Types of business ownershipTypes of business ownership

Chapter 4Chapter 4

Academic PreparationAcademic Preparation

To take business classes in high schoolTo take business classes in high school To go to college and get a degree in To go to college and get a degree in

businessbusiness Co-oping or InternshipCo-oping or Internship Attending workshops, seminars, trade Attending workshops, seminars, trade

showsshows

What do successful entrepreneurs What do successful entrepreneurs do before opening a new business?do before opening a new business?

Identify the wants and needs of the Identify the wants and needs of the marketplace. Will their business be able to marketplace. Will their business be able to satisfy?satisfy?

Set financial goals - (how much money you Set financial goals - (how much money you want to make, when you want to pay off your want to make, when you want to pay off your debts)debts)

Set nonfinancial goals – personal satisfaction Set nonfinancial goals – personal satisfaction receive (helping community, personal receive (helping community, personal independence, doing something you like)independence, doing something you like)

Sole Proprietorship (most Sole Proprietorship (most common form of business)common form of business)

One person is in control of the businessOne person is in control of the business– Advantages: Very little government controlAdvantages: Very little government control– Receives all of the profitsReceives all of the profits– Relatively easy to startRelatively easy to start– Taxed less Taxed less – Disadvantages: You are solely responsible – Disadvantages: You are solely responsible –

unlimited liabilityunlimited liability– Limited money Limited money – Make all decisions yourselfMake all decisions yourself

PartnershipPartnership

Advantages Advantages – Have someone to share in decision-making and Have someone to share in decision-making and

management responsibilitiesmanagement responsibilities– You don’t have to come up with all of the You don’t have to come up with all of the

money/capital by yourselfmoney/capital by yourself– Less taxation than corporationLess taxation than corporation– Losses will be shared by all partnersLosses will be shared by all partners– Face very little government regulationFace very little government regulation

DisadvantagesDisadvantages

May have disagreements on business May have disagreements on business operationoperation

May be held liable for partner’s mistakesMay be held liable for partner’s mistakes All partners must assume the liability (unless All partners must assume the liability (unless

wrote up different)wrote up different) Death of partner may dissolve the Death of partner may dissolve the

partnershippartnership

Corporation (chartered through a Corporation (chartered through a state and legally operates apart state and legally operates apart

from owners)from owners) Advantages: Advantages:

– Can get money through sale of stockCan get money through sale of stock– Limited liabilityLimited liability– Can easily enter and leave business (sell stock)Can easily enter and leave business (sell stock)– Areas can be managed by expertsAreas can be managed by experts

Disadvantages:Disadvantages:– Complex to formComplex to form– Increased government regulationIncreased government regulation– Higher taxes on profitsHigher taxes on profits– Major accounting /recordkeepingMajor accounting /recordkeeping

What is a business plan???What is a business plan???

A written document that describes all the A written document that describes all the steps necessary in opening and operating a steps necessary in opening and operating a business (used to guide your business)business (used to guide your business)

FranchiseFranchise

Legal agreement that gives an individual a Legal agreement that gives an individual a legal right to market a company’s product or legal right to market a company’s product or services in a particular areaservices in a particular area

Operating CostsOperating Costs

Initial franchise fee – right to run businessInitial franchise fee – right to run business Start-up costs – costs to rent facility, Start-up costs – costs to rent facility,

equipment costs, inventoryequipment costs, inventory Royalty fees – weekly or monthly payments Royalty fees – weekly or monthly payments

to owner to seller of franchiseto owner to seller of franchise Advertising fees – fees paid to support Advertising fees – fees paid to support

advertising of franchise as a wholeadvertising of franchise as a whole

Advantages of franchiseAdvantages of franchise

Have an established product or serviceHave an established product or service Franchisors offer management, technical, Franchisors offer management, technical,

and other assistanceand other assistance Equipment and supplies may be less Equipment and supplies may be less

expensive (get better contract deals)expensive (get better contract deals) Guarantee of consistency attracts Guarantee of consistency attracts

