Discuss the free enterprise system

Free Enterprise System

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

Freedom of ownership Competition Risk Profit

Freedom of ownership

The ability to choose a house, car, job or business.

There are restrictions on how and where particular businesses can operate.

Ex. zoning

Competition

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

The potential for loss or failure.

Profit

The essence of the free enterprise system.

The money earned from conducting business after all costs and expenses have been paid.

Advantages of Entrepreneurship

Personal independence to make key business decisions.

Personal fulfillment and feeling of self worth

Potential for increased income

Disadvantages of Entrepreneurship

Risk associated with potential loss of income

Hours can be long and often irregular

Sole Proprietorship

A business owned and operated by one person

70% of all businesses in the US are sole proprietorships

Advantages of a Sole Proprietorship

Ease of startup Limited government

regulations including taxes

Profits go to the owner Freedom in making

business decisions

Disadvantages of a Sole Proprietorship

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

A business owned and operated by two or more people.

Less than 10% of all businesses in the US are partnerships

Types of Partnerships

General partnership

Limited partnership

General Partnership

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

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

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

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

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

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

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

Numerous legal restrictions Complex to start up and dissolve Taxed heavily Complex record keeping

Franchise

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

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

Freedom to make business decisions is limited

Franchise fees may be expensive Supplies and products must be purchased

directly from the franchisor