1. Entrepreneurship, Small Business, and New Venture Creation
Chapter 4:

2. L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to:
Explain the meaning and Interrelationship of the terms small business, new venture creation, and entrepreneurship.
Describe the role of small and new businesses in the Canadian economy.
Explain the entrepreneurial process and describe its three key elements.
2009 Pearson Education, Inc.
In this chapter we will examine entrepreneurship, new ventures and types of business ownership. We will define small business, discuss its importance to the U.S. economy, and explain popular areas of small business. We will explain entrepreneurship and describe some key characteristics of entrepreneurial personalities and activities.
Additionally, we will describe the business plan and the start-up decisions made by small businesses and identify sources of financial aid available to such enterprises. We will discuss the trends in small business start-ups and identify the main reasons for success and failure among small businesses.
Teaching Tips:
Ask the class to engage in the following way with the each objective:
Objective 1: Define small business, discuss its importance to the U.S. economy, and explain popular areas of small business.
Please take out a piece of paper and write down one example of a small business that you visit frequently. Then write down why you think it is important for this small business and others like it to be part of the U.S. economy. Now join with another student and share your response. Each pair of students will share their responses with the class.
Responses will vary.
Objective 2: Explain entrepreneurship and describe some key characteristics of entrepreneurial personalities and activities.
Please remain in your teams from Objective 1. I would like each team to provide a description of entrepreneurship and make a list of 5 key characteristics of an entrepreneur. Once you have completed your description and five examples, join with another team and share your answers with your combined team. Each team will then tell the class its best example of a characteristic of an entrepreneur and why this characteristic is important.
Answers will vary. You can reserve judgment on characteristics until you have completed reviewing the chapter with the students.
Objective 3: Describe the business plan and the start-up decisions made by small businesses and identify sources of financial aid available to such enterprises.
Please form new pairs of two students. Each pair will write down its answer to the following question, “What is the purpose of a business plan?”.
Answers should include:
It is needed to obtain financing.
It is needed to plan how the small business will operate.
It is needed to decide how the small business will sell its products or services.
Other answers may also apply.
Objective 4: Discuss the trends in small business start-ups and identify the main reasons for success and failure among small businesses.
Please combine with another pair of students. Take a moment and answer the following questions:
What are two main reasons for success and failure among small businesses?
How does a recession affect a small business?
Once you have completed your answers, please share them with your team. Each team will them report their answers to the entire class.
Answers will vary and could include such areas as web-based businesses, small restaurants, etc. Reasons for the success and failure could include not enough business planning or an inappropriate business plan, inadequate financing for the business, etc. You can also tell the students that they need to review their answers after you have completed review of the entire chapter.

3. L E A R N I N G O B J E C T I V E S (cont’d)
After reading this chapter, you should be able to:
Describe three alternative strategies for becoming a business owner-starting from scratch, buying an existing business, and buying a franchise.
Describe four forms of legal organization for a business and discuss the advantages and disadvantages of each.
Identify four key reasons for success in small businesses and four key reasons for failure.
We will also explain types of companies that businesses can form and the advantages and disadvantages of each. These include sole proprietorships, partnerships and cooperatives, corporations, and different types of corporations.
We will also explain the basic issues involved in managing a corporation and discuss special issues related to corporate ownership.
Teaching Tips
Objective 5: Explain sole proprietorships, partnerships, and cooperatives and discuss the advantages and disadvantages of each.
In your teams, please choose one of the three types of small businesses in Objective 5. Please list two advantages and disadvantages of each.
Answers will vary. If you choose, you can hold off on providing the right answers until later in the class when you review this material.
Objective 6: Describe corporations, discuss their advantages and disadvantages, and identify different kinds of corporations.
In your student teams, please think of two types of corporations and write down one advantage and one disadvantage of each. We will share our answers with the class.
Answers will vary but should include the major types of corporations such as C corporation, sub chapter S and others. You can wait to see if their advantages and disadvantages are correct once you get to that point in the chapter.
Objective 7: Explain the basic issues involved in managing a corporation and discuss special issues related to corporate ownership.
In your student teams, discuss what you think is one of the basic issues involved in managing a corporation. We will share these with the class.
Answers will vary.
© 2009 Pearson Education, Inc.

4. What’s in It for Me?
By understanding the material discussed in this chapter, you’ll be better prepared to:
Understand the keys to entrepreneurial success, including business planning
Discuss the reasons for success or failure
Evaluate the advantages and disadvantages of different kinds of ownership
What’s in this for you?
By understanding the material discussed in this chapter, you’ll be better prepared to:
Understand the keys to entrepreneurial or small business success, including the elements of business planning.
Discuss the reasons for the success or failure of a small business.
Evaluate the advantages and disadvantages of different kinds of ownership.
Teaching Tips:
Which of these three points will be most interesting to you and why? Discuss in your teams, and we will share with the class.
Answers will vary.
© 2009 Pearson Education, Inc.

5. Exercise
Write down one example of a small business that you visit frequently. Then write down why you think it is important for this small business and others like it to be part of Gaza economy.

6. Small businesses in Canada
In 2009, the number of self-employed Canadians increased by
Every day, approximately 380 businesses are started in Canada.

7. Small business (SM)
Defining a "small" business can be a bit tricky.
Various measures might be used, including the number of people the business employs, the company's sales revenue, the size of the investment required, or the type of ownership structure the business has.

8. SM in Canada
A goods producing business in the Register is considered small if it has fewer than 100 employees.
while a service producing business is considered small if it has fewer than 50 employees.
Industry Canada reports that there are 2.3 million “ small business establishments" in Canada and about 2.6 million people who are "self-employed."