customerscustomers

Disadvantages of franchiseDisadvantages of franchise

Can cost a lot of money Can cost a lot of money Don’t get as much of profitsDon’t get as much of profits Less freedom to make decisionsLess freedom to make decisions Dependent on performance of other Dependent on performance of other

franchisesfranchises Franchisor my terminate the franchise Franchisor my terminate the franchise

agreement or not renew itagreement or not renew it

Things to consider???Things to consider??? Will I have an exclusive territory?Will I have an exclusive territory? What are the costs and royalty fees?What are the costs and royalty fees? How profitable have other franchises been?How profitable have other franchises been? How long has franchisor been in business?How long has franchisor been in business? What services will the franchisor offer me?What services will the franchisor offer me? What happens if I cancel the agreement?What happens if I cancel the agreement?

Financial and Nonfinancial GoalsFinancial and Nonfinancial Goals Set goalsSet goals

– Financial – how much money make, how long to Financial – how much money make, how long to make a profitmake a profit

– Non-financial – personal satisfaction, independenceNon-financial – personal satisfaction, independence

Three main skills needed by entrepreneurs?Three main skills needed by entrepreneurs? IndependentIndependent PersistentPersistent OrganizedOrganized Good decision-makersGood decision-makers

What is scarcity?What is scarcity?

There are limited resources and unlimited There are limited resources and unlimited wants and needs in our economy – forces wants and needs in our economy – forces us to have to make choicesus to have to make choices– Resources of a business:Resources of a business:

Land – physical property ownedLand – physical property owned Labor – people workingLabor – people working Capital – money and resources used to make a Capital – money and resources used to make a

product (could be buildings, equipment, etc.)product (could be buildings, equipment, etc.) Entrepreurship – people owning their own businessEntrepreurship – people owning their own business

Command Economy/Market Command Economy/Market EconomyEconomy

Market economy (United States)Market economy (United States)– Not a lot of government controlNot a lot of government control– The consumer decides The consumer decides whatwhat gets produced, gets produced, howhow its produced, and for its produced, and for whomwhom

Command economy (North Korea)Command economy (North Korea)– Government controls the factors of production Government controls the factors of production

and makes all the economic decisions (What, and makes all the economic decisions (What, How, and for Whom)How, and for Whom)

Government affects what gets Government affects what gets produced by?produced by?

Allowing competitionAllowing competition Having regulations to protect the consumerHaving regulations to protect the consumer Promote business ownershipPromote business ownership

Advantages to buying an existing Advantages to buying an existing businessbusiness

The business already has customers, The business already has customers, suppliers, and proceduressuppliers, and procedures

The seller may train the new ownerThe seller may train the new owner There are prior records of revenues, There are prior records of revenues,

expenses and profits.expenses and profits. May be easier to get financing (less risk for May be easier to get financing (less risk for

the bank)the bank)

Disadvantages of buying an existing Disadvantages of buying an existing business.business.

The business may not be making a profit.The business may not be making a profit. You may inherit serious problems. (poor You may inherit serious problems. (poor

reputation, trouble with suppliers, etc.)reputation, trouble with suppliers, etc.) Capital is requiredCapital is required

Before buying a new business what Before buying a new business what should you find out/do???should you find out/do???

Visit during business hoursVisit during business hours Make sure business meets your objectivesMake sure business meets your objectives Get a complete financial accounting report Get a complete financial accounting report

for the last 3 yearsfor the last 3 years Ask for important information in writing.Ask for important information in writing. Meet with a business broker to help with Meet with a business broker to help with

whether or not it is a good investment.whether or not it is a good investment.

Advantages of entering a family Advantages of entering a family business?business?

Pride and sense of mission working with Pride and sense of mission working with familyfamily

Some enjoy working with relatives.Some enjoy working with relatives. Like keeping the business in the familyLike keeping the business in the family

Disadvantages of working with familyDisadvantages of working with family

Senior management positions – held by Senior management positions – held by family members regardless of their abilityfamily members regardless of their ability

May be hard to retain good employees who May be hard to retain good employees who are not members of familyare not members of family

Family politics may affect decision-makingFamily politics may affect decision-making Sometimes distinction between family-life Sometimes distinction between family-life

and business is blurredand business is blurred