Meaning & Goals of Business

Meaning of Business

• A business is an organization that aims to generate profits
• It does this by providing products in the form of goods and services
• It aims to satisfy peoples needs

Goals of a Business

• Businesses engage in goal-oriented activities.
• Profit maximization is a goal
• Value maximization is a goal

Profit Maximization as a Goal

• Profit maximization is the primary goal of a firm
• Profit maximization is increasing a firms net income or total profits
• Profit maximization may not be an ideal basis, due to;
• Lack of a time dimension
• The focus being solely on accounting profits
• Failing to consider risk

Value Maximization as a Goal

• Value maximization is also known as wealth maximization.
• The goal is to maximize the wealth of owners for whom the firm operates.
• This involves increasing the sum of all financial claims like common stock, preferred stock, and debt.
• Maximizing long-term value is important.
• Firm value means the market value of equity.
• Publicly-held corporations maximize the share price of a firm's stock.
• Privately-held companies, value is the price the firm could be sold at.
• Wealth maximization benefits society by:
• Encouraging efficient businesses producing high-quality products at low cost
• Producing goods and services designed to meet consumer needs
• Using new technology
• Promoting new products
• Creating new jobs

Stakeholders in Business

• A stakeholder is any person or group a business has a responsibility to
• Businesses are responsible to investors, customers, employees, and society.
• External stakeholders exist
• Internal stakeholders exist

Key Stakeholders

• Owners have the main economic responsibility
• A firm must answer to its owners or investors
• Owners want to earn a profit or return on investment
• It is responsible for making money for its investors
• A stockholder is any person owning at least one share of stock in a corporation
• Customers require good service
• Meeting customer preferences yields profits
• Employees undertake work within a business
• It's a business responsibility to provide safe, clean workplaces, and avoid discrimination
• Society has business firms that have a social responsibility to;
• Create new wealth
• Develop the quality of the workforce
• Promote social justice
• Protect the environment.

Stakeholder Theory

• Managers should make decisions considering the interests of all stakeholders
• Stakeholders include citizens, shareholders, consumers/customers, employees, and communities
• The theory has roots in sociology, organizational behavior, and special interests politics
• It is considered part of a firm's social responsibility
• Stakeholder theory can sidetrack managers from the primary business goal.
• The business goal is shareholder wealth maximization

Types of Business Organizations

• Sole Proprietorship
• Partnership
• Corporation
• S Corporation
• Limited Liability Company (LLC)

Sole Proprietorship

• A single person owns and operates it
• It might have employees.
• The entity is inseparable from its owner

Advantages of Sole Proprietorship

• Ease of formation
• There are few legal restrictions
• The owner is the sole owner
• The owner receives all the profits
• It's the least expensive business to establish
• The owner has total control
• All decision-making, responsibility and control belong to the owner

Disadvantages of Sole Proprietorship

• Unlimited personal liability
• The owner is responsible for all business debt
• Liability extends to all assets like home and vehicle.
• Less available capital
• Funding comes from the proprietor
• Obtaining long-term financing is difficult
• Loans are based on the owner's strengths
• Limited growth potential
• Company future depends on the owner's capabilities
• This includes knowledge, drive, and financial potential
• Heavy responsibility: The owner is the only person responsible
• Death, illness, or injury can endanger the business
• The business ceases to exist when the owner dies

Partnership

• A legal business relationship exists
• Two or more people agree to share ownership and management
• It's not a separate legal entity

Advantages of Partnership

• Ease of formation
• It has fewer legal requirements and expenses to form than corporations
• Shared Responsibility
• Two or more do better than one
• Profits motivate partners to succeed
• Increased growth potential
• It's possible to obtain more capital and tap into skills
• Ease of operation
• More freedom exists from government control and special taxation

Disadvantages of Partnership

• Unlimited personal liability
• Owners are personally responsible for business debt
• Lack of continuity
• Like sole proprietorships, it terminates upon death
• It terminates or upon a partner's withdrawal
• Unless an agreement establishes it otherwise
• Profits are shared among partners
• It is shared as set out in the partnership agreement
• Distribution of responsibility in bankruptcy
• The partner with more personal assets loses more

Types of Partners

• General partners
• Share responsibility for managing and financing the business
• They share equally in the liability
• Limited Partners
• They risk only their investment
• They are not subject to the same liabilities as general partners
• As long as they do not participate in management and control

Corporation

• A distinct legal entity exists, separate from individuals who own it.
• Authority from the state government forms it
• Approval comes from the secretary of state

Advantages of a Corporation

• Its ownership is readily transferable
• It does not cease with the death of an owner
• It has increased options for growth and for fundraising
• It has access to numerous investors.
• A corporation can raise capital through stock sales
• It is a separate legal entity
• It is responsible and liable for all debts
• Shareholders are only liable for their investment
• It exists separately from the people who own it
• Authority can be delegated
• It can draw in expertise and skills from several individuals

