Business Firms

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Business Firms

• Chapter 6 Section 1

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Indiana Academic Standards for Economics

• Students will understand the organization and
  role of business firms and analyze the various
  types of market structures in the United States
  economy.
• Standard 3.1
• Compare and contrast the following forms of
  business organization sole proprietorship,
  partnership, and corporation.

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Question

• What is your definition of the word liability?

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Objectives

• Why do business firms exist?
• What is a sole proprietorship?
• What is a partnership?
• What is a corporation?

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• Liability
• Being legally responsible for something
• List some of your liabilities

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• Business Firm
• An organization that uses resources to produce
  goods and services, which are in turn sold
• Reasoning for firms
• People working together can produce more than the
  sum of what people working alone can

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Firm Structure

• Shirking
• The behavior of a worker who is putting forth
  less than the agreed-to effort
• Monitor
• The person in a business who coordinates team
  production and reduces shirking

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• Residual Claimant
• A person who shares in the profits of a business
  firm
• The monitor

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Sole Proprietorship

• One owner
• All Decisions
• All Profits Losses
• All Liability -

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Sole Proprietorship

• Easy to form
• Low Ability to Raise Funds -
• End with Death
• Profit taxed once

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Partnership

• 2 or More Owners
• Share Decisions
• Complicated -
• Share Profits Losses

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Partnership

• General Partner
• Unlimited Liability -
• Limited Partner
• Limited Liability

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Partnership

• Profit taxed once
• Specialization

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Corporation

• Legal Entity that Acts as the Owner
• Ownership Resides with the Stock Holders
• Profits Proportionally Shared by Stock Holders
  (dividends)
• Limited Liability
• Stockholders

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Corporation

• Continue in the Event of Death
• Raise Large Amounts of by Selling Stock
• Complicated to Form -
• Double Taxation -

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• Why are corporations subject to DOUBLE
  TAXATION?
• Possible Theory
• Double Taxation pays for the
• Limited Liability

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• Of the 3 business firms, which is the most
  numerous?
• Sole Proprietorship

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Other Business Organizations

• Cooperative
• A business that provides services to its members
  and is not run for profit
• Co-op

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• Franchise
• A contract by which a firm (usually a
  corporation) lets a person or group use its name
  and sell its goods or services
• In exchange for certain payments being made and
  certain requirements being met

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• Franchiser
• The entity that offers the franchise
• Franchisee
• The person or group that buys a franchise

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Does Business Have an Ethical and Social
Responsibility?

• This is debatable.
• Yes,
• Business should use profits to meet socially
  worthwhile objectives

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Does Business Have an Ethical and Social
Responsibility?

• No,
• According to Milton Friedman,
• the only responsibility a business has is to
• Play by the rules
• 1. Engage in open free competition
• 2. Do not deceive or commit fraud upon the
  buying public

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• If you entered a partnership, what should you
  keep in mind?
• In a partnership, what type of person would you
  want as a partner?

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Assessment

• Why do business firms exist?
• What is a sole proprietorship?
• What is a partnership?
• What is a corporation?