Chapter One: Foundations of Business and Economics

Q1: Why we study business

• Shape your answers

• Sharpen your skills
• Understand the business and economic links within a country and between countries
A. Increasing Dependence on Others
✓ Over the years, people have become more and more dependent on each -others
✓ Mutual dependence
✓ Using business systems effectively
✓ Be a part of business
✓ Few people today produce everything they need.

Business

The exchange of goods, services, or money for mutual benefit or profit.

Barter

The exchange of goods without using money.

B. International Opportunities
✓ Being educated in business, people can avail exciting opportunities in the 21st century
✓ Joint ventures between different countries
✓ Investment across geographical boundaries
✓ Working for foreign owned enterprises.
C. Standard of Living

A measure of how well a person or family is doing in terms of satisfying needs and wants with
goods and services.

✓ Minimal amount of government interference

✓ A free-market business system.
Free Enterprise:

A system in which private businesses are able to start and do business competitively to earn profits,
with a minimal degree of government regulation.

D. Coping with Change

✓ Price change
✓ New product development
✓ Need change
✓ Unexpected events occurred
E. Preventing Misconceptions

Understanding business also prevents our accepting misconceptions, misinformation and

inaccurate data as truth.

How we are doing in business

Gross National Product

The market value of all final goods and services produced over a one-year period.

Business Enterprise

An organization involved in exchanging goods, services, or money to earn a profit.

People from the core of business

The human element is the core of business. Business needs people as owners, managers,
employees, and consumers. People need business for the production of goods and services and the
creation of jobs. Whether business is transacted in Mexico, Canada, or Nigeria does not matter.

a. Owners
 People who own a business, as well as those who invest money in one and have right on
the business property, do so because they expect to earn profit. e.g. GM 1.2 million shareholders
(owners) and huge number of students.

b. Managers

The person responsible for operating the business may be the owner (an owner-manager
also called an entrepreneur) or a professional manager employed by the owner. Both types of
managers seek to achieve profit, growth, survival, and social responsibility.

The owner-manager sets his or her own objectives

 A professional manager attempts to achieve objectives set by others. They are accountable to
the owners of the business who judge the managers performance by how well their objectives have
been accomplished over a period of time.

c. Employees

Employees supply the skills and abilities needed to provide a product or service and to
earn a profit - expect equitable wage and favorable working condition.

d. Consumers

A person or business who purchases a good or service for personal or organizational use.
– Expect quality, fair price, and reliability.
Chapter two:

Sole Proprietorship

A business that is established, owned, operated, and often financed by one person—because it was
the easiest to set up.

A sole proprietorship is the easiest and simplest form of business ownership. It is owned by one
person. There is no distinction between the person and the business. The owner shares in the
business’s profits and losses. Since the sole proprietor is self-employed, self-employment taxes
must be paid. There is no liability protection for the owner. The owner is liable for all debts. If the
individual is sued and loses, the business and personal property may be seized to pay obligations.
Sole proprietorships do not have perpetuity. If the proprietor sells the business, quits, or dies, the
business ceases to exist.

Advantages of Sole Proprietorships

Sole proprietorships have several advantages that make them popular.

1. Easy and inexpensive to form: Sole proprietorships have few legal requirements (local
licenses and permits) and are not expensive to form, making them the business organization
of choice for many small companies and start-ups.
2. Profits all go to the owner: The owner of a sole proprietorship obtains the start-up funds
and gets all the profits earned by the business. The more efficiently the firm operates, the
higher the company’s profitability.
3. Direct control of the business: All business decisions are made by the sole proprietorship
owner without having to consult anyone else.
4. Freedom from government regulation: Sole proprietorships have more freedom than
other forms of business with respect to government controls.
5. No special taxation: Sole proprietorships do not pay special franchise or corporate taxes.
Profits are taxed as personal income as reported on the owner’s individual tax return.
 6. Ease of dissolution: With no co-owners or partners, the sole proprietor can sell the
business or close the doors at any time, making this form of business organization an ideal
way to test a new business idea.

