2. part
Starting and Growing
2
A Business
CHAPTER 4 Options for Organizing Business
CHAPTER 5 Small Business, Entrepreneurship, and Franchising
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3. Forms of Business Ownership
Sole proprietorship
Partnership
Corporation
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5. Sole Proprietorship
Businesses owned and operated by one
individual; the most common form of business
organization in the United States
15-20 million in the U.S.
Nearly three-quarters of all businesses
Men 2x more likely than women to start own business
o Restaurants
o Hair salons
o Flower shops
o Dog kennels
o Independent grocery stores
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6. Sole Proprietorship
Advantages Disadvantages
Ease and cost of formation Unlimited liability
Secrecy Limited sources of funds
Distribution and use of profits Limited skills
Flexibility and control of the business Lack of continuity
Government regulation Lack of Qualified Employees
Taxation Taxation
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7. Partnership
A form of business organization defined by the
Uniform Partnership Act as “an association of two
or more persons who carry on as co-owners of a business
profit”
General partnership
Limited partnership
Articles of Partnership
• Legal documents that set forth the basic agreement between partners
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8. Two Types of Partnerships
General Partnership
A partnership that involves a complete sharing in both
the management and the liability of the business
Limited Partnership
A business organization that has at least one general partner, who assumes
unlimited liability, and at least one limited partner whose liability is limited to his
or her investment in the business
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9. Articles of Partnership
Name, purpose, location
Duration of the agreement
Authority and responsibility of each partner
Character of partners (i.e., general or limited, active or silent)
Amount of contribution from each partner
Division of profits or losses
Salaries of each partner
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10. Articles of Partnership
How much each partner is allowed to withdraw
Death of partner
Sale of partnership interest
Arbitration of disputes
Required and prohibited actions
Absence and disability
Restrictive covenants
Buying and selling agreements
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11. Partnerships
Advantages Disadvantages
Ease of organization Unlimited liability
Capital & credit Business responsibility
Knowledge & skills Life of the partnership
Decision making Distribution of profits
Regulatory controls Limited sources of funds
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12. Corporations
Legal entities created by the state whose assets and
liabilities are separate from its owners
Have most of the rights of people
Typically owned by shareholders /stockholders
A corporation is created (incorporated) under the laws of the state in which it
incorporates
The individuals creating the corporation are called incorporators
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13. Articles of Incorporation
Legal documents filed with basic information
about the business with the appropriate state office
(often the Secretary of State)
Common elements:
Name & address of corporation
Objectives of the corporation
Classes of stock (common, preferred, voting, nonvoting) and number of
shares of each class of stock
Financial capital required at time of incorporation
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14. Articles of Incorporation
Provisions for transferring shares of stock
Regulation of internal corporate affairs
Address of business office
Names and addresses of the initial board of directors
Names and addresses of the incorporators
The state issues a corporate charter based on the
information in the articles of incorporation.
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15. Types of Corporations
A corporation doing business in the state in which
it is chartered is a domestic corporation.
When a corporation does business in other states, it is then
referred to as a foreign corporation.
If a corporation does business outside the nation in which it is
incorporated, it is termed an alien corporation.
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16. Types of Corporations
Private Corporation
A corporation owned by just one or a few people who are
closely involved in managing the business
Public Corporation
A corporation whose stock anyone may buy, sell, or trade
Initial Public Offering
A private corporation who wishes to go “public” to raise additional capital and
expand. The IPO is selling a corporation’s stock on public markets for the first
time
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17. Types of Corporations
Quasi-Public Corporation
Corporation owned and operated by the federal, state,
or local government
NASA, U.S. Postal Service
Non-Profit Corporation
Focuses on providing a service rather than earning a profit but is not owned by
a government entity
Mercy Corps., The Conservation Fund
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18. Elements of a Corporation
Board of Directors: A group of individuals, elected
by the stockholders to oversee the general operation
of the corporation, who set the corporation’s long-range
objectives.
Inside Directors
Individuals who serve on a board and are employed by the corporation
(usually executives of the corporation)
Outside Directors
Individuals who serve on a board who are not directly affiliated with the
corporation (usually executives of other corporations)
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19. Stock Ownership
Preferred Stock
A special type of stock whose owners, though not generally having a say in
running the company, have a claim to profits before other stockholders do.
Common Stock
Stock whose owners have voting rights in the corporation, yet do not receive
preferential treatment regarding dividends.
