Principal forms of business organization, financial intermediaries and their conomic functions

1-2 What are three principal forms of business organization? What are the advantages and disadvantages of each?

The three principal forms of business organization are as follows:

a)      Sole proprietorship: Sole proprietorship is an unincorporated business owned by one individual. In this type of business, owner has all responsibility, accountability and right to handle business. To open sole proprietorship, owner should obtain any required city or state business license. Some advantages and disadvantages of this business are as follows:

Advantages:

·         Easily and inexpensively formed.

·         Subject to few government regulation.

·         Its income is not subject to corporate taxation but taxed only as a part of the proprietor’s personal income.

Disadvantages:

·         Difficult to generate cash for the growth of an organization.

·         Proprietor has unlimited personal liability for the business debt.

·         The life of the sole proprietorship business limited to the life of its founder.

b)      Partnership Business: Partnership business is non corporate business owned by two or more persons for profit. Partnership may operate under different degrees of formality, ranging from informal, oral understanding to formal agreements field with the secretary of the state in which the partnership was formed. Partnership agreement whether formal or informal, defines the ways any profits and losses are shared between partners. Some advantages and disadvantages of partnership business are as follows:

Advantages:

·         Easy and inexpensively formed.

·         Income is not subject to the corporate taxation but is taxed only as a part of the partner’s personal incomes.

·         Subject to few governmental regulation.

Disadvantages:

·         Unlimited liabilities

·         Limited life of organization

·         Difficulty in raising capital

c)      Corporation: A corporation is a legal entity created by a state, and is separate and distinct from its owner and mangers. Unlike the sole proprietor and partnership business it has its own existence in the society as an entity. Some advantages and disadvantages of corporation are as follows:

Advantages:

·         Unlimited life: A corporation can continue after its original owners and managers are dead.

·         Limited liability: Losses are limited to the actual funds invested.

·         Easy transferability of ownership interest: Ownership interests can be dividend into share of stock, which can be transferred for more easily than proprietorship or partnership interest.

Disadvantages:

·         Subject to double tax: The earning of the corporation are taxed at the corporate level, and then earnings paid out as dividends are taxed again as income to the stake holders.

·         Subject to the large government regulation: Setting up a corporation involves preparing a charter, writing a set of bylaws, and filing the many required state and federal reports.

·         Complex and time consuming.

1-4. What are financial intermediaries, and what economic functions do they perform?

Financial intermediary is a financial institution that acquires funds from one group of investors and make available to another economic unit. Thus, financial intermediaries play a very pertinent role in the economy by channeling funds from surplus savings units to deficit units. Financial intermediaries can be commercial bank, savings and loan associations, mutual fund, pension fund, credit union and many more. Some of the economic functions of the financial intermediaries are as follows:

·         Perform denomination divisibility function: Financial intermediary pools the savings of many small investors and invested these funds in securities of various sizes. It helps small savers to invest their funds in a situation when they have no sufficient funds to employ in large denomination transactions.

·         Perform maturity Flexibility function: It is able to buy direct securities issued by deficit spending units and issue indirect securities with precise maturities desired by the surplus spending units. In this regard, commercial bank and financial companies have enabled investors to put deposits of various maturities and they are made payable on demand.