9. SM contribution to GDP in Canada
small business's contribution to Canada's GDP over the past decade at 26 percent annually

10. What Is a “Small” Business?
Small Business Defined
A business that is independent (not part of a larger business) and that has relatively little influence in its market.
A new venture as a recently formed commercial organization that provides goods and/or services for sale.
First, let’s define a small business:
A small business is one that is independent or not part of a larger business, and that has relatively little influence in its market.
There are a number of reasons why small business is important in the U.S. economy. Let’s see if the points you discussed earlier are among these reasons:
Job creation: Did you know that more than half of all new jobs created in the U.S. are by small businesses?
Innovation: Most new innovative product or service ideas come from small businesses.
Contributions to big business: Small businesses are suppliers of specialized services and raw materials to big business. They are also retailers or distributors of the larger firms’ products or services.
Teaching Tips:
Please return to your student team and the list you prepared of the types of small businesses you discussed. Please review your response as to why you believe your small business example is important to the U.S. economy. Please provide a connection to the three key reasons from our review of the chapter. We will share the answers with the class.
Answers will vary.
© 2009 Pearson Education, Inc.

11. What Is a “Small” Business?
Why Small Business is important in the Economy
Job creation: more than half of all new jobs created in the U.S. are by small businesses.
Innovation: Most new innovative product or service ideas come from small businesses. E.g., PC, photocopier.
Contributions to big business:
Suppliers of specialized services and raw materials
Sellers of larger firms’ products
First, let’s define a small business:
A small business is one that is independent or not part of a larger business, and that has relatively little influence in its market.
There are a number of reasons why small business is important in the U.S. economy. Let’s see if the points you discussed earlier are among these reasons:
Job creation: Did you know that more than half of all new jobs created in the U.S. are by small businesses?
Innovation: Most new innovative product or service ideas come from small businesses.
Contributions to big business: Small businesses are suppliers of specialized services and raw materials to big business. They are also retailers or distributors of the larger firms’ products or services.
Teaching Tips:
Please return to your student team and the list you prepared of the types of small businesses you discussed. Please review your response as to why you believe your small business example is important to the U.S. economy. Please provide a connection to the three key reasons from our review of the chapter. We will share the answers with the class.
Answers will vary.
© 2009 Pearson Education, Inc.

12. FIGURE 3.2: Small Business by Industry
Let’s take a look at the number of small businesses by industry in this graph.
Services represent 50.07% of all small businesses.
Retail stores represent 13.06%.
Construction firms represent 12.70%.
Wholesalers represent 6%.
Finance and insurance businesses represent 4.11%.
Manufacturing represents 4.4%.
Transportation represents 2.76%.
Other types of small business make up the remaining 6.90%.
Teaching Tips:
In your student teams, please think of three examples of small businesses that provide services.
Answers will vary.
© 2009 Pearson Education, Inc.

13. Entrepreneurship Entrepreneurship
The process of seeking business opportunities under conditions of risk and accessing the resources needed to capitalize on/exploit that opportunity.
Entrepreneur
One who accepts the risks and opportunities of creating, operating and growing a new business
Small Business Owner
A person who independently owns a business that has relatively little impact in its market
Let’s define some terms relating to entrepreneurship:
Entrepreneurship is the process of seeking business opportunities under conditions of risk.
An entrepreneur is someone who accepts the risks and opportunities of creating, operating and growing a new business.
A small business owner is a person who independently owns a business that has relatively little impact in its market .
Teaching Tips:
In your student teams, please give an example of each one of the three definitions we just reviewed.
Answers will vary.
© 2009 Pearson Education, Inc.

14. Intrapreneur
People who exhibit entrepreneurial characteristics and create something new within an existing firm or organization are called intrapreneurs .

15. Businesses in Canada by size
97.8 percent of all businesses In Canada are small (they have fewer than 100 employees), and more than half of them have fewer than 5 employees
Medium-sized businesses: ( employees) comprise 1.9 percent of employer businesses.
Large businesses (those with 500 or more employees) represent just 0.3 percent

16. New Ventures in Canada
New firms are not only the main source of job creation, they are also responsible for the vast majority of new products and services.
In 2007, small business created jobs in Canada; this represented 40 percent of all jobs that were created that year.
Between 2002 and 2006, approximately new small businesses were started each year in Canada.
During that same period, an equal number of small businesses ceased operations each year

17. women entrepreneurs in Canada
More and more women are starting their own small businesses; women now account for half of all new businesses that are formed.
According to a recent Statistics Canada report, there are about women entrepreneurs in Canada

18. The Entrepreneurial Process
First: Identifying Opportunities:
Idea Generation: Typically, generating ideas involves abandoning/ stopping traditional assumptions about how things work and how they ought to be, and seeing what others do not do. Thinking outside the box.
Screening Entrepreneurs often generate many ideas, and screening them is a key part of the entrepreneurial process.

19. Characteristics of good ideas
The Idea Creates or Adds Value for the Customer: solves a significant problem
The Idea Provides a Competitive Advantage That Can Be Sustained:
The Idea Is Marketable and Financially Viable: enough customer.
The Idea Has Low Exit Costs: can be shut down without a significant loss.

20. The Entrepreneurial Process
Second: Developing the Opportunity
New ventures use one or more of three main entry strategies:
They introduce a totally new product or service; they introduce a product or service that will compete directly with existing competitive offerings but adds a new twist (customization of the standard product); or they franchise, or an existing business.

