Chapter Three

Entrepreneurship, New Ventures, and Business Ownership

After 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.

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 S

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After reading this chapter, you should be able to:1. Explain sole proprietorships, partnerships, and

cooperatives and discuss the advantages and disadvantages of each.

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

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

L E A R N I N G O B J E C T I V E S (cont.)L E A R N I N G O B J E C T I V E S (cont.)

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What’s in It for Me?

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

1. Understand the keys to entrepreneurial success, including business planning

2. Discuss the reasons for success or failure3. Evaluate the advantages and disadvantages of

different kinds of ownership

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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

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FIGURE 3.2: Small Business by Industry

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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

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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

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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

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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

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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?

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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

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Trends in Small-Business Startups

Emergence of Emergence of E-commerceE-commerce

Crossovers fromCrossovers fromBig BusinessBig Business

Opportunities for Opportunities for Minorities & WomenMinorities & Women

GlobalGlobalOpportunitiesOpportunities

BetterBetterSurvival RatesSurvival Rates

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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!!!

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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

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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

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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

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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

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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

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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

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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

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Types of Corporations

• Closely Held (Private) Corporation• Publicly Held (Public) Corporation

• Subchapter S Corporation

• Limited Liability Corporation (LLC)

• Professional Corporation

• Multinational (Transnational) Corporation

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Managing a Corporation

• Corporate Governance• Who makes corporate decisions and who is accountable

• Established by the firm’s 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

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Stockholders: Owners of Corporations

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

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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

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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

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Key Terms

acquisition board of directors business plan chief executive officer (CEO) closely held (or private) corporation cooperative corporate governance corporation divestiture double taxation

employee stock ownership plan (ESOP)

entrepreneurentrepreneurship franchise general (or active) partner general partnership institutional investor joint venture limited liability limited liability corporation

(LLC)

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Key Terms (cont.)limited partner limited partnership master limited partnership merger multinational (or transnational) corporationofficers professional corporation publicly held (or public) corporation S corporation small business Small Business Administration (SBA)

Small Business Development Center (SBDC) small-business investment company (SBIC) sole proprietorship spin-offstockholder (or shareholder) strategic alliance tender offer unlimited liability venture capital company

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