THE BUSINESS

ORGANIZATION AND
BUSINESS CYCLE
 THE BUSINESS
ORGANIZATION
BUSINESS ORGANIZATION
The term business organization describes how
businesses are structured and how their structure
helps them meet their goals. In general, businesses
are designed to focus on either generating profit or
improving society. When a business focuses on
generating profits, it is known as a for-profit
organization.
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 BUSINESS ORGANIZATION

There are different categories of business

organizations that relate to how the business is
established, owned, and operated. The basic
categories of business organization are sole
proprietorship, partnership, and corporation. Each
type of business organization has benefits as well as
disadvantages.

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BASIC CATEGORIES OF BUSINESS ORGANIZATION

SOLE PROPRIETORSHIP
is a business that can be owned and
controlled by an individual, a company
1 or a limited liability partnership. There
are no partners in the business. The
legal status of a sole proprietorship can
be defined as follows: It is not a
separate legal entity from the business
owner.
  A sole proprietorship is an unincorporated
business with only one owner who pays
personal income tax on profits earned.
 Sole proprietorships are easy to establish
and dismantle due to a lack of
government involvement, making them
1 popular with small business owners and
contractors.
 Most small businesses start as sole
proprietorships and end up transitioning
to a limited liability entity or corporation
as the company grows.
 One of the main disadvantages of
sole proprietorships is that they do
not have any government
protection, as they are not
registered. This means that all
liabilities extend from the business
to the owner.
 Sole proprietors report their
income and expenses on their
personal tax returns and pay
income and self-employment taxes
on their profits.
 Disadvantages Of Sole
Proprietorship
ADVANTAGES OF SOLE PROPRIETORSHIP
• you’re the boss
1 •
•
you keep all the profits
start-up costs are low
• you have maximum privacy
• establishing and operating your business is simple
• it’s easy to change your legal structure later if
circumstances change you can easily wind up your
business.
 DISADVANTAGES OF SOLE
PROPRIETORSHIP
• you have unlimited liability for debts as there’s
no legal distinction between private and business
assets
1 • your capacity to raise capital is limited
• all the responsibility for making day-to-day
business decisions is yours
• retaining high-caliber employees can be difficult
• it can be hard to take holidays
• you’re taxed as a single person the life of the
business is limited.
 PARTNERSHIP
consists of two or more people who
combine their resources to form a
business and agree to share risks,
profits and losses. Common
2 partnership business examples include
law firms, physician groups, real estate
investment firms and accounting
groups.
 Advantages And
Disadvantages Of Partnership
ADVANTAGES OF PARTNERSHIP
• two heads (or more) are better than one
• your business is easy to establish and start-up
2 costs are low
• more capital is available for the business
• you’ll have greater borrowing capacity
• high-calibre employees can be made partners
• there is opportunity for income splitting, an
advantage of particular importance due to
resultant tax savings
 ADVANTAGES OF PARTNERSHIP

• partners’ business affairs are private

• there is limited external regulation
2 • it’s easy to change your legal
structure later if circumstances
change.
 DISADVANTAGES OF PARTNERSHIP
• the liability of the partners for the debts of
the business is unlimited
• each partner is ‘jointly and severally liable for
the partnership’s debts; that is, each partner is
liable for their share of the partnership debts
2 as well as being liable for all the debts
• there is a risk of disagreements and friction
among partners and management
• each partner is an agent of the partnership and
is liable for actions by other partners
• if partners join or leave, you will probably have
to value all the partnership assets and this can
be costly.
 CORPORATION
is a business entity that is owned
by its shareholder(s), who elect a board
of directors to oversee the
organization’s activities. The
3 corporation is liable for the actions and
finances of the business – the
shareholders are not. Corporations can
be for-profit, as businesses are, or not-
for-profit, as charitable organizations
typically are.
 TYPES OF Corporations

Subchapter S Corporations
which are larger organizations
owned by multiple shareholders, which
can also be other businesses.

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 TYPES OF Corporations

Subchapter S Corporations
Which are often (but not always)
smaller businesses owned by an
individual shareholder.

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 ADVANTAGES OF CORPORATION

• Shareholders have limited liability

• Corporations can raise funds
• No life limit
3 •
•
Attractive to investors
Tax-deductible expenses
• Employee stock options
 DISADVANTAGES OF CORPORATION
• A corporation is a distinct legal
entity
• Double taxation
3 • More complicated to form
• Rigid requirements
• Costly
• Legal disadvantages
 COOPERATIVE
are businesses owned by “member-
owners”. Co-ops are democratically
controlled by their member-owners,
and unlike a traditional business, each
4 member gets a voice in how the
business is run. Services or goods
provided by the co-op benefit and
serve the member-owners.
 ADVANTAGES OF COOPERATIVE

• there are equal voting rights for

members
• this structure encourages member
4 contribution and shared
responsibility
• liability for members is limited
• there is no limit on the number of
members
 DISADVANTAGES OF COOPERATIVE
• members have equal voting rights
regardless of investment - which
may not suit an investor-driven
4 business
• legal limits on payments of
dividends on shares may not suit
an investor-driven business
 THE BUSINESS CYCLE
is completed when it goes
through a single boom and a
single contraction in sequence.
The time period to complete
this sequence is called the
length of the business cycle. A
boom is characterized by a
period of rapid economic
growth whereas a period of
relatively stagnated economic
growth is a recession.
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STAGES OF BUSINESS CYCLE

Expansion
The first stage in the business cycle is
expansion. In this stage, there is an increase in
1 positive economic indicators such as employment,
income, output, wages, profits, demand, and
supply of goods and services. Debtors are generally
paying their debts on time, the velocity of the
money supply is high, and investment is high. This
process continues as long as economic conditions
are favorable for expansion.
 Peak
The economy then reaches a saturation point,
or peak, which is the second stage of the business
cycle. The maximum limit of growth is attained.
2 The economic indicators do not grow further and
are at their highest. Prices are at their peak. This
stage marks the reversal point in the trend of
economic growth. Consumers tend to restructure
their budgets at this point.
 Recession
is the stage that follows the peak phase. The
demand for goods and services starts declining
rapidly and steadily in this phase. Producers do
3 not notice the decrease in demand instantly and
go on producing, which creates a situation of
excess supply in the market. Prices tend to fall.
All positive economic indicators such as income,
output, wages, etc., consequently start to fall.
 Depression
There is a commensurate rise in

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unemployment. The growth in the economy
continues to decline, and as this falls below the
steady growth line, the stage is called a
depression.
 Trough
In the depression stage, the economy’s growth
rate becomes negative. There is further decline
until the prices of factors, as well as the demand
5 and supply of goods and services, contract to
reach their lowest point. The economy eventually
reaches the trough. It is the negative saturation
point for an economy. There is extensive depletion
of national income and expenditure.
 Recovery
After the trough, the economy moves to the
stage of recovery. In this phase, there is a
turnaround in the economy, and it begins to
6 recover from the negative growth rate. Demand
starts to pick up due to low prices and,
consequently, supply begins to increase. The
population develops a positive attitude towards
investment and employment and production starts
increasing.
 ¡Buena suerte y
hasta el
próximo
semestre!
See You On
Your Final
Exam.
Good Luck!
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