1. Business Essentials, 7th Edition Ebert/Griffin
CHAPTER-2
Business Essentials, 7th Edition Ebert/Griffin

2. Understanding Entrepreneurship and Business Ownership
Instructor Lecture Power Points
PowerPoint Presentation prepared by Carol Vollmer Pope Alverno College
© 2009 Pearson Education, Inc.

3. 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.
The Importance of Small Business in the U.S. Economy
Job creation
Innovation
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.

4. 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.
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5. 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.

6. Financing the Small Business
Personal Resources
Loans from Family and Friends
Bank Loans
Venture Capital Companies
Small-Business Investment Companies (SBICs)
Minority Enterprise Small-Business Investment Companies (MESBICs)
SBA Financial Programs
Guaranteed loans and immediate loan programs
Management advice (SCORE and SBDCs)
Once we’ve decided to start or buy a small business, we need to determine how we are going to finance the business. Here are some sources from which we can potentially obtain loans:
Personal resources (i.e., our own money)
Loans from family and friends
Bank loans
Venture Capital Companies
Small Business Investment Companies
Minority Enterprise Small-Business Investment Companies
The Small Business Administration (SBA) and its financial programs. These include guaranteed loans and immediate loan programs, as well as management advice through its team of retired business executives (called SCORE) and from Small Business Development Corporations (SBDCs).
Teaching Tips:
What is the first thing you need in order to obtain most of these types of financing?
A business plan!
© 2009 Pearson Education, Inc.

7. 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.

8. Reasons for Failure and Success
Poor management
Neglect
Weak control systems
Insufficient capital
Success
Hard work, drive, and dedication
Market demand
Managerial competence
Luck!!!
There are a number of key reasons for the failure or success of any new business. Many new businesses fail due to:
Poor management.
Neglect.
Weak control systems.
Insufficient capital.
Reasons why new businesses succeed include:
Hard work, drive, and dedication. Many small business owners spend 12 to 15 hours a day in the initial stages of their new business start up working to market, manage and promote their offerings.
Market demand. You need to have a market to whom you can sell your product or service, and you need to add value to your product or service for it to be accepted in the marketplace.
Managerial competence. If you don’t understand why your general ledger accounting software does not balance, you have a problem!
Luck!!!!
Teaching Tips:
In your student teams, take one of the new business ideas you have discussed today and choose one of the small business failure reasons. Please discuss what you as the owner could do to make your business succeed if your firm were suffering from one of the elements of failure. We will share our ideas with the class.
Poor Management: Join a local chamber of commerce and its CEO small-business roundtable to share with other managers. Or take classes at a local university or community college or the SBA.
Neglect: Pay attention to your business during each and every day.
Weak control systems: Attend seminars on business controls. Hire a consultant to evaluate your control systems. Get help from the SBA by working with a SCORE retired executive.
Insufficient capital: Cut back expenses, look at and focus only on your core business.
Answers will vary.
© 2009 Pearson Education, Inc.

9. Entrepreneurship Entrepreneurship Entrepreneur Small Business Owner
The process of seeking business opportunities under conditions of risk
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.

10. Entrepreneurial Characteristics
Successful Entrepreneurs:
Are resourceful.
Are concerned about good customer relations.
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.
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.

11. Business Ownership Forms of Legal Ownership Choice of Ownership Form
Sole proprietorship: 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.

12. Sole Proprietorships Advantages: Disadvantages: Freedom Simple to form
Low start-up costs
Tax benefits
Formation of cooperatives
Disadvantages:
Unlimited liability: Owners are responsible for all debts of a business
Limited resources
Limited fundraising capability
Lack of continuity
Let’s examine the advantages and disadvantages of each type of ownership. We will start by looking at sole proprietorships. The advantages of a sole proprietorship include:
Freedom. There are only the rules of the sole owner to follow.
It is simple to form.
There are low start-up costs.
There are tax benefits, since income and expenses for a sole proprietorship flow through your personal income tax.
The formation of cooperatives, meaning the ability to work with other sole proprietors.
There are also disadvantages of operating your small business as a sole proprietorship.
The biggest disadvantage is that there is unlimited liability; in other words, the owners are responsible for all the debts or liabilities of a business.
In addition, sole proprietors have limited resources unless, of course, they are millionaires!
They have limited fundraising capability.
There is also a lack of continuity, since they are the only person who knows the business.
Teaching Tips:
In your same student teams, please revisit your example we just discussed. Please discuss which advantages or disadvantages would apply to your new internet business.
Answers will vary, but should address the advantages and disadvantages just discussed.
© 2009 Pearson Education, Inc.

13. Partnerships Advantages: Disadvantages: More talent and money
More fundraising capability
Relatively easy to form
Limited liability for limited partners
Tax benefits
Disadvantages:
Unlimited liability for general partner
Disagreements among partners
Lack of continuity
Let’s examine the advantages and disadvantages of partnerships. The advantages include:
There is more talent and more money available when there is more than one person working in a business.
There are more fundraising capabilities.
Partnerships are relatively easy to form.
There is limited liability for limited partners.
There are also tax benefits.
The disadvantages of partnerships include:
Once again, unlimited liability for any general partner in the firm.
There may be disagreements among partners.
There can also be lack of continuity.
Teaching Tips:
Continue to address the same Internet business you have been discussing in your student teams. Please discuss whether a partnership would be a better form of organization for your new business than a sole proprietorship. Why or why not? We will share our answers with the class.
Answers will vary but should focus on the advantages and disadvantages noted above.
© 2009 Pearson Education, Inc.

14. Alternatives to General Partnerships
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.

15. Master Limited Partnership
Organization sells shares (partnership interests) to investors on public exchange. Investors are paid back from profits
The master partner retains at least 50 percent ownership and runs the business, while minority partners have no management voice

16. Corporations Corporation Firms that have filed papers of incorporation
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.

17. Corporations Advantages: Disadvantages:
Limited liability: The owners’ responsibility for the debts of a business is limited to their investment in a business
Continuity
Stronger fundraising capability
Disadvantages:
Double taxation of dividends
Fluid control
Complicated and expensive to form
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.

18. Types of Corporations Closely Held (Private) Corporation
Publicly Held (Public) Corporation
Subchapter S Corporation
Limited Liability Corporation (LLC)
Professional Corporation
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.

19. 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.
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20. 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.
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21. FRANCHISING