Economics Chapter 3:
Business Organizations
Chapter 3: Business Organizations
Form of Business Organization
Advantages
Disadvantages
1. Sole Proprietorships – a
business owned and run by one
person.
Most common form of business organization in
the U.S.
Are the smallest in size and easy to manage.
Start up is easy – if you have an idea
or an opportunity to make a profit, all
you have to do is decide to go into
business, then do it.
Relative ease of management –
decisions are made quickly, without
having to consult a co-owner.
Owner enjoys all the profits – don’t
have to share
Does not pay separate business
income tax – is not recognized as a
separate legal entity. Pay only
personal income tax on profits.
Psychological satisfaction – being
own boss, seeing name in print.
Ease of getting out of business – can
sell or decide to close.
Owner has unlimited liability – the
owner is personally and fully
responsible for all losses and debts of
business.
Difficult to raise financial capital –
personal financial resources available
is limited and banks usually don’t
like to loan money to new or very
small businesses.
Size and Efficiency – because of
limited capital, the proprietor may
not be able to hire enough personnel
or stock enough inventory to operate
business efficiently.
Proprietor often has limited
managerial experience
Difficulty of attracting qualified
employees because of limited
financial capital, may not be able to
pay competing wages.
Limited Life – means the firm
legally ceases to exist when the
owner dies, quits, or sells the
business.
Chapter 3: Business Organizations
Form of Business Organization
2. Partnerships – is a business
jointly owned by 2 or more
persons.
2 types of partnerships:
1.General Partnership – most common
form – is where all partners are
responsible for the management and
financial obligations of the business.
2.Limited Partnership – at least one
partner is not active in the daily running
of the business even though they may
have contributed funds to finance the
operation.
Because more than one owner is
involved, legal papers called articles of
partnership are usually drawn up to
specify arrangements between partners.
Advantages
Disadvantages
Ease of start up – like sole
proprietorships.
Ease of management – each
partner brings in different
expertise to the business.
Lack of special taxes – each
partner pays individual income
taxes on profits.
Can attract financial capital
easier than proprietorships – can
bring in more partners.
More efficient operation –
because bigger than sole
proprietorships.
Easier to attract top talent –
because most partnerships offer
specialized services.
Each partner is fully
responsible for acts of all other
partners, including personal as
well as business debts of all
partners.
Limited liability – in the case
of a limited partnership, the
limited partner loses only what
they invested, whereas, the
other partners make up the rest
of the losses.
Has limited life – when a
partner dies or leaves, the
partnership must be dissolved
and re-organized.
Conflict between partners –
may not always get along,
especially if a large partnership.
Chapter 3: Business Organizations
Form of Business Organization
Advantages
Disadvantages
3. Corporations – is a form of business organization
recognized by law as a separate legal entity having all the
rights of an individual.
Must file a charter – a government document that gives
permission to create a corporation. States the name of the
corporation, address, purpose of the business, and other
features of the business.
The charter also specifies the number of shares of stock,
or ownership certificates in the firm.
Stocks are sold to investors, called stockholders.
The money is used to set up the corporation. If the
corporation is profitable, it may eventually pay dividends
– a check representing a portion of profits.
Common Stock – represents basic ownership of a
corporation – 1 share = 1 vote for each share of stock to
elect board of directors whose duty is to direct the
corporation’s business by setting broad policies and goals.
Also hires professional staff to run the business on a daily
basis.
Preferred Stock represents non-voting ownership shares
of the corporation. These stockholders receive their
dividends before common stockholders. If corporation
goes out of business and if some property and funds
remain after all debts are settled, preferred stockholders
get their investment back before common stockholders.

Ease of raising financial capital – can
sell additional stock, is a bond – is a written
promise to repay the amount borrowed at a
later date. The amount borrowed is known as
the principal. The corporation pays interest –
the price paid for the use of another’s money.
