3

chapt
er
Entrepreneurship, New Ventures,
and Business Ownership

What Is a Small Business?

Small Business Defined
A business that is independent 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

FIGURE 3.2: Small Business by

Industry

Entrepreneurship
Entrepreneurship
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

Entrepreneurial Characteristics
Successful Entrepreneurs:
Are resourceful and open-minded
Are concerned about good customer
relations
Desire to be their own boss
Can deal with uncertainty and risk
Rely on networks, business plans, and
consensus

Starting and Operating a New Business

Crafting a Business Plan
State business plan and implementation

Preparing a Business Plan

Setting goals and objectives
Sales forecasting
Financial planning

Starting the Small Business

Buying an Existing Business
Less risk

Franchising
Advantages for franchisee
Proven business opportunity
Access to management expertise

Disadvantages for franchisee

Start-up costs
Ongoing payments
Management rules and restrictions

Starting the Small Business (cont.)

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 they pay for my product?
How much product can I expect to sell?
Who are my competitors?
Why will customers buy my product rather than
the competitors?

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

Trends in Small-Business Startups

Emergence of
E-commerce
Crossovers from
Big Business
Opportunities for
Minorities & Women
Global
Opportunities
Better
Survival Rates

Reasons for Failure and Success

Failure

Poor management
Neglect
Weak control systems
Insufficient capital

Success

Hard work, drive, and dedication

Market demand
Managerial competence
Luck!!!

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 entrepreneurs needs/desires for
control, ownership participation, financing
sources, and appropriateness of the chosen form
for the industry in which the firm will compete

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

Limited resources
Limited fundraising
capability
Lack of continuity

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(s)
Disagreements
among partners
Lack of
continuity

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
General (or active) partner(s), runs the business

Master Limited Partnership

Organization sells shares (partnership interests) to
investors on public exchange; investors paid back
from profits
Master partner has majority ownership and runs
the business; minority partners have no
management voice

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

Corporations
Corporation
Legal status as separate entities

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

Corporations (cont.)
Advantages:
Limited liability:
owners financial
responsibility is
limited to their
investment

Continuity
Stronger
fundraising
capability

Disadvantages:
Double taxation
of dividends
Fluid control
Complicated and
expensive to
form

Types of Corporations
Closely Held (Private) Corporation
Publicly Held (Public) Corporation
Subchapter SCorporation
Limited Liability Corporation (LLC)
Professional Corporation
Multinational (Transnational)
Corporation

Managing a Corporation
Corporate Governance
Who makes corporate decisions and who is
accountable
Established by the firms bylaws and involves
three bodies:
Stockholders (shareholders): Investors who buy
ownership shares in the form of stock
Board of Directors: elected by stockholders to
oversee corporate management
Corporate officers: Top managers hired by the board
to run the corporation

Stockholders: Owners of Corporations

Stock: A share of ownership in a
corporation
Dividends: Profits distributed among
stockholders

Special Issues in Corporate Ownership

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

Employee Stock Ownership Plans

Allows employees to own a share of the
corporation through trusts established on their
behalf

Institutional Investors
Control enormous resources and can buy huge
blocks of stock

Special Issues in Corporate Ownership

(cont.)
Mergers, Acquisitions, Divestitures,
and Spin-Offs:
Merger: Two firms combine to create a
new company
Acquisition: One firm buys another
Divestiture: A firm sells one or more of
its business units
Spin-off: A firm sells part of itself to
raise capital