UNIT-2

Small Business Meaning

A business which functions on a small scale level involves less capital
investment, less number of labour and fewer machines to operate is known
as a small business.

Small scale Industries or small business are the type of industries that
produces goods and services on a small scale. These industries play an
important role in the economic development of a country. The owner
invests once on machinery, industries, and plants, or take is a lease or hire
purchase. These industries do not invest more than one crore. Few
examples of small-scale industries are paper, toothpick, pen, bakeries,
candles, local chocolate, etc., industries and are mostly settled in an urban
area as a separate unit.

Small business is defined as a business that has a limited

number of employees, typically fewer than 500, and
operates independently of larger corporations. Small
businesses are typically privately owned and operated and
have a single owner or a small group of owners.

According to the SBA, men own 56.8% of small businesses,

women own 38.3%, and the remaining 4.8% are equally
owned by men and women partnerships. Women are more
likely to own service-based businesses, where men own
more product or technology-based ventures.

Characteristics of Small Scale Industries

 Ownership: They have a single owner. So it is also known as a sole

proprietorship.
 Management: All the management works are controlled by the
owner.
  Limited Reach: They have restricted area of operation. So they may
be a local shop or an industry located in one area.
 Labor Intensive: Their dependency on technology is very little
because they are dependent on labours and manpower.
 Flexibility: Because they are small, they are open and flexible to
sudden changes, unlike large industries.
 Resources: They utilize local and immediately available resources.
They do better utilization of natural resources and limited wastage.

On the basis of capital invested, small business units can be divided into the following
categories:

(1) Small Scale Industry (Before 2006)

 They invest in fixed assets of machinery and plant, which does not surpass than one crore.
 For export improvement and modernization, expenditure ceiling in machinery and plant is
five crores.

(2) Ancillary Small Industrial Unit

 This industry can hold the status of an ancillary small industry if it supplies a minimum 50 per
cent of its product to another business, i.e. the parent unit.
 They can produce machine parts, components, tools or standard products for the parent unit.

(3) Export Oriented Units

 This industry can possess the status of an export-oriented unit if it exports exceeds 50 per
cent of its manufactures.
 It can opt for the compensations like export bonuses and other grants awarded by the
government for exporting units.

(4) Small Scale Industries Owned by Women

 An enterprise operated by women entrepreneurs in which they alone or combined share

capital minimum of 51 per cent.
 Such units can opt for the special grants from the government, with low-interest rates on
loans, etc.

(5) Tiny Industrial Units

 It is an Industrial or a company whose expenditure on machinery and plant does not exceed
Rs. 25 lakhs.

(6) Small Scale Service and Business

  It is a fixed asset investment on machinery and plant excluding land and building should not
surplus Rs. 10 lakhs

(7) Micro Business Enterprises

 It is a tiny and small business sector.

 The investment in machinery and plant should not exceed Rs.1 lakh.

(8) Village Industries

 The industries which are located in rural areas and manufacture any product
performs any service with or without the utilization of power is called village
industries.

They have fixed investments on capital as per head, workers, and artisan, which does
not exceed Rs.50, 000.

(9) Cottage Industries

 It is also known traditional or rural industries.

 These industries are not covered by the capital investment criterion.

What is ownership structure?

A company’s ownership structure looks at who owns the respective
company. Those with private structures can control who buys and
sells shares. Companies with public ownership can have public
investors buy and sell shares on the open market.

Ownership structure can impact how companies make decisions.

Those with concentrated ownerships have strong control over
decision-making, while companies with less-concentrated
ownership can give more power to minority shareholders.

Advantages of Small-Business Ownership

 Independence. Entrepreneurs are their own bosses. They make the decisions.
They choose whom to do business with and what work they will do. They decide
what hours to work, as well as what to pay and whether to take vacations. For
 many entrepreneurs the freedom to control their destiny is enough to outweigh the
potential risks.
 Financial gain. Entrepreneurship offers a greater possibility of achieving
significant financial rewards than working for someone else. Owning your own
business removes the income restraint that exists in being someone else’s
employee. Many entrepreneurs are inspired by the mega-millionaire entrepreneurs
we see today, such as Steve Jobs, Elon Musk, Jeff Bezos, and Mark Zuckerberg.
 Control. It enables one to be involved in the total operation of the business, from
concept to design to creation, from sales to business operations to customer
response. This ability to be totally immersed in the business is very satisfying to
entrepreneurs who are driven by passion and creativity and possess a “vision” of
what they aim to achieve. This level of involvement allows the business owner to
truly create something of their own.
 Prestige. It offers the status of being the person in charge. Some entrepreneurs
are attracted to the idea of being the boss. In addition, though, there is the
prestige and pride of ownership. When someone asks, “Who did this?” the
entrepreneur can answer, “I did.”
 Equity. It gives an individual the opportunity to build equity, which can be kept,
sold, or passed on to the next generation. It’s not uncommon for entrepreneurs to
own multiple businesses throughout their life. They establish a company, run it for
a while, and later sell it to someone else. The income from this sale can then be
used to finance the next venture. If they’re not interested in selling the business,
the goal may be to build something that can be passed down to their children to
help ensure their financial future. One thing is sure: In order to fully reap the
financial benefits of a business venture, you need to be the owner.
 Opportunity. Entrepreneurship creates an opportunity for a person to make a
contribution. Most new entrepreneurs help the local economy. A few—through
their innovations—contribute to society as a whole.

