Notes
Forms of business
| Form | Owners | Liability | Taxes | Key trade-off |
|---|---|---|---|---|
| Sole proprietorship | one | unlimited | profits taxed once, as owner's income | easy to start, hard to raise money |
| Partnership | two or more | unlimited for general partners | taxed once, as partners' income | more money and skills, shared control |
| Corporation | stockholders | limited | corporate profits and dividends both taxed | raises large sums, more regulation |
| LLC | members | limited | usually taxed once | combines protection and simpler taxes |
- Other forms: franchises, cooperatives and nonprofits.
- Firms grow through horizontal mergers (same product), vertical mergers (different stages of production) and conglomerates (unrelated businesses).
Labor markets
- Wages are set by supply and demand for labor. Labor demand is derived from demand for products.
- Higher wages go to scarce skills, more human capital and difficult or risky jobs.
- Laws ban pay and hiring discrimination (Equal Pay Act 1963, Civil Rights Act 1964). The Fair Labor Standards Act (1938) set the first federal minimum wage and overtime rules.
- A minimum wage is a price floor. Economists debate its effects on jobs and incomes.
Unions
- Unions use collective bargaining, and sometimes strikes. Disputes can go to mediation or arbitration.
- The AFL (1886) and CIO merged in 1955. The Wagner Act (1935) protected organizing; the Taft-Hartley Act (1947) allowed right-to-work laws. Union membership has declined since the 1950s.
Topics in this unit
Each topic has its own short notes and practice.
Practice
Limited liability means shareholders risk only their investment.
$\displaystyle \frac{300}{20{,}000} = 0.015 = 1.5\%$.
Drilling and refining oil and selling gasoline are different stages of the same industry.
Firms hire workers because customers want what they produce.
$40 \times 15 = 600$, plus $8 \times 22.50 = 180$ for overtime, totals $780.
The Wagner Act (1935) protected organizing; Taft-Hartley (1947) limited unions and allowed right-to-work laws.
Free response
Write your answer first, then open the scoring guide.
Free-response question
Maria and Tom start a food truck business as a general partnership. They agree that Maria will receive two-thirds of the profits and Tom one-third.
(a) Explain what unlimited liability means for Maria and Tom, and how this differs from a corporation.
Show the answer and scoring guide
In a general partnership, both partners are personally responsible for all the business's debts, so creditors can take their personal savings or property if the business cannot pay. In a corporation, owners have limited liability and can lose only the money they invested.
Check off the points you earned:
(b) In its first year the food truck takes in $120,000 in revenue and has $75,000 in costs. Calculate each partner's share of the profit.
Show the answer and scoring guide
Profit $= 120{,}000 - 75{,}000 = 45{,}000$ dollars. Maria receives $\displaystyle \frac{2}{3} \times 45{,}000 = 30{,}000$, or $30,000. Tom receives $\displaystyle \frac{1}{3} \times 45{,}000 = 15{,}000$, or $15,000.
Check off the points you earned:
(c) The partners want to open ten more trucks and are thinking of forming a corporation. Give ONE advantage and ONE disadvantage of this change.
Show the answer and scoring guide
Advantage: a corporation can raise large amounts of money by selling stock, and the owners would gain limited liability. Disadvantage: profits would face double taxation (corporate profits and then dividends), and the business would face higher start-up costs and more regulation and reporting.
Check off the points you earned: