Downloaded 13 times
Uploaded byFatin Nazihah Aziz
Topic 5 - Business Organization
This document provides an overview of different types of business organizations, including sole proprietorships, partnerships, corporations, and cooperatives. It discusses the key characteristics of each type of organization such as ownership structure and liability. The document also covers topics like forming partnerships and corporations, issuing stocks, mergers and acquisitions, the goals of business firms, and the role of government regulation. Finally, it outlines some Islamic principles for business organizations including emphasizing ethics, prohibiting uncertainty in transactions, and disallowing fraud.
More Related Content
Similar to Topic 5 - Business Organization
Topic 5 - Business Organization
- 1. PSCI 1500: Introduction toEconomics Business Organization
- 2. OVERVIEW OF BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS Business • Organization established to produce and sell goods and services. • The key differences between businesses are the Liability and Legal Forms.
- 4. OVERVIEW OF BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 ofBusiness 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 ofBusiness 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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 BUSINESSORGANIZATIONS 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).