Entrepreneurship and Small Business

What Is “Small Business”? Independently owned and managed business that does not dominate its market

What Is “Small Business”? A small business serves a limited geographic area, employs fewer than 500 people, and is not dominant in its industry.

Popular Areas of Small Business Enterprise Services Retailing Construction Financial Insurance Wholesaling Transportation Manufacturing Manufacturing 5% Finance & Insurance 10% Other 1.7% Wholesale 8% Transportation 5% Construction 10% Services 37.6% Retailing 22.7%

Advantages of Small Business Some of the advantages of owning a small business are: Being the boss Offering services large companies cannot offer Ease of formation

Disadvantages of Small Business When you’re a small business owner, you’re responsible for decisions. You often work long hours and have great financial responsibility.

Disadvantages of Small Business About four out of five small businesses fail in their first five years.

Disadvantages of Small Business Small business owners may mistake the freedom of being in business for oneself for the liberty of working or not.

Disadvantages of Small Business A small business may underprice or overprice goods or services. Going into business with little or no experience may result in the business closing.

Disadvantages of Small Business Why a small business might not work: 1. Effect of Change Consumers’ tastes change. If flexibility and change are not part of the business, then it’s likely to fail.

Disadvantages of Small Business Why a small business might not work: 2. Managerial Skills Needed A small business owner must have multiple skills including: Financing Employee relations continued

Disadvantages of Small Business Managerial Skills Needed Production Customer Relations

Disadvantages of Small Business Why a small business might not work: 3. Inadequate Financial Planning Starting with little money, spending carelessly, borrowing money without planning, and forgetting about taxes and insurance may result in a failure.

Types of Business Organizations Type of Business 73% 7% 20% Sales Revenue 5% 6% 89% Sole Proprietorship Partnership Corporations

Comparative Summary: Three Forms of Business Business Form Liability Continuity Management Investment Sources Proprietorship Personal, unlimited Ends with death or decision of owner Personal, unrestricted Personal General Partnership Personal, unlimited Ends with death or decision of any partner Unrestricted or depends on partnership agreement Personal by partner(s) Corporation Capital invested As stated in charter, perpetual or for specified period of years Under control of board of directors, which is selected by stockholders Purchase of stock Copyright ©2003 Prentice Hall, Inc. 4 - 15

Limited fundraising capability Lack of continuity Sole Proprietorships Advantages: Freedom Simple to form Low start up costs Tax benefits Disadvantages: Unlimited Liability Limited resources Limited fundraising capability Lack of continuity Unlimited Liability Legal principle holding owners responsible for paying off all debts of a business

More fundraising capability Relatively easy to form Tax benefits Partnerships Advantages: More talent and money More fundraising capability Relatively easy to form Tax benefits Disadvantages: Unlimited Liability Disagreements among partners Lack of continuity Unlimited Liability Legal principle holding owners responsible for paying off all debts of a business

Remember… “When two men in business always agree, one of them is unnecessary.” William Wrigley Jr. But… An exit plan is still crucial!

What is a Corporation? “An artificial being, invisible, intangible, and existing only in contemplation of the law.”

Stronger fundraising capability Disadvantages: Double Taxation Corporations Advantages: Limited Liability Continuity Stronger fundraising capability Disadvantages: Double Taxation Fluid control Complicated and expensive to form

Types of Corporations Closely Held (Private) Corporation Publicly Held (Public) Corporation Limited Liability Corporation (LLC) Professional Corporation Multinational or Transnational Corporation

Buying an Existing Business Getting Started Buying an Existing Business Starting From Scratch

Financing the Small Business Personal resources Loans Venture capital companies Small-business investment companies Small Business Association (SBA) Financial aid and management advice

FRANCHISING An Ownership Opportunity Advantages Disadvantages Proven business opportunity Access to management expertise Disadvantages Start-up costs On-going payments Management rules and restrictions