Disadvantages of Small-Business Ownership

Time commitment. When someone opens a small business, it’s likely, at least in the
beginning, that they will have few employees. This leaves all of the duties and
responsibilities to the owner. Small-business owners report working more than
eighty hours a week handling everything from purchasing to banking to advertising. This
time commitment can place a strain on family and friends and add to the stress of
launching a new business venture.
Risk. Even if the business has been structured to minimize the risk and liability to the
owner, risk can’t be completely eliminated. For instance, if an individual leaves a secure
job to follow an entrepreneurial dream and the business fails, this financial setback can
be hard to overcome. Beyond financial risk, entrepreneurs need to consider the risk
from product liability, employee disagreements, and regulatory requirements
Uncertainty. Even though the business may be successful at the start, external factors
such as downturns in the economy, new competitors entering the marketplace, or shifts
in consumer demand may stall the businesses growth. Even entrepreneurs who go
through a comprehensive planning process will never be able to anticipate all of the
potential changes in the business environment.
Financial commitment. Even the smallest of business ventures requires a certain
amount of capital to start. For many people starting small businesses, their initial source
of funding is personal savings, investments, or retirement funds. Committing these
types of funds to a business venture makes them unavailable for personal or family
needs. In most cases where a small business receives start-up funding through a loan,
the entrepreneur must secure the loan by pledging personal assets, such as a home.
Risking the equity in one’s home is a financial commitment not all entrepreneurs are
willing to make.

What is business ownership?

Business ownership provides a management framework for business owners. Thus,
understanding the various types of ownership is essential to these folks.

DEFINATION

“Business ownership refers to legal control over a business. It gives the owner the legal
right to make certain business decisions.
The legal structure of a business is crucial in its ramifications, so it must be understood and
planned out carefully. The decisions involved impact daily operations, taxation, and the level
of risk. “

“The legal structure is the framework through which a business is defined in a particular
jurisdiction.”

Types of business ownership structures

There are six basic types of business ownership structures:

1. Sole Proprietorship
2. Partnership
3. Private limited companies (LTD)
4. Public Limited Companies, PLC
5. Not-for-profit organisation
6. Cooperatives.

. Sole proprietorship
This is the most common form of business ownership and the simplest. Sole proprietorship
means that a business is owned and directed by one individual. This individual owns all the
rights to run the business however they deem fit. In other words, if you start a brand new
business, and you are the only person owning and running the business, it is considered a
sole proprietorship .

2. Partnership
This business ownership structure means two or more people own a business. Partnerships
are of two types, namely:

1. General partnership - this involves an investment from all partners, and all partners
bear the responsibility for any debt incurred by the business. The partnership usually
doesn’t need a formal agreement as it could be verbal between business owners.
2. Limited Liability Partnership, LLP - LLP provides protection for each partner against
debt incurred by the other partner(s). It usually requires a formal agreement between
partners to protect each from the actions of the others.

3. Private limited company/LTD

A private limited company - also referred to as LTD - is an incorporated business entity that
is privately held and controlled. The ownership of the business is divided by shares in the
company. Those who own the shares are known as shareholders.

This type of business ownership provides limited liability to the owners. Limited liability
provides the shareholders' personal assets with protection from liabilities incurred by the
business.

4. Public Limited Company/PLC

A public limited company - also known as PLC - is a business ownership style unique to the
United Kingdom, although it is equivalent to what is known as corporation in other
countries. A PLC is an incorporated business, meaning it exists legally as a separate entity
from its owners. It also has limited liability, as it offers protection to its shareholders from
business liabilities.

A PLC is managed by a board of directors and owned by shareholders. A PLC's shares can
be traded with the public on the stock exchange.

5. Non-Profit
A non-profit organisation has been established for purposes other than profit generation. The
organisation's generated income does not go to the owners or members. Examples include
Amnesty International and the Boy Scouts.
6. Cooperative
A cooperative is a business structure whose owners are consumers of its services. It is
operated to provide benefits to those people. It often aims to pursue economic, social, or
cultural goals.

Examples of cooperatives include community-owned stores and farms such as Anglia

Farmers or supporter-led sports clubs.

Factors to consider in choosing a business structure

In choosing a business structure best suited to your business, the following factors should be
considered:

1. Start-up finance
The cost of setting up a business increases proportionally to the amount of legal paperwork.
One important factor to consider when choosing a business structure is the amount of money
you are willing to invest in the initial setup costs.

2. Number of owners
The amount of owners you are willing to involve in the management of your business is also
an important factor to consider. Then you can custom-fit your business ownership structure
to one of the many available - whether for one or 100 owners.

3. Liabilities
The need to protect your personal assets from debt makes business risk and liability an
important consideration. Sole proprietorships and certain types of partnerships face unlimited
liability, meaning that the owners are personally liable for any debts the business incurs.

4. Business ownership transfer

A sole proprietorship rarely outlives its owner. Considering whether you want your business
to keep running after you are gone is also important. If you are looking to pass ownership to
your family or children, the kind of business ownership structure you choose will be
absolutely crucial.
4. Business ownership transfer
A sole proprietorship rarely outlives its owner. Considering whether you want your business
to keep running after you are gone is also important. If you are looking to pass ownership to
your family or children, the kind of business ownership structure you choose will be
absolutely crucial.

4. Business ownership transfer

A sole proprietorship rarely outlives its owner. Considering whether you want your business
to keep running after you are gone is also important. If you are looking to pass ownership to
your family or children, the kind of business ownership structure you choose will be
absolutely crucial.