Chapter 2. The Structure of Corporations

Capitalism is the economic system of business. This is a system based on private enterprise. Individuals and businesses own land, farms, factories, and equipment, and they use those assets in the attempt to earn profits. Capitalism is a good economic system because it can provide rewards for those who work hard and are inventive and creative enough to figure out new and better ways of doing things. The capitalistic system provides most of the jobs and creates most of the wealth in our society. One of the potential rewards for creating value in the economy is wealth for you. The wealth incentive provides the fuel for the constant generation of new ideas and fosters economic value that provides jobs and raises the American standard of living.

Selling products and services for a profit creates economic value. The goal of the firm is to create an environment in which it can earn profits over the long term. The creation of long- term profits is based on two main sources. First, a business must provide products and/or services to its customer base. A large portion of the value of the business comes from the profits, now and in the future, of this business activity. Finding ways to increase the profits from these core operations can increase economic value. Second, potential for increasing profits comes from the growth in sales. Sales growth comes from selling more of the existing product and from providing new products to sell.

However, expansion usually requires more money, or capital. Business activities also entail risk. The ability to access capital and control risk is an important aspect in the success or failure of a firm. Access to capital and ability to control risk are influenced by the manner in which a firm is organized. A business can be a sole proprietorship, a partnership, or a corporation. Each of these organizational forms has different advantages and disadvantages in the business world.