1. Business Organizations
Chapter 3

2. Economic Institutions
Persons and organizations that use or represent the factors of production
Ex. Business organization- profit-seeking enterprise that serves as main link between scarce resources and consumer satisfaction
Three Types:
Sole Proprietorship
Partnership
Corporation

3. Sole Proprietorship Business owned and run by one person
Most numerous but smallest in size
Relatively most profitable
Easiest form to start
Little red tape- licenses and fees
Simple to start- ex. Lemonade stand
Set up anywhere- home or office

4. Sole Proprietorship Strengths Easy to start Easy to manage
Owner keeps profits
No business income tax
Personal freedom
Easy to get of business

5. Sole Proprietorship Weaknesses
Unlimited liability: owner is personally and fully responsible for all losses and debts
Difficultly in raising funds/financial capital
Size and efficiency
Labor and inventory
Limited managerial experience
Difficultly of attracting qualified employees
No many fringe benefits
Limited life

6. Partnership Business jointly owned by two or more persons
Similar strengths and weaknesses to sole proprietorship
Types:
General partnership: all partners are equally responsible for management and finances
Limited partnership: at least one partner is not active in the daily running but may contribute to funds and finances
Forming a Partnership:
Articles of partnership: to specify partner arragements
$, property, management, portions of ownership, etc.

7. Partnership Strengths Easy to start Ease of management
Lack of special taxes
No business income tax
Attract more financial capital than proprietorship
Slightly larger in size; more efficient
Easier to attract better talent

8. Partnership Weaknesses
Each partner is fully responsible for the acts of partners
Unlimited liability- based on portion or ownership
Limited life
Potential conflict between partners

9. Corporation
A form of business organization recognized by law as a separate legal entity having all the rights of an individual
Right to buy and sell property, enter into legal contracts, sue and be sued
Very formal and legal arragement
File for permission from fed/state gov’t of HQs to get an approved CHARTER
Name of company, address, purpose, other important features
Number of shares/stocks (parts of ownership)
Sold to inventors as capital to start
If corporation very profitable it can issue dividends
Portion of profits to each stockholder

10. Corporation Structure
Investor purchases stock = owner
Common stock=basic ownership
1 vote/share- used to elect board of directors
Preferred stock=nonvoting ownership
Receive dividends before common stocks
Get investments back before common stocks if corporation closes
No voting power
Proxy – stockholders representative to vote on all corporate matters

11. Corporate Structure

12. Corporation Strengths Ease of raising financial capital
Stocks, bonds (written promise to pay back)
Can hire best management
Limited liability for owners
Corp not its owners are liable for debt and obligations
Unlimited life
Ease of transferring ownership

13. Corporation Weaknesses Difficulty and expense of getting a charter
Owners have little say how business is run after election of directors
Must pay corporate income tax
Subject to much more government regulations
Register in state of HQ
Must register with SEC if going public
Provide certain financial information

14. Prediction
When a corporation wants to introduce a potentially profitable but risky product, it frequently sets up a separate company that has its own corporate structure. Why do you think the corporation does this?

15. Role of Government
Government has a duel role as an economic institution
Direct Role: produce goods and services to consumers
Ex. TVA – Tennessee Valley Authority
Provides electric power for 7-state area
Military, local/state police, firefighters, EMTs, schools, courts
Indirect Role: acts as an umpire/referee to make sure the market economy operates as the rules say it should
Ex. Regulation of public utilities
Social Security, financial aid to college students, veterans benefits