Fourth Edition

PART 1 . . . . . . . . . . . . . . . . . . . . . . . .

Understanding the Contemporary Business Environment

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Chapter 4

Entrepreneurship and Small Business

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Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.
~ Victor Kiam
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Key Topics
Small business and its importance in the economy Sole proprietorships, partnerships, and corporations Creating and managing corporations Corporate trends and issues Starting and funding a small business

Pros and cons of franchising

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What Is Small Business?

Independently owned and managed business that does not dominate its market

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Small business plays a critical role in the U.S. economy.

Job Creation Innovation

Importance to Big Businesses

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The Labor Force Reflects the Importance of Small Business

86.09

Percentage of All U.S. Businesses

Percentage of All U.S. Workers

25.60 29.10

25.50
12.70 7.10

11.00
Under 20 2099

2.00
0.20 100499 0.10 500- 1000 or 1000 more

Under 20

2099

100499

500- 1000 or 1000 more

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Total Employees
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Total Employees

Popular Areas of Small Business Enterprise

Services Retailing Construction
Manufacturing 5% Finance & Insurance Other 10% 1.7% Wholesale 8%

Financial
Insurance Wholesaling Transportation Manufacturing
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Construction 10% Transportation 5%

Retailing 22.7%

Services 37.6%

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Types of Business Organizations

Type of Business
73% 7% 20%

Sales Revenue
89% 5%

6%

Sole Proprietorship
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Partnership

Corporations
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Comparative Summary: Three Forms of Business

Business Form
Proprietorship

Liability
Personal, limited

Continuity
Ends with death or decision of owner Ends with death or decision of any partner

Management
Personal, unrestricted

Investment Sources
Personal

General Partnership

Personal, unlimited

Unrestricted or depends on partnership agreement

Personal by partner(s)

Corporation

Capital invested

As stated in charter, perpetual or for specified period of years

Under control of Purchase of board of stock directors, which is selected by stockholders

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Sole Proprietorships
Advantages: Freedom Simple to form Disadvantages: Unlimited Liability Limited resources

Low start up costs

Tax benefits

Limited fundraising capability

Lack of continuity
Unlimited Liability

Legal principle holding owners responsible for paying off all debts of a business
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Partnerships
Advantages: Disadvantages: More talent and money Unlimited Liability More fundraising capability Relatively easy to form Tax benefits
Unlimited Liability
Legal principle holding owners responsible for paying off all debts of a business
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Disagreements among partners Lack of continuity

Remember
When two men in business always agree, one of them is unnecessary.
William Wrigley Jr.

But
An exit plan is still crucial!
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What is a Corporation?

An artificial being, invisible, intangible, and existing only in contemplation of the law.
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Corporations
Advantages:
Limited Liability

Disadvantages:
Double Taxation

Continuity
Stronger fundraising capability

Fluid control
Complicated and expensive to form

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Types of Corporations
Closely Held (Private) Corporation
Publicly Held (Public) Corporation

S Corporation
Limited Liability Corporation (LLC)

Professional Corporation
Multinational or Transnational Corporation
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Stockholders
Owners of Corporations Stock: Share of ownership in a corporation
Common Stock Preferred Stock

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Corporate Governance Hierarchy

Stockholders

Board of Directors

Officers

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Special Issues in Corporate Ownership

Joint Ventures & Strategic Alliances

Employee Stock Ownership Programs (ESOPS)

Institutional Ownership
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Special Issues in Corporate Ownership

Mergers & Acquisitions (M&As)

Divestitures & Spin-offs

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Entrepreneurship vs. Small Business

Entrepreneur: Accepts the risks and opportunities of creating, operating and growing a new business

Small Business Owner: Does not have plans for growth

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Trends in Small Business Start-ups

Emergence of E-commerce
Crossovers From Big Business Opportunities for Minorities & Women Global Opportunities Increased Survival Rates
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E-commerce Continues to Grow Rapidly

$20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 $17,387

Percentage

$12,090 $7,924 $4,828 $2,444

1997

1998

1999

2000

2001

Year
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Reasons for Success and Failure

Reasons for Failure Poor management Neglect Weak control systems Insufficient capital

Reasons for Success Hard work, drive, dedication Market demand Strong management Luck!!!
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Getting Started

Buying an Existing Business

Starting From Scratch

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Financing the Small Business

Personal resources Loans Venture capital companies Small-business investment companies Small Business Association (SBA)

Financial aid and management advice

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FRANCHISING
An Ownership Opportunity
Advantages
Proven business opportunity Access to management expertise
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Disadvantages
Start-up costs On-going payments Management rules and restrictions
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Chapter Review
Define small business and explain its importance to the U.S. economy. Describe sole proprietorships, partnerships, and corporations, and explain the advantages and disadvantages of each. Identify the different types of corporations. Describe the start-up decisions made by small businesses and the potential sources of financial aid and management advice. Identify the advantages and disadvantages of franchising.
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