guide line of business group actiovity

Starting a Small BusinessLecture 2 of Introduction to Business

(BUS30104)

Objectives– The Small Business & its Characteristics– Why do People Start (Small) Businesses– How to be a Successful Business Owner?– Start from Scratch, Buy an Existing Business, or go

Franchise?– The Different Forms of Ownership

The Small Business& Its Characteristics

The Small Business

• A small business is a business owned by one to several persons.

• It operates on a small amount of capital and serves a limited number of customers.

The Small Business

• For example, the restaurants and food stalls in the campus are small businesses.

The Small Businesses

• They represent a large percentage (50% to 70%) of many nations’ economy, including the U.S. and Malaysia.

• They can be found everywhere i.e. from construction to wholesaling, etc.


• Most of them are in the service industry because it requires less capital.

• Recall that goods-producing businesses need more capital for its assets (land, factory, etc.), compared to service businesses.

The Small Businesses– Most small businesses have limited growth potential

i.e. they stay small.

– However, there are exceptions.

– Example: Apple, Microsoft and Dell are examples of small businesses that transformed into (very) large, successful corporations that we know of today.

Apple I (1976)

http://en.wikipedia.org/wiki/File:Apple_I.jpg


• They serve as distributors of products for the big businesses.

• Example: You buy Wrigley’s chewing gum & Milo from small retail stores, not the manufacturers.


• Small business also act as suppliers to big businesses.

• For instance, the restaurants/food stalls at a university cater to the people who work and study there.


• Small businesses also provide innovations and/or serve niche markets.

• Examples: Starbucks for its unique way of running a coffee business. Intel for its microprocessor. (Both were originally small businesses.)


– Niche market refers to very specific or unique markets.

– Examples include pet cleaning, flower arranging, internet businesses that sells eBooks.


• Small business are less bureaucratic (i.e. informal) so they can respond quickly to changes in the market.

• For example, when the economy recovers from a recession, small businesses are normally the first to start hiring again.

Group Discussions- How to be a Successful

Business Owner

Activity 1

• What are the main challenges/problems faced by business owners or entrepreneurs?

• Discuss them with your neighbors (10 minutes).

Problems/Challenges1. _______________ 6. ________________2. _______________ 7. ________________3. _______________ 8. ________________4. _______________ 9. ________________5. _______________ 10. ________________

Activity 2

• Why do people start their own businesses?• Discuss the reasons/motivations with your neighbors (10

minutes).

Reasons/motivations1. _______________ 6. ________________2. _______________ 7. ________________3. _______________ 8. ________________4. _______________ 9. ________________5. _______________ 10. ________________

Activity 3

• What qualities & skills should you have if you want to be a successful business owner?

• Discuss with your neighbors (10 minutes).

Personalities/Skills1. _______________ 6. ________________2. _______________ 7. ________________3. _______________ 8. ________________4. _______________ 9. ________________5. _______________ 10. ________________

Key Point• The important point is this – To become a successful

business owner, you must have strong reasons (or motivations) and the right qualities. Otherwise, you would not be able to tackle the problems you face in business effectively.

Reasons/Motivations

Skills + Qualities

Problems/Issues

Tackle

Start from Scratch, Buy an Existing Business,

or go Franchise?

Buy an Existing Business, Go Franchise or Start from Scratch?

• So how should you start your business? There are generally 3 options:

Buy an ExistingBusiness

FranchiseStart from

Scratch


• Starting from Scratch – Even though many businesses started in this manner

eventually fail*, some people like the satisfaction of starting a business from the ground up.

– Also, the owners have complete freedom to decide on how to run their business.

*55% of them fail within 5 years, according to a research study done by University of Tennessee.


• Starting from Scratch – However, there are also more risks (compared to

other 2 options), therefore more preparation and hard work are required to make it work.


• Purchase an existing business– This means buying over an existing business from its

current owner.

– For example, if you bought Taylor’s University today, then you have become the new owner of an existing business.


