1. Chapter 10 Choosing Legal Structures and Distribution Channels
Entrepreneurship
Chapter 10
Choosing Legal Structures and Distribution Channels
Mariotti: Entrepreneurship

2. 4 Types of Business Manufacturing Makes products
Rarely sells direct to consumer
Wholesale
Buys products from manufacturers in bulk
Sells smaller quantities to retailers
Retail
Buys products from wholesaler
Sells single items to consumers
Service
Sells time, skills, or expertise
May serve retail, wholesale, or manufacturing clients
Marriotti: Entrepreneurship

3. The Production-Distribution Chain
Manufacturer sells in bulk (hundreds) to
Wholesaler who sells quantities (dozens) to
Retailer who sells single pieces (one) to
Consumer
Each link along the chain marks up (increases) the price.
Marriotti: Entrepreneurship

4. The Markup Is Dictated by the Competition
If you mark up your goods 20% and the competition only marks them up 10%, your customers will buy from the competition.
You must be able to mark up your goods high enough to cover operating costs and make a profit, or you will go out of business.
If you can buy a product at a low wholesale price and customers are willing to pay a retail price that includes a profit, you will have a successful business.
Buy low, sell high!
Marriotti: Entrepreneurship

5. Retail Price Per Unit – Wholesale Cost Per Unit
Gross Profit Margin
Gross Profit Per Unit =
Retail Price Per Unit – Wholesale Cost Per Unit
Gross Profit Per Unit (or Gross Profit Margin): Difference between the price the retailer paid the wholesaler and the price the retailer charges the consumer.
Marriotti: Entrepreneurship

6. A Typical Markup Manufacturer (doubles the cost) $1.00 (cost)
$2.00 (price)
Wholesaler (adds 20%)
$2.00 (cost)
$2.40 (price)
Retailer (doubles the cost)
$2.40 (cost)
$4.80 (price)
Consumer
$4.80 (cost)
Marriotti: Entrepreneurship

7. Percentage Markups Wholesale Cost X Markup % = Markup
Markup/Wholesale Cost X 100 = Markup %
Marriotti: Entrepreneurship

8. Markdowns and Discounts
Reasons to markdown inventory:
Reduce storage costs
Make room for new merchandise
Get rid of items that are not selling at the current price
Markdowns are expressed as percentages:
Markdown/Retail Price X 100 = Markdown %
Reasons to offer discounts:
Encourage customers to pay bills sooner
Encourage customers to try new products/services
Marriotti: Entrepreneurship

9. Contracts: Building Blocks of Business
Formal written agreement between 2 or more parties
Enforceable in court of law
Contracts define the relationships in the production–distribution chain (between manufacturer, wholesaler, retailer)
Never sign a contract without having a lawyer examine it for you. Ask attorney:
Will this agreement protect my interests?
What what you add, drop, or change?
Never sign a contract without reading and understanding every word.
Marriotti: Entrepreneurship

10. A Good Contract Achieves the Four A’s
Avoid misunderstanding—spell out all details, even the obvious.
Assure work—for contract to be binding, parties must exchange something of value or agree not to do something they were legally entitled to do.
Assure payment—specify how/when payment will be made.
Avoid liability—spell out contingencies (unpredictable events, “acts of God”).
Marriotti: Entrepreneurship

11. Breach of Contract
Contract is breached (broken) when a signatory (person who signed it) fails to fulfill it.
Injured party may then sue for breach of contract.
Lawsuit is attempt to recover a right or claim through legal action.
Other options:
Small claims court
Arbitration
A contract cannot substitute for trust. If you don’t trust someone, don’t expect a contract to protect you.
Marriotti: Entrepreneurship

12. Manufacturing: Pros and Cons
Can build products that don’t exist yet
Can fine-tune design and features of a product
Can obtain patents on new product designs to block competitors
Cons:
Expensive to set up and maintain a manufacturing company
Costly to hire and train workers
Have to pay to make the product before it can be sold
Marriotti: Entrepreneurship

