The Role of Business in the American EconomyEntrepreneurs and How Businesses are Owned

Business—any organization that combines labor, land, and capital in order to produce goods or services.

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

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.

How Businesses Are Owned• Sole Proprietorship• Partnership• Corporation

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.

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.

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.

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.

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

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

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.

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.

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

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