CHAPTER 3

BUSINESS ORGANIZATIONS AND

ECONOMIC INSTITUTIONS

GENERAL INFORMATION

- ECONOMIC INSTITUTIONS

o PERSONS OR ORGANIZATIONS THAT USE OR REPRESENT THE FACTORS OF PRODUCTIONS

§ EXAMPLES – CHURCHES, UNIONS, SO-OPERATIVES, SCHOOLS ETC

- BUSINESS ORGANIZATIONS

o PROFIT SEEKING ENTERPRISES THAT SERVE AS A LINK BETWEEN SCARCE RESOURCES AND THE CONSUME

- GENERAL TYPES

o SOLE PROPRIETORSHIP – def – ONE MAN BUSINESS

§ EASIEST TO START BUT THE EASIEST TO FAIL

§ ADVANTAGES

· EASY TO START

· MAKE ALL DECISIONS

· MAKE ALL PROFITS

§ DISADVANTAGES

· UNLIMITED LIABILITY

· LIMITED LIFE

· LIMITED SEED CAPITOL

o DEF – MONEY NEEDED TO START A BUSINESS

o POOR ACCESS TO CREDIT

o PARTNERSHIP

§ ADVANTAGES

· MORE SEED CAPITOL

· MORE EXPERTISE AVAILABLE

· SHARED DECISION MAKING AND RESPONSIBILITY

§ DISADVANTAGES

· UNLIMITED LIABILITY

· LIMITED LIFE

· DISAGREEMENTS

§ MOST PARTNERSHIPS ARE GENERAL PARTNERSHIPS

· ALL PARTNERS SHARE EQUALLY IN PROFIT, DECISION MAKING AND LIABILITY

· LIMITED PARTNERSHIP – def – AN AGREEMENT WHICH LIMITS THE DECISION MAKING AND POTENTIAL PROFIT OF A PARTNER

o SILENT PARTNER

§ USUALLY LIMITED TO LIABILITY OF INITIAL INVESTMENT

o CORPORATIONS

§ ADVANTAGES

· GREAT ACCESS TO CAPITOL

o BONDHOLDERS – CREDITORS OF CORPORATION

§ CAN FORECLOSE IF NOT PAID INTEREST

o COMMON STOCKHOLDERS

§ OWNERS AND MANAGERS

o PREFERRED STOCKHOLDERS

§ OWNERS ONLY

§ GUARANTEED A DIVIDEND FIRST

· LIMITED LIABILITY

o LIABILITY EXTENDS TO THE AMOUNT INVESTED

· UNLIMITED LIFE

o CAUSED BY THE TRANSFERABILITY OF STOCK

o ABLE TO MAKE LONG TERM CONTRACTS

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§ DISADVANTAGES

· DOUBLE TAX STANDARD

o PROFITS ARE TAXED AS CORPORATE LEVIES AND DIVIDENDS ARE TAXED AS ORDINARY INCOME

· OWNERSHIP CAN BE SEPARATED FROM MANAGEMENT

o EACH COMMON STOCKHOLDER HAS 1 VOTE/SHARE

o PROXY – def – WHEN SOMEONE VOTES YOUR SHARES

· GOVERNMENT “RED TAPE”

§ A CORPORATION IS A LEGAL ENTITY

· OWN PROPERTY

· ENTER INTO CONTRACTS

· SUE OR BE SUED

BUSINESS GROWTH AND EXPANSION

- MERGER – def - BUYING OR JOINING WITH ANOTHER BUSINESS

o REASONS FOR MERGING

§ GROW THE BUSINESS

§ BECOME MORE EFFICIENT – ELIMINATE DUPLICITY

§ STANDARDIZE A PRODUCT

§ BUY IN BULK – SAVINGS

· TAKE ADVANTAGE OF “ECONOMIES OF SCALE”