21. The Entrepreneurial Process
Collateral= loan security/guarantee
Financial Resources, Source of fund:
Personal savings
Love money. This type of financing includes investments from friends
Private investors: usually entrepreneurs.
Venture capitalists: professionally managed pools of Investor money
Financial Institutions

22. The Entrepreneurial Process
Collateral= loan security/guarantee
Financial Resources, Source of fund:
Suppliers. This Is referred to as trade credit from supplier, receive goods today and pay later.
Incubator: consulting services, legal advice, accounting services ..

23. The Entrepreneur- Opportunity Fit
The first assessment of fit is between the entrepreneur and the opportunity.
The entrepreneur needs to decide whether the opportunity is something he or she can do and wants to do. A realistic self-assessment is important.

24. The entrepreneurial process in a new venture context.

25. Entrepreneurial Characteristics
Successful Entrepreneurs:
Are resourceful: money – skills- experience.
Are concerned about good customer relations.
Desire to be their own boss (self-employed).
Can deal with uncertainty and risk.
Are open-minded.
Rely on networks, business plans, and consensus.
Have different views on how to succeed, to automate a business, and when to rely on experience or business acumen/wisdom.
A successful entrepreneur has a number of characteristics that make him or her successful. Let’s review some of these. Successful entrepreneurs:
Are resourceful.
Are concerned about good customer relationships.
Desire to be their own boss.
Can deal with uncertainty and risk.
Are open-minded.
Rely on networks, business plans and consensus.
Have different views on how to succeed, to automate a business, and when to rely on experience or business acumen.
Teaching Tips:
Please join with another class member. In your team please review the list you made earlier of entrepreneurial characteristics, when we were discussing learning objectives for this chapter. First, see how on target you were. Second, prepare a list of the characteristics that apply to you. Let’s share our examples with the class.
Answers will vary but can build upon examples presented earlier in the discussion of the chapter learning objectives and from the list on this slide.
© 2009 Pearson Education, Inc.

26. Starting and Operating a New Business
The first step: Crafting a Business Plan
Business Plan: Conveys a description of the business strategy for the new venture and how it will be implemented
A business plan should address:
The entrepreneur’s goals and objectives
The strategies that will be used to obtain them
The implementation of the chosen strategies
Now we will turn our attention to starting and operating a new business. The first step is to craft a business plan. A business plan conveys a description of the business strategy for the new venture and how it will be implemented. It should also address three key areas:
The entrepreneur’s goals and objectives.
The strategies that will be used to obtain them.
The implementation of the chosen strategies.
How do we prepare a business plan?
We set goals and objectives.
We forecast sales of our products or services.
We undertake financial planning.
In addition, there are three key questions every business plan should answer. These will be easy for you to remember:
Where is the business now? How did it get to this point?
Where do we want to go with the business? (This addresses the first item we discussed earlier.)
How are we going to get where we want to go? (These address the second and third items we reviewed earlier.)
Teaching Tips:
In your same team, please think of an idea for a new business. In your team, please answer the three questions—where are we now (or where is the idea now), where do we want to go with this new business (what are our objectives) and how are we going to get there (what strategies will we use). Please share your example with the class.
Answers will vary.
© 2009 Pearson Education, Inc.

27. Prepare a simple business plan, should include
Homework
Prepare a simple business plan, should include
Type of business (restaurant, supermarket..)
Objectives
Capital size, source of money.
Strategy will be used to do it
Location and marketing
Submission date: 12/10/2016

28. Starting and Operating a New Business
How do we prepare a business plan?
Setting goals and objectives
Sales forecasting
Financial planning: prepare budget, financial statements, financial analysis.
Now we will turn our attention to starting and operating a new business. The first step is to craft a business plan. A business plan conveys a description of the business strategy for the new venture and how it will be implemented. It should also address three key areas:
The entrepreneur’s goals and objectives.
The strategies that will be used to obtain them.
The implementation of the chosen strategies.
How do we prepare a business plan?
We set goals and objectives.
We forecast sales of our products or services.
We undertake financial planning.
In addition, there are three key questions every business plan should answer. These will be easy for you to remember:
Where is the business now? How did it get to this point?
Where do we want to go with the business? (This addresses the first item we discussed earlier.)
How are we going to get where we want to go? (These address the second and third items we reviewed earlier.)
Teaching Tips:
In your same team, please think of an idea for a new business. In your team, please answer the three questions—where are we now (or where is the idea now), where do we want to go with this new business (what are our objectives) and how are we going to get there (what strategies will we use). Please share your example with the class.
Answers will vary.
© 2009 Pearson Education, Inc.

29. Methods of Starting the Small Business
Buying an Existing Business
Less risk in purchasing ongoing, viable business
About one third of all new businesses that were started in the past decade were bought from someone else.
Advantages:
Increases the likelihood of success;
it has already proven its ability to attract customers and has established relationships with lenders, suppliers, and other stakeholders.
The track record.
Real Picture of what to expect than estimate.
Let’s examine different ways of starting a small business. One way is to buy an existing business. This provides for less risk because it is an ongoing, viable business.
Another method is franchising. Franchising involves either buying an existing franchise, such as a fast food restaurant or store, etc., or buying the franchise to start a new branch or site for an existing franchise. Let’s look at the advantages and disadvantages of franchising. Advantages include:
A franchise is a proven business opportunity for the franchisee.
The franchise provides access to the management expertise of the franchisor.
Disadvantages include:
Start-up costs for the purchase of the franchise. These can run from $50,000 to the hundreds of thousands of dollars.
Ongoing payments must be made to the franchisor.
Management of the franchise places rules and restrictions on the franchisee.
Teaching Tips:
In your student teams, pick a common franchise that you frequent and discuss either advantages or disadvantages of owning that particular franchise.
Answers will vary but should reflect on the advantages and disadvantages just discussed.
© 2009 Pearson Education, Inc.

