Unit III: Economics of the Business Firm

1
Unit III Economics of the Business Firm
ECONOMICS for Christian Schools
By Alan J. Carper Bob Jones University Press. 1998
2
Chapter 7

• Forms of Business Ownership

3
Objectives

• Define sole proprietorship partnership
• List the advantage and disadvantages of a
  sole proprietorship
• List the advantages and disadvantages of a
• partnership
• Describe the Scriptural principles that apply
  to Christians involvement in partnerships.
• Define and describe two types of corporation
• Explain the significance of stock to a
  corporation
• List the advantages and disadvantages of
  incorporation.

4
Biblical Integration

• Believers should not enter into a business
  partnership with a non-believer, due mainly to
  Christians having different priorities than the
  unsaved.
• Christians should also avoid becoming obligated
  for another's debts
•  
• (2 Cor. 614 Prov. 2226-27)

5
Todays Scripture

• Seest thou a man diligent in his business? He
  shall stand before kings he shall not stand
  before mean men. Proverbs 2229

6

• Entrepreneurship is the ability to take risks and
  coordinate the factors of production in order to
  produce a good or service for a profit.

(Carper 97)
7
Forms of Business Ownership

• An entrepreneur determines what the market
  wishes to purchase, hires managers and workers,
  encourages their efforts, and leads them in
  performance that will be attended and applauded.

(Carper 97)
8
Entrepreneur

• Most important decision an entrepreneur must make
  is which form of business ownership they will
  use.

(Carper 97)
9
Forms of Business Organizations

• The only forms of business organizations we will
  be discussing are those that occur in
  capitalistic economies.
• Capitalism is often described as free
  enterprise or private enterprise in reference
  to the fact that private citizens may own and
  operate business enterprises free from excessive
  governmental controls.

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Three categories of business

• (1) sole proprietorship

(2) partnerships
(3) corporations
(Carper 97)
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Sole Proprietorship

• Sole Proprietorships are businesses owned by one
  person, but ran by a number of managers and/or
  employees.

(Carper 98)
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Sole Proprietorship

• The most common type of
• business in America today
• is sole proprietorship,
• accounting for 74 of the
• nations 16 million
• business firms.

(Carper 98)
13
Advantages of Sole Proprietorship

• (1) Freedom is the main advantage of sole
  proprietorship. Freedom to enter and exit the
  market easily.
• First, step is to register the companys name
  with the clerk of court of the county in
  which the proprietor resides.

(Carper 98)
14
Advantages of Sole Proprietorship

• (2) Freedom from outside control - still
  accountable, however, to obey laws that apply to
  businesses.
• Government considers the business and the
  proprietor as one and the same.

(A sole proprietor has the freedom to share their
faith unlike an employee.)
(Carper 98)
15
Advantages of Sole Proprietorship

• (4) Freedom from paying excessive taxes all
  income of a sole proprietorship is subject to
  taxation at the personal income tax rate.
  (Corporations tend to pay significantly higher
  taxes.)

(Carper 98)
16
Advantages of Sole Proprietorship

• (3) Freedom to retain information except
  for a possible audit by the Internal Revenue
  Service, the proprietor may keep his business
  information as secret as he wishes.

(Carper 98)
17
Advantages of Sole Proprietorship

• (5) Freedom from being an employee
• personal responsibility, independence, and
  individualism is most attainable under this
  form of business ownership.

(Carper 98)
18
Disadvantages of Sole Proprietorship

• Some individuals jump too fast into business for
  themselves without thinking about the limitations
  and problems it carries with it.

(Carper 99)
19
Disadvantages of Sole Proprietorship

• (1). Unlimited Personal Financial Liability a
  sole proprietor is personally responsible to pay
  all debts the business will occur even if it
  has to come from their personal savings and
  selling of their personal possessions.

(Carper 99)
20
Disadvantages of Sole Proprietorship

• A Christian needs to pay careful attention to the
  Biblical principle of counting the cost before
  becoming a sole proprietor, because their
  testimony is on the line. (Luke 14 28-29).

(Carper 99)
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Disadvantages of Sole Proprietorship

• (2). Limited Management and Employee Skills
  lack of expertise poses a problem for the
  proprietor, especially if they are competing
  with firms that have skilled personnel in which
  they cannot afford to hire.

(Carper 99)
22
Disadvantages of Sole Proprietorship

• (3). Limited Life sole proprietorships tend to
  be unstable. Many factors can change the health
  of a business in an instant.

(Carper 99)
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Disadvantages of Sole Proprietorship

• (4) Limited Availability of Money as long as
  the business remains a sole proprietorship, the
  owner cannot sell a portion of his ownership
  interest to others to raise money to expand or
  continue operations. Even obtaining a loan is
  limited to a sole proprietor.

(Carper 99)
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• When deciding to grant a loan to a proprietor,
  the creditor, or lender, must determine the
  probability of whether the proprietorship will be
  in business long enough to repay the loan.

(Carper 99)
25

• If a loan is granted, creditors may charge a high
  rate of interest to compensate for the high risk
  involved.

(Carper 99)
26
Partnership

• A partnership, or general partnership, is a
  business enterprise owned by two or more people.
  It is the least popular form of business
  ownership, accounting only for around 8 of all
  American businesses.

(Carper 101)
27
Partnership

• General partnership is a business firm owned by
  two or more people.

(Carper 101)
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Advantages of Partnership

• (1) Greater Management Skills partnerships
  combine the complementary talents of two or
  more people.

(Carper 101)
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Advantages of Partnership

• (2) Greater Chance of Keeping Competent
  Employees
• unlike sole proprietorship, partnerships
  have ability to promote exceptionally
  well- qualified employees.

