instructions for information about submitting assignments.
If you are ready to explore the fundamentals of business, begin Lesson 1: What Is a Business?
Overview1
Lesson 1: What Is a Business?
A business is an organization that exists for the purpose of making a profit by selling products or services to customers. Owners take a risk by investing time, money, and energy into the business. By taking this risk, they hope to make money.
Businesses range from one-person consulting practices, to restaurants and retail shops, to midsize and large corporations. Knowing basic information about how businesses work is helpful forboth employment and career advancement. This lesson describes the primary forms of ownership. It then gives examples of different types of businesses and lists the main functions of a business. Finally, it shows how to apply business concepts to a real-life scenario. Learning basic information about businesses will enable you to discuss the primary goals and functions of a business.
Objectives
After completing this lesson, you will be able to
a.identify forms of ownership
b.list types of businesses
c.name functions of businesses
d.apply business concepts to a real-life scenario
Forms of Ownership
You're probably familiar with a wide variety of businesses, from the one-person repair shop to the partners at your doctor's office. From large department stores to computer companies to credit unions, various businesses provide you with goods and services. They may also provide employment opportunities.
Four standard types of ownership exist: sole proprietorship, partnership, corporation, and cooperative. These four types vary greatly, and each has advantages and disadvantages. In addition, nonprofit organizations exist, although they use their profit to maintain their services.
Sole Proprietorship
A business owned by one person is a sole proprietorship. Dentists, lawyers, consultants, shop owners, and many others choose this type of ownership. The owner may operate the business by him- or herself or employ others.
The sole proprietor can own and run the business in his or her own name, such as Adam Smith, Plumber.
The proprietor can also name the business Reliable Plumbing. This type of name is known as a "doing business as" (DBA).
A sole proprietor has total and unlimited personal liability for the business's debts. In other words, the owner is financially responsible for everything that happens in the business. If you are a sole proprietor, the law considers you and your business as one legal identity.
If you are a sole proprietor, business accounts are considered the same as personal accounts for the purposes of taxes and liability. The first advantage of this setup is that business owners avoid a double tax. They pay only personal taxes. They do not file a separate business tax return. The second advantage is that they may deduct business losses from their personal tax return.
One major advantage of being a sole proprietor is that you do not have to register the business with the state and pay a large fee. The business may need some kind of local license or permit, however. The major disadvantage is that you are personally liable, or responsible, for all the debts. For example, a plumber who accidentally floods a customer's basement is personally liable for the damages caused by the flood.
Partnership
A business owned by two or more people who have the common goal of making a profit is a partnership. They become partners to increase efficiency or to combine resources and expertise. As with a sole proprietorship, the owners do not have separate legal identities from the business. Partners may own and run the business in their own names: Lopez and Malek's Diner. Or they may use a DBA name such as Village Restaurant.
The major advantage and disadvantage of a partnership are like that of the sole proprietorship. The major advantage is thatthe partners do not have to register with the state and pay a large fee. The major disadvantage is that the partnersare personally liable for debts, including lawsuits and insurance claims. Two different types of partnership exist, the limited partnership and the general partnership.
Limited Partnership
In a limited partnership, the partners are responsible only for their specific individual contributions to the business. For example, suppose Frank Caruso invests $50,000 as a limited partner in a candy business. If the business ends up losing a million dollars, the most Frank can lose is $50,000.
General Partnership
In a general partnership, the partners put everything on their personal tax returns. They are equally responsible for debts and losses, no matter how much they individually invest, or pay into the business. Think of the example of the candy business. If Frank was a general partner and the business lost a million dollars, Frank might lose half a million dollars, even though he invested just $50,000!
Corporation
A business that has a separate legal identity from its owners is a corporation. In other words, suppose Mystery Books is run by a corporation, and Jane Perez is one of the owners. Now suppose that Bridget Green sues Mystery Books because she suffered such terror after reading a book she bought there. If Bridget Green wins her case, she may get money from the actual corporation, but Jane Perez's personal bank account would remain safe.
Corporations have their own names. For example, the Hudson Bay Company, established in 1670,is the oldest commercial corporation in North America and one of the oldest in the world.Note that even if a corporation has the name of its owner, it has a separate legal identity. For example, consider the example of Mystery Books. Even if the store were called Jane Perez Books, it still would have a legal identityseparate from Jane Perez.
Most corporations register as either stock or nonstock companies. Shareholders are people who invest in the corporation by buying stock, or part of what the business is worth. Shareholders elect people who run the corporation. A corporation is managed by a board of directors. All corporations, whether stock or nonstock, hire managerial staff to operate the business. Nonstock companies do not have shareholders; they have members with voting rights.
A corporation owns and runs the business as a separate entity from its owners or shareholders.
With only a few exceptions, none of the shareholders in a corporation are obligated for the debts of
the corporation. Creditors can look to only the corporation's assets for payment. Assets are the net worth of a company, including its capital, inventory, and cash. The main disadvantage of a corporation, however, is that both the corporation itself and its shareholders are taxed. In addition, it is more difficult to set up a corporation, and owners pay legal and licensing fees.
Cooperative
A cooperative, or co-op, is a business owned by multiple people. Often, its customers own and run the business, and membership gives them decision-making authority over the business. Unlike a partnership, members do not have total and unlimited personal liability for the debts incurred by the business. They have the same type of debt protection found in corporations.
Co-ops, unlike most businesses, look for price savings rather than profit. Many types of co-ops exist in health care, insurance, food stores, and credit unions. Their goal is to provide members with quality goods and services at the lowest costs. On the other hand, the majority of businesses are for-profit ones and sell goods at the highest price that the customers are willing to pay.