30. Methods of Starting the Small Business
Franchising:
A franchising agreement outlines the duties and responsibilities of each party. It stipulates/specifies the amount and type of payment that franchisees must make to the franchiser. E.g., McDonald's, Pizza.
payment to the franchiser ranging from 2 to 30 percent of the franchisee's annual revenues or profits.
The franchisee may also pay an advertising fee to the franchiser. Franchise fees vary widely, e.g., $1 million for a Burger King franchise.
Let’s examine different ways of starting a small business. One way is to buy an existing business. This provides for less risk because it is an ongoing, viable business.
Another method is franchising. Franchising involves either buying an existing franchise, such as a fast food restaurant or store, etc., or buying the franchise to start a new branch or site for an existing franchise. Let’s look at the advantages and disadvantages of franchising. Advantages include:
A franchise is a proven business opportunity for the franchisee.
The franchise provides access to the management expertise of the franchisor.
Disadvantages include:
Start-up costs for the purchase of the franchise. These can run from $50,000 to the hundreds of thousands of dollars.
Ongoing payments must be made to the franchisor.
Management of the franchise places rules and restrictions on the franchisee.
Teaching Tips:
In your student teams, pick a common franchise that you frequent and discuss either advantages or disadvantages of owning that particular franchise.
Answers will vary but should reflect on the advantages and disadvantages just discussed.
© 2009 Pearson Education, Inc.

31. Methods of Starting the Small Business
Franchising
Advantages
Proven business opportunity for franchisee
Access to management expertise of franchisor
Disadvantages
Start-up costs for franchise purchase
Ongoing payments to the franchisor
Management rules and restrictions on the franchisee
Let’s examine different ways of starting a small business. One way is to buy an existing business. This provides for less risk because it is an ongoing, viable business.
Another method is franchising. Franchising involves either buying an existing franchise, such as a fast food restaurant or store, etc., or buying the franchise to start a new branch or site for an existing franchise. Let’s look at the advantages and disadvantages of franchising. Advantages include:
A franchise is a proven business opportunity for the franchisee.
The franchise provides access to the management expertise of the franchisor.
Disadvantages include:
Start-up costs for the purchase of the franchise. These can run from $50,000 to the hundreds of thousands of dollars.
Ongoing payments must be made to the franchisor.
Management of the franchise places rules and restrictions on the franchisee.
Teaching Tips:
In your student teams, pick a common franchise that you frequent and discuss either advantages or disadvantages of owning that particular franchise.
Answers will vary but should reflect on the advantages and disadvantages just discussed.
© 2009 Pearson Education, Inc.

32. Starting the Small Business (cont’d)
Starting from Scratch
Disadvantage: Higher risk of business failure
Advantage: Avoids problems of an existing business
Questions to Be Answered:
Who and where are my customers?
How much will those customers pay for my product?
How much of my product can I expect to sell?
Who are my competitors?
Why will customers buy my product rather than the product of my competitors?
Let’s review starting a business from scratch. First, the disadvantage is that there is a higher risk of business failure than if we purchase an existing business or franchise. Second, starting from scratch avoids problems that may be inherent in an existing business that we might purchase.
There are a number of questions that need to be answered when starting a business from scratch:
1. Who and where are my customers?
2. How much will those customers pay for my product?
3. How much of my product can I expect to sell?
4. Who are my competitors?
5. Why will customers buy my product rather than the product of my competitors?
Teaching Tips:
In your same student teams, remember the idea you came up with for a new business a few minutes back. Now please answer the questions we just asked about your new business idea. These of course will only include your own ideas and best estimate.
Answers will vary.
© 2009 Pearson Education, Inc.

33. Exercise
What is the first thing you need in order to obtain a bank loan?
A business plan!

34. Trends in Small-Business Startups
Emergence of
E-commerce
Crossovers from
Big Business
Opportunities for Minorities & Women
Global
Opportunities
Now we will focus on five largest growth trends for new small business startups.
The first is the emergence of e-commerce. The Internet provides new ways of doing business, and entrepreneurs are jumping on board. Internet sales have increased from $55.7 billion in 2003 to $125.1 billion in 2007.
Crossovers from big business is another big trend. What does this mean? It means that more people than ever are leaving big business to start their own small business with much success. Our text offers the example of John Chambers who turned Cisco into a huge Internet connectivity firm, after first spending years working for IBM and Wang.
Opportunities for minorities and women within the small business market have grown rapidly. For example, African American small business owners own 1.2 million small businesses, an increase of 48% over the last five years. Hispanic American small business owners own 1.6 million small businesses, an increase of 31% over the last five years. Asian American small business ownership has grown 24% and Asian Pacific Islander American small business ownership has grown 64% both in the last five years. Nearly 11 million small businesses are now owned by women. Added together, these businesses generate $2.5 trillion in revenues each year.
Women cited a number of reasons for starting their own small business. Let’s review them:
46% of the women started their own business to better control their own schedule.
24% of the women saw a market opportunity and decided to pursue it.
23% of the women were frustrated by the “glass ceiling” in wages at big companies.
And the remaining 7% cited other reasons.
Global opportunities represent another new market for small business owners, such as software development companies, consulting firms and higher education.
44% of small businesses will succeed and remain in operation after 4 years, offering better survival rates than in the 1970s when nearly half of all new businesses failed.
Teaching Tips:
In your student teams, think of a new idea for an e-commerce or Internet-based business. Discuss why you believe your business idea could succeed. Then we will share our ideas with the class.
Answers will vary.
Better
Survival Rates
© 2009 Pearson Education, Inc.

