Part 5—Job Satisfaction Chapter 22 Entrepreneurship: A Business of Your Own

Chapter Objectives Explain the importance of small business to the U.S. economy. Determine advantages and disadvantages of entrepreneurship. Explain points to consider when planning a business, selecting a location, and pricing a product or service. Discuss advantages and disadvantages of conducting a business from home. Describe legal and financial issues associated with starting a business.

Key Concepts Entrepreneurs and their small businesses play an important role in the economy of the United States. Many people find that the advantages of being an entrepreneur are worth the risks. Setting up a business includes choosing the business, choosing the location of your business, and pricing your product or service. Entrepreneurs often need professional help dealing with the legal and financial issues involved with starting a business.

Entrepreneurship: A Business of Your Own Entrepreneur: A person who organizes and manages a business. Entrepreneurship: The organization and management of a business.

The Importance of Small Business Businesses owned by entrepreneurs create jobs, which helps keep the economy strong. Small businesses can identify and meet consumer needs by providing specialized products and services. The majority of workers who do not work for the government are employed by small businesses.

Opportunities for Entrepreneurs An entrepreneur must organize a business, plan its direction, and take risks. Entrepreneurship includes starting a new business, significantly enlarging it, or reorganizing a failed business.

Advantages of Entrepreneurship Are their own bosses. Make their own decisions. Set their own schedules. Try new ideas. Keep their company’s profit.

Disadvantages of Entrepreneurship Must be willing to do all the jobs of a new business. Often work 60 hours per week. Worry about making a profit. Bear the burden of their decisions. Feel pressure from knowing their business could fail.

Types of Business Ventures An entrepreneur can start any type of business he or she wants. Some entrepreneurs use established business concepts, while others introduce new ideas.

Franchises Franchise: The right to market another company’s product or service. Purchasing a franchise can be very expensive. continued

Franchises Advantages: Disadvantages: Entrepreneur buys business with a proven track record. Exclusivity – no one can buy into the franchise in the same area. Support from franchiser. Disadvantages: Need a lot of money for initial investment. Ongoing fees for continued use of company’s name. May be required to follow company guidelines.

Buying an Existing Business Existing owners may sell their business if they want to: Change careers. Move. Retire. Advantages: Location is already decided. Business name is already familiar in the community. You will already have loyal customers.

Planning Your Own Business If you had a paper route or lemonade stand as a child, you were an entrepreneur. If that motivated you, you might consider your own business. Making the decision to open your own business should only be done after careful study and thought.

What Does It Take to Succeed? Qualities of successful entrepreneurs: Optimistic. Self-starter. Innovative. Skilled decision maker. Risk taker. Ability to set and achieve goals. Good manager.

Helpful Planning Resources Do research at a library, chamber of commerce, or state commerce department. Small Business Administration (SBA): An agency that provides assistance for small business owners. Many good sources are available online.

Choosing a Business Ideally, your business should combine your interests and abilities. Consider the needs and wants of your consumers. After you choose, find out more about the business—it is better to choose another business than to open one that will fail.

Avoiding Fraud Fraud: The act of deceiving or tricking. Illegal and unethical marketers of business opportunities have scammed thousands of dollars out of people who want to start their own businesses. Fraudulent businesses usually advertise big profits. Your state’s consumer protection agency or a local Better Business Bureau can help you determine if the business is fraudulent.

Choosing a Location The importance of the location depends on the type of business. Factors to keep in mind when choosing a location: Proximity to customers. Ease of access for suppliers. Neighboring businesses that will help attract people. Where competition is located. If area population is in growth or decline. Size of building and number of rooms. Available parking facilities. Any need for special fixtures.

Working from Your Home Working at home can help you keep your costs down while your business is getting started. After your business grows and profits increase, you can move to another location.

Occupations Suited for Working from Home Some types of businesses work well as home-based operations. If you respond to a work-at-home advertisement, the sponsors should be able to tell you: What tasks you will be performing. If pay is based on salary or commission. Who will pay you and when. What will be the cost to you. Commission: A percentage of sales paid to a salesperson.

Advantages and Disadvantages of Working from Home No rent or lease commitment. No commute. No parking expenses. Ability to handle home responsibilities during the workday. Tax advantages. Disadvantages: Family disruptions. Neighbors’ objections. Clients may not take your business seriously. Zoning ordinances may prohibit a home business. continued

Advantages and Disadvantages of Working from Home Zoning laws: Laws that regulate what type of business activities can be performed in certain areas. Check with local zoning commission. You may not be able to open a store in some residential areas.

Setting up a Home Office Setting up a home office requires careful planning and decision making. For tax purposes, keep detailed records, business receipts, bank statements, credit card statements, and mileage logs. Before purchasing office equipment, map your work area and consider space limitations.

Pricing Your Product or Service Many entrepreneurs do not charge enough for their products. Tips to help you decide what price to charge: Determine the highest and lowest acceptable rates for your area. Analyze your field and level of expertise. Consider the level of demand. Determine the value of your product or service. It is important that you charge enough to pay for materials, labor, and overhead expenses.

Legal and Financial Issues If you become an entrepreneur, you will be affected by legal and financial issues: Choosing your business structure. Zoning, licensing, and permits. Obtaining financing. Financial record keeping. Professional assistance.

Choosing Your Business Structure Proprietorship: Advantage – you would be the only owner. Disadvantage – you are responsible for the business and its associated risks. continued

Choosing Your Business Structure Partnership: Advantage – shared business responsibility. Disadvantage – deciding who has the final say in disagreements. Advantage – you may be able to borrow more money than you could by yourself. Disadvantage – being responsible for a partner’s debts. continued

Choosing Your Business Structure Corporation: Advantage – easier to raise money. Disadvantage – costs more to set up. Advantage – less risk to personal assets. Disadvantage – subject to more taxes.

Zoning, Licensing, and Permits Before you open your business, find out what your legal responsibilities are. License: A certificate showing you have been granted permission to practice your occupation. Your state Department of Commerce can help you find out what licenses and permits you will need.

Obtaining Financing Many entrepreneurs have trouble because they fail to obtain sufficient money to run their business. Sources of financing include: Your savings account. Family and friends. A loan from a bank. Outside investors. continued

Obtaining Financing Have the following prepared before you apply for a loan: Your business plan. A list of your financial needs estimating your capital, fixed, and flexible expenses. A statement of your assets and liabilities. Your résumé. continued

Obtaining Financing Capital expenses: One-time costs needed to get the business started. Fixed expenses: Expenses that must be paid regularly in set amounts. Flexible expenses: Expenses that vary from month to month. Assets: Items you own. Liabilities: All the debts you owe.

Financial Record Keeping Keeping good financial records can help in your planning once your business is running. Bookkeeping: The recording of income and other expenses. Accounting: An analysis of the record keeping data of the business. continued

Financial Record Keeping The type of record keeping system you use depends on the type of business. Compare your profits from year to year to evaluate the success of the business. Receipts: All the money you receive from customers for cash and credit sales. Profit ratio: The percentage of receipts that are profits; figured by dividing total profit by total receipts. Break-even point: When income equals expenses.

Professional Assistance Lawyers: Help set up business structure, check zoning laws and license requirements, other legal problems related to your business. Accountants: Help choose record keeping system, help with loan applications, handle your taxes, analyze your books, and give advice on how to increase profits. Insurance agents: Recommend and provide different types of coverage (fire, theft, liability, disability).

Thinking Back What should you consider when planning a business? What are the advantages and disadvantages of conducting business from home? What legal and financial issues are associated with starting a business?