Most co-ops follow a set of principles that often include
- voluntary and open membership
- democratic member control
- the promotion of education among the members
Nonprofit Organizations
According to the Society of Nonprofit Organizations, "The difference between nonprofit and for-profit organizations is that nonprofits use their profits to advance their programs, while for-profits distribute their profits to their owners or stockholders." The society categorizes nonprofit organizations as trade associations, charitable organizations, social clubs, government groups, and political groups. Nonprofit organizations use many of the principles outlined in this course for their own purposes.
Section Review
Select the best item to answer each of the following questions.
1.For what purpose does a business exist?
a.to sell products or services to customers to make a profit
b.to buy products and services from customers
c.to make laws
The correct answer is (a). The purpose of a business is to sell products or services to customers to make a profit.
2.How many owners are in a sole proprietorship?
a.one
b.only two
c.unlimited
The correct answer is (a). A sole proprietorship is a business owned by one person.
3.What is the major advantage of a partnership?
a.The partners have involved stockholders.
b.The partners do not have to register with the state and pay a large fee.
c.The partners are not personally liable for any debts.
The correct answer is (b). The major advantage of a partnership is that the partners do not have to register with the state and pay a large fee.
4.What type of ownership usually has stockholders?
a.cooperative
b.partnership
c.corporation
The correct answer is (c). A corporation usually has stockholders who invest by buying stock.
5.What form of business looks for price savings rather than profit?
a.cooperative
b.sole proprietorship
c.corporation
The correct answer is (a). A cooperative, or co-op, is a form of business that looks for price savings rather than profit.
6.How does a nonprofit organization differ from a business?
a.A nonprofit does not need money to operate.
b.A nonprofit distributes profits to stockholders.
c.A nonprofit uses profits to advance programs.
The correct answer is (c). A nonprofit organization differs from a business in that it uses its profits to advance its programs.
Four main types of business ownership exist: sole proprietorship, partnership, corporation, and cooperative. Some business organizations are nonprofit. The next time you work with a business, use this information to identify which type it is.
Types of Businesses
The easiest way to classify businesses is by how they generate revenue, or gain income, and make a profit. Most businesses fall into the following eight types:
- manufacturing
- service providers
- distributors and retailers
- agriculture and mining
- financial services
- utilities
- real estate
- transportation
These types of business vary greatly, and each has a unique structure and purpose. You can start to understand them by looking at examples of each type. Note that many additional types of small businesses prosper, or succeed, by providing goods and services to these major industries.
Manufacturers
Businesses that produce products from raw materials or by assembling parts are manufacturers. These companies make physical goods such as cars or machines. Some large companies, like John Deere, make farm equipment. Other midsize companies manufacture pharmaceuticals, or medicine; electronics; steel; plastics; food; beverages; and so on. Access Tech Creations (ATC) is a midsize company that manufactures access technology for computer systems. Some small manufacturers create new technologies or make parts.
Service Providers
Businesses that offer intangible goods or services are service providers. They make a profit by charging for labor or other services to governments, other businesses, and consumers. For example, a consultant, interior designer, or information technology vendor may charge for services by the hour or a fixed price. Hotel and hospitality workers provide lodging and service.
Restaurants are considered service providers because they serve customers, even though food is a tangible good. Restaurants are unique in that they blend manufacturing and service. For example, the Business Enterprise Program (BEP) trains and licenses legally blind individuals to manage cafeterias and snack bars in government buildings. This program was established in 1937 by the Randolph-Sheppard Act. These cafeteria managers and their staff are service providers, even though they provide food, which is an actual product.
Distributors and Retailers
Companies that make a profit by distributing and selling items are known as distributors and retailers. The distributor is the middleman between the manufacturer and retail stores. The distributor receives goods directly from the manufacturer, storing items in warehouses. The distributor then sells the goods to various retail stores. Most stores and catalog companies are retailers or distributors. An online bookstore such as Amazon.com is a distributor. The corner bookstore is a retailer.
Retailers get items from the distributors and then resell them to the consumers. Retailers can be large or small. Some like J.C. Penney are huge, with stores nationwide. Others, like the corner mom-and-pop grocery store, are small. For example, J.C. Penney purchases thousands of dresses that they put on sale at their stores. The owners of the small grocery store may purchase about a hundred loaves of bread that they sell to neighborhood customers.
A franchiseis a special kind of retail business. One example is Supercuts, which has haircutting salons in many cities across the United States. A franchise acquires a trademark and uses a proven way of doing business to make a profit. Each store has its own owner, and this owner pays a fee and percentage of sales to the franchisor. In this case, the owner would pay Regis Corporation, the company that owns the Supercuts franchise.
Last, some businesses make money by selling intellectual property, or intangible goods. Movie studios and book publishers fall into that category. They sell the ideas of writers and other artists to the public.
Agriculture and Mining
Businesses that produce raw material are in the agriculture and mining category. Agricultural businesses grow the crops and process the cattle. Mining companies extract ore, coal, gold, silver, diamonds, nickel, salt, tin, uranium, and other metals.
Agriculture still has some independent farmers working the land, but large corporations now own many farms in the United States. Also, big businesses conduct mining because of the amount of capital needed to dig in a mine.
Financial Services
Businesses such as banks and other companies that make a profit by helping others invest and manage money are in the financial services category. A bank issues money, receives deposits, lends money, processes transactions, creates credit, and provides many other financial services. In recent years, the finance industry has created other companies that provide services for a fee. These financial service providers include credit card companies, insurance carriers, and stockbrokers.