The Role of Business in the American Economy
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Transcript of The Role of Business in the American Economy
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The Role of Business in the American EconomyEntrepreneurs and How Businesses are Owned
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Business—any organization that combines labor, land, and capital in order to produce goods or services.
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The Role of the Entrepreneur• Entrepreneur—a person who starts a business• Begins with an idea for a new product, a new way of doing something,
or a better way of providing a service• Then—raise money for capital goods to start the business• Motivated by the hope of earning a profit
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Payments for Resources• May provide some of the factors of production themselves• May obtain the factors of production from other sources• Economists consider Entrepreneurship to be a fourth factor
of production because they provide ideas and take risks in return for payment in the form of profit.
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How Businesses Are Owned• Sole Proprietorship• Partnership• Corporation
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Sole Proprietorship• business owned and operated by an individual or a married
couple • relatively the most numerous and profitable of all business
organizations• smallest in size
• They earn almost 1/5 of the net income earned by all businesses, even though they make only a fraction of total sales.
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Forming a Sole Proprietorship• easiest to start b/c it involves almost no requirements
except for occasional business licenses and fees. (Lemonade stand in the front yard.)• Normally ready for business immediately. • It can be run from anywhere.
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Advantages• Easy to start• Easy to manage.- Decisions may be made quickly w/out
having to consult a co-owner, partner etc. • enjoys the profits if successful• do not have to pay separate business income taxes. b/c
the business is not recognized as a separate legal entity. The owner still has to pay taxes on profits taken from the business but the business is exempt from tax on income.
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Disadvantages
• Unlimited liability-The owner is personally and fully responsible for all losses and debts of business. • Difficulty in raising financial capital. • Little free time• Limited life- the firm legally ceases to exist when the owner
dies, quits, or sells the business.
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Partnership-business jointly owned by two or more people
• general partnership- one in which all partners are responsible for the management and financial side of the company• Limited partnership- (silent partner)at least one
partner is not active in the daily running of the business, although they may have contributed funds to finance
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Advantages• Easy to start- even fees that are needed
are minimal if extended over numerous partners.• Partners can specialize bringing their
qualities to the table.• Partnerships usually attract financial
capital more easily. • Lack of special taxes• More time off
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Disadvantages• Each partner is fully responsible for the acts of all
other partners. If one partner causes the firm to suffer a huge loss then all other partners are responsible. • Share profits• Limited Life- when a partner dies or leaves, the
partnership must be dissolved and reorganized. • Decisions/Management shared-Potential for
conflict between partners.
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Corporations
• form of business recognized by law as a separate legal entity having all the rights of an individual. • Large publically held companies, but could include small and single
owners. • This status gives the corp. the right to buy and sell property, enter
into legal contracts, and to sue and be sued.
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Advantages• Can raise large quantities of money to grow mainly through
selling stock• Stockholders are not responsible for the corporation’s debts• If the corporation fails, a stockholder loses only the value of
his or her stock• Directors of the corp can hire professional managers• Limited liability for the owners• Unlimited life• Ease of transferring ownership
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Disadvantages
• More difficult and more expensive to start than other businesses• More limited by government regulations• Shareholders and owners have little say in how the
business is run• Double taxation—once as a corp. profit and again as
personal income