35. Five largest growth trends for new small business startups
The first is the emergence of e-commerce. The Internet provides new ways of doing business, and entrepreneurs are jumping on board. Internet sales in USA have increased from $55.7 billion in 2003 to $125.1 billion in Globally B2B represented more than 7 trillion in 2004 according to UN. In 2015 estimated 20 trillion

36. Five largest growth trends for new small business startups
Second: Crossovers from big business is another big trend. An example, John Chambers who turned Cisco into a huge Internet connectivity firm, after first spending years working for IBM and Wang.

37. Five largest growth trends for new small business startups
Third: Opportunities for minorities and women within the small business market have grown rapidly. For example, African American small business owners own 1.2 million small businesses, an increase of 48% over the last 5 years. Hispanic American small business owners own 1.6 million small businesses, an increase of 31% over the last 5 years. Asian American small business ownership has grown 24% Nearly 11 million small businesses are now owned by women in US. All together, these businesses generate $2.5 trillion in revenues each year in USA.

38. Five largest growth trends for new small business startups
Women cited a number of reasons for starting their own small business. Let’s review them:
46% of the women started their own business to better control their own schedule.
24% of the women saw a market opportunity and decided to pursue it.
23% of the women were frustrated by the “glass ceiling” in wages at big companies (discrimination)
And the remaining 7% cited other reasons.

39. Five largest growth trends for new small business startups
Fourth: Global opportunities represent another new market for small business owners, such as software development companies, consulting firms and higher education. Fifth: 44% of small businesses will succeed and remain in operation after 4 years, offering better survival rates than in the 1970s when nearly 50% of all new businesses failed.

40. How about in Palestine?
More than 98% percent of all businesses are small, they employ 10 persons or less.
Why the businesses in Palestine are dominated by small ones?
Individualism trend.
Family oriented.
Lack of availability of fund.
Lack of awareness of the process of establishing corporations/large business.
The skills needed to set and manage large companies are not there.
The Israeli occupation’s policies.
Lack of government support.

41. The Labor Force Reflects the Importance of Small Business
Over 86% of U.S. businesses have no more than 20 employees. The total number of people employed by these small businesses is about 25% of the entire U.S. workforce. Another 29% of the workforce is employed by businesses with fewer than 100 employees.

42. Success and Failure in new ventures
Ultimately, 63% of all new businesses fail in US.
Each year 600,000 and 650,000 new businesses are launched in US. 500,000 to 600,000 are failed.

43. Reasons for failure
Poor management: it is not enough to know a common sense about business, they must have the basic business principles. How make a proper decisions.
Neglect: Starting a new business requires an overwhelming time commitment. Doing it “on the side” usually isn’t enough.
Weak control systems: Without control systems, small business owners don’t know about problems until it’s too late.
Insufficient capital: Many experts recommend that a new business should have enough capital to last 6 months to 1 year without earning a profit.

44. Reasons for success
Hard work, drive, and dedication: Commitment is essential. Nearly 44% of successful entrepreneurs interviewed by the Ontario Department of Industry and Commerce cited determination as the personal quality that contributed to success.
Market demand: Clearly, if there is demand for a product, success will be easier.
Managerial competence: Training and experience make a real difference. Most successful entrepreneurs spend time working in successful companies or they partner with others who bring more expertise.
Luck: Never underestimate the importance of luck, but keep in mind Thomas Jefferson’s saying: “The harder I work, the luckier I become”!. Example, McAfee made a significant profit once Microsoft announced that it is entering the security business.

45. Business Ownership Forms of Legal Ownership Choice of Ownership Form
Sole proprietorship/sole trader: Owned and operated by one person
Partnership: Sole proprietorship multiplied by the number of partner-owners
Corporation
Choice of Ownership Form
Based on the entrepreneur’s needs/desires for control, ownership participation, financing sources, and appropriateness of the chosen form for the industry in which the firm will compete
There are a number of ways to structure and own a business.
There are three main forms of legal ownership:
The first is sole proprietorship, which is owned and operated by one person.
The second is a partnership, where there is more than one partner-owner, but the business the same status as a sole proprietorship.
The third is a corporation.
Why choose one over the other?
The type of ownership a small business owner chooses is based on the entrepreneur’s needs/desires for control, ownership participation, financing sources and appropriateness of the chosen form for the industry in which the firm will compete.
Teaching Tips:
In your student teams, refer back to your new internet business idea. What form of ownership would you choose? Please discuss this and we will share with the class.
Answers will vary.
© 2009 Pearson Education, Inc.

46. 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

47. Sole proprietorships\ traders
Sole proprietorships are the most basic legal form of business organization.
Advantages:
Freedom: Sole proprietors answer to no one but themselves—this is a terrific fit for certain personalities (and we can probably all think of someone who fits the profile!).
Simple to form: In some states, forming a business is as simple as hanging a sign on the door.
Low start-up costs: Low costs go hand-in-hand with minimal legal requirements
Tax benefits: Sole proprietors are taxed only on personal income, and can take advantage of certain tax deductions.