Disadvantages of Sole Proprietorships

Along with the freedom to operate the business as they wish, sole proprietors face several
disadvantages:

1. Unlimited liability: From a legal standpoint, the sole proprietor and the company are one
and the same, making the business owner personally responsible for all debts the company
incurs, even if they exceed the company’s value. The owner may need to sell other personal
property—their car, home, or other investments—to satisfy claims against the business.
2. Difficulty raising capital: Business assets are unprotected against claims of personal
creditors, so business lenders view sole proprietorships as high risk due to the owner’s
unlimited liability. Owners must often use personal funds—borrowing on credit cards,
second-mortgaging their homes, or selling investments—to finance their business.
Expansion plans can also be affected by an inability to raise additional funding.
3. Limited managerial expertise: The success of a sole proprietorship rests solely with the
skills and talents of the owner, who must wear many different hats and make all decisions.
Owners are often not equally skilled in all areas of running a business. A graphic designer
may be a wonderful artist but not know bookkeeping, how to manage production, or how
to market their work.
4. Trouble finding qualified employees: Sole proprietors often cannot offer the same pay,
fringe benefits, and advancement as larger companies, making them less attractive to
employees seeking the most favorable employment opportunities.
5. Personal time commitment: Running a sole proprietorship business requires personal
sacrifices and a huge time commitment, often dominating the owner’s life with 12-hour
workdays and 7-day workweeks.
6. Unstable business life: The life span of a sole proprietorship can be uncertain. The owner
may lose interest, experience ill health, retire, or die. The business will cease to exist unless
the owner makes provisions for it to continue operating or puts it up for sale.
 7. Losses are the owner’s responsibility: The sole proprietor is responsible for all losses,
although tax laws allow these to be deducted from other personal income.

The sole proprietorship may be a suitable choice for a one-person start-up operation with no
employees and little risk of liability exposure. For many sole proprietors, however, this is a
temporary choice, and as the business grows, the owner may be unable to operate with limited
financial and managerial resources. At this point, the owner may decide to take in one or more
partners to ensure that the business continues to flourish.

Partnership

A business owned by two or more people, who agree to share in its profits, is considered a
partnership. Like sole proprietorships, the laws do not distinguish between the business and its
owners. The Partners should have a legal agreement that sets forth how decisions will be made,
profits will be shared, disputes will be resolved, how future partners will be admitted to the
partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership
when needed. It’s difficult to think about a "break-up" when the business is just getting started, but
many partnerships split up at crisis times and unless there is a defined process, there will be
problems. They also must decide up front how much time and capital each will contribute. Like
the sole proprietorship, it is easy to start and the red tape involved is usually minimal. The tax
structure is the same as proprietorship except in the profits and losses of the partnership are divided
by an agreed percentage by the partners.

Main characteristics or features of partnership:

1. Agreement: Without agreement partnership cannot be formed. The agreement may be

written or oral. But it must be written on settle the disputes.
2. Registration: It is not necessary that a partnership may be registered. But in case of
registered firm many problems can be created.
3. Number of Partners: In a partnership there should be at least two partners. In ordinary
business the partners must not exceed the twenty. In case of banking not more ten.
 4. Profit and Loss Distribution: The basic aim of partnership is to earn profit. This profit is
distributed among the partners according their agreement. In case of loss also all the
partners share in it.
5. Business: The object of the partnership it to carry on the business. It may be production or
trading. It should be according the laws of the state.
6. Unlimited Liability: The liability of the partner is not limited to his invested amount. In
case of loss the private property of the partner also used to pay the business obligations.
7. Entity: Law has not granted it any legal entity; it is not independent from the partners. It
has not separate entity from its members.
8. Share in Capital: According to the agreement every partner contributes his share. It is not
necessary all the partners should contribute equally. Some people provide only skill and
ability to become a partner.
9. Management: All the partners can participate actively in the business management.
Sometimes only few persons are allowed to handle the business affairs.
10. Payment of Tax: Every partner pays the tax on his share of profit individually.
11. Co-Operation: For the successful partnership mutual co-operation and mutual confidence
is an important factor.
12. No Audit: In the partnership there is no restriction for the audit of accounts. So this type
of organization may operate freely.
13. Partners are Agent: Every partner stand as an agent and principal to one another. In the
position of an agent one can do contract with other parties on behalf of the firm.
14. Transferability of Shares: No one partner can transfer his share to any other person
without the consent of the existing partners.
15. Dissolution: It is a temporary form of business. It operates at the pleasure of the partners.
It is dissolved if a partner leaves, dies or declared bankrupt or insane. Partners can also
dissolve it by obtaining the degree from the court.
Advantages of Partnerships:

