PSCI 150 : INTRODUCTION TO ECONOMICS Bachelor of Political Science, KIRKHS, IIUM

1. PSCI 1500:
Introduction to Economics
Business Organization

2. OVERVIEW OF BUSINESS ORGANIZATIONS
The economy can be divided into two business sectors:
1. The Public Sector
• Made up of central government, local government,
and businesses that are owned by government
2. The Private Sector
• Firms that are owned by private individuals:
• Sole Traders/Proprietors
• Partnerships
• Private Limited Companies (Ltd)
• Public Limited Companies (PLC)

3. OVERVIEW OF BUSINESS ORGANIZATIONS
Business
• Organization established to produce and sell goods
and services.
• The key differences between businesses are the
Liability and Legal Forms.

4. OVERVIEW OF BUSINESS ORGANIZATIONS
Liability
i. Unlimited Liability
 Business owner’s personal assets are subject to
use as payment for business debts.
 Personal assets can be seized if the business's
assets are insufficient to satisfy claims against it.

5. OVERVIEW OF BUSINESS ORGANIZATIONS
Liability
ii. Limited liability
 Business owner’s financial liability is limited to the
value of a person's investment in the business.
 There is a legal separation between ownership and
liability since a stockholder can lose not more than
what he paid for the shares of ownership,
regardless of the firm's financial obligations.

6. Legal Forms of Business
SOLE PROPRIETORSHIP
Characteristics
• owned and operated by one person
• that one person bear liability which is legally inseparable
from the business
• the resources for operating business are subject to the
owner’s personal capacity
OVERVIEW OF BUSINESS ORGANIZATIONS

7. OVERVIEW OF BUSINESS ORGANIZATIONS
Advantages of sole proprietorships
• easy start-up
• flexible (can make decisions quickly)
• the profits are owned by the owner
• the owner is the boss
• little formality (but still maintain business records)

8. OVERVIEW OF BUSINESS ORGANIZATIONS
Disadvantages of sole proprietorships
• unlimited liability – the owner’s personal and
business assets are subject to liability
• difficult to raise capital - financing from single
owner
• diseconomies of scale (expensive inventory –
high cost)
• limited management experience
• Owner is the employee, also hard time finding
qualified employees to fill in the need of
business
• limited business lifespan

9. Legal Forms of Business
PARTNERSHIP
Organization of a business that is similar to a sole
proprietorship but has two or more owners.
Characteristics
• Involves two or more partners, thus allows for the pooling of
money, experience, and talent.
• Must have at least one general partner who holds unlimited
legal liability for the activities of the business.
• Can attract additional resources through limited partner
contributions.
OVERVIEW OF BUSINESS ORGANIZATIONS

10. OVERVIEW OF BUSINESS ORGANIZATIONS
Forming a Partnership
Legal papers drafted must specify:
• how profits are divided.
• how new partners may join.
• how property is divided if the partnership ends.

11. OVERVIEW OF BUSINESS ORGANIZATIONS
Forming a Partnership
There are two types of partners:
i. General Partner
• There must be one general partner (responsible
for operating the business) and have unlimited
liability
• Often the general partner is a corporation
ii. Limited Partners
• Passive investors - Contribute money only to the
business, and share in the profits

12. OVERVIEW OF BUSINESS ORGANIZATIONS
Advantages of partnerships
• easy to start and manage
• all partners get the share of the profits
• can attract financial capital easier than sole
proprietorships
• easier to attract qualified employees
• combine the talents and energies of all the
partners
• combine financial resources of the partners
• limited partner only lose original investment

13. OVERVIEW OF BUSINESS ORGANIZATIONS
Disadvantages of partnerships:
• responsible for the acts of all the other partners
• conflict between partners may lead to the end of
partnership
• general partner have to pay off debts in case of
bankruptcy
• some formality does exist –through a formal
agreement
• It can be legally challenging to disassociate
ones’ self from and/or dissolve a partnership
arrangement

14. OVERVIEW OF BUSINESS ORGANIZATIONS
Legal Forms of Business
CORPORATIONS
A form of business organization that is recognized by the
law as having all the legal rights of an individual (own a
name business, functions performed by individuals, have
the right to buy & sell property, enter into legal contracts,
and to sue & be sued)

15. OVERVIEW OF BUSINESS ORGANIZATIONS
Legal Forms of Business
CORPORATIONS
Characteristics
• Governed by the Board of Directors, managed by
professional managers and owned by shareholders
• Flexible and long term running since it can issue stocks,
bonds and other hybrid securities to raise capital for R&D
and overall corporate growth

16. OVERVIEW OF BUSINESS ORGANIZATIONS
How a corporation is formed and run
1) Approval of the government.
2) If approved, a charter will issued.
3) The charter states the name of the company, the
address of the business, how many shares of
stock can be issued, and other specific features
of the business.
4) Co-operatives are owned by their staff, who are
known as ‘members’ of the firm
5) Profits and loss are shared amongst the members

17. OVERVIEW OF BUSINESS ORGANIZATIONS
Stock
• Stock – a certificate of ownership in a firm.
• Stockholders/shareholders – investors in a
corporation (they own stock).
• The money from the stockholders (investors) is
used to set up the firm. This money is called
financial capital.