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20. Corporations
Advantages Disadvantages
Limited liability Double taxation
Transfer of ownership Forming a corporation
Perpetual life Disclosure of information
External sources of funds Employee-owner separation
Expansion potential
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21. Other Types of
Business Ownership
Joint Venture
A partnership established for a specific project or for a limited time
Control can be divided equally, or with one party taking more responsibility for
decision making
S-Corporation (S-Corp)
Corporation taxed as though it were a partnership (no double-taxation) with
restrictions on shareholders.
Very popular with entrepreneurs
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22. Other Types of Business Ownership:
S-Corporations
Subchapter S-Corporation
Popular because the form eliminates double-taxation
Combines the taxation structure of partnerships with legal
environment of C-corporations
Qualifications:
• Only 1 class of stock
• Less than 100 shareholders
• Shareholders must be U.S. citizens or residents
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23. Other Types of Business Ownership:
Limited Liability
Limited Liability Company (LLC)
Form of ownership that provides limited
liability and taxation like a partnership but
places fewer restrictions on members
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24. Other Types of Business Ownership:
Cooperative
Cooperative (Co-Op)
An organization composed of individuals or small
businesses that have banded together to reap the benefits
of belonging to a larger organization
Can take many different forms (retail, housing, social, worker)
Co-ops are increasingly popular with small farmers and artisans
Gives small producers more power as a group
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25. Trends in Business Ownership
Merger
The combination of two companies (usually corporations)
to form a new company
Horizontal merger: When firms that make and sell similar products merge.
Vertical merger: When companies operating at different but related levels of an
industry merge.
Conglomerate merger: When firms in unrelated industries merge.
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26. Trends in Business Ownership
Acquisition
The purchase of one company by another, usually by buying
its stock and/or assuming its debt.
Corporate raider: A company or individual who wants to acquire or take over another
company and first offers to buy some or all of its stock at a premium in a tender offer.
Poison pill: The firm allows stockholders to buy more shares of a stock at lower prices
than the current market value to head off a hostile takeover.
Shark repellant: Management requires a large majority of stockholders to approve a
takeover.
White knight: A more acceptable firm that is willing to acquire a threatened company.
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27. Trends in Business Ownership
Leveraged Buyout (LBO)
A purchase in which a group of investors borrows money from banks
and other institutions to acquire a company (or a division of one), using the
assets of the purchased company to guarantee repayment of the loan.
Mergers and acquisitions (particularly the merger mania in the late 20th
century) have been criticized
Executives have to focus excessively on avoiding takeovers, not on managing
the business
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28. part
Starting and Growing
2
A Business
CHAPTER 4 Options for Organizing Business
CHAPTER 5 Small Business, Entrepreneurship, and Franchising
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29. Entrepreneurship
[ ]
The process of creating and
managing a business to achieved
desired objectives
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30. What is Small Business?
“Smallness” is relative
Small business is any independently owned and
operated business, not dominant in its competitive
area
Employs less than 500 people
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32. Small Businesses Represent
64% of new net jobs, annually, created in the
last 15 years
99.7% of all businesses employ fewer than
500 people
89% of businesses employ fewer than 19 people
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33. Small Business Innovation
Small businesses represent 55%
of all innovations
Airplane
Audio tape recorder
Double-knit fabric
Fiber-optic examining equipment
Heart valve
Optical scanner
Personal computer
Soft contact lenses
Zipper … and much more
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35. Popular Industries for
Small Business
Especially attractive industries to entrepreneurs:
Retailing and wholesaling
Services
Manufacturing
High technology
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37. Services and Manufacturing
Services
Service sector is 80% of U.S. jobs
Attracts individuals whose skills are not required by
large firms
Manufacturing
Small manufacturers excel at customization
The Malcolm Baldridge National Quality Award rewards
innovative small manufacturing firms
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38. High Technology
Businesses that depend heavily on advanced
scientific and engineering knowledge.
40% of high-tech jobs are with small businesses
The government offers small business grants for high-tech
companies
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39. Small Business Ownership
Advantages Disadvantages
Independence High stress level
Costs High failure rate
50% of all new businesses fail within the first 5
years
Flexibility Undercapitalization
Lack of funds to operate normally
Focus Managerial inexperience or
incompetence
Reputation Inability to cope with growth
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40. Starting a Business
Start with a concept or general idea
Create a business plan
Devise a strategy to guide planning & development
Make decisions
• Form of ownership
• Financing
• Acquire existing business or start new business?
