Discuss the free enterprise system

1. Discuss the free enterprise system

2. 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.

3. Basic Economic Freedoms • Freedom of ownership • Competition • Risk • Profit

4. 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

5. 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.

6. Risk • The potential for loss or failure.

7. Profit • The essence of the free enterprise system. • The money earned from conducting business after all costs and expenses have been paid.

8. Advantages of Entrepreneurship • Personal independence to make key business decisions. • Personal fulfillment and feeling of self worth • Potential for increased income

9. Disadvantages of Entrepreneurship • Risk associated with potential loss of income • Hours can be long and often irregular

10. Sole Proprietorship • A business owned and operated by one person • 70% of all businesses in the US are sole proprietorships

11. Advantages of a Sole Proprietorship • Ease of startup • Limited government regulations including taxes • Profits go to the owner • Freedom in making business decisions

12. 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

13. Partnership • A business owned and operated by two or more people. • Less than 10% of all businesses in the US are partnerships

14. Types of Partnerships • General partnership • Limited partnership

15. 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

16. 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

17. 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.

18. 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

19. 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

20. 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

21. 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

22. Disadvantages of Corporations • Numerous legal restrictions • Complex to start up and dissolve • Taxed heavily • Complex record keeping

23. 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

24. 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

25. 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