Chapter 6 1. What are the three (3) principal forms of business organization? Wh

Question

Chapter 6

1. What are the three (3) principal forms of business organization? What are the advantages and disadvantages of each?

2. Would the management of a firm in an oligopolistic industry or in a competitive industry be more likely to engage in “socially conscious” practices? Explain your reasoning.

3. Why do U.S. corporations build manufacturing plants abroad when they could build them at home?

4. In general terms, how is value measured? What are the three (3) factors that determine value? How does each factor affect value?

5. What is corporate governance? Does a firm’s corporate governance policy relate to whether it conducts business in an ethical manner? Explain.

Explanation / Answer

Generally there are Three Types of business form

Sole Proprietorship- This is the basic form of a business. Here one man or women establish the business and becomes the owner of the firm. That individual is responsible for all the profits and losses.

Advantages- The advantage of this arrangement is that are very easy to form and handle. One can sue his or her full intelligence for managing the firm.

The government regulations are very few in such arrangements. The taxation happens as a individual income hence tax rate is very low as compared to other business types.

Disadvantages- If business gets vast then sole proprietorship is not appropriate. Al the capital has to be invested by the sole proprietor hence it is very expensive. When the sole proprietor dies it gets dissolved. So its life is limited to the life of the owner.

Partnership- When 2 or more person gets agree on sharing the profit ort losses of non corporate business then ti becomes partnership. The profits and losses are shared among the partners as per their investment in the firm.

Here are some advantages- Formation of this firm is easy and inexpensive as capital is distributed among the investors. Corporate taxation is not applied in this arrangement and tax is applied as per the personal income of the business partners. In this arrangement there is less government intervention. The life of the business is more than the sole proprietorship in case of death.

Disadvantages- The business partners have unlimited liabilities. It is still very tough to arrange capital for the business. The life is very limited of the organization.

Corporation- It is a legal entity which is created by law and its is spate from those owners or managers. It has its existence as an entity in the community or society.

Advantages-

The corporation has unlimited life and the death of manger, owner, founder does not have effect on this. In corporation the losses are counted as per the amount of capital invested. The transfer of the ownership in this arrangement is very easy. It is suitable when the business gets vast.

Disadvantages- Forming the corporation is very complicated and risky. Further the government tax laws are very huge on such entities, as double taxation occurs. There are various rules and regulations of governemtn are there which have to be adhered otherwise huge penalty can be imposed on the corporation. The business functions are very complex and time consuming.

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