• Buy a franchise
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41. The Business Plan
A precise statement of the rationale for
the business and a step-by-step explanation
of how it will achieve its goals. Acts as a guide
and reference document.
Explanation of the business
Analysis of competition
Income/Expense estimates
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42. Forms of Business Ownership
Sole Proprietorship
Partnership
Corporation
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43. Financial Resources
Provide your own personal capital
Cash money
Obtain capital
Financing options
Loans
Stocks
Equity financing
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44. Equity Financing
[ ]
Selling or borrowing against the value of
an asset such as an (automobile, insurance
policy, savings account) to obtain funds to
operate a business
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45. Venture Capitalists
[ ]
Persons/organizations that agree to
provide funding for a new business in
exchange for an ownership interest or
stock. Usually requires a sharing of
ownership/control
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46. Debt Financing
[ Borrowing financial resources typically
from a bank or lending institution– often
collateral is needed ]
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47. Line of Credit
[ An agreement by which a financial
institution promises to lend a business a
predetermined sum on demand ]
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48. Starting from Scratch vs.
Buying an Existing Business
Starting from scratch can be expensive
and will require a lot of promotional efforts
to familiarize customers with the business
Existing businesses have the advantage of a built-in network of
customers, suppliers and distributors
Reduces guesswork
Involves taking on any problems the business already had
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49. Franchising
A license to sell another’s products or to use
another’s name in business, or both
Franchiser
The company that sells a franchise
Franchisee
The purchaser of a franchise
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50. Franchises
Advantages Disadvantages
Training & support Fees and profit sharing
Brand name appeal Standardized operations
National advertising Restrictions on purchasing
Financial assistance Limited product line
Proven products Possible market saturation
Greater chance for success Less freedom in decisions
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51. Help for Small
Business Managers
Organizations and programs exist to help
small businesses
Small Business Administration
Small Business Development Centers
Service Corps of Retired Executives
Active Corps of Executives
Small Business Institutes
U.S. and Local Departments of Commerce
Other small businesses
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52. The Future for Small Business
Demographic Trends
The Baby Boomers
Generation Y (Millennials)
Immigrants and shifting demographics
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53. The Future for Small Business
Technological & Economic Trends
Internet usage continues to increase
Increase in service exports
Economic turbulence
Deregulation of the energy market & alternative fuels
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54. Big Businesses Acting Small
Common Approaches
Large firms emulate smaller ones to improve
bottom line
Downsizing (Rightsizing)
• Acting small from inception – Southwest Airlines
Intrapreneurs
• Individuals in large firms who take responsibility for the
development of innovations within the organization
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Editor's Notes
In chapter four, we consider the various options that are available for organizing a business. The organization of a business is very important as it affects how it operates, how much tax it pays, and how much control the owners have. We will consider the primary forms of business ownership that include sole proprietorship, partnerships, and corporations. In addition, the advantages and disadvantages of each form of organization will be discussed.
A business’s legal form of ownership affects how it operates, how much in taxes it pays and how much control its owners have.
Notice that sole proprietorships far outnumber corporations or partnerships in the United States, but that they bring in the smallest share of sales and income. Corporations tend to be much larger and therefore represent the majority of sales and income.
Many sole proprietorships focus on services.
Partnerships can consist of two or more individuals, or of organizations. Large organizations even occasionally form strategic partnerships in order to take advantage of the other’s knowledge and skills. A formal articles of partnership document is not always required, but is highly recommended as it formally lays out the terms of the partnership.
A limited partner’s primary role is to provide funding for the partnership. Limited partnerships are most common in risky industries where the chance of loss is great.
Legal documents that solidify the basic agreement between partners. Not all states require an articles of partnership, but it is highly recommended.
A limited partner’s primary role is to provide funding for the partnership. Limited partnerships are most common in risky industries where the chance of loss is great.
The corporation is what most people think of when they think of businesses. This is because they tend to be larger and more visible than other forms of business organization. They are also longer-lived. Stocks are shares of the business that individuals and organizations can purchase to become partial owners. Sometimes, a corporation’s profits are distributed to shareholders through dividends, which are cash payments that many (but not all) corporations make.
Every state has a different procedure for incorporation. Some states are considered easier than others.
These terms may seem strange to students. A foreign corporation is not a corporation from another country, but rather one doing business in a state in which it is not incorporated.
