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  • 1. Economics Chapter Seven Notes BUSINESS OF FREE ENTERPRISE
  • 2. Impact of New Businesses
    • Every new biz. contributes to the amount of goods & svcs in the market
      • -Impacts both the demand and supply related to that biz
  • 3. Key to Becoming a Biz Owner
    • How to become an entrepreneur:
      • If you have a good idea, start developing, creating it & marketing it early!
      • Examine how to use common products differently--new uses.
      • Develop a new method to sell goods & svcs
      • Introduce new products (or old ones) to new markets--developing/3 rd world countries.
      • Don't leave "good", but undeveloped ideas hanging. Stop procrastinating--"Just Do It!"
  • 4. Entrepreneur Strategies
    • Look for unexpected opportunities
        • Goods & svcs that fail for one group, might work for others
    • Change Market Conditions
        • When one method of proving good & svcs isn't working, find another outlet
          • i.e., walk-in clinics compete w/ hospitals
    • Change techniques of getting goods & svcs
        • make things easier to use or gain
    • Introduce an alternative
        • Make a similar good or svcs easier to get
    • Know your buyers
    • Modify techniques & choices to fit the needs of consumers
  • 5. Role of Small Business
    • Small business is defined as one w/ less than $3.5 million in sales and fewer than 500 employees
    • Advantages of:
        • Ability to satisfy special market (“niche”)
          • more able to intro. New products or try new methods
        • Ability to adapt to change
          • Having one owner = change easier
    • Challenges of:
        • Poor Management
          • Easier to mismanage when you are the only one(s) running the show
            • Not all small biz fail because the owner messes up
            • They are just risky
    • Inadequate Financing
        • All businesses have plenty of expenses
    • Problems include: insufficient capital, slow sales, heavy tax burden
  • 6. Sole Propietorship: 1-2 Owners (also “Mom & Pop”)
    • Advantages :
    • All profits are yours
    • Little govt regulations
    • Tax breaks
    • Success is yours
    • Disadvantages :
    • Unlimited liability (all your risk)
    • Limited funds (personal or borrowed $)
    • Limited potential
    • Low $ flow, can't move easily, costly employee benefits
  • 7. Partnership: owned by 2 or more people
    • Advantages :
      • Increased capital (pool $)
      • Multiple biz ideas
      • Easy to form
      • No special taxes to pay
    • Disadvantages :
      • Unlimited liability (all responsibility)
      • Limited life (partner dies = biz dies)
      • Limited funds
      • Shared responsibility = shared blame
  • 8. Corporation - Stocks (Equity) sold, needs Gov’t Charter
    • Advantages :
    • Limited liability (own only part of company)
    • Easy to sell (sell your shared)
    • Unlimited life (not reliant on few people)
    • Receive tax breaks
    • Disadvantages :
    • Expensive to start (charter, legal costs)
    • Govt regulations
    • Limit action & require disclosure
    • Double taxation on earnings from profit & on stock dividends
  • 9. Types of Businesses (cond.)
        • "S" Corporation: stock holders pay tax on dividends
          • no more than 35 stockholders & individual can't own more than 80%
        • Not-For-Profit Corp.: serves education or charity purpose
          • Not subject to tax
          • Must cover expenses to run (can have $ reserve)
          • United Way
        • Government-Owned Corp.: fed, state & local govt operated corp.
          • US Postal Service ("quasi-govt" org)
          • Fed. Deposit Insurance Corp. (FDIC)--protects $ in bank
  • 10. Types of Businesses (cond.)
        • Limited Liability Companies: intended for high-risk biz.
          • Ownership spread out among several owners (stocks)
          • Taxed like a corp.
          • Increase liability insurance to conduct dangerous, hazardous, "sensitive" work
        • Co-operative (Co-Op): is an association of people who contribute $ to a biz & then frequent that biz (membership)
          • Pay dues to shop, but also get a little $ from profit
        • Franchise: McDonalds, Carl's Jr., Allstate
          • Indiv. ownership of a biz, governed by parent company's contract
          • Sole proprietorship to sell parent company's product (e.g., Big Mac, car insurance)
  • 11. Vocabulary
        • Board of Directors: elected by stockholders to run company on behalf of stockholders
        • Small Biz Administration: clearinghouse for info on starting biz (100 locations in cities in US)
  • 12. Questions
    • What are common advantages to the types of business structures in this lecture?
    • What are common disadvantages to types of business structures in this lecture?