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Many people outside the United States see the country as one dominated by a few-large, powerful corporations. In reality though small to medium sized businesses play an important role in the American economy. Statistics provided by the U.S. Small Business Administration (SBA) report that, if a small business is defined as one employing fewer than 500 persons, there approximately half of the workforce is employed in small businesses. (If a small business is defined more narrowly, as employing 100 employees, about 36 percent of all workers are employed in small businesses.)

The basic categories of businesses in America are traditionally divided into:

The Sole Proprietor

The Business Partnership

Franchising and Chain Stores

Large Corporations

Each type of business has particular advantages and disadvantages, as they are susceptible to fluctuations in economy in different ways.

The Sole Proprietor is strictly defined as a firm owned by one person. Ultimately, this person is responsible for the success or failure of the enterprise. All profits go directly to this person, but, at the same time, any losses are born by him as well. This person would be liable for all losses of his business, even if it required that he cover them with his own personal finances.

One advantage of the sole proprietorship is that the owner can make independent decisions quickly and decisively without bothersome consultations. Another advantage is that the sole proprietor pays less taxes than a corporation. (This is one of the mechanisms of the federal government that encourages initiative and entrepreneurship)

The principal limitation of a sole proprietorship is the amount of resources and capital that the owner has. Because of this, it is often difficult to expand the business into a large-scale enterprise.

The main contributions of small businesses to the vitality of the American economy are:


A small business is often the starting point for the development of a new product or service. The entrepreneur, working on his own, is in a position to take risks without compromising his ideas to the demands or doubts of others.

The small business can give a person experience which may later be used in a larger project. Small businesses are ideal for serving specialized local needs.

Small businesses can provide services where a close relationship with the clientele is important.

Sole proprietors are often more trusted than corporations, as customers know exactly w ho is accountable for the quality of the product or service.

Successful small businesses can grow into large ones, and these examples represent the creativity that drives progress in the American economy. Of course, small businesses often fail, but ingenious people willing to take risks are certain that they can try again with another plan.

The Business Partnership is formed by two or more co-owners. The rights and duties of a partnership are regulated by state laws and the legal agreement of the co-owners. This kind of agreement primarily concerns the amount of money invested from each side and the responsibilities of each of the partners to the success of the firm.

The advantage of the business partnership is that partners with different talents can combine their skills to the benefit of their business. For example, one partner might be an expert in product design, the other in marketing, and the other in distribution. This allows each person to specialize according to his or her own talent. In addition, it also has a relatively favorable tax position in comparison to corporations.

The disadvantage of a partnership is that all partners are liable for losses incurred by unsuccessful operations. The actions of one partner arc legally binding for the rest - if one person makes a decision that is destructive to the company, all are equally liable. Decision making is often a problem, as well. It is typically more difficult to come to agreement with others when there is not one person who ultimately makes the decision for the whole team.

Franchising and chain stores is most common in the restaurant business. Franchising combines the benefits of a corporation and the benefits of local ownership. In this arrangement, a large corporation allows an individual or group to use its name and products in exchange for a percentage of the profits. The franchise does not have to advertise or do product research, as all of this is taken care of by the parent company. The individual is only responsible for the efficient operation of the individual store or restaurant. This individual, does, however, have to assume the risks connected with the enterprise. McDonald's the most famous example of a chain store that has gone international.

The benefit of the chain store to the economy is debatable. Undoubtedly, it has given individuals without capital or ideas the opportunity to manage a franchise and make money for himself and the parent company. However, the popularity of some franchises has had a negative effect on some independent entrepreneurs, and even driven some out of business. Some even consider the franchise as representative of a decline in ingenuity and creativity in the field of business, and indicative of a general lack of ambition. Buying into the system of a company with a fixed set of rules and procedures is not exactly representative of the spirit of individualism and the American Dream.

Large corporations are important in that they perform certain functions that could not be handled by a small business. For example:

They can supply goods to a greater number of people in a wider geographic area. They can work on an international level.

Corporate products usually cost less because of the large volume of products they produce. Recognizable corporate "brand names" can be associated with a certain level of quality. They have the financial resources to do research and develop new products.

In the United States, a corporation is a specific legal form of organization of persons and resources chartered by the state for the purpose of conducting business. When the people and resources are brought together to form a corporation, the result - in the eyes of the law - is a person. A U.S. corporation, distinct from any other individual human being, may own property, sue or be sued in court and make contracts.

The following section, taken from “An Outline of American Economy” describe how corporations raise capital:

The large corporations have grown to its present size in part because they have found innovative ways to raise new capital for further expansion. Five primary methods used by corporations to raise new capital are:

Issuing bonds. A bond is a written promise to pay a specific amount of money at a certain date in the future or periodically over the course of a loan, during which time interest is paid at a fixed rate on specified dales. Should the holder of the bond wish to gel back his money before the note is due, the bond may be sold lo someone else. When the bond reaches "maturity," the company promises to pay back the principal at its face value.

Sales of common stock. Holders of bonds have lent money to the company, but they have no voice in its affairs, nor do they share in profits or losses. Quite the reverse is true for what are known as "equity" investors who buy common stock. They own shares in (he corporation and have certain legal rights including, in most cases, the right to vote for the board of directors who actually manage the company. But they receive no dividends until interest payments are made on outstanding bonds. Issuing "preferred stock." This stock pays a "preferred" dividend. That is, if profits arc limited, the owners of preferred stock will be paid dividends before those with common stock. Legally, the owners of this stock stand next in line to the bondholders in getting paid. A company may choose to issue new preferred stock when additional capital is desired.

Borrowing. Companies can also raise short-term capital - usually working capital to finance inventories -in a variety of ways, such as by borrowing from lending institutions, primary banks, insurance companies and savings-and-loan establishments. The borrower must pay the lender interest on a loan at a rate determined by competitive market forces. The rate of interest charged by a lender can be influenced by the amount of funds in the overall money supply available for loans. If money is scarce, interest rates will tend to rise because those seeking loans will be competing for funds. If plenty of money is available for these loans, the rate will move downwards.

Using profits. Some corporations pay out most of their profits in the form of dividends to their stockholders. Investors buy into these companies because they want a high income on a regular basis. But some other corporations, usually cal led "growth companies," prefer to take most of their profits and reinvest them in research and expansion. Persons who own such stocks are content to accept smaller dividend or none at all if by rapid growth the shares increase in price. These persons prefer to take die risk of obtaining a "capital gain," or rise in value of the stock, rather than be assured a steady dividend.

The primary advantages of a corporation are:

1. The corporation has a legal standing, so the owners are safe from legal responsibility when they act as agents of the business.

2. The owners of shares of the stock have limited liability; they arc not responsible for corporate debts. 3. Corporate stock is transferable. The corporation is not damaged by the death or disinterest of a particular person.

The main disadvantages are:

1. Corporations must pay taxes both on the transfer of profits along to individuals in the form of dividends, and the individuals are taxed again on these dividends. This is known as "double taxation."

2. Management tends to be separated from ownership (the shareholders), and this can lead to a disparity in the wishes of the ownership and the interests of the management.



Date: 2015-01-02; view: 1115

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