American CapitalismForms of Business Organizations

Essential Question

Why do American’s start their own businesses?

Desire for Independence Desire for Money

Desire for Prestige General Interest in Product

Desire to satisfy a consumer need ???

CapitalismWhat “elements” of American Capitalism

allow for people to start their own businesses?

Freedom of EnterprisePrivate Property

Weak Barriers of Entry into the MarketProfit Incentives

Types of American Businesses Sole Proprietorships

Partnerships

Corporations

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Sole Pro-prietor-shipsPartnershipsCorporations

Sole ProprietorshipsMaximum Gain v. Maximum Loss

Sole ProprietorshipRun by one person who benefits from all the

profits but also has unlimited liability should the business fail.

Easiest type of business to beginRequires few licenses and feesEasiest type to locate (internet, warehouse,

home, etc.)

Sole Proprietorships

Number of Organiza-tionsSalesNet Income (Profit)

SP: Advantages & DisadvantagesAdvantages1. Easiest to start up2. Simple Management-

immediate decision making

3. No sharing of profits4. Owner does not pay

separate business taxes5. You are your “Own

Boss”6. Easy exit of market- pay

bills and your FREE!

Disadvantages1. Unlimited Liability-

personal possessions at risk2. Difficult to raise financial

capital- banks hesitant…individual must use savings, credit, etc.

3. Limited on size and efficiency

4. Limited management experience

5. Difficulty in attracting qualified personnel.

6. Limited Life

PartnershipsLimited Gain v. Limited Loss

PartnershipsUnincorporated business owned and

operated by two or more people who share the profits and the responsibility for debt.

General Partnership: All partners are equally responsible for management and debts

Limited Partnership: One or more partners are not active in the daily running of the business and have limited responsibility for debts

Partnerships

Number of Organiza-tionsSalesNet Income (Profit)

P: Advantages & DisadvantagesAdvantages:1. Easy start-up2. Ease of Management-

partners specialize3. Lack of special taxes4. Better at attracting

financial capital5. Larger size = better

efficiency 6. Easier to attract top

talent

Disadvantages:1. GP- partners

responsible for acts of others

LP- LP only loses

investment1. Limited Life2. Divided Profits3. Conflict between

partners?

CorporationPossible Max/Min Profits v. No Liability

CorporationsBusiness organization recognized by law as a

separate legal entity

They can buy and sell property, enter into legal contracts, and sue and be sued (rights of individuals but separate from owners)

Corporation

Number of OrganizationsSalesNet Income (Profit)

Corporate FormationFormal and legal arrangement

1. File for permission w/ national government2. Upon approval a charter is granted3. Specified amount of stock granted4. Stocks sold to investors/shareholders5. $ from stock sales go towards “set up” of

corporation6. Once business profits, dividends are issued

to stockholders

Corporate StructureStockholders = Owners

Common Stock: basic ownership of corporation (1 stock = 1 vote)

Preferred Stock: nonvoting membership…can’t elect board members, but receive dividends BEFORE common stock holders.

**Should corporation go out of business…PS holders receive return of investment before CS holders**

C: Advantages & DisadvantagesAdvantages1. Easy to raise

financial capital (issuing of bonds)

2. Limited Liability3. Owners can hire

managers to run firm

4. Unlimited Life5. Ease of ownership

transfer (sell stock)

Disadvantages1. Double taxation =

detailed sales & expense records

2. Expense of getting a charter

3. Shareholders do not dictate how business is run

4. Federal Government Regulation

Why do many business owners prefer corporations over other forms

of business organizations?