Bus 100

Chapter 3

ENTREPRENEURSHIP, NEW VENTURES, AND BUSINESS

OWNERSHIP

2

L E A R N I N G O B J E C T I V E SL E A R N I N G

O B J E C T I V E SAfter reading this chapter, you should be able to:1. Define small business, discuss its importance to the U.S.

economy, and explain popular areas of small business.2. Explain entrepreneurship and describe some key

characteristics of entrepreneurial personalities and activities.3. Describe the business plan and the start-up decisions made

by small businesses and identify sources of financial aid available to such enterprises.

4. Discuss the trends in small business start-ups and identify the main reasons for success and failure among small businesses.

3

L E A R N I N G O B J E C T I V E S (cont’d)

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:

5. Explain sole proprietorships, partnerships, and cooperatives and discuss the advantages and disadvantages of each.

6. Describe corporations, discuss their advantages and disadvantages, and identify different kinds of corporations.

7. Explain the basic issues involved in managing a corporation and discuss special issues related to corporate ownership.

4

What’s in It for Me?

By understanding the material discussed in this chapter, you’ll be better prepared to:

1. Understand the challenges and opportunities provided in new venture start-ups

2. Assess the risks and benefits of working in a new business

3. Evaluate the investment potential inherent in a new enterprise

5

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

6

Popular Areas of Small-Business Enterprise

Major small-business industry groups: Services Retailing Construction Wholesaling Finance and insurance Manufacturing and

transportation

7

Small Business by IndustrySmall Business by Industry

8

Entrepreneurship

Entrepreneurship The process of seeking businesses

opportunities under conditions of riskEntrepreneur

One who accepts the risks and opportunities of creating, operating and growing a new business

Small Business Owner Does not always have growth of the

business as a primary entrepreneurial goal

9

Entrepreneurial CharacteristicsSuccessful Entrepreneurs:

are resourceful. are concerned for 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.

10

Starting and Operating a New Business

Crafting a 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 objectivesThe strategies that will be used to obtain themThe implementation of the chosen strategies

Preparing a Business Plan Setting goals and objectives Sales forecasting Financial planning

11

Starting the Small BusinessBuying an Existing Business

Less risk in purchasing ongoing, viable business

Franchising Advantages

Proven business opportunity for franchiseeAccess to management expertise of franchisor

DisadvantagesStart-up costs for franchise purchaseOngoing payments to the franchisorManagement rules and restrictions on the

franchisee

12

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?

13

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 loans programs

Management advice (SCORE and SBDCs)

14

Trends in Small-Business StartupsEmergence of Emergence of E-commerceE-commerce

Crossovers fromCrossovers fromBig BusinessBig Business

Opportunities for Opportunities for Minorities & WomenMinorities & Women

GlobalGlobalOpportunitiesOpportunities

BetterBetterSurvival RatesSurvival Rates

15

Reasons for Failure and SuccessFailure

Poor management Neglect Weak control systems Insufficient capital

Success Hard work, drive, and

dedication Market demand Managerial competence Luck!!!

16

Noncorporate Business Ownership

Forms of Legal Ownership 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

17

Sole Proprietorships

Advantages: 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

18

Partnerships

Advantages: 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

19

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

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

20

Cooperatives

Combine the freedom of sole proprietorships with the financial power of corporations

Groups of sole proprietorships or partnerships agree to work together for their common benefit

21

CorporationsCorporation

“An artificial being, invisible, intangible, and existing only in contemplation of the law”

Corporations May: Sue and be sued Buy, hold, and sell property Make and sell products Commit crimes and be tried and

punished for them

22

Corporations

Advantages: 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

23

Types of Corporations

Closely Held (Private) CorporationPublicly Held (Public) CorporationSubchapter S Corporation

Limited Liability Corporation (LLC)

Professional Corporation

Multinational (Transnational) Corporation

24

Managing a CorporationCorporate Governance

The roles of shareholders, directors, and other managers in corporate decision making and accountabilityCorporate governance is established by the firm’s bylaws and involves three bodies:

Stockholders (shareholders): Investors who buy ownership shares in the form of stockThe board of directors: Group elected by stockholders to oversee corporate managementCorporate officers: Top managers hired by the board to run the corporation

25

Stockholders: Owners of Corporations

Stock: A share of ownership in a corporation

Dividends: Profits distributed among stockholders

26

Special Issues in Corporate Ownership

Joint Ventures and Strategic Alliances:Strategic alliance: Two or more organizations collaborate on a project for mutual gainJoint venture: Partners share ownership of a new enterprise

Employee Stock Ownership PlansAllows employees to own a share of the corporation through trusts established on their behalf

Institutional InvestorsControl enormous resources and can buy huge blocks of stock

27

Special Issues in Corporate Ownership (cont’d)

Mergers, Acquisitions, Divestitures, and Spin-Offs:Merger: Two firms combine to create a new companyAcquisition: One firm buys another outrightDivestiture: Strategy whereby a firm sells one or more of its business unitsSpin-off: A firm sells part of itself to raise capital

28

T H E E N D !T H E E N D !

29