Discuss the free enterprise system Free Enterprise System

Discuss the free enterprise system

Free Enterprise System n n n Referred to as private enterprise. Encourages individuals to start and operate their own businesses without government involvement. Allows the market to determine prices through supply and demand.

Basic Economic Freedoms n n Freedom of ownership Competition Risk Profit

Freedom of ownership n n n The ability to choose a house, car, job or business. There are restrictions on how and where particular businesses can operate. Ex. zoning

Competition n A rivalry between two or more businesses to gain as much of the total market share or as possible. Helps maintain reasonable prices, provides consumers with new and improved products and results in a wider selection of products from which to chose. Forces businesses to operate in the most efficient manner possible.

Risk n The potential for loss or failure.

Profit n n The essence of the free enterprise system. The money earned from conducting business after all costs and expenses have been paid.

Advantages of Entrepreneurship n n n Personal independence to make key business decisions. Personal fulfillment and feeling of self worth Potential for increased income

Disadvantages of Entrepreneurship n Risk associated with potential loss of income n Hours can be long and often irregular

Sole Proprietorship n A business owned and operated by one person n 70% of all businesses in the US are sole proprietorships

Advantages of a Sole Proprietorship n n Ease of startup Limited government regulations including taxes Profits go to the owner Freedom in making business decisions

Disadvantages of a Sole Proprietorship n n n Unlimited liability Responsible for all aspects of the business including skills and finances Life of business is limited to the life or interest of the owner

Partnership n n A business owned and operated by two or more people. Less than 10% of all businesses in the US are partnerships

Types of Partnerships n General partnership n Limited partnership

General Partnership n n An agreement in which both partners agree to share equally in the profit and/or loss of the business Each partner is liable for all debts incurred by the business

Limited Partnership n n Each partner is liable for any debts of the business up to the amount of his/her investment Must have at least one partner who has unlimited liability

Advantages of Partnerships n n n n Relatively inexpensive to start Combined financial resources and knowledge Shared management responsibilities Increased potential for profits Shared responsibility for risk Taxed less than a corporation A change in ownership does not alter the continuity of the business.

Disadvantages of Partnerships n n n Partners can disagree about business decisions The decision or action of one partner is legally binding on the other partner, including finances If one partner dies, the business is dissolved

Corporation n A business owned by stockholders A legal entity that is chartered by the state in which the business is located Boards, directors and officers manage the daily operations

Types of Corporations n n n Private (closed) -- Do not offer shares of stock for sale to the general public Public (open) -- Offer shares of stock for sale to the general public Subchapter “S” – Taxed like a sole proprietorship and limited to 35 or less shareholders

Advantages of Corporations n n n Delegation of specific management skills Limited liability for stockholders Life of the corporation is unlimited Easier to secure capital Stockholders can easily enter or leave the business by purchasing or selling stock

Disadvantages of Corporations n n Numerous legal restrictions Complex to start up and dissolve Taxed heavily Complex record keeping

Franchise n n A business or organization with the right to use an established name and sell trademarked products Granted to a retailer or a wholesaler for a fee

Advantages of Franchises n n n Reduced liability due to name recognition and common products Franchisor usually provides training Business plan is established by the franchisor, modified for the location and franchisee

Disadvantages of Franchises n n n Freedom to make business decisions is limited Franchise fees may be expensive Supplies and products must be purchased directly from the franchisor