(Carper 101)
30
Advantages of Partnership

• (3) Great Source of Financing
• has a major advantage over sole
  proprietorships, because partnerships have more
  competent employees, creditors are often more
  willing to lend money to lend money to the firm.

(Carper 101)
31
Disadvantages of Partnerships

• (1) Unlimited Personal Financial Liability
  this is the greatest drawback to the partnership
  form of business ownership. Each general partner
  is responsible to pay all obligations of the
  firm. Each partner is liability for all of the
  firms debts, but each general partner has the
  power to obligate the firm without the other
  partners knowledge.

(Carper 101)
32
Disadvantages of Partnerships

• (2) Uncertain Life general partnerships have
  the shortest life span of any form of business,
  due to dissolution of partnerships death,
  withdrawal insanity, bankruptcy, or failure of
  one party to carry out certain responsibilities
  of the partnership.

(Carper 102)
33
Disadvantages of Partnerships

• (3) Conflicts Between Partners all
  conflicts between partners stem from one basic
  problem for any endeavor it is impossible to
  have two masters.
•  
• In a general partnership each partner has an
  equal vote in matters of policy. Each partner
  believes his opinion is the correct one.

(Carper 102)
34
Scripture and Partnerships

• Specific rules for business partnerships are not
  mentioned directly in Scripture, but it does give
  us some general principles we may use when
  considering a partnership.

(Carper 102, 103)
35
Scripture and Partnerships

• (1) 2 Cor. 614 Be ye not unequally yoked
  together with unbelievers for what fellowship
  hath righteousness with unrighteousness? And what
  communion hath light with darkness.

(Carper 102, 103)
36
Scripture and Partnerships

• Yoking is considered any situation in which two
  or more people are tied together in a common
  endeavor, striving toward a common goal where one
  individual has the ability to influence, affect,
  or control the other. An unbeliever in business
  strives mainly for increased profits, whereas, a
  believer s main goal should be to magnify Jesus
  Christ.

37
Scripture and Partnerships

• (2) Scripture implies that a general
  partnership between two saved persons would
  even be unwise because each would become a
  surety, or cosigner, for debts that the other
  may incur (Prov. 1115 17 18 22 26-27).

(Carper 102, 103)
38
Limited Partnership

• In order to counter some of the biggest
  complaints of general partnership, the limited
  partnership was developed.
• Limited partnership is a business firm in which
  one investor has unlimited personal liability
  while another investor can lose only his
  investment in the firm.

(Carper 102, 103)
39
Limited Partnership

• A limited partner invests money in the business
  and has the right to inspect the books, and share
  in the profits of the firms but they have no
  responsibility in the management of the firm.

(Carper 102, 103)
40
Incorporation

• A corporation is formed when a person or group
  incorporates legally declaring the business to
  be separate from themselves. Therefore, it is a
  separate entity created by the law.

(Carper 104)
41
Incorporation

• Types of Corporations
• (1)  Private corporation is one that is owned
  by private citizens (IBM, Exxon, Disney, Coca
  Cola, and General Electric).
• (2) Public corporation, which is owned by
  the general public and managed by the
  government.

(Carper 104)
42
Ownership of a Corporation

• To become an owner of part of a corporation a
  person purchases its stock.
• A shareholder is given a share certificate that
  declares the number of shares owned. This degree
  of ownership is determined by the number of
  shares they own divided by the total number of
  shares outstanding.
• (If one million shares are outstanding in a firm
  and you own 500,000 shares, then you own one-half
  the firm.)

(Carper 104)
43
Advantages of Incorporation

• (1) Limited Personal Financial Liability of
  Stockholders
• Stockholders have the advantage of risking
  only their investment in the firm. The firms
  creditors cannot touch the personal property of
  the shareholders.

(Carper 104)
44
Advantages of Incorporation

• (2) Experienced Management and Specialized
  Employees
• Corporations are run by a board of directors,
  who are elected by votes of the stockholders.

(Carper 104)
45

• The board of directors represents the interest
  of the stockholders and usually is composed of
  people with experience in running other
  corporations.
• The board of directors appoints a Chief
  Executive Officer, or CEO who serves as
  president of the corporation.

(Carper 104)
46
Advantages of Incorporation
(3) Continuous Life unlike proprietor or
partnership, corporations keep living.
(4) Ease in Raising Financial Capital
unlimited number of owners, borrows money at a
lower interest rate than proprietorships or
partnerships, because of their higher caliber of
management, limited financial liability, and
unlimited life enable their firms to repay their
debts with less risk of default.
(Carper 104)
47
Disadvantages of Incorporation

• (1) Higher Taxes greatest disadvantage of
  incorporation pays taxes on a higher graduated
  scale. After profits are paid out to the
  stockholders, they must pay personal income
  taxes on the dividends.

(Carper 104)
48
Disadvantages of Incorporation

• (2) Greater Government Regulation because the
  government created the corporation, the
  government has the right to control.
• There are thousands of regulations that apply
  to all areas of business. Corporations spend a
  great deal of time and money interpreting and
  obeying these laws in addition to keeping records
  and reporting to various government agencies.

(Carper 104)
49
Disadvantages of Incorporation

• (3) Lack of Secrecy - by law, corporations
  must keep the government and their stockholders
  aware of the firms overall status.
• Due to the lack of privacy many corporations
  have gone private, where the managers of the
  firm purchase all outstanding stock. This aids
  the corporation to keep sensitive information
  from going private.

(Carper 104)
50
Disadvantages of Incorporation

• (4) Impersonality due to the size of large
  corporations it causes employees to become
  demotivated,

(5) Rigidity corporations tend to move at a
much slower pace than a proprietorship or
partnership.
(Carper 104)