48. Sole proprietorships\ traders
Sole proprietorships are the most basic legal form of business organization.
Disadvantages:
Unlimited liability: Sole proprietors are personally liable for all debts incurred by the company (including damages in lawsuits/claims). This is the most significant drawback to this form of business.
Limited resources: This can ultimately limit the size of the business.
Limited fundraising capability: Sole proprietors often find it difficult to borrow money. Difficult to provide loan security.
Lack of continuity: A sole proprietorship legally dissolves when the owner dies.

49. 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

50. Partnerships
The most common type of partnership, a general partnership, is simply a sole proprietorship multiplied by the number of partner-owners.
Advantages:
More talent and money: A partnership draws on the talent and money of more than one person.
More fundraising capability: Partnerships are able to borrow money more easily from lending institutions, and also have the option of inviting more partners to invest.
Relatively easy to form: Legal requirements are limited, but must include a partnership agreement of some kind.
Tax benefits: Partners are taxed only on personal income.

51. Partnerships Disadvantages:
Unlimited liability: Each partner is liable for all debts incurred in the name of the partnership, even if one partner incurs a debt without the knowledge of the other partners.
Disagreements among partners: Partnerships have been known to ruin relationships between close friends and family members.
Discussion: What are some possible safeguards against this happening?
(Possibilities: Creating a fair, complete partnership, planning up front for all the contingencies you can think of, developing a fair exit agreement at the outset of the partnership.)

52. Partnerships
Lack of continuity: When one partner leaves or dies, the original partnership dissolves, and must be reorganized if other partners want to continue.
Within a partnership, a significant level of conflict can be healthy and creative, generating more effective solutions to a range of different obstacles. However, an exit plan is still crucial in case disagreements become unmanageable.
Discussion: What should be included in the exit plan for a partnership?
(Possibilities: How to dispose of and distribute assets, how to reorganize should one or more partners exit.)

53. Alternatives to General Partnerships
1) Limited Partnership
Allows for limited partners who invest money but are liable for debts only to the extent of their investments
Must have at least one general (or active) partner, who is usually the person who runs the business and is responsible for its survival and growth
There are also alternatives to general partnerships. We will discuss two of these here: the Limited Partnership and the Master Limited Partnership.
The Limited Partnership:
Allows for limited partners who invest money and who are liable for debts, but only to the extent of their investments.
Must have at least one general or active partner, who is usually the person who runs the business and is responsible for its survival and growth.
The Master Limited Partnership differs in that:
The organization sells shares or partnership interests to investors on a public exchange. Investors are paid back from the profits.
The master partner retains at least 50% ownership and runs the business, while minority partners have no management voice.
Teaching Tips:
Which form of partnership do you think is best for your new Internet business example if you had to choose? Why? Please discuss in your teams and then share with the class.
Answers will vary but should be based on the information on partnerships just presented.
© 2009 Pearson Education, Inc.

54. Alternatives to General Partnerships
2) Master Limited Partnership
Organization sells shares to investors on public exchange. Investors are paid back from profits
The master/general partner retains at least 50 percent ownership and runs the business, while minority partners have no management voice
There are also alternatives to general partnerships. We will discuss two of these here: the Limited Partnership and the Master Limited Partnership.
The Limited Partnership:
Allows for limited partners who invest money and who are liable for debts, but only to the extent of their investments.
Must have at least one general or active partner, who is usually the person who runs the business and is responsible for its survival and growth.
The Master Limited Partnership differs in that:
The organization sells shares or partnership interests to investors on a public exchange. Investors are paid back from the profits.
The master partner retains at least 50% ownership and runs the business, while minority partners have no management voice.
Teaching Tips:
Which form of partnership do you think is best for your new Internet business example if you had to choose? Why? Please discuss in your teams and then share with the class.
Answers will vary but should be based on the information on partnerships just presented.
© 2009 Pearson Education, Inc.

55. Cooperatives
Combine the freedom of sole proprietorships with the financial power of corporations
Cooperatives are groups of sole proprietorships or partnerships that agree to work together for their common benefit.
In the U.S., these are usually agricultural in nature.
Now let’s look at cooperatives as a form of business. Cooperatives combine the freedom of sole proprietorships or partnerships with the financial power of corporations.
Cooperatives are groups of sole proprietorships or partnerships that agree to work together for their common benefit.
In the U.S., these are usually agricultural in nature.
Teaching Tips:
Please think of one example of a cooperative.
Ocean Spray cranberry growers, Florida citrus growers, and Wisconsin dairy cooperatives are some examples.
© 2009 Pearson Education, Inc.

56. Cooperatives
It is formed to benefit its owners in the form of reduced prices and/or the distribution of surpluses at yearend.
At the end of the fiscal year, any surpluses/profits are distributed to members on the basis of how much they purchased, not how much their investment.
Now let’s look at cooperatives as a form of business. Cooperatives combine the freedom of sole proprietorships or partnerships with the financial power of corporations.
Cooperatives are groups of sole proprietorships or partnerships that agree to work together for their common benefit.
In the U.S., these are usually agricultural in nature.
Teaching Tips:
Please think of one example of a cooperative.
Ocean Spray cranberry growers, Florida citrus growers, and Wisconsin dairy cooperatives are some examples.
© 2009 Pearson Education, Inc.

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

58. Corporations in Palestine
Total number around 50 corporation PLC.
The Number of PLCs who joint palestinian stock exchange around 40.
The size of board of directors between 5-11 members.

