The United States’ industrial era has ended, starting to become

a “service centered economy”.

In the United States there are three main types of businesses:
Individual proprietorships, partnerships and corporations. The
average annual revenue of an individual proprietorships is 42,400$,
and that of a partnership is 4 times as much, while corporations sell
on average 2 million dolars worth of goods and services.
An individual proprietorship is a business owned by an
individual who is fully responsible for the losses and fully entitled for
the profit of the business.
Not all individual proprietorships succeed, and if it goes
bankrupt, the owner will have to pay the losses. If it prospers, in
order to make more profit it needs to expand, and in order to expand
it needs money which can be obtained from a friend or relative who
can become the owner’s partner.
A partnership is a business owned by at least 2 people who
share its profit and are responsible for its losses. A partnership can be
very large, for example some law and accounting firms can have
hundreds of partners. A partnership has two big disadvantages. One
of them is that each partner is responsible for the firm’s debts. For
instance, if there are 2 partners and one of them goes bankrupt, the
other one is fully responsible for the debts of the business whether
he is actually active or not. The other disadvantage is that
partnerships are inflexible.
If the business prospers, it will be much harder to manage, and
because of all these disadvantages you will probably need to
incorporate it.
A corporation is an organization legally permitted to carry
certain activities, such as running a railroad or producing a
newspaper. The owners of the corporation are only responsible for
the money they invest in it. A corporation is a legal entity separated
from its owners called shareholders. So, when a shareholder dies, the
corporation does not go out of existence. Also, the corporation is
managed by directors who are chosen by the owners.
The ownership of a corporation is divided among the
shareholders who get stock certificates in change which represent a
part of the firm’s earnings. The shares can be sold on the stock
market. The firm’s earnings can be either given to the shareholders
as dividends or kept in the firm as retained earnings.
Dividends are payments made by a corporation to its
stockholders. Retained earnings are earnings that are not paid to the
corporation’s stockholders but are kept in the firm. Corporations do
not necessarily need to pay dividends but most do. The retained
earnings are used to finance investment and increase the value of the
firm’s shares.
Capital Gains are earned when an asset such as a share of stock
is sold and the seller receives more than was originally paid for the
asset. They can be used to finance investment in equipment, kept in
the bank or to buy another company. A company that uses its
earnings to build up assets are more likely to have their shares’ value
risen because potential shareholders will expect the company to pay
larger dividends.
So, the advantages of a corporation are:
-The shares can be quickly and cheaply sold.
-The shareholders have limited liability compared to a
partnership. For example, the worst case scenario for a shareholder
would be that the shares’ price to fall, while a partner would have to
pay the for the firm’s debt.
How can a corporation’s profit be maximized? The board of
directors who are chosen do not have direct control over the
management decisions. The day to day decisions are made by
managers. The managers’ salaries are usually higher the larger the
firm is. Therefore, it is argued that the managers’ goal is to make the
firm grow bigger than trying to maximize the wealth of the
shareholders. And to make the company grow, managers might
instead retain the earnings and use them to expand.
Large businesses make donations to charity, television or act in
philanthropic ways that don’t directly increase their profits . They, in
fact, increase the profit in the long run because the community in
which the firm operates will think well of it. Though, corporations
don’t spend a large fraction of their profit on donations (less than 1
percent of the profits).
The main purpose of a firm is to maximize profit which is the
difference between revenue and cost. A firm’s revenue is the amount
of money it receives on a given period. The firm’s costs represent the
expenses of producing the goods or services sold during the period.
Very often, a firm is not paid right after it sells the services or
goods it sold, not does it pay the services or goods it bought.
However, revenues are defined as the value of goods or services sold
or rented during the year, regardless of when payment is received.
A firm’s cash flow is the amount of money it actually receives in
a given period. So, the cash flow might be low while the profits are
high. This is why firms need to start with a high capital-so that they
are able to pay the bills even when little cash is flowing in.
Physical capital is the durable assets that are used in operating
a firm. The cost of using, instead of the cost of buying should be
treated when buying assets, as the physical capital’s price is
depreciated. Depreciation is the loss of value resulting from the use
of physical capital within a given period.
The income, profit or loss tell us how a firm did during a year
and the balance sheet gives us a picture of it at a given time. The
assets are what a firm own and liabilities are what it owes. Net worth
is the difference between assets and liabilities. The profit kept as
retained earnings can increase the net worth in 2 ways: increase the
assets’ value or decrease the liabilities.
Though, a firm’s selling value can be higher than the net worth
because the firm has assets that are not on the balance sheet such as
the skill or knowledge of the employees and good reputation which
lead to future growth.