Private corporations tend to be smaller, and they do not issue stock. Private corporations go public through an initial public offering. Some private corporations are forced to go public in order to quickly raise funds (such as when a principle owner dies).
There are a number of different kinds of corporations that work a bit like hybrids. Quasi-public corporations and non-profits have different goals than most other corporations– namely, they are not motivated as much by profits.
Some of the important duties of the Board are to select the chairman of the board, and president and CEO of the company. Boards of directors are legally liable for mismanagement of the firm, even though many board members are not involved in day-to-day operations of the company. No matter how hands-off it is, the board remains legally culpable for the actions of a firm. Directors can come from within or outside the company. It is essential to have a knowledgeable, well-qualified and independent board of directors. Many companies in recent years could have staved off disaster if their boards had been better equipped to deal with problems.
Preferred stock owners are a special class because they receive dividends first. Most preferred stock shares have a cumulative claim to dividends, meaning if a company does not pay dividends one year, preferred stock holders will receive those accumulated dividends the next year. Common stockholders do not always get dividend payments, but they are the voting owners of the corporation and therefore get a say in the decisions of the business. Common stockholders also have preemptive right to purchase new shares of stock when they are issued (another perk over preferred shareholders).
The following are less common alternative types of business ownership. They all have their pros and cons.
S-Corporations, because of their limits on shareholders, tend to be smaller businesses. This may be a good organizational form for a small business, however, and is popular with entrepreneurs.
There are different ways to merge, as outlined in this slide.
Acquisitions are not always welcome by the corporation being acquired, and the business may fight the process.
Chapter five examines the expanding world of entrepreneurship and small business. We will investigate the importance of small business in the U.S. economy, specify the advantages of small-business ownership and summarize the disadvantages of small businesses. Let’s examine small business and the incredible economic impact that it has.
Many well-known large businesses started out as small businesses (Dell Computers, McDonald’s, Levi Strauss) run by entrepreneurs.
Defining what constitutes a small business can be difficult because “small” is a relative term. This text uses the Small Business Administration definition of a small business as defined in the slide.
Small businesses are vital to the global economy. They represent nearly all firms in the United States, and nearly half of sales. They are a key source of innovation and help to provide for the communities in which they are located.
Small business owners generally do not worry about achieving economies of scale; they can be more flexible and produce in smaller batches– therefore they often excel at customization
Many successful entrepreneurs share certain personality traits, as outlined in the table above.
Small businesses tend to be concentrated in industries where start-up costs are not high (such as retailing and services). However, certain areas of manufacturing and high technology can be appealing to small businesses as well. Small businesses can often provide a level of customization and personalized customer service that large businesses cannot.
Undercapitalization means lacking sufficient funds to operate business normally– this can be a major problem for small businesses.
Starting a business can be a daunting undertaking with a steep learning curve.
The business plan is an important document, as it helps to lay out systematically the plan for the business, its goals and how they are to be achieved.
Forms of business ownership were discussed in chapter 4.
A large hurdle for many small businesses will be finding sources of capital with which to start the business and keep it running– especially during the first few years when it may not be making a profit.
The owner is the most important source of financing for a new small business. Owners’ personal resources may be used to receive financing to help get the business off the ground. The owner can provide working capital too by reinvesting profits into the business or not drawing a full salary.
Venture capitalists can be an important source of funding– especially if your business is in an industry with high growth potential (such as renewable energy).
The Small Business Administration offers financial assistance to qualifying businesses . Most formal loans require collateral, which is a financial interest in the property or fixtures of the business. In the case that the loan is not paid off, the collateral serves to make up the loss.
Small businesses may obtain a line of credit from their suppliers called trade credit , which means that businesses can take possession of needed goods and pay suppliers later. Bartering is less common and involves trading goods/services for another business’s goods/services.
Buying a franchise has many benefits and can take the guesswork out of starting a business. However, franchisees often need to have a lot of capital at their disposal and must have stellar credit histories.
Being a small business owner can be a daunting challenge. Luckily, local and state governments, non-profits and the Small Business Administration all offer programs and classes that can help. Other small business owners can be a great resource for information and advice.
Shifting demographics will create new opportunities and threats for small businesses. Aging Baby Boomers, Generation Y’s unique needs and increasing immigrant populations are all changing the types of products and services that are most in demand in the United States.
Technological advances have created new ways for businesses to reach consumers and conduct business. They have also opened up new industries in which small businesses can find a niche. Energy is going to be a major industry of the future.
Even large companies can benefit from “acting small”.