59. Corporations Firms that have filed papers of incorporation.
There are 4.93 million corporations in the U.S. that account for 20% of all U.S. businesses, but generate 85% of all revenue.
Corporations may:
Be small or large
Sue and be sued
Buy, hold, and sell property
Make and sell products
Commit crimes and be tried and punished for them
Have limited liability for individuals who form them
Now we will examine corporations. First, let’s define a corporation. A corporation is a firm that has filed papers of incorporation. There are 4.93 million corporations in the U.S. that account for 20% of all U.S. businesses, but generate 85% of all revenue.
Corporations may:
Be small or large.
Sue and be sued.
Buy, hold and sell property.
Make and sell products.
Commit crimes and be tried and punished for them.
Have limited liability for individuals who form them, but as we know from the past few years, CEOs of corporations can and do go to jail for committing fraud.
Teaching Tips:
In your student teams, discuss the possibility of incorporating your new Internet business. Please share your discussion with the class.
Answers may vary, but could address the issues of limited liability for the individuals forming the new internet corporation.
© 2009 Pearson Education, Inc.

60. : guess the largest Palestinian companies.
Discussion
: guess the largest Palestinian companies.
Examples: PALTEL, PADECO, Bank of Palestine, Alawda.

61. Corporations Disadvantages: Advantages: Double taxation of dividends
Fluid control
Complicated and expensive to form
Advantages:
Limited liability: The owners’ responsibility for the debts of a business is limited to their investment in a business
Continuity
Stronger fundraising capability
Let’s examine the advantages and disadvantages of forming a corporation. The advantages of incorporating include:
Limited liability: The owners’ responsibility is limited to their investment in a business.
Continuity.
Stronger fundraising capability.
The disadvantages of incorporating include:
Double taxation of dividends.
Fluid control: The corporation will generally have a board of directors you need to serve.
Corporations are complicated and expensive to form.
Teaching Tips:
In your student teams, please choose a corporation with which you are familiar. Please discuss why you think this firm chose to incorporate. Then we will discuss our examples with the class.
Answers will vary based on the corporation chosen, but should address advantages and disadvantages just discussed.
© 2009 Pearson Education, Inc.

62. Corporation Advantages:
Limited liability: The liability of investors (owners) for the debts of a corporation is limited to the size of their investments—a huge benefit!
Continuity: Theoretically, a corporation may continue to exist forever, with ownership transferred via sale of stock.
Stronger fund-raising capability: Lenders are more willing to grant loans. Larger corporations also have the option of selling stock to raise capital.

63. Corporation Disadvantages
Double taxation: Profits earned by corporations are taxed at the corporate level, and then taxed again at the ownership level. Is it fair? Who benefits?
Fluid \difficult control: Given the easy transfer of ownership, corporations are subject to hostile takeovers, which (at the very least) distract/divert management from achieving the corporation’s goals. El-Fayed took over Harrots.
Complicated and expensive to form: Costs include filing fees to meet government incorporation requirements, and usually legal fees as well. (e.g., must register to: ministry of Justice, chamber of commerce, ministry of economics, local authority).

64. Types of Corporations
Closely Held (Private) Corporation: stock is held by few people, not available to public.
Publicly Held (Public) Corporation: shares are publically issued.
There are many types of corporations. These can include both closely held, or what is called private corporations, and they can also include publicly held companies whose shares of stock are traded on a stock exchange.
Within these two types of corporations there are four other types of organization:
Subchapter S Corporation: These firms are corporations and they are organized like a corporation but they are treated like partnerships for tax purposes. There are strict rules for eligibility.
Limited Liability Corporation (LLC): This is a popular form of incorporation because owners are taxed like partners but have the limited liability of a corporation.
Professional Corporation: These are usually doctors, lawyers, etc. Their corporate status provides limited liability, but an individual’s negligent performance can make an individual within the firm liable.
Multinational or Transnational Corporation: The stock of these corporations may be traded in stock markets in multiple countries and they may be managed in more than one country.
Teaching Tips:
Please join with another class member. In your team, please come up with one example of a privately held corporation and a publicly held corporation. Let’s share our answers.
Answers will vary.
© 2009 Pearson Education, Inc.

65. Types of Corporations
Limited Liability Corporation (LLC). This is a popular form of incorporation because owners are taxed like partners but have the limited liability of a corporation.
Professional Corporation. These are usually doctors, lawyers, etc. Their corporate status provides limited liability, but an individual’s negligent performance can make an individual within the firm personally liable.
Multinational (Transnational) Corporation
There are many types of corporations. These can include both closely held, or what is called private corporations, and they can also include publicly held companies whose shares of stock are traded on a stock exchange.
Within these two types of corporations there are four other types of organization:
Subchapter S Corporation: These firms are corporations and they are organized like a corporation but they are treated like partnerships for tax purposes. There are strict rules for eligibility.
Limited Liability Corporation (LLC): This is a popular form of incorporation because owners are taxed like partners but have the limited liability of a corporation.
Professional Corporation: These are usually doctors, lawyers, etc. Their corporate status provides limited liability, but an individual’s negligent performance can make an individual within the firm liable.
Multinational or Transnational Corporation: The stock of these corporations may be traded in stock markets in multiple countries and they may be managed in more than one country.
Teaching Tips:
Please join with another class member. In your team, please come up with one example of a privately held corporation and a publicly held corporation. Let’s share our answers.
Answers will vary.
© 2009 Pearson Education, Inc.