18. OVERVIEW OF BUSINESS ORGANIZATIONS
Types of Stock
1. Common Stock
Basic form of ownership in a corporation. Each
share is worth one vote for the board of directors,
who run the company, Pays a dividend dependent
on the profit of a firm after all other financial
obligations have been met.

19. OVERVIEW OF BUSINESS ORGANIZATIONS
Types of Stock
2. Preferred Stock
Pays a stated dividend to its holder before
dividends are issued to common stockholders, non-
voting shares of stock, but these shareholders
receive profits before common stockholders.

20. OVERVIEW OF BUSINESS ORGANIZATIONS
Advantages of Corporations
• easy to raise financial capital:
i. sell stock
ii. issue bonds
• professionals/ experts in its board of directors
• limited liability – shareholders only lose money
invested
• unlimited life – the firm stay alive if shareholder dies
• immortal – issue securities with very long terms to
maturity
• potential to attract great amounts of financing by
expanding the base of shareholders

21. OVERVIEW OF BUSINESS ORGANIZATIONS
Disadvantages of Corporation
• difficult to start
• shareholders have little say about how to run the
business
• subject to government regulation.
• formality and structure may slow the decision
making
• corporate taxation – shareholder’s income
(dividends) are paid after-tax and then are taxed
again on the shareholders

22. OVERVIEW OF BUSINESS ORGANIZATIONS
Business Ownership of Business
Merger
• Also called an acquisition.
• Acquiring of one company by another.
 Conglomerate Merger
Corporation acquires another corporation that
produces unrelated goods and services.
 Vertical Merger
Corporation acquires another corporation that
supplies its inputs or distributes its products.
 Horizontal Merger
Corporation acquires another corporation that
competes in the same market.

23. OVERVIEW OF BUSINESS ORGANIZATIONS
Why Merge?
1. Grow faster
2. Become more efficient
3. Acquire or deliver a better product
4. Eliminate a rival
5. Change image
What is the Goals of Business Firms?
Profit maximization or loss minimization
(Profit or loss = Revenue – Cost)
Revenue is the money or income that a company receives
from selling its product.

24. OVERVIEW OF BUSINESS ORGANIZATIONS
The Role of Government
Direct Role of Government
• government supplies good or service that also
competes with private businesses.
• many government agencies are organized as the
government-owned corporations.

25. OVERVIEW OF BUSINESS ORGANIZATIONS
The Role of Government
Indirect Role of Government
• government plays an indirect role when it acts as
an intermediary to make sure the market
economy operates smoothly and efficiently.
• for example, the regulation of public utilities,
investor or state-owned companies that offer
important products to the public, i.e. water or
electricity.

26. OVERVIEW OF BUSINESS ORGANIZATIONS
Islamic principles on business organizations
Islam encourages trade and commerce. In
fact, Prophet Mohammad PBUH was himself
engaged in this profession before he became a
prophet. He was a successful businessman. Known
for integrity, he bore the honorific title, the
Trustworthy.
The Quran states:
“God has permitted for you trade .....”
(2:275)

27. OVERVIEW OF BUSINESS ORGANIZATIONS
Islam stressed business ethics and Shari’ah’s
limitation as the pre-requisite in forming any business
organization.
1. Business Ethics in Islam
• Trustworthiness
• Generosity and leniency
• Honouring and fulfilling business obligations
• Honesty and truthfulness
• Mutual consent in business transactions
• Mutual respect
• Justice and fairness

28. OVERVIEW OF BUSINESS ORGANIZATIONS
2. Shari’ah’s limitation
i. Prohibits from producing, selling and purchasing of
goods, which are prohibited in Islamic law, i.e.
alcohol, drugs
ii. Prohibition any kind of transaction involving
uncertainty, or unspecified quantity, i.e.
acceptance of money for fish in the river or bird in
the air as there is element of uncertainty. However;
if the element of uncertainty is very small, the
transactions are permissible.

29. OVERVIEW OF BUSINESS ORGANIZATIONS
2. Shari’ah’s limitation
iii. Condemn hoarding to make high profit at the cost
of public interest. Islam, however, allows normal
trade - buying and selling of goods again and again
at a reasonable profit.
iv. Prohibits fraud in business dealings. The Prophet
has said: "Sell the good and bad separately. He
who deceives is not of us" .The sin of fraud is
greater if the seller supports it by swearing falsely.
The Prophet has said, "Swearing produces ready
sale but blots out blessing".

30. OVERVIEW OF BUSINESS ORGANIZATIONS
2. Shari’ah’s limitation
iii. Prohibits buying or selling what's legal if we know
that it will be used for illegal use: weapons,
abortion drugs, drugs to be sold to drug addicts and
so on.
iv. Muslims are not allowed to pay or receive interest.
The Quran is explicit about it and says, "God has
permitted for you trade and prohibited interest"
(2 : 275).