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In this lesson we will examine three forms of business organizations. In a market economy like that of the United States, individual businesses are important centers of economic decision making. Individual business companies vary greatly in size and the way they are organized. Basically, there are three forms of business organizations: sole proprietorships, partnerships, and corporations. The goal of most businesses is to make a profit.

However, nonprofit organizations also play a part in the economy.

As you read through this lesson ask yourself the following questions:

What are the advantages of sole proprietorships? In which professions are most partnerships found? How do corporations obtain their funds?

For hundreds of years, individuals have been running businesses as sole proprietors.

The sole proprietorship (only one owner) was the first type of business organization, and it still exists today.

However, because of the problem of unlimited liability, the other types of organizations are safer.

A sole proprietorship does not require any legal paperwork to form or dissolve the business.

The owner makes all decisions and gains all profits.

However, the owner also assumes all liability.

The next step in business organization is the partnership.

This is a business form that has one or more partners who share responsibilities for the decisions of the company.

Each partner agrees to provide some part of the work (or capital, or both), and to take a share of the profits or losses.

A business partnership is generally established in a written contract.

Certain important matters are spelled out in this partnership contract. For example, how profits and losses are to be shared and the duties of each partner would be included.

The procedure to follow on the death or withdrawal of one or more of the partners would also be mentioned.

Partnerships are not a common form of business organization in the United States.

This form of organization is widely used by some professional workers, such as accountants, architects, doctors and lawyers.

Certain types of corporations existed during the colonial era.

However, it was not until the 19th century that the corporation as we know it today began to take form.

The expansion of businesses during the Industrial Revolution identified the need for a more sophisticated business corporation.

Corporations were founded for two specific purposes: to obtain capital and to limit liability.

The diagram above shows the ways in which the major forms of business combinations - pools, trusts, and holding companies - were organized.

In the late 1800s, some American business leaders built huge

industrial empires by using such methods of business consolidation.

Two more ECONOMIC APPLICATION TOOLS: capital and liability.

Capital is money needed to open, operate, or expand a business.

Liability means responsibility for all debts, actions, or problems.

If you have a car, you are required to carry liability insurance on it. That means that your insurance company will pay for damages to someone else's car if you are responsible for causing the damage to it.

In the early 1900s, the Supreme Court ruled that a corporation was an organization with legal entity.

Legal entity means that a corporation legally exists just as an individual. It has the same responsibilities as an individual citizen.

The corporation is legally accountable for all of its actions. The corporation can exist, vote, borrow money, pay taxes, etc.

The corporation can even be sued, tried, found guilty of a crime and even sentenced. The only thing that the corporation cannot do is serve a jail or prison sentence. Instead, a corporation can be dissolved or fined.

A corporation is also considered to have a perpetual life.

Perpetual life means that the existence or life of the corporation can be never-ending.

This can happen because stock can be bought and sold. Ownership can change, but unless the corporation goes out of business, it still lives as a legal entity.

There are two types of corporations: public and private.

Private corporations are those owned by stockholders.

Public corporations are those owned by the general public. These corporations are most often owned and managed for the purpose of providing a service, such as a public utility.

To make a corporation legal, there must be a charter applied for and granted by the Secretary of State in the state where the corporate offices will be located.

The application for a charter must specify the principal location of the business--street, city, and state. It must also include the names of the officers and the general type of business in which the corporation will be engaged.Corporations can come in all sizes.

Large corporations have a very interesting structure.

Let's examine this structure.

First, if stock is sold to obtain capital, it may be common or preferred stock.

If officers are elected by the stockholders, typically they are the President, Vice President, Secretary, and Treasurer.

In a very large corporation, there may be vice presidents for finance, personnel, marketing, manufacturing or operations, legal services, and publications - depending on what service or product is being produced.

Each vice president in a large corporation directs a specialized segment of the business with people who are experts in specific areas of responsibility.

The board of directors is elected by the stockholders.

The board of directors appoints the president.

Because each of these levels has a very distinct function, they are depicted on an organizational chart.

Each level of the corporation is shown on a chart and each position is listed under it.

This chart is called a line organization chart.

When a corporation controls the production, consumption, and price of a product, it has a monopoly on that product.

This can force other companies out of business.

When this happens, the federal government can file an injunction against the corporation to make it stop this practice.

The federal government wants free trade and competition among corporations. There are laws to protect the smaller companies against illegal practices.

You have already learned that corporations issue certificates of ownership, or stock, and that the ownership of stock is transferable.

But where and how are stocks transferred from one person to another?

The general term for certificates issued by corporations is security. Securities are bought and sold in the securities market.

This is an economic market in which buyers and sellers of securities get together to trade. Trading is done in places called stock exchanges.

These may be organized on a national level, such as the New York Stock Exchange or the American Stock Exchange.

Other exchanges may be organized on a regional level, such as the Midwest Stock Exchange or the Pacific Coast Stock Exchange.

Stock exchanges are also located in foreign countries.

Stock exchanges do not buy securities; they provide a place where trading for securities can be done.

Corporations are usually formed for the purpose of making money.

Once the corporation has become successful at making money, it will usually expand in various ways so that it can produce even more money.

There are several ways that corporations can expand.

Some grow vertically, some grow horizontally, and some emerge into conglomerates.

Let's look at an example of each.

At one time, General Electric (GE) produced and sold large appliances with the name General Electric.

GE also produced and sold small appliances under the brand name of Hotpoint.

They also made other appliances in smaller divisions.

Even though both companies produced appliances, they were owned and managed by a lot of the same people.

This is an example of horizontal expansion.

General Motors (GM) produces automobiles.

In order to have everything to their expectations for their automobiles, the company also owns the following: fabric production companies, companies which make car radios, tire manufacturers, glass companies, and motor companies.

Even though all of these products are for automobiles, each company is making a different product.

Each product contributes to the final product - the automobile.

This is an example of vertical expansion.

The company builds upward until the car is produced.

A company that owns a lot of different an unrelated companies is known as a conglomerate.

For instance, the Turner Companies is a conglomerate that owns television networks and produces movies and music.

It also owns a baseball team as well as a multitude of other products and services.

When an individual has an idea or a dream for a new business venture, they set out to organize and make their dream a reality.

Because these individuals are pioneers, in a sense, they are taking a big chance.

Many fail.

Few survive the first three years.

Here is another ECONOMIC APPLICATION TOOL.

These risk takers are known as entrepreneurs.

An entrepreneur is someone who is willing to take a chance with the hope of being successful and making a profit.