Disadvantages of a Corporation

• Extensive government regulations exist
• It can be complex to manage and is highly regulated
• Burdensome local, state, and federal reports must be filed
• Regular stockholder meetings are required
• It is expensive to form and maintain
• Fees exist for setting up a corporate structure
• Costs of stockholders' meetings exist
• Expenses exist for legal fees and paperwork
• Increased tax load is a factor
• Income tax is paid on corporate net income (profit)
• Tax is paid on individual salaries and dividends

S Corporation

• An S corporation is a regular corporation electing S corporation tax status
• An S corporation allows limited liability
• One pays income taxes like a sole proprietor or partner
• Each shareholder has to be a citizen or resident
• Profits and losses are allocated by the shareholders' interest ratios
• Corporations are limited to a maximum of 100 shareholders.
• S corporations cannot deduct costs of fringe benefits
• This applies to employee shareholders owning over 2% of the corporation

Limited Liability Company (LLC)

• A limited liability company is a legal structure
• It fits between corporations and partnerships of sole proprietorships
• The LLC is not a separate taxable entity

Advantages of an LLC

• More liberal loss deductions
• Owners do not assume liability and losses can be used against active income
• More stock options exist
• LLCs can offer stock with varying rights
• Less restriction on participation exists
• LLCs can be formed with just one person

Disadvantages of an LLC

• Business expansion is difficult in other states
• If doing business in a state that allows LLCs, doing business elsewhere becomes difficult
• This is due to a lack of legally registering
• Transferability restriction tests exist
• Ownership cannot be transferred without some restrictions
• Lack of uniform code may be a problem
• Dissolving business in some states occurs on death or another life change

External Business Environment

• Businesses do not operate in a vacuum
• Firms must understand a variety of external forces
• These include sociocultural, economic, global, technological, and political-legal forces
• Such forces impact operations

External Dimensions

• Socio-Cultural
• Economic
• Global
• Technological
• Political-Legal

Socio-Cultural Dimension

• It represents demographic characteristics and culture
• This is within which a business firm operates
• Socio-cultural factors dictate goods, services, and standards
• Standards are likely to value society
• Recent trends include no smoking and low-carbohydrate diets
• Increased diversity of consumers and the workforce influences outcomes
• These factors can lead to new and declining opportunities

Socio-Cultural Trends

• Increased workforce diversity creates opportunities and challenges
• Diversity consists of age, race, ethnicity, abilities, attributes, and characteristics
• Managers must understand factors and manage strategies

Economic Dimension

• The economic dimension is the general environment of overall health
• The Economic system is where a business operates
• All economic forces affect every business
• The two major forces are;
• Macroeconomic
• Microeconomic

Macroeconomic Forces

• Inflation, interest rates, and employment relate to the economy.
• All forces affect demand

Additional Macro Aspects

• Changes are hard to forecast accurately in macroeconomics.
• Implications of economic forces are important
• So are monetary and fiscal policy

Microeconomic Forces

• These involve the firm and industry-level factors
• These include supply and demand and competition

Global Dimension

• The extent that businesses are involved in or are affected by other countries.
• Businesses operate globally
• International environments have both aspects
• Opportunities
• Threats

Global Threats

• Rising foreign competition drives a need to control costs.
• Being able to produce goods cheaply is a cost-cutting measure

Global Opportunities

• Market growth
• Joint ventures
• Alliances

Global Operating Considerations

• Thinking in global terms is important
• Awareness of economic, cultural, and ethical issues is important
• Consider tariffs
• Government involvement can be a factor as well
• As well as free-trade agreements exist
• Globalization increases pressure
• Requires increased sophistication and knowledge

Technological Dimension

• Methods, processes, and systems go into transforming resources into products.
• Adapting to change becomes an important management task
• Technology improves productivity
• Improves efficiency
• Reduces costs
• Enhances customer service
• Examples:
• In the production process, new tech plays a role, such as robotics
• Emergence of IT affects business
• The new technology includes computers, modems, the internet, etc
• Ecommerce development also changes business
• This can be defined as the buying and selling of goods over the Internet.
• This makes businesses more responsive to consumers.

Political-Legal Dimension

• Political factors can affect relations between business and government
• Legal and regulatory forces partially define business
• Limitations that dictate operations
• The government supports business by:
• Limiting owner liability
• Limited loss, via bankruptcy laws
• Protecting innovation through laws
• Provides structure

Forms of Business Regulation

• Regulation of monopoly
• Regulation of employee relations
• Regulation of consumer relations
• City, county, and state regulations

Regulations Conclusion

• Large firms have legal staff to comply with the relevant laws
• Small firms seek outside support from associations