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Economics 3.1
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Economics 3.1


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  • 1. Chapter 3 Business Organizations
  • 2. 3-1: Forms of Business Organization
    • Sole Proprietorships
      • Most common form of business organization in the U.S. (71.6% of all businesses)
      • Business owned and run by a single individual.
      • Smallest form of business.
      • Have the smallest fraction of total sales. (4.6% of all sales)
      • Relatively profitable. (20.9% net income)
      • Easiest form of business to start because it involves almost no requirements except for occasional business licenses and fees.
  • 3.
      • 7. Advantages of Sole Proprietorships
        • Easy to start up.
        • Management is simple.
        • Owner keeps all the profits.
        • Does not have to pay separate business income taxes because the business is not recognized as a separate legal entity.
        • Psychological satisfaction from being own boss.
        • Easy to get out of business.
      • 8. Disadvantages of Sole Proprietorships
        • Unlimited liability. Owner is personally and fully responsible for all losses and debts of the business.
        • - Owner’s personal possessions may be taken away to satisfy business debts.
  • 4.
        • 2. Difficult to raise financial capital.
        • - Cost a lot of money to start up a business.
        • - Banks are often reluctant to lend money to new or very small businesses.
        • 3. Small and inefficient.
      • 4. Proprietor often has limited managerial experience.
      • 5. Difficulty of attracting qualified employees.
      • 6. Limited life.
      • - Business ceases to exist when owner dies, quits or sells the business.
  • 5.
    • 2. Partnerships
      • Business jointly owned by 2 or more individuals.
      • Least numerous form of business organizations in the U.S. (8.5% of all businesses)
      • Have the second smallest fraction of total sales. (11.8% of all sales)
      • Second most profitable. (25.7% of all net income)
      • Shares many of the same strengths and weaknesses of a sole proprietorship.
      • 2 types of partnership
        • General partnership – all partners are responsible for the management and financial obligations of the business.
        • Limited partnership – at least one partner is not active in the daily running of the business and has limited responsibility for the debts and obligations of the business.
  • 6.
      • Forming a partnership
        • Formal legal papers called Articles of Partnership are usually drawn up to specify how profits and losses are to be divided and obligations of the partners.
    • 8. Advantages
    • 1. Ease of start-up.
    • 2. Ease of management.
    • 3. Lack of special taxes.
    • 4. Can attract financial capital more easily than proprietorships.
    • 5. More efficient operations with slightly larger size.
    • 6. Easier to attract top talent.
  • 7.
      • Disadvantages
      • 1. Each partner is fully responsible for the acts of all other partners.
      • In a limited partnership, a partner’s responsibility for the debts of the business is limited by the size of their investment in the firm.
      • 2. Limited life.
      • 3. Potential for conflict between partners.
  • 8.
    • Corporations
      • Second smallest number of business organizations in the U.S. (19.9% of all businesses)
      • Largest fraction of total sales. (83.6% of all sales)
      • Most profitable. (53.4% of all net income)
      • Recognized by the law as a separate legal entity with all the rights of an individual.
        • Can buy and sell property.
        • Enter into legal contracts.
        • Sue and be sued.
  • 9.
      • 5. Forming a Corporation
        • Very formal legal arrangement.
        • Must obtain a charter, or written government approval to establish a corporation.
        • Charter also specifies the number of shares of stock, or ownership certificates in the firm. Shares are sold to stockholders or shareholders.
      • 6. Corporate Structure
      • 1. Common stock represents the basic ownership of a corporation.
      • - Stockholder has one vote per one share of stock.
      • - Vote elects Board of Directors who sets broad policies and goals.
      • - Board of Directors hire management team to run the business on a daily basis. chart
  • 10.
      • 2. Preferred stock represents nonvoting ownership shares of a corporation.
      • - Owners of preferred stock have no right to elect Board of Directors.
      • - Receive dividends before common stockholders. A dividend is a check that transfers a portion of the company profits to stockholders, usually quarterly.
      • - If corporation goes out of business, preferred stockholders get their investment back before common stockholders. the skinny on...
      • 3. Advantages of Corporations
      • 1. Easy to raise financial capital.
      • - sell additional stock
      • - sell bonds
  • 11.
      • 2. Limited liability for its owners.
      • - Corporation is responsible, not its owners.
      • 3. Directors can hire professional managers to run the firm.
      • 4. Unlimited life.
      • 5. Ease in transferring ownership.
      • 4. Disadvantages of Corporations
      • 1. Double taxation of corporate profits.
      • 2. Difficulty and expense of getting a charter.
      • 3. Owners have little voice in how the business is run.
      • - Separation of ownership and management.
      • 4. Subject to more government regulation.