Usachev V.A., Vashanova V.V.

Donetsk Nation University of Economics and Trade named after Mikhailo Tugan-Baranovsky

The Work of Private Enterprises

In capitalist economies, a predominant proportion of productive capacity has belonged to companies, in the sense of for-profit organizations. This include many forms of organizations that existed in earlier economic systems, such as sole proprietorships and partnerships. Non-profit organizations existing in capitalism include cooperatives, credit unions and communes.

Another form of organization is called corporation, which can be both for-profit and non-profit. This entity can act as a virtual person in many matters before the law. This gives some unique advantages to the owners, such as limited liability of the owners and perpetual lifetime beyond that of current owners.

A special form of corporation is a corporation owned by shareholders who can sell their shares in a market. One can view shares as converting company ownership into a commodity - the ownership rights are divided into units (the shares) for ease of trading in them. Such share trading first took place widely in Europe during the 17th century and continued to develop and spread thereafter. When company ownership is spread among many shareholders, the shareholders generally have votes in the exercise of authority over the company in proportion to the size of their share of ownership.

Authority over productive capacity in capitalism has resided with the owners of companies. Within legal limits and the financial means available to them, the owners of each company can decide how it will operate. In larger companies, authority is usually delegated in a hierarchical or bureaucratic system of management.

Importantly, the owners receive some of the profits or proceeds generated by the company, sometimes in the form of dividends, sometimes from selling their ownership at higher price than their initial cost. They may also re-invest the profit in the company which may increase future profits and value of the company. They may also liquidate the company, selling all of the equipment, land, and other assets, and split the proceeds between them.

When starting a business, the initial owners or investors typically provide some money (the capital) which is used by the business to buy or lease some means of production. Thus, to be successful in business you must take into consideration the follows:

1. Share capital.

Share capital is contributed by shareholders who put up money and hold shares in the company. Each share represents ownership of a small proportion of the company. Shareholders receive periodic payments called dividends, usually based on the company’s profit during the relevant period. Capital in the form of shares is also called equity.

A venture capitalist is someone who puts up money for a lot of new companies.

2. Loan capital.

Investors can also lend money, but then they do not own a small part of the company. This is loan capital, and an investor or a financial institution lending money in this way is a lender. The company borrowing it is the borrower and may refer to the money as borrowing or debt. The total amount of debt that a company has is its indebtedness.

The sum of money borrowed is the principal. The company has to pay interest, a percentage of the principal, to the borrower, whether it has made a profit in the relevant period or not.

3. Security.

Lending to companies is often in the form of bonds or debentures, loans with special conditions. One condition is that the borrower must have collateral or security: that is, if the borrower cannot repay the loan, the lender can take equipment or property, and sell it in order to get their money back. This may be an asset which was bought with the loan.

4. Leverage.

Many companies have both loan and share capital. The amount of loan capital that a company has in relation to its share capital is its leverage. Leverage is also called gearing in BrE. A company with a lot of borrowing in relation to its share capital is highly leveraged or highly geared. A company that has difficulty in making payments on its debt is overleveraged.

For example, the enterprise may buy or lease a piece of land and a building; it may buy machinery and hire workers (labor-power), or the capitalist may provide the labor himself. The commodities produced by the workers become the property of the capitalist ("capitalist" in this context refers to a person who has capital, rather than a person who favors capitalism), and are sold by the workers on behalf of the capitalist or by the capitalist himself. The money from sales also becomes the property of the capitalist. The capitalist pays the workers a portion of this profit for their labor, pays other overhead costs, and keeps the rest. This profit may be used in a variety of ways, it may be consumed, or it may be used in pursuit of more profit such as by investing it in the development of new products or technological innovations, or expanding the business into new geographic territories. If more money is needed than the initial owners are willing or able to provide, the business may need to borrow a limited amount of extra money with a promise to pay it back with interest. In effect, it may rent more capital.