§ MAKE MORE EFFICIENT USE OF ADVERTISING

o HORIZONTAL MERGER

§ 2 OR MORE COMPANIES PRODUCING THE SAME PRODUCT JOIN TOGETHER

o VERTICAL MERGER

§ FIRMS AT DIFFERENT STAGES OF PRODUCTION COME TOGETHER

· EXAMPLE – U.S. STEEL AND USX

· NECESSITATED TO PROMOTE A CONSTANT FLOW OF SUPPLIES/RAW MATERIALS NEEDED FOR PRODUCTION

o CONGLOMERATE

§ Def - A FIRM COMPOSED OF 4 OR MORE UNRELATED BUSINESSES

§ RATIONALE – DIVERSIFICATION

§ EXAMPLE – RJR

o MULTINATIONAL

§ Def – A CORPORATION THAT HAS PLANTS OR SERVICE OPERATIONS IN MORE THAN ONE COUNTRY

§ IT IS A CITIZEN OF MORE THAN ONE COUNTRY AND PAYS TAXES IN MORE THAN ONE COUNTRY

§ IT HAS THE ABILITY TO MOVE RESOURCES ACROSS NATIONAL BOUNDARIES QUITE EASILY

§ ADVANTAGES

· HELPS TO SPREAD TECHNOLOGY WORLDWIDE

· GENERATES NEW JOBS IN THE HOST COUNTRY

· PRODUCES TAX REVENUES IN THE HOST COUNTRY

§ DISADVANTAGES

· MAY EXPLOIT THE HOST NATION

o EXPORTING RAW MATERIALS

o PAYING LOW WAGES

· MAY INFLUENCE THE POLITICS OF THE HOST NATION

· MAY HAMPER THE DEVELOPMENT OF LOCAL BUSINESS

· WORKERS IN THE INDUSTRIAL NATION LOSE JOBS WHEN A MULTINATIONAL BUILDS A NEW PLANT OVERSEAS

OTHER BUSINESS ORGANIZATIONS AND INSTITUTIONS

- NON-PROFIT CORPORATIONS

o SERVICE ORIENTED

§ EXAMPLES – SCHOOLS, HOSPITALS CHARITIES, CHURCHES

o THEY DO NOT

§ PAY TAXES

§ ISSUE STOCK

§ PAY DIVIDENDS

o CREATED TO UTILIZE THE UNLIMITED LIFE ASPECT OF A CORPORATION

- CO-OPERATIVES

o Def – A VOLUNTARY ORGANIZATION OF PEOPLE CREATED TO CARRY OUT A SPECIFIC ECONOMIC FUNCTION TO BENEFIT ITS MEMBERS

§ A BUSINESS OWNED BY ITS MEMBERS WHO ARE ITS PRIMARY USERS

§ CONSUMER CO-OPERATIVE – BUYING CO-OPERATIVE

· EXAMPLE – THE GRANGE

· ADVANTAGES

o LOW PRICES

o SHARE IN THE PROFITS

§ PRODUCER CO-OPERATIVE – MARKETING CO-OPERATIVE

· EXAMPLE – PA MILK PRODUCING BOARD

· ALLOWS MEMBERS TO CONTROL SUPPLY AND AS A RESULT PRICE

§ SERVICE CO-OPERATIVE

· EXAMPLE – A CREDIT UNION

- LABOR UNIONS

o AN ECONOMIC PLAYER DUE TO THE FACT THAT IT

§ CONTROLS LARGE AMOUNTS OF PENSION DOLLARS

§ IT IS INVOLVED IN COLLECTIVE BARGAINING

- PROFESSIONAL ASSOCIATIONS

o EXAMPLES - NEA, PSEA, ABA, AMA NRA

o INTENDED TO IMPROVE THE SKILL LEVEL, WORKING CONDITIONS, AND PUBLIC PERCEPTION OF THE ORGANIZATION

- BUSINESS ORGANIZATIONS

o CHAMBER OF COMMERCE

§ LOBBIES FOR FAVORABLE BUSINESS LEGISLATION

§ PROMOTES THE WELFARE OF ITS MEMBERS

o BETTER BUSINESS BUREAU

§ PROVIDES GENERAL INFORMATION ON LOCAL BUSINESSES

§ ACTS AS A SOUNDING BOARD FOR CONSUMER INQUIRIES AND COMPLAINTS

- GOVERNMENT

o DIRECT INVOLVEMENT

§ TVA

§ NATIONAL DEFENSE AND POLICE PROTECTION

o INDIRECT INVOLVEMENT

§ FICA, FDIC, SBA, FHA

§ GOVERNMENT SANCTIONED MONOPOLIES

· UTILITIES