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Business Organizations

Business Organizations. Chapter 3. Economic Institutions . Persons and organizations that use or represent the factors of production Ex. Business organization- profit-seeking enterprise that serves as main link between scarce resources and consumer satisfaction Three Types:

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Business Organizations

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  1. Business Organizations Chapter 3

  2. Economic Institutions • Persons and organizations that use or represent the factors of production • Ex. Business organization- profit-seeking enterprise that serves as main link between scarce resources and consumer satisfaction • Three Types: • Sole Proprietorship • Partnership • Corporation

  3. Sole Proprietorship • Business owned and run by one person • Most numerous but smallest in size • Relatively most profitable • Easiest form to start • Little red tape- licenses and fees • Simple to start- ex. Lemonade stand • Set up anywhere- home or office

  4. Sole Proprietorship • Strengths • Easy to start • Easy to manage • Owner keeps profits • No business income tax • Personal freedom • Easy to get of business

  5. Sole Proprietorship • Weaknesses • Unlimited liability: owner is personally and fully responsible for all losses and debts • Difficultly in raising funds/financial capital • Size and efficiency • Labor and inventory • Limited managerial experience • Difficultly of attracting qualified employees • No many fringe benefits • Limited life

  6. Partnership • Business jointly owned by two or more persons • Similar strengths and weaknesses to sole proprietorship • Types: • General partnership: all partners are equally responsible for management and finances • Limited partnership: at least one partner is not active in the daily running but may contribute to funds and finances • Forming a Partnership: • Articles of partnership: to specify partner arragements • $, property, management, portions of ownership, etc.

  7. Partnership • Strengths • Easy to start • Ease of management • Lack of special taxes • No business income tax • Attract more financial capital than proprietorship • Slightly larger in size; more efficient • Easier to attract better talent

  8. Partnership • Weaknesses • Each partner is fully responsible for the acts of partners • Unlimited liability- based on portion or ownership • Limited life • Potential conflict between partners

  9. Corporation • A form of business organization recognized by law as a separate legal entity having all the rights of an individual • Right to buy and sell property, enter into legal contracts, sue and be sued • Very formal and legal arragement • File for permission from fed/state gov’t of HQs to get an approved CHARTER • Name of company, address, purpose, other important features • Number of shares/stocks (parts of ownership) • Sold to inventors as capital to start • If corporation very profitable it can issue dividends • Portion of profits to each stockholder

  10. Corporation Structure • Investor purchases stock = owner • Common stock=basic ownership • 1 vote/share- used to elect board of directors • Preferred stock=nonvoting ownership • Receive dividends before common stocks • Get investments back before common stocks if corporation closes • No voting power • Proxy – stockholders representative to vote on all corporate matters

  11. Corporate Structure

  12. Corporation • Strengths • Ease of raising financial capital • Stocks, bonds (written promise to pay back) • Can hire best management • Limited liability for owners • Corp not its owners are liable for debt and obligations • Unlimited life • Ease of transferring ownership

  13. Corporation • Weaknesses • Difficulty and expense of getting a charter • Owners have little say how business is run after election of directors • Must pay corporate income tax • Subject to much more government regulations • Register in state of HQ • Must register with SEC if going public • Provide certain financial information

  14. Prediction • When a corporation wants to introduce a potentially profitable but risky product, it frequently sets up a separate company that has its own corporate structure. Why do you think the corporation does this?

  15. Role of Government • Government has a duel role as an economic institution • Direct Role: produce goods and services to consumers • Ex. TVA – Tennessee Valley Authority • Provides electric power for 7-state area • Military, local/state police, firefighters, EMTs, schools, courts • Indirect Role: acts as an umpire/referee to make sure the market economy operates as the rules say it should • Ex. Regulation of public utilities • Social Security, financial aid to college students, veterans benefits

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