66. Comparative Summary: Three Forms of Business
Business Form
Liability
Continuity
Management
Investment Sources
Proprietorship
Ends with death or decision of owner
Personal, unrestricted
Personal
Personal, unlimited
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/ continue or for unspecified period of years
Under control of board of directors, which is selected by stockholders
Purchase of stock
Copyright ©2003 Prentice Hall, Inc.
4 - 66

67. Managing a Corporation
Corporate Governance
The roles of shareholders, directors, and other managers in corporate decision making and accountability
Corporate governance is established by the firm’s bylaws and involves three bodies:
Stockholders (shareholders): Investors who buy ownership shares in the form of stock
The board of directors: Group elected by stockholders to oversee corporate management
Corporate officers: Top managers hired by the board to run the corporation
Managing a corporation involves what is called corporate governance. This includes the roles of shareholders, directors, and other managers in corporate decision making and accountability.
Corporate governance is established by the firm’s bylaws and involves three bodies:
Stockholders or shareholders: These are investors who buy ownership shares in the form of stock.
The board of directors: This is a group elected by stockholders to oversee corporate management.
Corporate officers: These are a group of top managers hired by the board to run the corporation.
Teaching Tips:
Do you think small, privately held corporations or small businesses issues shares of stock and have these three forms of corporate governance? Why or why not?
Yes, any small business can incorporate as a C corporation and must then have bylaws and must issue shares of stock to the key investors, which may be only one or two people. In addition, they must have a board of directors and top managers, and they must meet and keep minutes of their board meetings.
© 2009 Pearson Education, Inc.

68. Stockholders: Owners of Corporations
Stock: A share of ownership in a corporation
Dividends: Profits distributed among stockholders
If you are not familiar with stocks and their dividends, let’s define them briefly:
Stock is a share of ownership in a corporation.
Dividends are profits distributed among stockholders.
Teaching Tips:
Please take a minute and share with your student partner whether you own any stock or have owned it in the past and if you have received dividends.
Answers vary.
© 2009 Pearson Education, Inc.

69. Types of Stocks:
Common Stock: The most basic form of ownership. Common stockholders always have voting rights.
Preferred Stock: Offers fixed dividends but no corporate voting rights.
Discussion: How many of you own stock? Which companies? Why?

70. Special Issues in Corporate Ownership
Joint Ventures and Strategic Alliances:
Strategic alliance: Two or more organizations collaborate on a project for mutual gain, e.g., salah Eddeen Street in Gaza.
Joint venture: the collaboration of two or more organizations on a project for mutual gain. Partners share ownership of a new enterprise.
Employee Stock Ownership Plans
Allows employees to own a share of the corporation through trusts established on their behalf
Institutional Investors
Control enormous resources and can buy huge blocks of stock, E.g., pension Funds.
There are some special issues in corporate ownership that we will discuss. The first of these is the concept of joint ventures and strategic alliances.
A strategic alliance is the collaboration of two or more organizations on a project for mutual gain. A joint venture is a new enterprise in which partners share ownership.
The second of these are Employee Stock Ownership Plans or sometimes called ESOPs. An ESOP allows employees to own a share of the corporation through trusts established on their behalf.
The third issue is institutional investors. Institutional investors control enormous resources and can buy huge blocks of stock.
Teaching Tips:
In your student teams, please choose one of the three special issues we have just reviewed. Then please give two examples of the type of special issue, for example, the name of two organizations that fit that form.
Answers will vary.
© 2009 Pearson Education, Inc.

71. Special Issues in Corporate Ownership (cont’d)
Mergers, Acquisitions, Divestitures, and Spin-Offs:
Merger: Two firms nearly same size, combine to create a new company
Acquisition: One firm (usually large) buys another.
Divestiture: Strategy whereby a firm sells one or more of its business units
Spin-off/ Turnaround: A firm sells part of itself to raise capital, e.g., sell assets.
Mergers, acquisitions, divestitures and spin-offs are another special issue in corporate ownership.
Let’s look at each one:
A merger is achieved when two firms combine to create a new company.
An acquisition occurs when one firm buys another outright.
A divestiture is a strategy used whereby a firm sells one or more of its business units.
A spin-off occurs when a firm sells part of itself to raise capital.
Teaching Tips:
Please work with a student partner and choose one form of this last special issue we have just reviewed. In your team, please come up with two examples of the type of issue your team chose. We will share our answers with the class.
Answers will vary.
Examples could include:
Merger: Miller-Coors.
Acquisition: When Coors purchased all of The Stroh Brewing Company.
Divestiture: When Pepsi sold off the Doritos brand.
Spin-off: Johnson Diversy, which was spun off of S.C. Johnson Company because it was in the industrial and not personal sector of the business.
© 2009 Pearson Education, Inc.

72. Review
From the standpoint of the franchisee, what are the primary advantages and disadvantages of most franchise arrangements?
Advantages: proven business opportunity, access to management expertise
Disadvantages: high start-up costs, possible on-going fees, management rules and restrictions

73. Remain private: to retain control
Review
Why might a closely held corporation choose to remain private? Why might a closely held corporation choose to become a publicly traded corporation?
Remain private: to retain control
Become public: to generate additional funding

74. Answer questions (1-6) page 108.
Homework
Answer questions (1-6) page 108.

75. Review
Small businesses produce more patents per employee than large firms.
Small businesses are an important source of innovation
Most businesses in the United States are large businesses with more than 500 employees.

76. Review
People who assume the risk of business ownership with a primary goal of growth and expansion are called entrepreneurs.
Most successful entrepreneurs have a strong desire to be their own bosses.
  A business plan demonstrates how an entrepreneur's business strategy will be implemented.