Types of business ownership Chapter 4

Academic Preparation  To take business classes in high school  To go to college and get a degree in business  Co-oping or Internship  Attending workshops, seminars, trade shows

What do successful entrepreneurs do before opening a new business?  Identify the wants and needs of the marketplace. Will their business be able to satisfy?  Set financial goals - (how much money you want to make, when you want to pay off your debts)  Set nonfinancial goals – personal satisfaction receive (helping community, personal independence, doing something you like)

Sole Proprietorship (most common form of business)  One person is in control of the business –Advantages: Very little government control – Receives all of the profits –Relatively easy to start –Taxed less –Disadvantages: You are solely responsible – unlimited liability –Limited money –Make all decisions yourself

Partnership  Advantages –Have someone to share in decision-making and management responsibilities –You don’t have to come up with all of the money/capital by yourself –Less taxation than corporation –Losses will be shared by all partners –Face very little government regulation

Disadvantages  May have disagreements on business operation  May be held liable for partner’s mistakes  All partners must assume the liability (unless wrote up different)  Death of partner may dissolve the partnership

Corporation (chartered through a state and legally operates apart from owners)  Advantages: –Can get money through sale of stock –Limited liability –Can easily enter and leave business (sell stock) –Areas can be managed by experts  Disadvantages: –Complex to form –Increased government regulation –Higher taxes on profits –Major accounting /recordkeeping

What is a business plan???  A written document that describes all the steps necessary in opening and operating a business (used to guide your business)

Franchise  Legal agreement that gives an individual a legal right to market a company’s product or services in a particular area

Operating Costs  Initial franchise fee – right to run business  Start-up costs – costs to rent facility, equipment costs, inventory  Royalty fees – weekly or monthly payments to owner to seller of franchise  Advertising fees – fees paid to support advertising of franchise as a whole

Advantages of franchise  Have an established product or service  Franchisors offer management, technical, and other assistance  Equipment and supplies may be less expensive (get better contract deals)  Guarantee of consistency attracts customers

Disadvantages of franchise  Can cost a lot of money  Don’t get as much of profits  Less freedom to make decisions  Dependent on performance of other franchises  Franchisor my terminate the franchise agreement or not renew it

Things to consider???  Will I have an exclusive territory?  What are the costs and royalty fees?  How profitable have other franchises been?  How long has franchisor been in business?  What services will the franchisor offer me?  What happens if I cancel the agreement?

Financial and Nonfinancial Goals  Set goals –Financial – how much money make, how long to make a profit –Non-financial – personal satisfaction, independence  Three main skills needed by entrepreneurs?  Independent  Persistent  Organized  Good decision-makers

What is scarcity?  There are limited resources and unlimited wants and needs in our economy – forces us to have to make choices –Resources of a business:  Land – physical property owned  Labor – people working  Capital – money and resources used to make a product (could be buildings, equipment, etc.)  Entrepreurship – people owning their own business

Command Economy/Market Economy  Market economy (United States) –Not a lot of government control –The consumer decides what gets produced, how its produced, and for whom  Command economy (North Korea) –Government controls the factors of production and makes all the economic decisions (What, How, and for Whom)

Government affects what gets produced by?  Allowing competition  Having regulations to protect the consumer  Promote business ownership

Advantages to buying an existing business  The business already has customers, suppliers, and procedures  The seller may train the new owner  There are prior records of revenues, expenses and profits.  May be easier to get financing (less risk for the bank)

Disadvantages of buying an existing business.  The business may not be making a profit.  You may inherit serious problems. (poor reputation, trouble with suppliers, etc.)  Capital is required

Before buying a new business what should you find out/do???  Visit during business hours  Make sure business meets your objectives  Get a complete financial accounting report for the last 3 years  Ask for important information in writing.  Meet with a business broker to help with whether or not it is a good investment.

Advantages of entering a family business?  Pride and sense of mission working with family  Some enjoy working with relatives.  Like keeping the business in the family

Disadvantages of working with family  Senior management positions – held by family members regardless of their ability  May be hard to retain good employees who are not members of family  Family politics may affect decision-making  Sometimes distinction between family-life and business is blurred