• Purchase an existing business– If the existing business is already successful (i.e. have

a large customer base, established relationship with suppliers and bankers, and profitable), then it would be less risky than the 1st option i.e. starting a business from scratch.


• Franchising– A franchise is a business operating under licenses

issued by parent companies.

– For example, the McDonald’s outlet in Sunway Pyramid is owned by a Malaysian. However, he needs to get the permission (i.e. license) from the parent company in U.S.A. to run it.


• Franchising– To obtain the license, franchisees need to pay a one-

time fee (anywhere from $200K to several million) to the parent company.

– In addition, the franchisee must also pay a percentage of their annual revenue to the parent.


• Franchising– However, the franchisees obtain training, technical

help, and free advertising from the parent company.

Types of LegalOwnership

Types of Legal Ownership

• So how do you “own” a business?

Types of LegalOwnership

Sole Trader Partnership Corporations


• Sole Traders– Means the business only has one owner.

– Advantages:• The sole proprietor has full control of the business.

• Legal paperwork to set up the business is simple and low cost.


• Sole Traders– Disadvantages• Unlimited Liabilities – i.e. the owner is personally

responsible for all the debts of his business.

• Example: If the business goes bankrupt and has $50,000 of debt still owing, the owner must personally pay it off.

• Due to its small size and perceived higher risk (only one owner), bankers are reluctant to lend $$$ to sole traders.


• Partnership– Means the business has at least 2 or more owners

(or partners).

– Advantages:• Easier to get capital due to more owners. As a result,

banks are also more willing to lend $$$.

• Legal paperwork is simple and low cost.


• Partnership– Disadvantages• Unlimited Liabilities i.e. all owners are personally

responsible for the business’ debts.

• Arguments may arise if the owners do not share the same business objectives.


• Corporation– Also known as a company.

– It can have 2 to ∞ owners (or shareholders).

– It is treated as a separate legal entity i.e. legally recognized as a person.


• Corporation– Because it is a “person”, a company can buy, sell

and own assets, as well as sue or be sued in court.

A company is treatedas a person.


• Corporation– Since it is treated as a “person”, it is therefore

considered as an entity separate from its owners.

– As a result, this gives the owners or shareholders the advantage of limited liabilities.


• Corporation– Limited liabilities – An owner is not personally

responsible for the debts of his company.

– This means, if a company went bankrupt, the owners lose their invested capital only and need not to come up with more $$$ to pay off the company’s debts.


• Corporation– Why? Remember, a company is a “person”. Therefore

the company should be responsible for its own debts.

– Think: If John (company) owes money, should Sally (owner) be responsible for the debt?

– Answer: No! Because Sally and John are 2 different persons.


• Corporation – Advantages:• Limited liabilities.

• Continuity – ownership in the corporation (i.e. shares) can be transferred from one person to a another, thereby granting corporations an indefinite life.

• Ease of raising funds – to raise money, owners of corporations can sell shares to new owners


• Corporation – Disadvantages:• The cost for legal paperwork is higher than sole trader

or partnership.

• Double taxation – the company’s profit gets taxed at the corporate level first. Then, when the profit is distributed to the shareholders, it is taxed again (at the shareholder level).


• Corporation– There are 2 types of companies: Public-listed and

Private

Corporation

Private CompanyPublic-listed

Company


• Corporation– Public-listed companies are companies whose shares

can be bought and sold by anyone i.e. the public.

– In other words, you can become an owner by buying its shares at the share market.

– The price of these shares are quoted on the stock exchange e.g. NYSE, Bursa Malaysia, etc.


• Private Companies– Private companies cannot sell their shares to the

public i.e. via the share market.

– Shares are to be sold privately i.e. between friends, family members and business associates.

– As a result, raising capital is harder for private companies (since they cannot sell shares to the public) and therefore, they tend to be smaller than public-listed companies.

Summary

• The Small Business:– The Characteristics of Small Businesses– Group Activities– Buy an Existing Business, Franchising or Starting

from Scratch?– The Different Forms of Ownership

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