Business
Organizations
Forms of Business
Organizations
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The most common form of business in the
United States is a sole proprietorship
Defined as a business run or owned by 1
person
They are also the smallest in size (number of
employees and revenue)
They earn about 1/6 of the net income earned
by all businesses
ADVANTAGES
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Ease of startup
Ease of management
Owner enjoys the profits
of successful management
The owner does not have
to pay separate business
income taxes
Psychological satisfaction
Ease of getting out of
business
DISADVANTAGES
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The owner has unlimited
liability
Difficulty in raising
financial capital
Size and efficiency
The proprietor often has
limited managerial
experience
Difficulty in attracting
quality employees
The sole proprietorship is
limited life
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Partnership is another type of business
It is a business that is jointly owned by 2 or
more people
There are 2 types of partnerships
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General- all partners are responsible for the
management and financial obligations of the
business
Limited- at least 1 partner is not active in the daily
running of the business, although he or she may
have contributed funds to finance the operation
ADVANTAGES
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Ease of establishment
Ease of management
Lack of special taxes
They usually attract
financial capital more
easily than
proprietorships
Slightly larger in size,
making for more efficient
operation
They find it easier to
attract top talent into their
organizations
DISADVANTAGES
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Each partner is fully
responsible for the
actions of the other
partners
Limited life
Potential conflict
between partners
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It is a form of business organization recognized by law as a
separate legal entity, having all the rights as an individual
They account for 1/5 of the firms in the United States but
90% of all the sales
It is a very formal procedure to form and it must receive
permission from the United States in order to be formed
The government gives it a charter (a document that gives
permission to form a corporation)
The charter specifies the amount of stock a corporation may
have
Stockholders, or share holders, then buy stock in the
corporation and becomes an owner with certain owner
rights
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There are 2 basic kinds of stock purchased in a
corporation
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Common Stock- represents basic ownership and the
owner generally receives 1 vote for each share of
stock they own in order to elect a board of directors;
can receive dividends
Preferred Stock- represents non-voting ownership
shares of the corporation; has priority over common
stockholders for dividends
ADVANTAGES
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The ease of raising
financial capital
The directors can hire
professional managers to
run the firm
The corporation provides
limited liability for its
owners
Unlimited life
The ease of transferring
ownership
DISADVANTAGES
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The difficulty and expense
of getting a charter
The owners and
shareholders have little
say in how the business is
run after they have voted
in a board of directors
Double taxation
They are subject to more
government regulation
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Government can regulate corporations in order
to protect the consumers’ interests
States have limited regulations lately in order
to encourage competition
States actively recruit corporations to come to
their state
They can offer tax credits, or a reduction in
taxes, in return for the creation of new jobs or
new business investment
Business Growth
and Expansion
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A business must estimate its cash flow first by
finding its net income (subtracting all of its
expenses, including taxes, from its revenues)
These expenses include any and all costs, as
well as depreciation (how much value an item
loses through general wear and tear)
Cash flow = sum of net income and
depreciation (non-cash charges)
Companies must then reinvest its cash flow in
order to be able to produce more products
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When firms merge (join together), 1 of the
firms gives up its corporate identity
Mergers happen for multiple reasons. For
example:
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Managers feel they cannot grow as fast they would
using the funds they are currently generating
internally
Efficiency
The need to acquire new product lines
To catch up with, or even eliminate, their rivals
To lose its corporate identity
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There are generally 2 types of mergers:
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Horizontal merger- when 2 or more firms that produce the
same kind of product join forces
Vertical merger- When firms involved in different steps of
marketing or manufacturing merge
A conglomerate is when a corporation becomes so
large through mergers and acquisitions
Diversification is the main reason for conglomerates
Other large corporations are also known as
multinationals basically meaning they manufacture or
service operations in a number of different countries
Multinationals are important because they can sell
goods and produce goods in many different places
Other Organizations
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Community and Civic Organizations are nonprofit organizations (schools, churches,
hospitals, welfare groups, and adoption
services)
They provide goods and services to the public
while pursuing other rewards which are not
cash driven
They do not issue stock, pay dividends, or pay
income taxes
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Cooperatives (or Co-ops) are non-profit
organizations that carry out economic activity
that will benefit its members
Some types of Cooperatives are as follows:
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Consumer Cooperatives- Voluntary associations
that buy bulk amounts of goods such as food and
clothing on behalf of its members
Service Cooperatives- Provides services such as
insurance, credit, and baby-sitting to its members
Producer Cooperatives- Helps members promote or
sell their products.
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Labor Unions are organizations workers form to
represent its members’ interests in various
employment matters
They generally participate in collective bargaining
by negotiating with management over various
issues for its members
Professional associations are a group of people in a
specialized occupation that work to improve
working conditions
Business associations are groups used to promote
the interest of businesses, for example, the
Chamber of Commerce or Better Business Bureau
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Government is a non-profit economic
organization
TVA Power Company, is an example of a
Government company that provides a direct
service to the people, competing with private
power companies
FDIC (Federal Deposit Insurance Company) is
another example by insuring deposits in banks
U.S. Post Office is another example
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Government also acts indirectly by way of making
sure the market economy operates smoothly
Public utilities are regulated by the government in
order to deliver important products to the public at
affordable prices for consumers
It also plays an indirect role when it grants money
to people in the form of Social Security, veterans
benefits, financial aid to college, and
unemployment
This power is used to influence the production of
goods and services