Business OrganizationsChapter 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: Sole Proprietorship Partnership Corporation

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

Sole Proprietorship Strengths

Easy to start Easy to manage Owner keeps profits No business income tax Personal freedom Easy to get of business

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

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.

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

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

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

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

Corporate Structure

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

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

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?

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