Economics Chapter 3: Business Organizations

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Economics Chapter 3Business Organizations
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Chapter 3 Business Organizations
Form of Business Organization Advantages Disadvantages
1. Sole Proprietorships a business owned and run by one person. Most common form of business organization in the U.S. Are the smallest in size and easy to manage. Start up is easy if you have an idea or an opportunity to make a profit, all you have to do is decide to go into business, then do it. Relative ease of management decisions are made quickly, without having to consult a co-owner. Owner enjoys all the profits dont have to share Does not pay separate business income tax is not recognized as a separate legal entity. Pay only personal income tax on profits. Psychological satisfaction being own boss, seeing name in print. Ease of getting out of business can sell or decide to close. Owner has unlimited liability the owner is personally and fully responsible for all losses and debts of business. Difficult to raise financial capital personal financial resources available is limited and banks usually dont like to loan money to new or very small businesses. Size and Efficiency because of limited capital, the proprietor may not be able to hire enough personnel or stock enough inventory to operate business efficiently. Proprietor often has limited managerial experience Difficulty of attracting qualified employees because of limited financial capital, may not be able to pay competing wages. Limited Life means the firm legally ceases to exist when the owner dies, quits, or sells the business.
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Chapter 3 Business Organizations
Form of Business Organization Advantages Disadvantages
2. Partnerships is a business jointly owned by 2 or more persons. 2 types of partnerships General Partnership most common form is where all partners are responsible for the management and financial obligations of the business. Limited Partnership at least one partner is not active in the daily running of the business even though they may have contributed funds to finance the operation. Because more than one owner is involved, legal papers called articles of partnership are usually drawn up to specify arrangements between partners. Ease of start up like sole proprietorships. Ease of management each partner brings in different expertise to the business. Lack of special taxes each partner pays individual income taxes on profits. Can attract financial capital easier than proprietorships can bring in more partners. More efficient operation because bigger than sole proprietorships. Easier to attract top talent because most partnerships offer specialized services. Each partner is fully responsible for acts of all other partners, including personal as well as business debts of all partners. Limited liability in the case of a limited partnership, the limited partner loses only what they invested, whereas, the other partners make up the rest of the losses. Has limited life when a partner dies or leaves, the partnership must be dissolved and re-organized. Conflict between partners may not always get along, especially if a large partnership.
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Chapter 3 Business Organizations
Form of Business Organization Advantages Disadvantages
3. Corporations is a form of business organization recognized by law as a separate legal entity having all the rights of an individual. Must file a charter a government document that gives permission to create a corporation. States the name of the corporation, address, purpose of the business, and other features of the business. The charter also specifies the number of shares of stock, or ownership certificates in the firm. Stocks are sold to investors, called stockholders. The money is used to set up the corporation. If the corporation is profitable, it may eventually pay dividends a check representing a portion of profits. Common Stock represents basic ownership of a corporation 1 share 1 vote for each share of stock to elect board of directors whose duty is to direct the corporations business by setting broad policies and goals. Also hires professional staff to run the business on a daily basis. Preferred Stock represents non-voting ownership shares of the corporation. These stockholders receive their dividends before common stockholders. If corporation goes out of business and if some property and funds remain after all debts are settled, preferred stockholders get their investment back before common stockholders. Ease of raising financial capital can sell additional stock, is a bond is a written promise to repay the amount borrowed at a later date. The amount borrowed is known as the principal. The corporation pays interest the price paid for the use of anothers money. Can hire professional managers to run the firm owners can own a portion of the business without having to know a great deal about the business itself. Limited liability stockholders only lose the money they invested in stock. Unlimited life corporation continues to exist even when ownership changes. Ease of transferring ownership stockholder simply sells his/her stock to someone else. Expense and difficulty of getting charter depends on the state, attorney fees, and filing expenses can cost several thousand dollars. Shareholders have little say about how the business is run after they vote for board of directors. Double taxation of corporate profits dividends are taxed twice once as corporate profit and again as personal income. Subject to more government regulation than other forms of businesses. Must register with the state in which they are chartered. If the corporation wants to sell stock to the public, it must register with the Federal Securities and Exchange Commission (SEC). Must provide financial information on a regular basis to the public.
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Chapter 3 Business Organizations

• Business Growth and Expansion 2 ways
• Growth through investment businesses can grow
  by re-investing their cash flows (the total
  amount of new funds the business generates from
  operations) in plant, equipment, and new
  technology.
• Growth through business mergers most mergers
  take place because firms want to become bigger,
  more efficient, acquire a new product, catch up
  to or eliminate a competitor, or change its
  corporate identity.

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Chapter 3 Business Organizations

• Types of Mergers
• Horizontal Mergers takes place when 2 firms
  that produce similar products come together.
• Vertical Mergers is one that involves 2 or more
  firms at different stages of manufacturing or
  marketing.

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Chapter 3 Business Organizations

• Types of Mergers (continued)
• Conglomerates is a large firm that has at least
  4 different businesses, none of which is
  responsible for a majority of sales.
• Multinationals can be an ordinary corporation
  or a conglomerate, but it has manufacturing or
  service operations in several different
  countries.
• Multinationals introduce new technology, generate
  jobs, and produce tax revenues for the host
  countries.

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Chapter 3 Business Organizations

• Other Organizations
• Non-Profit Organizations function like a
  business, but on a non-profit basis to further a
  cause or for the welfare of their members.
• Examples are schools, hospitals, churches,
  welfare groups, and adoption agencies.
• Provide goods and services to their members while
  they pursue other rewards such as improving
  educational standards and helping those in need.
• Their activities often produce revenue in excess
  of expenses, but they use the profits to further
  the work of their institution.

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Chapter 3 Business Organizations

• Other Organizations (continued)
• Cooperative or Co-Op is one of the major
  non-profit organizations. The Co-Op can be
  organized to provide goods and services, or to
  help producers.
• Professional Associations work to improve the
  working conditions, skill levels, and public
  perceptions of their profession.
• Examples are the American Medical Association
  (AMA) and the American Bar Association (ABA).

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Chapter 3 Business Organizations

• Other Organizations (continued)
• Labor Unions an organization of workers formed
  to represent its members interests in various
  employment matters.
• Business Associations ? Chamber of Commerce
  promotes the welfare of its members and of the
  community.
• Better Business Bureau association that helps
  to protect the consumer.

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Chapter 3 Business Organizations

• Government plays a direct role in the economy
  when it provides goods and services directly to
  consumers it plays an indirect role when it
  provides social security, veterans benefits,
  unemployment compensation, and financial aid to
  college students or when it regulates businesses.

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Chapter 3 Business Organizations

• Examples of Direct Role of Government
• Called direct because the government supplies a
  good or service that competes with private
  businesses.
• FDIC (Federal Deposit Insurance Corporation)
• TVA (Tennessee Valley Authority) supplies
  electric power for almost all of Tennessee.
• USPS (United States Postal Service)
• State and local governments provide police, fire
  protection, rescue services, schools, and court
  systems.

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Chapter 3 Business Organizations

• Examples of Indirect Role of Government
• The government plays an indirect role when it
  acts as an umpire to make sure the market economy
  operates smoothly and efficiently.
• Regulations of public utilities water or
  electricity
• Social security payments, veterans benefits,
  financial aid to college students, and
  unemployment compensation.

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Chapter 3 Business Organizations

• The End