ECONOMICS CHAPTER 3

BUSINESS ORGANIZATIONS

FORMS OF BUSINESS ORGANIZATION

• SOLE PROPRIETORSHIP• DEFINITION:• HOW TO FORM ONE:

– LICENSES• GENERAL BUSINESS LICENSE• (SKILL) LICENSE

– FEES• ADVANTAGES

– EASY TO START– EASE OF MANAGEMENT (QUICK DECISION MAKING)– OWNER RECEIVES ALL THE PROFITS– DOES NOT PAY BUSINESS TAXES– BEING YOUR OWN BOSS– EASY TO CLOSE DOWN

• DISADVANTAGES– UNLIMITED LIABILITY– DIFFICULT TO RAISE OPERATING CAPITAL– LIMITED SIZE AND EFFICIENCY– LIMITED ENTREPRENEURIAL SKILLS—INVENTORY AND TRUSTED

WORKERS– HARD TO ATTRACT QUALIFIED EMPLOYEES– LIMITED LIFE

BUSINESS ORGANIZATIONS CONTINUED• PARTNERSHIP

• Definition:• Types of partnerships:

– General partnership-– Limited partnership

• Forming a partnership:– Articles of Partnership

• Attorney fees• Licenses and fees

• Advantages:– Easy to start– Ease of management– Lack of special taxes– Easier to attract start up capital than a sole proprietor– Slightly larger in size– Easier to attract talented employees

• Disadvantages:– Each partner is fully responsible for the actions of each other.– (Limited partners = limited liability)– Limited life– Conflict between partners– Split the profits

BUSINESS ORGANIZATIONS CONTINUED• CORPORATIONS• Definition:• Forming a Corporation:

– File incorporation papers– Charter– # shares (stock)– Stockholders– dividends

• Corporate structure:– Common stock-voting privileges for the Board of Directors.– Preferred stock-nonvoting owners, first recipients of dividends.– Voting by proxy

• Advantages:– Ease of raising capital

• Sell more stock• Issue bonds

– Hire professional managers to run the company– Owners have limited liability– Unlimited life of the company– Due to their size they can attract and hire the best because they can offer the highest salaries and best benefits packages..

• Disadvantages:– Expensive to get a charter– Owners have little say in the running of the company.– Owners are double taxed– Corporations are subject to much government regulation

Worldwide Web

GOVERNMENT REGULATION OF BUSINESS

• 1880s -- government regulation of business. “Populists”—regulated railroads.

– ICC.

• Since the end of the Civil War there has been a conflict between large corporations and government regulation.—anti-monopoly, or anti- “trusts” laws.

– Sherman Anti-Trust Act

• Great Depression caused the biggest wave of government involvement.

– Banking laws, working hours, minimum wages, worker’s compensation, pollution standards, clean and safe workplaces, union protections, utilities.

• BUSINESS DEVELOPMENT• State governments today work very hard at getting new

industry to locate in their state.• Incentives: building infrastructure, bond offers, deferred taxes,

low taxes, state financing. Why? • JOBS!!

BOEING

BUSINESS GROWTH AND EXPANSION• BUSINESS GROWTH

• There are two BASIC ways businesses grow:• 1. Growth through investment:

– Income statement p. 69– Net Income + depreciation = cash flow– Those $ may be reinvested back into the company.

• 2. Growth through mergers:– Reasons for merging

• Quicker growth• Efficiency (cut costs)• Need to acquire new product lines• Keep up with rival companies• To lose its corporate identity (if the old name had a bad name)--Valujet

– Types of mergers• Horizontal merger• Vertical merger

– Conglomerates• Diversification

– Multinationals• International in scope

Other Business Organizations• LLC—Limited Liability Company, sole proprietorship with limited liability.• Non-Profit Organizations

– Definition:– Examples: YMCA, United Way,

• Cooperatives– Consumer Co-ops

• Co-op grocery stores in big cities/apartments– Service Co-ops

• Credit Union– Producer Co-ops

• Farm co-ops• Labor, Professional and Business Organizations

– Labor Unions• Collective Bargaining• UAW

– Professional Associations• NEA, AMA, American Bar Association

– Business Associations• Chamber of Commerce, Better Business Bureau

• Government– Direct Role of Government

• TVA, FDIC, US Postal Service– Indirect Role of Government

• Oversee Public Utilities, Social Security, VA

INVESTING ON THE STOCK MARKET

• 1. Financial investments on the stock market are called equities.

• 2. Prices of equities are determined by:Number of shares on the market for sale.

Profitability of the company.Expectations for the future

3. ACCURACY OF THE MARKETThe Efficient Market Hypothesis

•Due to the # of market analysts, prices of stock are right…there are no bargains.•Stock market therefore is not luck.•Portfolio diversification, buy lots of different types of stock.

– Buy from internet account– Use a stockbroker

• 4. Places where equities are sold:–New York Stock Exchange (NYSE)—Wall Street—lists 2,800 companies-each of these companies must meet profitability and size requirements–American Stock Exchange (AMEX)—Wall Street—750 companies–Global Stock Exchanges (Tokyo, London)–Over-the-Counter Markets (electronic stock marketplace)—National Association of Securities Dealers Automated Quotation NASDAQ

MEASURES OF STOCK PERFORMANCE AND HOW TO MAKE MONEY OFF THE STOCK MARKET

• MEASURES OF STOCK PERFORMANCE

• Dow –Jones Industrial Average—publishes the average closing price of 30 stocks.

• Standard & Poor’s 500—uses price changes of 500 representative stocks as an indicator of the overall market performance.

• Bull Market—is a strong market where stock prices have been going up over a certain period of time. 1995-2000 Dow-Jones average went from 4,000-12,000.

• Bear Market—is a period where the market is weak for a certain period of time. 1930s and 2001-2003 (market dropped by 33%), 2008-2009

• HOW TO MAKE MONEY OFF THE STOCK MARKET

• 1. Stock speculation—buy low and sell high.

• 2. Dividend value—based on the profit yield of the company.

• 3. Short selling– borrow stock when price is high and sell it, then buy it back when the price drops. The difference is your profit.