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Effects of the corporate form of organization

Corporations are now the dominant form of business


organization. The development of multimillion, and even multibillion,
dollar corporations has had many favorable effects on economy as a
whole. The corporation opens up the possibility for large-scale
growth on total output. When shares of stock are sold to the public,
the firm has gained access to a source of investment funds equal to
amount of all household savings a huge sum. The result is an
enormous in crease both in real output and efficiency. The
corporation is able to expand in size to take
advantage of
economies of scale (such as techniques of mass production) that
smaller proprietorships and partnerships must rule out. Also, the
large supply of working capital available to the corporation allows it
to hire the most highly specialized managers and well-trained
workers another increase in efficiency. For these reasons, many
observers list the development of the corporate form of business
organization and the chief factors that has contributed to the high
standard of living enjoyed in the United States today.

But in spite of the fact that the corporation has made a


significant contribution to our record of economic growth over the
last 100 years, modern critics point to some serious shortcomings
that have arisen from the corporate form of organization. Among
these are possible conflict of interest resulting from the separation
of ownership and management,and the threat of monopoly control.
Neither of these problems necessarily accompanies the corporate
form of business , but both are possibilities that this type of
organization allows.

Significant ownership and management


The first corporation were simply a changed form of accounting,
a new legal structure for the old proprietorship and partnerships.
Men who started business just set up a corporation and hold most of
the stock themselves.Standard Oil, for example, was under the
management of John D. Rockfeller, and he also owned most of the

stock in the early days of company. But as corporations grew larger,


management continued to finance the growth by selling more and
more shares of stock to the public.. Slowly, corporate ownership
passed from the hands of founding owner-managers into the hands
of millions of American households, who invested their savings in
corporate stocks. Today only a few pf the very large corporations are
still privately owned by the men who are responsible for their
management as well. American Telephone and Telegraph, the
corporations with the greatest assets and profits (in terms of dollar
value) in the United States, is owned by more than three million
stockholders.

When ownership shifted to the public, a new kind of manager


began to appear. A man who wanted a large business no longer
had to inherit or save the money to open a proprietorship, he
could work for a salary in a corporation. The new manager was a
salaried employee, and he was likely to have been trained in
the skills of business administration.

Because corporate owners and managers are two separate


groups of people, the possibility exists that their evaluations of
what is best for the company will not always coincide. The
difficulty of defining and measuring profits can add to this
problem. The stockholders of a company may feel that avoiding
a costly strike would serve to maximize profits, but the
management might contend that the company should accept the
costs of the strike and hold out for lower wage settlement.
Judging which recommendation is the best will often involve
many rather subjective criteria.

There are other reasons may be different form that of


stockholders are influenced in their decision making by factors other
than the interests of owners their personal self-interest and profit,
which are not necessarily identical to those of the firm, the demands
of labor unions for higher wages, which may be presented more
forcefully than the demands of the owners for more profit, or the
request of government for new product features that protect the
consumer. If a corporate executive derives nationwide prestige
merely form the size of the firm he manages, he would probably

sacrifice some amount of profits in order to increase the companys


size.
In addition ,the fact that a highly specialized managerial stuff
runs the typical corporation does not make for clear-cut channels
of responsibility between managers and owners. In a large
corporation, responsibility is divided into many segments,and it
is not easy to know who is really responsible if inefficiency exists
of if profits begin to decline clearly, if sales are low,the
stockholders will hold management responsible. But exactly who
is to blame? Should the vice-president in charge of sales be
blamed alone, or is it the fault of bad market research, problem
in delivering products, or poor product development instead?
Many analysis have suggested that the very diffuse
ownership of most large corporation makes it difficult for an
individual owner to be heard by the management of his
company. In a publicly owned company, the stockholders are
scattered all over the country, no one person owns a controlling
interest. The governments requires all public corporations to
send stockholders a balance statement showing them the
amount of revenues earned each year and the way those
revenues are spent. But the average stockholders is not well
enough informed to be able to tell what the balance sheet
means about the activities of the company. When matters of
policy or personnel changes come before the owners, many
stockholders do not even vote, most of those who do simply sign
over their voting rights by proxy to the management.

Threat of monopoly

Another effect of the corporate form of business organization is


the possibility that monopoly control of an industry may arise form
the growth of large-scale corporate firms. Many observers from that
in spite of the efficiency that large-scale production can bring, the
dominance of an entire industry by a single huge firm will mean a
very substantial and harmful reduction in competition. Such a firm
may be able to earn a much larger than normal share of profits, and
economic resources may be wasted. When this kind of monopoly
control exists, and business are no longer completely responsive to

the demands of consumers, society must find an alternative way to


allocate resources efficiently.

Business Firms

These are the entities that employ factors of production


(resources) and produces goods and services to be sold to the
consumers, other firms of government.

Why Firms Exist


Answer

A business firm is
an
entity
that
employs
resources,
or
factors
of
production,
to
produce goods and
services to be sold to
consumers,
other
firms,
or
the
government.

The Alchian and Ronald Coase


Demsetz Answer
Answer
Firms are formed
when benefits can be
obtained
from
individuals
working
as a team.

The main reason


why it is profitable to
establish
a
firm
would seem to be
that there is a cost of
using
the
price
mechanism.