Can hire professional managers to
run the firm – owners can own a portion of
the business without having to know a great
deal about the business itself.
Limited liability – stockholders only
lose the money they invested in stock.
Unlimited life – corporation
continues to exist even when ownership
changes.
Ease of transferring ownership –
stockholder simply sells his/her stock to
someone else.
Expense and difficulty of getting charter –
depends on the state, attorney fees, and filing
expenses can cost several thousand dollars.
Shareholders have little say about how the
business is run after they vote for board of
directors.
Double taxation of corporate profits –
dividends are taxed twice; once as corporate
profit and again as personal income.
Subject to more government regulation than
other forms of businesses. Must register
with the state in which they are chartered. If
the corporation wants to sell stock to the
public, it must register with the Federal
Securities and Exchange Commission (SEC).
Must provide financial information on a
regular basis to the public.
Chapter 3: Business Organizations
Business Growth and Expansion – 2 ways
– Growth through investment – businesses can
grow by re-investing their cash flows (the total
amount of new funds the business generates
from operations) in plant, equipment, and new
technology.
– Growth through business mergers – most
mergers take place because firms want to
become bigger, more efficient, acquire a new
product, catch up to or eliminate a competitor,
or change its corporate identity.
Chapter 3: Business Organizations
Types of Mergers
– Horizontal Mergers – takes place when 2
firms that produce similar products
come together.
– Vertical Mergers – is one that involves 2
or more firms at different stages of
manufacturing or marketing.
Chapter 3: Business Organizations
Types of Mergers (continued)
– Conglomerates – is a large firm that has at
least 4 different businesses, none of which is
responsible for a majority of sales.
– Multinationals – can be an ordinary corporation
or a conglomerate, but it has manufacturing or
service operations in several different
countries.
Multinationals introduce new technology, generate
jobs, and produce tax revenues for the host
countries.
Chapter 3: Business Organizations
Other Organizations:
– Non-Profit Organizations – function like a business, but
on a non-profit basis to further a cause or for the
welfare of their members.
Examples are schools, hospitals, churches, welfare
groups, and adoption agencies.
Provide goods and services to their members while
they pursue other rewards such as improving
educational standards and helping those in need.
Their activities often produce revenue in excess of
expenses, but they use the profits to further the work
of their institution.
Chapter 3: Business Organizations
Other Organizations (continued)
– Cooperative or Co-Op – is one of the major non-profit
organizations. The Co-Op can be organized to provide
goods and services, or to help producers.
– Professional Associations – work to improve the working
conditions, skill levels, and public perceptions of their
profession.
Examples are the American Medical Association
(AMA) and the American Bar Association (ABA).
Chapter 3: Business Organizations
Other Organizations (continued)
– Labor Unions – an organization of workers
formed to represent its members’ interests in
various employment matters.
– Business Associations → Chamber of
Commerce – promotes the welfare of its
members and of the community.
Better Business Bureau – association that
helps to protect the consumer.
Chapter 3: Business Organizations
Government plays a direct role in the
economy when it provides goods and
services directly to consumers; it
plays an indirect role when it
provides social security, veteran’s
benefits, unemployment
compensation, and financial aid to
college students or when it regulates
businesses.
Chapter 3: Business Organizations
Examples of Direct Role of Government
– Called direct because the government supplies
a good or service that competes with private
businesses.
– FDIC (Federal Deposit Insurance Corporation)
– TVA (Tennessee Valley Authority) supplies
electric power for almost all of Tennessee.
– USPS (United States Postal Service)
– State and local governments provide police,
fire protection, rescue services, schools, and
court systems.
Chapter 3: Business Organizations
Examples of Indirect Role of Government
– The government plays an indirect role when it
acts as an umpire to make sure the market
economy operates smoothly and efficiently.
– Regulations of public utilities – water or
electricity
– Social security payments, veteran’s benefits,
financial aid to college students, and
unemployment compensation.
Chapter 3: Business Organizations
The End