Chapter 7Chapter 7

The Business of Free EnterpriseThe Business of Free Enterprise

Anticipatory SetAnticipatory Set

Have you ever heard the phrase you Have you ever heard the phrase you don’t have to reinvent the wheel? What don’t have to reinvent the wheel? What does it mean to you?does it mean to you?

ObjectiveObjective

Our objective today is Learn what an Our objective today is Learn what an Entrepreneur is and what types of Entrepreneur is and what types of businesses exist.businesses exist.

EntrepreneurEntrepreneur

Someone who not only starts their own Someone who not only starts their own business, but invents or introduces a new business, but invents or introduces a new product or idea.product or idea.

A) they are usually a risk takerA) they are usually a risk taker B) ExamplesB) Examples

Henry FordHenry Ford Ray KrockRay Krock Bill gatesBill gates

Who becomes an Who becomes an Entrepreneur?Entrepreneur?

A) Improve a product or process by finding A) Improve a product or process by finding new ways to sell or use a product (kitty litter) new ways to sell or use a product (kitty litter) Ed LoweEd Lowe

B) Unexpected opportunities (Post-it-Note)B) Unexpected opportunities (Post-it-Note) C) Spotting New Markets (Kinko’s Fed Ex)C) Spotting New Markets (Kinko’s Fed Ex) D) Start at an early age (babysitting)D) Start at an early age (babysitting) E) Identifying population trendsE) Identifying population trends

Small BusinessSmall Business

Most entrepreneurs start with a Most entrepreneurs start with a small small businessbusiness

A small business is a business earning A small business is a business earning 3.5 million or less and employing no 3.5 million or less and employing no more than 500 people.more than 500 people.

But they do have some key But they do have some key advantages…advantages…

AdvantagesAdvantages

1) ability to satisfy small markets1) ability to satisfy small markets 2) their ability to adapt to change2) their ability to adapt to change 3) imagination and flexibility are 3) imagination and flexibility are

welcomedwelcomed 4) you are the boss4) you are the boss 5) job security5) job security

DisadvantagesDisadvantages

**Most fail within a few weeks of getting **Most fail within a few weeks of getting startedstarted

1) Poor Management1) Poor Management Most people are unprepared for the heavy Most people are unprepared for the heavy

workloadworkload

2) Inadequate finances2) Inadequate finances A) don’t have enough money when getting A) don’t have enough money when getting

startedstarted 1. insufficient capital, 2) slow sales, 3) heavy debt1. insufficient capital, 2) slow sales, 3) heavy debt

Day twoDay two

Where To StartWhere To Start

Anticipatory set:Anticipatory set: If you had to start a business tomorrow If you had to start a business tomorrow

what would it be?what would it be?

Where to StartWhere to Start

Objective: today we are going to talk Objective: today we are going to talk about how small businesses get started about how small businesses get started and how they contrast with other types of and how they contrast with other types of businessesbusinesses

Where to StartWhere to Start

You can go to Small Business AdministrationYou can go to Small Business Administration They provide counseling, literature, adviceThey provide counseling, literature, advice

There are entrepreneurial programs offered by There are entrepreneurial programs offered by collegescolleges

You can get on the job training (getting paid while You can get on the job training (getting paid while you learn)you learn)Steamfitters Local Union 420 Website - Apprenticeship

You can learn from successful family membersYou can learn from successful family members

Forms of Business Forms of Business OrganizationsOrganizations

1) 1) Sole proprietors-Sole proprietors- When 1 Person owns When 1 Person owns & operates a business& operates a business A. most common type of business (73% of A. most common type of business (73% of

all businesses)all businesses) B. Oldest form of businessB. Oldest form of business C. Most simple to form (fewest government C. Most simple to form (fewest government

restrictions)restrictions)

