Types of Busines

ses

A person who starts his or her own business is called an entrepreneur. Entrepreneurs take risks to produce goods and services in search of a profit. Profit is the incentive (the thing that motivates) an entrepreneur into business. People go into business to make money--this is called the profit motive.

There are three basic kinds of businesses:

1) A sole proprietorship is a business that is owned by one person. This one person assumes all the risks when business is bad, and gets all the profits if the business is successful. Examples of this kind of business are small shops (bakeries, repair shops, gift shops) run by one family.

2) A partnership is a form of business with two or more owners who shares the risks and the profits. Examples of this kind of business include law firms with many lawyers, or doctor’s offices shared by many different physicians.

3) A corporation is a large business with many owners. When a business incorporates, it applies to the state for a charter. This will allow the company to act and have the privileges of a single individual, even though it has many owners. This group of owners can now act as one, and can enter into contracts and buy and sell property, but it can also be sued.

Corporations are big companies, usually with several stores around the U.S. or even in other countries.

Many corporations offer shares of their company in the form of stock.

Someone who owns stock in a company has invested money in that company, and is now part owner. These people are called stockholders.

The owners of a corporation collectively take the risks and share the profits of business. Stockholders have several advantages over sole proprietorships and partnerships. One advantage is that they enjoy limited liability. This means that if the corporation loses money, the most the stockholder could lose is whatever he or she has invested. For example, if someone invests $500 in a company, and the company does poorly, the most that person could lose is $500. Partnerships and sole proprietorships have much more personal risk involved.

There are two types of stock:Common stock are shares of a company that pay dividends. A dividend is a small share of the company’s profits. The amount of the dividend for common stock depends on how well the company did this year.

Preferred Stock are shares of a company that pay a fixed dividend no matter what the company’s sales are for the year. Preferred stock is safer than common stock, and is also more expensive.