Chapter 2

Module 4
Week 4
The Firm and its Environment

OBJECTIVES

1. Differentiate the various forms of business organizations

2. Analyze the forms and economic roles of business organizations
3. Differentiate the phases of economic development and its impact to business environment

INTRODUCTION

An entrepreneur starts a new business every eleven seconds in the United States and one in
twelve Americans attempts to start a new business annually. Business organizations can be legal entities
through which investors and entrepreneurs provide goods and services and collaborate with one
another to achieve commercial goals. Other business organizations, called nonprofits, further charitable
purposes.

WHAT IS A BUSINESS ORGANIZATION?

A business organization is a collection of people working together to achieve a common
purpose related to their organization’s mission, vision, goals and objectives, and sharing a common
organizational culture.

Organizational culture is the set of beliefs and values shared by organization members
and which guide them as they work together to achieve their common purpose.

Simple business organization is an organization with few departments, centralized

authority with a wide span of control, and with few formal rules and regulations.

Functional business organizations group together people with similar or related duties,
practices delegation of authority to functional managers like the personnel managers, sales
managers or financial managers but allow CEOs to retain authority for strategic decisions.
 Divisional business organizations are made up of semi-autonomous, separate business
units, with a division head responsible for his or her unit’s performance.

Profit business organizations are organizations designed for the purpose of achieving
their goals and achieving stability through income generation and profit-making. 22. Non-profit
organizations are organizations designed to give service to clients without expecting monetary
gains o r financial benefits for their endeavors.

Open/Flexible business organizations are formed to meet today’s changing work

environment. They include team structures, matrix business organizations, project business
structures, boundary less business organizations, and virtual business organizations

3 TYPES OF BUSINESS

There are three major types of businesses:

1. Service Business
A service type of business provides intangible products (products with no physical form).
Service type firms offer professional skills, expertise, advice, and other similar products.

Examples of service businesses are: salons, repair shops, schools, banks, accounting firms, and
law firms.
2. Merchandising Business

This type of business buys products at wholesale price and sells the same at retail price.
They are known as "buy and sell" businesses. They make profit by selling the products at prices
higher than their purchase costs.

A merchandising business sells a product without changing its form. Examples are: grocery
stores, convenience stores, distributors, and other resellers.
3. Manufacturing Business

Unlike a merchandising business, a manufacturing business buys products with the

intention of using them as materials in making a new product. Thus, there is a transformation of
the products purchased.

A manufacturing business combines raw materials, labor, and overhead costs in its production
process. The manufactured goods will then be sold to customers.
Hybrid Business

Hybrid businesses are companies that may be classified in more than one type of
business. A restaurant, for example, combines ingredients in making a fine meal
(manufacturing), sells a cold bottle of wine (merchandising), and fills customer orders (service).

FORMS OF BUSINESS ORGANIZATION

1. Sole Proprietorship

The vast majority of small businesses start out as sole proprietorships.  These firms are
owned by one person, usually the individual who has day-to-day responsibility for running the
business.  Sole proprietorships own all the assets of the business and the profits generated by
it.  They also assume complete responsibility for any of its liabilities or debts.  In the eyes of the
law and the public, you are one in the same with the business.
Advantages of a Sole Proprietorship

 Easiest and least expensive

 Secrecy
 Profits from the business flow-through directly to the owner’s personal tax return.
 The owner is vested with the power to solely control the business, and within the
parameters of the law, may make decisions as they see fit.
 Spared from various government rules, which apply to partnership and corporation.
 The net income is treated as the personal income of the sole owner and is taxed
accordingly.
 The business is easy to dissolve, if desired.
Disadvantages of a Sole Proprietorship
1. Owner’s Lack of ability and experience

 Difficulty in Attracting Good employees

 Difficulty in Raising capital
 Limited life of the firm
 Unlimited Liability of the proprietor

2. Partnerships
In a Partnership, two or more people share ownership of a single business.  Like
proprietorships, the law does not distinguish between the business and its owners.  The
Partners should have a legal agreement that sets forth how decisions will be made, profits will
be shared, disputes will be resolved, how future partners will be admitted to the partnership,
how partners can be bought out, or what steps will be taken to dissolve the partnership when
needed; Yes, its hard to think about a “break-up” when the business is just getting started, but
many partnerships split up at crisis times and unless there is a defined process, there will be
even greater problems.  They also must decide up front how much time and capital each will
contribute, etc.
Advantages of Partnership

 Partnerships are relatively easy to establish; however time should be invested in

developing the partnership agreement.
 With more than one owner, the ability to raise funds may be increased.
 The profits from the business flow directly through to the partners’ personal tax return.
 Prospective employees may be attracted to the business if given the incentive to
become a partner.
 Pooling of knowledge and skills

Disadvantages of a Sole Proprietorship

 Partners are jointly and individually liable for the actions of the other partners.
 Profits must be shared with others.
 Potential conflict between partners
 Some employee benefits are not deductible from business income on tax returns.
 Limited life; it may end upon the withdrawal or death of a partner.