13. Idea-to-Product Process
Drawings and Specifications—diagrams explaining how to make the product
Parts and Materials List—figure out what materials are needed and where to get them
Prototype—working sample of product
Tooling—making/adapting equipment to produce the product
Setup—each time a batch of product is made, must set up equipment, workers, etc.
Marriotti: Entrepreneurship

14. Job Shops Subcontractors set up to do jobs for manufacturers
Can make a part less expensively
Can deliver a part more quickly
Maintain and provide equipment so manufacturers don’t have to buy/maintain it
Offer manufacturing facilities to companies that don’t have them
Marriotti: Entrepreneurship

15. Patents Protect Inventions
You need a patent if:
You have invented a product you want to market yourself or sell to a manufacturer.
You believe someone else could sell the product by copying your invention.
Patent application must include:
In-depth description of invention.
Drawing of invention.
Completed “Declaration for Patent Application.”
Notarized statement from inventor.
Filing fee to US Patent and Trademark Office.
Marriotti: Entrepreneurship

16. JIT Manufacturing “Just In Time” manufacturing
Developed in Japanese factories
Focuses on making smallest amount of product as needed, quickly and efficiently
Good method for small business
Principles:
Run smallest batches necessary
Reduce setup time/cost to minimum
Schedule production so products finished “just in time” to ship
Stay flexible
Marriotti: Entrepreneurship

17. 4 Parts of a Business Production—making or obtaining product
Financing—securing/using money to develop the business
Marketing—creating ways to get customer interested in product/service
Customer Service—keeping customers happy and loyal
Marriotti: Entrepreneurship

18. Registering a Sole Proprietorship
Call chamber of commerce to find out where to register.
Choose name for business.
Fill out “Doing Business As” (DBA) form with name of business and your name.
Conduct name search to make sure no other business in the state is using the name.
Fill out registration form, pay fee.
Have form notarized.
Marriotti: Entrepreneurship

19. After Registering a Business . . .
Research local regulations that may apply to your business. Obtain any necessary:
Permits
Licenses
Certificates
Research employee federal, state, city regulations.
Obtain sales tax identification number from state sales tax office.
Marriotti: Entrepreneurship

20. Partnerships
Consist of two or more owners who make decisions together, share profits/losses
Partners face unlimited liability in lawsuits
Both fully responsible for all debts, judgments
Exception: limited partnership includes some partners who are not liable and have no say in daily operation of business
Marriotti: Entrepreneurship

21. Corporations Pros: Limited legal liability
Money can be raised through issuing stock
Ownership can be transferred easily; new owner does not personally absorb corporation’s debt
Cons:
Profits taxed twice; first as corporate income, then as personal income when distributed to shareholders
Owner can lose control of company to stockholders if they gain more than 50% of stock
More expensive to start than sole proprietorship and partnership
Marriotti: Entrepreneurship

22. Types of Corporations
C Corporation —most common type, can sell ownership shares to anyone, use bonds to borrow money. Income taxed twice: 1) as corporate income 2) as personal income when distributed to owners (dividends)
Subchapter S Corporation —limits stockholders to 75; income taxed once, as personal income of owners
Professional Corporation (PC) —used by doctors, lawyers, small groups of professionals
Nonprofit corporation —tax exempt, mission is to improve society; may not sell stock or pay dividends
Limited Liability Company (LLC) —combines features of partnership and corporation; good choice for small business owners seeking liability protection; income taxed once as personal income of owners
Marriotti: Entrepreneurship

23. Comparison of Legal Structures
Marriotti: Entrepreneurship

24. Nonprofits 501 (c ) (3) in United States Tax exempt
Can receive charitable donations
Cannot be owned/bought/sold
May not issue stocks or bonds
Mission driven: must be involved with trying to solve a problem for society
Instead of Unit of Sale, uses Unit of Change to measure success and prove it is succeeding in mission
Marriotti: Entrepreneurship