Advantages of Sole Advantages of Sole ProprietorsProprietors

1. You are your own boss1. You are your own boss 2. Keep all of the profits2. Keep all of the profits 3. Tax advantage over corporations3. Tax advantage over corporations 4. Make all the decisions4. Make all the decisions 5. You can establish a personal 5. You can establish a personal

relationship with your customersrelationship with your customers

DisadvantagesDisadvantages

Unlimited LiabilityUnlimited Liability Total business responsibilities Total business responsibilities One source of capitalOne source of capital Limited lifeLimited life Tough to achieve specializationTough to achieve specialization

PartnershipsPartnerships

1. When 2 or more people own a 1. When 2 or more people own a business (roughly 7%)business (roughly 7%)

2. Two types of partners2. Two types of partners A. Active partner-contributes both time & A. Active partner-contributes both time &

moneymoney B. Silent partner-contributes money onlyB. Silent partner-contributes money only

AdvantagesAdvantages

1. Two or more sources of capital & 1. Two or more sources of capital & better fund raising abilitybetter fund raising ability

2. Share the business responsibilities2. Share the business responsibilities 3. Easy to organize with a better chance 3. Easy to organize with a better chance

to specializeto specialize

DisadvantagesDisadvantages

1. Unlimited liability1. Unlimited liability 2. Limited life2. Limited life 3. Dishonest partner3. Dishonest partner 4. You are responsible for your partners 4. You are responsible for your partners

mistakesmistakes 5. Must split the profits5. Must split the profits 6. Finances are still very limited6. Finances are still very limited

Student InputStudent Input

Answer the questions on page 106 and Answer the questions on page 106 and 111 in your JA Economics textbook111 in your JA Economics textbook

CorporationsCorporations

A A corporationcorporation is an artificial being is an artificial being permitted by Government to carry out a permitted by Government to carry out a businessbusiness

A A corporate charter-corporate charter-A written grant of A written grant of authority from the Government giving you authority from the Government giving you permission to exist.permission to exist. state charter is easier to obtainstate charter is easier to obtain Federal charter is more difficult and can be Federal charter is more difficult and can be

an expensive processan expensive process

Owners-StockholdersOwners-Stockholders

Paid dividends-how the corporate profits are Paid dividends-how the corporate profits are sharedshared

Proxy-written permission transferring your Proxy-written permission transferring your voting rightsvoting rights

This is the most dominant type of business in This is the most dominant type of business in modern U.S. capitalismmodern U.S. capitalism Makes up 20%of all businessesMakes up 20%of all businesses Generates 90% of all business sales & revenueGenerates 90% of all business sales & revenue

AdvantagesAdvantages

Most effective way to raise capitalMost effective way to raise capital Sell new stocks, bonds, lenders, dispose of Sell new stocks, bonds, lenders, dispose of

holdingsholdings

*Usually easier to access bank credit*Usually easier to access bank credit

AdvantagesAdvantages

*Limited Liability owners risk only what they *Limited Liability owners risk only what they paid for stockpaid for stock

Easier to expand in size and scopeEasier to expand in size and scope Mass production & specializationMass production & specialization A life separate from its owners (legally A life separate from its owners (legally

immortal)immortal)

DisadvantagesDisadvantages

Very, Very had to establishVery, Very had to establish Expensive and time consumingExpensive and time consuming Lots of Lots of “Red-Tape” “Red-Tape” all of the papers and all of the papers and

documents that must be completed documents that must be completed before legally beginningbefore legally beginning

Double TaxationDouble Taxation Corporate profits are taxed (usually 35%)Corporate profits are taxed (usually 35%) Stockholders are taxed on dividendsStockholders are taxed on dividends

Separation of Ownership Separation of Ownership & Business& Business

Corporate officers can avoid Corporate officers can avoid responsibility for questionable business responsibility for questionable business decisionsdecisions

Officers can vote themselves large pay Officers can vote themselves large pay raises & bonusesraises & bonuses

Most shareholders do not exercise voting Most shareholders do not exercise voting rightsrights