Types of Partnerships that should be considered:

1. General Partnership
 Partners divide responsibility for management and liability, as well as the shares of
profit or loss according to their internal agreement.  Equal shares are assumed unless
there is a written agreement that states differently.

2. Limited Partnership and Partnership with limited liability

Limited means that most of the partners have limited liability (to the extent of their
investment) as well as limited input regarding management decision, which generally
encourages investors for short term projects, or for investing in capital assets.  This form
of ownership is not often used for operating retail or service businesses.  Forming a
limited partnership is more complex and formal than that of a general partnership.
3. Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single
project.  If the partners in a joint venture repeat the activity, they will be recognized as
an ongoing partnership and will have to file as such, and distribute accumulated
partnership assets upon dissolution of the entity. 

3. Corporations

A Corporation, chartered by the state in which it is headquartered, is considered by law

to be a unique entity, separate and apart from those who own it.  A Corporation can be taxed; it
can be sued; it can enter into contractual agreements.  The owners of a corporation are its
shareholders.  The shareholders elect a board of directors to oversee the major policies and
decisions.  The corporation has a life of its own and does not dissolve when ownership changes.
Advantages of Corporation

 Shareholders have limited liability

 shareholders can only be held accountable for their investment in stock of the company
 Ease of expansion
 Ease of transferring ownership
 Relatively Long life
 Greater ability to hire specialized management

Disadvantages of a Corporation

 More expensive and complicated to organize

 Double taxation
 More extensive government restrictions and reporting requirements
 Employees lack personal identification with and commitment to corporate goals

4. Cooperatives
An organization composed of individuals or small businesses that have banded together
to reap the benefits of a larger organization. Cooperatives are not organized for profit,
but to make its members individually profitable to save money.
 Cooperatives are of various types. They are classified according to the special interests

of its members. They are as follows:

1. Producer Cooperatives

Producer cooperatives are created by producers and owned & operated by producers.
They are organized to process, market, and distribute their own products. This helps lessen
costs and strains in each area with a mutual benefit to each producer. Examples: agricultural
products, lumber, carpentry and crafts.

2. Service Cooperatives

They are organized to give members more control over the services that are
offered. Examples: service co-ops such as child care, health care clinics, and funeral services.

3. Consumer Cooperative

This is one of the best known forms of cooperatives. They are owned and controlled by
the people that buy the products and services sold, managed or distributed by the co-ops.

4. Credit Union

Accepts deposits from members and lends money to its members at a very reasonable
interest rate.

5. Marketing Cooperative

Assists members in the marketing of their product

ECONOMIC DEVELOPMENT - Is a total process which includes not only economic growth or the increase
in the amount of goods and services produced by the country’s economy but also consider the social,
political, cultural and spiritual aspects of the country’s growth.

PHASES/STAGES OF ECONOMIC DEVELOPMENT

1. MALTHUSIAN

• Proposed by Thomas Robert Malthus (1766 – 1834)

• A theory about economic growth which depends on

the rate of the population of a certain area

• The economic growth is inversely proportional to the population.

The smaller population, the higher the economic growth and vice versa

2. GOVERNMENT – LED ( LOCAL ECONOMIC DEVELOPMENT)

• An approach towards economic development which allows and encourages local people to work
together to achieve sustainable economic growth and development.

• Support the formation of a partnership between local and national institutions towards strategic
implementations.

3.  A LA KUZNETS (GOVERNMENT VS. ENVIRONMENT)

• Proposed by Simon Kuznets

• The existence of a pattern or behavior, between

economic growth and environmental degradation, consistent

with the environmental Kuznets curve (EKC) hypothesis.

4. HUMAN CAPITAL BASED

• Is a measure of the economic value of an employee’s skill set.

• Refers to the knowledge, skill sets and motivation that people have, which provide economic value.

• It could be invested in through education, training and enhanced benefits that lead to an improvement
in the quality and level of production.

5. POST DEMOGRAPHIC TRANSITION

• proposed in 1929 by Warren Thompson

• is the transition from high birth and death rate to lower birth and death rate as the country develops
from pre- industrial to an industrialized economic system

• fertility rate decreases when child mortality is low, and is weakly dependent in GDP.
ACTIVITY 1

1. In 50 words, discuss the main purpose of going into business.

ACTIVITY 2
Chapter Quiz

Fill in the blanks

1. The major types of business ownership are sole proprietorship, partnership and ______________

2. ________________ is that type of business entity owned and operated by a single person.

3. Partnership may either be general or ______________________.

4. The ease of transferring ownership is an advantage of __________________.

5. _______________ is an association of two or more persons, each with unlimited liability and who
are actively involved in the business.

6. _______________ is the easiest and least costly form of business to organize.

7. ________________ existence is co-terminus with the life of its owner.

8. ___________________ purpose is to provide members with quality goods and services.

9. ________________ are the owners of the corporation.

10. ________________ is the most expensive and complicated form of business to organize.