McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Three: Entrepreneurship and Starting a Small Business

© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill

Learning Outcomes

1. Explain the traits of a successful entrepreneur.

2. Describe the alternatives to starting a business from scratch.

3. Discuss the legal forms of business ownership, and the advantages and disadvantages of each.

4. Describe the five main areas of focus when starting a small business.

5. Explain why businesses fail and how they succeed.

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© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill

Entrepreneurs

Accepting the risk of starting and running a business

40% of people between 8 and 21 want to start their own businesses someday!

What are the qualities of an entrepreneur? Self directed Self nurturing Action oriented Energetic Tolerance of uncertainty …to name a few!

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© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill

Why Start a Business?

Opportunities Profit Independence Challenge Flexibility The chance to make a difference

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Options for Starting a Business

Start a business from scratch Buy an existing business Buy a franchise

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Start a Business from Scratch

Advantages Be your own boss Can operate business any way you wish Get to make all of the decisions

Disadvantages More cost and risk, since there is no proven way of doing

things Competition Can be lonely

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© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill

Start a Business from Scratch

Advice for getting started Find a mentor Do your research Know the industry Market yourself Read

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Buy an Existing Business

Advantages The business already has a proven track record You can save time and resources Obtain training Can be easier to finance

Disadvantages May be a higher cost May not be the location you want Could be hidden problems with the business Bizbuysell.com

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Franchises

Advantages Proven products and services Marketing assistance Training Operations and purchase assistance Ownership and lower failure rate

Disadvantages High start up costs Sharing profits Negative publicity by association Cannibalization Management restrictions

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Franchises

Chain Store A business location where there are one of many stores,

with the same management Company store

When a brand name is shared, but the management is not central. A company store is a franchise that the franchisor owns

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© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill

Legal Forms of Ownership

Sole Proprietorship Advantages

Easiest to start Ease of entry and exit Retail all profit

Disadvantages Financial burden Limited skills Unlimited liability

Define Long hours No fringe benefits

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Legal Forms of Ownership

Partnership A business with two or more owners Advantages

More financial resources Pooled knowledge Risk distribution

Disadvantages Division of profits Unlimited liability Conflict Difficult to get out

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Legal Forms of Ownership

Types of Partnerships General Partnership: All owners share business

and financial obligation Limited Partnership: One or more general

partners and one or more limited partners General partner: Owner with unlimited liability and is

active in managing the firm Limited partner: Owner who invests money in the

business but does not have liability for losses beyond the initial investment

MLP and LLP: Special forms of partnerships which are taxed different and have limited liability

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© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill

Legal Forms of Ownership

Corporations Advantages

Limited Liability Define

Shared ownership Continuity Lower Tax rates Fringe benefits

Disadvantages Double taxation More paperwork More regulations Owners’ limited focus

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© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill

Legal Forms of Ownership

Corporations Types of corporations

S-Corp Taxed like a sole proprietorship Some restrictions on size of company

LLC (Limited Liability Companies) Similar to S-Corp, but without the restrictions Limited Liability Choose their form of taxation

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The Five Areas of Focus

Planning the business Financing the business

Venture capitalists Angel investors

Knowing your customers (marketing) Managing employees Keeping records (accounting)

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Why Do Business Fail?

Lack of planning Lack of Marketing Lack of Financial understanding The wrong business partner Poor location Competition

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Making Your Business Succeed

Seek help! Focus on what can make the business fail and

figure out ways to mitigate this Have a business plan Control emotions and be realistic Monitor and understand cash flow Focus on Sales Watch for changes-don’t get too comfortable Have fun!

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