The
market
Sometimes
the
Firms
exist
in
guides
and sum
of
what order to economize
coordinates
individuals
can on buying and selling
individuals actions.
produce as a team is everything.
greater than the sum
of what they can
produce alone.
The market guides
individuals from the
production of one
good
into
the
production of another
good.
It
coordinates
individuals
actions
so that suppliers and
demanders
find
mutual
satisfaction

Firms
exist
to
reduce
transaction
costs

at equilibrium.

The Objective of the Firm

Separation of ownership from control in business firms has


allowed managers to pursue their own goals, such as increasing the
size of the firm or increasing the number of employees working for
them, at the expense of the profit maximization goal of the
stockholders of the firm.

Satisficing behavior is directed to meeting some satisfactory (but


not the maximum) target profit level.

Forms of Business Firms

Sole Proprietorship
It is a form of business organization owned and controlled by a
single individual.

Advantages of Sole Proprietorship


The single proprietor is the boss;
Capital requirement is very small;
Lesser business documents are required; and
Conflicts and quarrels are minimized.

Disadvantages of Sole Proprietorship

Engages himself in borrowing and mortgaging his properties;


Inability in transforming his small scale business into largescale; and
Lack of managerial ability

Examples
Local Barbershop
Restaurants
Family Farm
Carpet Cleaning Service

Partnership
It is a form of business organization owned and controlled by two
or more persons. Who bind themselves to contribute money,
property or industry to a
common fund, with the intention of
dividing profits among themselves. (General provisions,
Article
1767).

Advantages of Partnership
The owners may transfer their shares of stock to new owners
without affecting the life of the corporation;
Stockholders cannot be personally liable for any debts of the
corporation;
And a corporation may spread its responsibilities over many
persons hired
by the corporations.

Disadvantages of Partnership
A corporation is difficult to organize since it requires the
permission of the
government to operate.

Any changes in its original purpose require the approval of


the government;
And government regulation is also apt to be more extensive
in the case of a corporation.
Examples
Some Medical Offices
Some Law Offices
Some Advertising Agencies

Cooperative

It is a business voluntary organize by its members in order to


operate.
It is the only one organization composed primarily of small
producers and
consumers who voluntarily join together to form
business which they themselves own, control and patronize.

Basic Cooperative principles


Open and voluntary membership
Democratic control
Limited returns on capital
Patronage refund

Failures of Cooperative
Failure of the Board of Directors and members to provide
adequate capital.
Incompetent management;
Lack of proper
cooperatives; and

unde

rstanding

of

the

aims

of

the

The inability to meet competition happens when a very small


amount of
capital outlay is provided in the business.

Similarities of Cooperative and Corporation


Factors of production are privately owned, controlled and
managed;
Both depend on business efficiency to survive in a corporate
market;
Their activities and operations are both regulated and
supervised by the
government; and
Both enjoy a reasonable degree of economic freedom.

Differences of Cooperative and Corporation


Cooperatives are for service while corporations are for
profits;
Membership in cooperatives is open, it is a one man, one
vote, no proxy, while membership under a corporation is open
only wealthy members of the society; and
Profits are distributed among the members of the cooperative
based on
their patronage, while profits are distributed to the
members of the
corporation base on the number of their
shares.

Corporation
A legal entity that can conduct business in its own name in the
same way an individual does.

Advantages
The owners of the corporation are not personally liable for
the debts of the corporation;
Continue to exist even if one or more owners die; and

Usually able to raise large sums of financial capital for


investment purposes.

Disadvantages
The profits are taxed twice;
Often subject to problems associated with the separation of
ownership from control.

Examples
at&t
Microsoft
Toyota Motors
Ford Motors

Financing Corporate Activities

Corporations sell bonds, a promise to pay for the use of someone


elses money;
Bonds specify: the maturity date (the date the bond comes due);
a dollar figure
(the face value); a coupon rate (the interest rate
of the bond); and
A share of stock is a claim on the assets of the corporation that
gives the purchaser a share of the ownership of the corporation

Bond

It is a statement that promises to pay back a certain fixed sum of

money at specific point of time.

Share of Stock

It is a certification of the assets of a corporation that give the


purchaser a share of the ownership of the corporation.

Non- profit Organization

Public Corporation
It is created for the purpose connected with the
administration of the
government.
Non-stock Corporation
Their objective is to promote public welfare most of them
are the
religious, social, scientific, civic and political
organizations and societies.

Public and Private Nonprofit Firms


A private nonprofit firm is where citizens pay the cost. Ex:
your local church;
A public nonprofit firm is where taxpayers pay the cost. Ex:
your local police department;
Sometimes a nonprofit firm will receive some funds from
taxpayers and some from private citizens who purchase the
goods or services the nonprofit firm sells;
A private nonprofit firm that doesnt satisfy the persons who
contribute the funds is more likely to go out of business than a
public nonprofit firm that doesnt satisfy its customers.

Ethical Standard in Business

If the business firms obey the golden rules, then there would be
no need for a body of laws that will attempt to keep all rules and
regulations within bounds.

Ethical rules have suppressed the ethical psychology of business


because of the economic influence which lies in a capitalistic
societys motive of acquiring profits.

Ethics and Capitalism

The theory on the acquisition of gains puts the objective of the


firm which is to satisfy consumers as the secondary objective.

A person under the capitalist state of economy recognizes


the role of
morality and he is ready to put into practice the
acceptable norms of the society. No ethical standard shall seek to
correct bad practices.

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