Unit III

Business
Organizations

Business Organizations different ways of organizing

and running a business where goods and services are
sold.
- There many forms of Business Organizations in the U.S.:
Sole Proprietorship, Partnership, Corporation,
Cooperatives, and Non- Profit.
A). Sole Proprietorship/Proprietorship business
owned and run by
one person.
1. Advantages (strengths):
Easy to form
No profit sharing
Freedom of management
No separate income tax paid
Satisfaction of being your own boss
Easy to get out of business
2. Disadvantages (weaknesses):
Unlimited Liability
Difficult to raise financial capital

 Limited life, when owner dies or sells, original

business ceases to exist
Size and efficiency limited
Usually has limited managerial experience
Difficult to attract top talent
3. Aspects of Business: Inventory, Expenses, Receipts,
Overhead, Advertising, Risk, Bookkeeping, Assets &
Liability, Bankruptcy
B). Partnership business jointly owned by 2 or more
people
1. Articles of Partnership legal agreement outlining
the type of partnership.
2. General Partnership - all partners responsible for
managing and
obligations of the business.
3. Limited Partnership at least 1 partner is not active
in daily
business but may have contributed funds to
finance the firm, and limited liability.

4.

5.

Advantages (strengths):
Easy to form
Specialization of management possible
More financial capital available than proprietorship
No separate income tax paid
Usually runs more efficient
Easier to attract top talent than proprietorship
Disadvantages (weaknesses):
Unlimited Liability
Partners are liable for actions of other partner(s)
Potential conflicts between partners
Shared decision making slows process
Limited life, partner dies or sells, original business
ceases to exist

C). Corporation a business organization that is legally

recognized as a separate entity having the same legal
rights as a person.

1. Charter government document giving permission to

form a
corporation.
2. Stock ownership certificates in the corporation.
(a). Common Stock- basic ownership that receives a
vote.
(b). Preferred Stock nonvoting ownership, get
investment back
first it firm fails.
3. Stockholders/Shareholders investors who buy
stock.
4. Dividend check representing a part of the
corporate earnings a
stockholder will get if a profit is
made.
5. Bond a written promise to repay borrowed money.
6. Principle amount borrowed.
7. Interest the price paid for the use of someone
elses money.
8. Advantages (strengths):
Ease of raising financial capital with sale of stocks

 Ownership may be transferred easily by selling stock

Unlimited life, when owner or CEO dies or sells,
another is selected
9. Disadvantages (weaknesses):
Difficult to form, expensive to get charter
Separation of ownership and management
More govt regulation than proprietorship or
partnership
Owner has little say in day to day management of
firm
Corporate tax must be paid to federal and state
D). Franchises when a business has a contract with
another business to sell its products and use its name
E). Business Growth and Expansion:
1. Reinvest of funds
2. Growth through Mergers:

b). Reasons=>Efficiency, growth, acquire new product

lines, eliminate rivals, and to lose its corporate identity.
(i). Horizontal Merger when 2 or more firms that
produce the
same product combine.
(ii). Vertical Merger when firms involved in different
steps of
production combine.
3. Acquisition -process of acquiring a company to build
on strengths
of acquiring company in a quicker and
profitable manner.
F). Big Business:
1. Conglomerate a firm that has at least 4
businesses, each making
unrelated products. (none
have majority of sales).
-Diversification is one of the main reasons for
merging.
Sales & profits will be protected if they
dont put all eggs in one basket.
2. Multinationals a corporation that has

G). International Trade and Market Structures:

1. European Union (EU) organization of European
countries that
encourage economic activity as a single
market to increase free
trade.
2. NAFTA (North American Free Trade Agreement)
agreement between the U.S., Canada, and Mexico
dropping tariffs and
restrictions between the
countries.
3. Market Structures the extent in which competition
prevails in an
industry or market.
- There are 4 types of Market Structures:
(i). Perfect competition perfect from the
consumers
perspective.
Prices are low, quality is high, and large numbers
of sellers
Firms are price takers.
The product is identical; therefore buyers and
sellers are
linked at random.

 Farming and fishing are examples.

(ii). Monopolistic Competition has same conditions of
perfect,
except for identical products.
Many firms are in the industry.(athletic footwear,
clothing).
Products are similar but differentiated.
Buyers and sellers are no longer linked at
random, buyers have preferences.
Brand loyalty or recognition is important
Firms promote and advertise a great deal( Non
price competition).
Firms may gain some control over price.
(iii). Oligopoly- A few suppliers are in the industry, 3 or
4 dominate
Auto, steel, fast food, airline, cell phone,
&internet industry

 They tend to act together. Collusion (a formal

agreement to set prices and cooperate), Price
Fixing ( agreement to charge same price, usually
higher than under competition) and dividing
market into shares is sometimes used. Because
collusion restrains trade, it is illegal.
Sometimes price wars occur.

( iv). Monopoly - opposite perfect competition,

extreme, and rare to
have a pure monopoly.
Cable T.V. and local telephone are close to being
pure.
There are different types of monopolies:
a). Natural Monopoly utility companies
- competition is impractical or unworkable due
to costs.
- monopoly conditions are permitted and
govt. regulated

d). Government Monopoly only the

government owns and
operates a business. (public
water, alcohol sales,
uranium).
A Pure Monopoly is a firm that has no
competition. Also no substitutes exist for the
product.
A monopolist is a price maker, usually will not
charge the highest price but the profit maximizing
price.
H). Externalities:
1. Externalities unexpected economic side effect to
an uninvolved
third party not reflected in market price.
- Negative Externality harmful side effect,
inconvenience, or
external cost suffered by a third
party.
- Positive Externality benefit received by someone
not involved.