Entrepreneurship and starting a small business Chap 5

Learning Objectives Explain the traits a successful entrepreneur possesses. Discuss the types of business ownership and the advantages and disadvantages of each. Describe the alternatives to starting your business from scratch.

Introduction to entrepreneurship Entrepreneurship is a great way to apply your business skills to making a business out of a hobby, or out of a passion or some special skill a person possess. Entrepreneurship needs – commitment and proper preparation to be able start your business. Turn a passion into a business.

What does it take to be an Entrepreneur? Entrepreneurship possess a huge power in the creation of jobs in the economy. Some entrepreneurships grow to become millionaires, E.g – amazon.com Google Codak …etc

What does it take to be an Entrepreneur? There are common characteristics that all successful entrepreneurs have in common: Self-directed Self-nurturing Action-oriented Highly energetic Tolerant of uncertainty

What does it take to be an Entrepreneur? Most entrepreneurs use the flashlight approach to get innovations i.e. they would search every where for new ideas, and once they find an idea they would immediately a doubt it in the business.

What does it take to be an Entrepreneur? Even though opening your own business could be risky, still many people do it for following reasons: Opportunity Profit Independence Challenge

What does it take to be an Entrepreneur? Opportunity – to share in your dream to own your own business You have initiative and drive to work long hours to make your business successful More opportunities to work for yourself

What does it take to be an Entrepreneur? Profit What you earn after expenses and another reason that people take the Entrepreneurial challenge Independence because you do not enjoy working for someone else Challenge More than the excitement of taking a gamble, reaching achievements is another reason people take the Entrepreneurial challenge

Types of Business Ownership Sole Proprietorship This is a form of ownership that involves one individual – it is the easiest kind of business to start and some one who starts a sole proprietor is an entrepreneur A sole proprietor is one person running a business, it is the name given to a person who owns a sole proprietorship

Sole Proprietorship Advantages Disadvantages Easy to start, easy out; you are your our own boss; you retain all profit; and no special federal taxes Disadvantages Limited financial resources; skill gaps; unlimited liability; lack of fringe benefits; a limited lifespan

Partnerships This is the second type of business ownership and is a legal form of business with two or more owners There are several types of partnerships: - General partnership - Limited partnership - Master limited partnership

Partnerships General partnership a partnership in which all owners share in operating the business and in assuming liability for the business’s debts Every partnership must have at least one general partner

Partnerships Limited partnership is a partnership with one or more general partners and one or more limited partners General partner is an owner who has unlimited liability and is active in managing the firm A limited partner is an owner who invests money in the business but does not have any management responsibility or liability for losses Limited liability means that limited partners are not responsible for the debts of the business, beyond the amount of their investment—their liability is limited to the amount they put into the company; their personal assets are not at risk

Partnerships Master limited partnership Structured much like a corporation in that it acts like a corporation and is traded on the stock exchanges like a corporation, but taxed like a partnership and thus avoids the corporate income tax

Partnerships Many states are now allowing partners to form a limited liability partnership (LLP). LLPs limit partners’ risk of losing their personal assets to only their own acts and omissions, and to the acts and omissions or people under their supervision

Partnerships Advantages of Partnerships More financial resources when two or more individuals can contribute of the business. There is pooled knowledge – one partner may be very good at building web sites and another may be good at marketing the business.

Partnerships Disadvantage of partnership The division of profits – profits in a partnership must be divided between the partners Because of unlimited liability each general partner is liable for the debts of the firm, no matter who was responsible for causing those debts Conflict among the partners may arise - spending and how to run the business may cause conflict between partners A partnership agreement should be spelled out in writing, in order to protect all parties

Corporations Corporate governance This refers to the process, customs, policies, laws and institutions affecting the way in which a corporation is directed, administered or controlled. Board of directors is the group ultimately responsible for the business.

Corporations Conventional (C) corporation – this is a form of business ownership that provides limited liability – it is a state chartered legal entity with the authority to act and have liability separate from its owners

corporations S-corporation – this is a type of legal entity in which the biggest advantage is that it is taxed like a sole proprietorship.

Corporations Limited Liability Corporations Ownership rules are flexible; cannot sell stock; more paperwork; double taxation

Advantages and disadvantages of Corporations may issue shares of stock to attract investors corporate income splitting may help lower overall tax liability Disadvantages double taxation of corporate profits and shareholder dividends must hold annual meetings and record minutes S Corporations have restrictions on number of owners

Franchises and Cooperatives Franchising is an attractive entry form into Global business Domestically, franchising is a well sought out alternative as well to starting your business from scratch: 7-Eleven, Holiday Inn, McDonald’s A franchise is different from a chain store A franchise is not a legal form of business but rather a type of business

Franchising Advantages of franchising Established product Financial assistance Lower failure rate disadvantages of franchising Large start-up costs Must share profit Tight restrictions

Franchises and Cooperatives Buying an Existing Business Another option to start a business is to purchase an existing business. The advantage of purchasing this business is that there is already a customer base, inventory, and physical structure and location. Often, the previous owner is willing to stay awhile and train new owners.

Franchises and Cooperatives This is a business owned and controlled by the people who use it – producers, consumers, or workers with similar needs who pool their resources for mutual gain They can be found selling electricity, healthcare, housing, food, financial services, etc