Some advantages of partnerships come quickly to mind:

1. Ease of formation: Like sole proprietorships, partnerships are easy to form. The partners
agree to do business together and draw up a partnership agreement. For most partnerships,
applicable state laws are not complex.
2. Availability of capital: Because two or more people contribute financial resources,
partnerships can raise funds more easily for operating expenses and business expansion.
The partners’ combined financial strength also increases the firm’s ability to raise funds
from outside sources.
3. Diversity of skills and expertise: Partners share the responsibilities of managing and
operating the business. Combining partner skills to set goals, manage the overall direction
of the firm, and solve problems increases the chances for the partnership’s success. To find
the right partner, you must examine your own strengths and weaknesses and know what
you need from a partner. Ideal partnerships bring together people with complementary
backgrounds rather than those with similar experience, skills, and talents.
4. Flexibility: General partners are actively involved in managing their firm and can respond
quickly to changes in the business environment.
5. No special taxes: Partnerships pay no income taxes. A partnership must file a partnership
return with the Internal Revenue Service, reporting how profits or losses were divided
among the partners. Each partner’s profit or loss is then reported on the partner’s personal
income tax return, with any profits taxed at personal income tax rates.
6. Relative freedom from government control: Except for state rules for licensing and
permits, the government has little control over partnership activities.
Joint Venture

In a joint venture, two or more companies form an alliance to pursue a specific project, usually for
a specified time period. There are many reasons for joint ventures. The project may be too large
for one company to handle on its own, and joint ventures also afford companies access to new
markets, products, or technology. Both large and small companies can benefit from joint ventures.

Franchising

Franchising is a form of business organization that involves a franchisor, the company supplying
the product or service concept, and the franchisee, the individual or company selling the goods or
services in a certain geographic area. The franchisee buys a package that includes a proven product
or service, proven operating methods, and training in managing the business. Offering a way to
own a business without starting it from scratch and to expand operations quickly into new
geographic areas with limited capital investment, franchising is one of the fastest growing
segments of the economy. If you are interested in franchising, food companies represent the largest
number of franchises.

Merger

A merger occurs when two or more firms combine to form one new company.

In an acquisition, a corporation or investor group finds a target company and negotiates with its
board of directors to purchase it.

Entrepreneur

The entrepreneur is defined as someone who has the ability and desire to establish, administer and
succeed in a startup venture along with risk entitled to it, to make profits. The best example of
entrepreneurship is the starting of a new business venture. The entrepreneurs are often known as a
source of new ideas or innovators, and bring new ideas in the market by replacing old with a new
invention.
Business Plan

A business plan is a strategic document that outlines a company's goals, strategies for achieving
them, and the time frame for their achievement. It covers aspects like market analysis, financial
projections, and organizational structure, serving as a roadmap for business growth and a tool to
secure funding.

How to write a business plan in 9 steps?

1. Draft an executive summary
2. Write a company description
3. Perform a market analysis
4. Outline the management and organization
5. List your products and services
6. Perform customer segmentation
7. Define a marketing plan
8. Provide a logistics and operations plan
9. Make a financial plan