3. MULTINATIONAL ENTERPRISES
This chapter defines and distinguishes the three business forms: proprietorships,
partnerships, and corporations. Then students study the corporations extensively because they
have many advantages over proprietorships and partnerships, as well as different management
structures. Although corporations roughly comprise 20% of U.S. businesses, they dominate the
business and financial markets. Unfortunately, the corporate structure has several disadvantages
with the main one being susceptible to corporate fraud. Thus, students study the disadvantages
and ways to minimize them. Finally, corporations dominate international trade and finance,
which is why we study them in this book. Towards the end of the chapter, we explain the Law of
Comparative Advantage, and why businesses engage and profit from free trade.
Forms of Business Organizations
Goal of a business is to earn profits. Alfred P. Sloan stated, “General Motors is not in the
business of making automobiles. General Motors is in the business of making money.” All
business owners seek profit, and we classify them as a sole proprietorship, partnership, and
corporations. Sole proprietorship is one person owns the business. That one person becomes
liable for all the business’s debts, and the business is dissolved legally, when the owner dies.
Sole proprietors are the most numerous businesses in the United States, and they usually own
farms, grocery stores, hotels, and restaurants.
A partnership is a business owned and managed by two or more people. Partnership is
defined as general or limited liability. Under a general partnership, all partners become liable for
the partnership’s debts and obligations. If one partner applies for a bank loan, steals the money,
and flees the country, the remaining partners become liable for the bank loan. A limited liability
partnership restricts liability and helps protect the partners’ assets that he or she does not use
directly in the business. Thus, a partner can only lose assets invested in the partnership while his
or her other assets are protected from creditors. On the other hand, general partnerships do not
have this protection. If a general partnership bankrupts, then creditors can go after a partners’
assets such as the partners’ house, car, personal bank accounts, and other assets. Usual
partnerships are accounting and law firms.
A corporation becomes the last form, and the focus of this chapter. Although corporations
comprise approximately 20% of businesses in the United States, they dominate domestic and
international markets because they enter into all spheres of business activity. Unfortunately,
corporations can become so complex; the management loses sight on its goal of earning profits.
For instance, shareholders represent the owners of the corporation, and they should benefit.
Sometimes corporate managers lose sight of earning profits. Unfortunately, the managers do not
maximize the shareholders’ wealth, maximize share price, or maximize a firm’s value.
However, if a corporation continually earns losses year after year, then the business would fail,
similarly to a proprietorship and partnership.