Chapter 3 Business Organizations Economics and You Do you work at - - PowerPoint PPT Presentation

Chapter 3 Business Organizations

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Economics and You

Do you work at a business? Belong to a church? Participate in a club? Chances are these institutions play a significant role in your life.

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Introduction

• There are three main forms of business
• rganizations in the economy today–the

sole proprietorship, the partnership, and the

• corporation. 
• Each offers its owners significant

advantages and disadvantages.

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Sole Proprietorships

• A sole

proprietorship is a business run by

• ne person. It is

the smallest type

• f business
• rganization in

size, yet the most numerous and profitable.

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Sole Proprietorships (cont.)

• The advantages to sole proprietorships

are: ease of start-up; ease of management; owner gets all the profits; business itself pays no income taxes; taxes only on the owner’s personal income; psychological satisfaction of

• wning one’s business; ease of closing

the business.

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Sole Proprietorships (cont.)

• The disadvantages to sole

proprietorships are: the owner has unlimited liability; it is hard to raise financial capital; owner may not be able to hire enough personnel or stock enough inventory to operate efficiently; owner may have limited managerial experience; hard to attract qualified employees; business has limited life and legally stops existing when the owner dies or sell the business.

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Partnerships

• A partnership is a business jointly owned

by two or more persons. It is the least and has the second smallest proportion of sales and net income. 

• General partnerships are a type of

business in which all partners are involved in the management and

• finances. In a limited partnership, at least
• ne partner is not involved in
• management. This partner may have

helped to finance the business.

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Partnerships (cont.)

• Articles of the partnership document spell
• ut how the partners divide up the profits
• r losses. 
• The advantages of partnerships are: the

ease of start-up; ease of management; no special taxes on a partnership; easier to raise capital through bank loans or new partner; larger size aids efficient

• perations; easier to attract skilled

employees.

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Partnerships (cont.)

• The disadvantages of partnerships are:

partners are responsible for the acts of each and every partner, except in a limited partnership where the limits are spelled out; limited life of partnerships ends if a partner leaves; potential for partner conflicts.

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Corporations

• Corporations receive a charter, or

government permission to create a corporation, which includes details about stock ownership. 

• A corporation is a business organization

recognized by law as a separate legal entity with all the rights of an individual. 

• Investors who buy common or preferred

stock in a corporation become owners of the firm.

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Corporations (cont.)

• The disadvantages of corporations are; a

charter is expensive; ownership and management are separated so shareholders have little say in running the business; corporate income is taxed twice; subject to government regulation.

• The advantages of corporations are:

ease of raising capital; professionals may run the firm instead of the owners (shareholders); owners have limited liability; business’s life is unlimited; easy to transfer ownership. 

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Corporations (cont.)

Figure 3.2 Stock Ownership Figure 3.2 Stock Ownership

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Corporations (cont.)

Figure 3.3 Ownership, Control, and Organization of a Typical Corporation Figure 3.3 Ownership, Control, and Organization of a Typical Corporation

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Government and Business Regulation

• Federal and state governments regulate

interest rates and utility rates. 

• State governments may offer industrial

development bonds to help industries relocate or tax credits to draw

• investments. 

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Introduction

• A business can grow in one of two ways. 
• First it can grow by reinvesting some of its
• profits. 
• A business can also expand by engaging in

a merger–a combination of two or more businesses to form a single firm.

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Growth Through Reinvestment

• Business revenue can be used to invest in

factories, machinery, or new technologies. 

• Before reinvesting, a business must

estimate its cash flow. The business first records its total sales and then subtracts all expenses, taxes, and depreciation. The result is the business’s net income.

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Growth Through Reinvestment (cont.)

• Depreciation is added back to net income

to get cash flow, or the bottom line—the real measure of business profit. 

• Business owners then decide whether part
• f the cash flow should be reinvested in the

business to generate additional sales and more profits.

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Growth Through Reinvestment (cont.)

Figure 3.4 Figure 3.4

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Growth Through Mergers

• When firms merge, one gives up its

separate legal identity. 

• A company may merge with another to

grow faster; become more efficient; acquire

• r deliver a better product; eliminate a rival;
• r change its image. 
• A horizontal merger is the joining of firms

that make the same product. A vertical merger is the joining of firms involved in different stages of manufacturing or marketing.

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Growth Through Mergers (cont.)

• A conglomerate is

composed of four or more businesses, each making unrelated products, none of which is responsible for a majority of its sales.

Figure 3.6 Conglomerate Structure

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Growth Through Mergers (cont.)

• A multinational is a

corporation with manufacturing and service operations in several countries, which are subjected to each nation’s business regulations.

Figure 3.6 Conglomerate Structure

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Introduction

• Most businesses use scarce resources to

produce goods and services in hopes of earning a profit for their owners. 

• Other organizations operate on a “not-for-

profit” basis. 

• A nonprofit organization operates in a

businesslike way to promote the collective interests of its members rather than to seek financial gain for its owners.

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Community and Civic Organizations

• A nonprofit organizations is in business to

promote its members’ collective interests, not to seek financial gain. 

• Many nonprofit organizations incorporate to

take advantage of a corporation’s unlimited life and limited liability 

• If the nonprofit organization has money

after its expenses are paid, its board of directors may apply the surplus to other projects that further the organization’s mission.

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Cooperatives

• A cooperative is

voluntary association of people who carry on an economic activity that benefits its members.

Figure 3.7 Cooperatives in the United States Figure 3.7 Cooperatives in the United States

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Cooperatives

• Consumer cooperatives buy food and other

necessities in bulk. Members donate time to the co-op, and members pay lower prices for goods. 

• Service cooperatives, such as credit

unions, offer services to its members at lower rates. 

• Producer cooperatives help members, such

as farmers, promote or sell their products.

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Labor, Professional, and Business Organizations

• Labor unions represent workers’ interest

and negotiate with management through collective bargaining.. 

• Professional associations set standards for

those in the profession and influence government policies on issues concerning members’ interest. 

• Business associations are industries or

trade associations that represent specific kinds of businesses. Some business associations, such as the Better Business Bureau, help protect the consumer.

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Government

• Government plays a direct role in the

economy when its agencies produce and distribute goods and services to consumers such as the Tennessee Valley Authority (electricity), and the U.S. Postal Service (stamps and mail delivery). 

• Government corporations have boards of

directors, but Congress’s money rather than investor’s money supports their work. 

• Government plays an indirect role when it

regulates public utilities or when it grants money to people in the form of Social Security and student financial aid.

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