Entrepreneurship for Engineers

(IEng5242)

Instructor: Biruk K.
Industrial Engineering Department
College of Engineering, IoT
Debre Berhan University
Entrepreneurship for Engineers
(IEng5242)
Business Structures and Legal
Ownership
Introduction
3
2
Sole proprietorship
Partnership
Corporation
Cooperatives
 Business Structures and Legal
Ownership
Introduction
Entrepreneurs have a vision about what a business
might be like. When thinking about the positives,
the vision is probably one of good fortune and
success. But, as you can imagine, unfavorable things
may happen.
Revenues may not be enough to pay all the bills,
accidents can happen, and many other contingencies
may mean the entrepreneur has financial
responsibilities that must be met.
The legal form under which the firm operates can
have an impact on the financial position of the
entrepreneur.
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 Cont.…
 There are several ways of going into business and becoming an
entrepreneur.
 You can:
1. Purchase an existing business
2. Enter a family business
3. Purchase a franchise
4. Start your own business
 The advantages and disadvantages of these alternatives.
# Buying an existing business
Advantages
 Existing businesses already have customers, suppliers, and
procedures.
 Seller of the business may be willing to train the new owner.
 There are existing financial records.
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 Financial arrangements may be easier. 4
 Cont.…
Disadvantages
 Business may be for sale because it is not making a profit.
 Problems may be inherited with the purchase of an existing
business.
 Many entrepreneurs may not have the capital needed to purchase
an existing business.
# Entering a family business
Advantages
 There is a certain sense of pride and accomplishment that comes
from being part of a family endeavor.
 A business can remain in the family for generations.
 Some people enjoy working with relatives.
 The efforts of running a family business give one the benefit of
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knowing that their efforts are helping those whom they care about.
 Cont.…
Disadvantages
 Senior management positions are often held by family
members who may not be the best qualified.
 It may be difficult to retain qualified employees who
are not members of the family.
 Family politics may affect decisions regarding the
business.
 It is often difficult to separate business life and private
life in family-run businesses.
 It is often difficult to set policies and procedures and
to make decisions.
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 Cont.…
# Franchise Ownership
 A franchise is a legal agreement that gives an
individual the right to market a company‘s products or
services in a particular area.
 The two parties to a franchise agreement are the
franchisor, the parent company of a franchise agreement
that provides the product/service , and the franchisee, the
distributor of a franchised product/service OR
Franchisee: A person who purchases a franchise
agreement.
Franchisor: The person or company who sells a
franchise.
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 Cont.…
Advantages of purchasing a franchise business
 An established product or service is being provided.
 Franchisors often offer management, technical, and other
assistance.
 Equipment and supplies may be less expensive.
 A guarantee of consistency attracts customers.
Disadvantages of purchasing a franchise business
 The cost of franchises may be high, which can reduce profits.
 Franchise owners are limited in the decisions they can make
regarding the business.
 The performance of other franchises impact on the franchisee.
 The franchise agreement may be terminated by the franchisor.
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 Cont.…
Operating Costs of a Franchise
 The initial franchise fee is the fee the franchise
owner pays in return for the right to run the
franchise.
 Start-up costs are the costs associated with
beginning a business.
 Royalty fees are weekly/monthly payments made
by the owner of franchise.
 Advertising fees are fees paid to support advertising
of the franchise as a whole.

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 Cont.…
# Starting Your Own Business
 For whatever reason, running an existing business or operating a
franchise may not be right for you.
 This means to be an entrepreneur you will have to establish a
business of your own.
Advantages of Starting Your Own Business
 Independence
 Satisfaction
 Challenge of creating something new
 Triumph when business is profitable
Disadvantages of Starting Your Own Business
 RISKS
 Uncertainty of demand for the product/service
 Need to make decisions daily
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 Choose the Legal Form of Your
Business
Though it is difficult to know precisely when and
how business began, it is certain that the form of
business ownership are as old as business itself.
Those forms have been modified over the course of
time to keep pace with business needs and the custom
of society.
Ownership of business is represented by the right of
individual or a group of individuals
 To acquire legal title to property (assets) for the purpose
of controlling them and
 To enjoy the gains of profits from such possession and use.
 Once you decide to start your own business, you must
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decide what type of ownership the business will have. 11
 Cont.…
 There are Four types of major business ownership arrangements
to choose from:
 Sole Proprietorship
 Partnership
 Corporation
 Cooperatives
 A business that is owned exclusively by one person is a sole
proprietorship.
 A business owned by two or more people is a partnership.
 A business with the legal rights of a person and which may be
owned by many people is a corporation.
 Cooperatives is also mostly used as a fourth common type of
ownership arrangement and it is somewhat different from the
others.
 Each form of ownership has a characteristic internal structure,
legal status, size and field to which it is best suited.
 Each has key advantages and disadvantages.
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 Sole proprietorship

In a sole proprietorship, the individual entrepreneur

owns the business
An entrepreneur is fully responsible for all its debts
and legal liabilities.
Examples include writers and consultants, local
restaurants and shops, and home-based businesses.
This is the easiest and least expensive form of
business to start.
In general, an entrepreneur files all required
documents and opens a shop.
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 Cont.…
Advantages of Sole proprietorships
Ease and low cost of formation and dissolution
 It is simple to establish because there may not be a need for
making it formal.
Direct motivation and personal care
Freedom and promptness of action
Business Secrecy
Social Desirability
 From the social point of view, the sole proprietorship is
desirable as it ensures that too much wealth does not
concentrate in a few hands.
Single Tax
 The proprietorship does not pay tax as a business
 The profits from the business are the personal income of the
14 owner and are declare on his individual income tax return. 14
 Cont.…
Disadvantages of sole proprietorship
 Limited resources and size
 Limited Managerial Skill
 Unlimited liability
 The sole proprietor will be legally liable for all debts of the business.
 At time of loss and bankruptcy if the business asset is not sufficient to
satisfy the obligation of settle debts of creditors, his personal and
real property may be required to pay off.
 Uncertain future/Death of the owner terminates the
business/
 Difficulty in hiring and keeping high achievement
employees
 A good employee of the business may quit because there is no opportunity
to obtain an ownership interest in it.
 Few fringe benefits
 If you are your own boss, you lose many of the fringe benefits that
15 come from working for others 15
 Partnership
 The association of two or more persons to carry as co-owners of a
business where the relationship is based on agreement is called
partnership.
 This form of a business requires the existence of two or
more persons entering into a contractual relationship.
 This contract, which is an agreement between the parties, is
known as a memorandum of association or article of partners’
deed.
 Kinds of Partners
 The individuals who comprise a partnership are known as
partners, or copartners. They may be classified in several
different ways.
 The most common types of partners are the following:
1. A general partner : Assumes unlimited liability and is usually
active in managing the business.
16  Most partners are general partners. 16
 Cont.…
2. A limited or special partner : Assumes limited liability,
risking only his /her investment in the business. Limited
partners may not be active in management, and their names
are not used in the name of the business.
3. A secret partner: Takes an active role in managing a
partnership but whose identities are unknown to the public. i.e
the general public does not know of this person‘s partnership
status.
4. A silent partner : As opposed to a secret partner, a silent
partner, his identities and involvement, is known to the general
public, but is inactive in managing the partnership business.
5. A dormant or sleeping partner: Is nether known to the
general public nor active in management

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 6. Nominal partners: Are not actually involved in a
partnership but lend their names to it for public relations
purposes but invest no money in the firm and play no role in
its management. These are not partners but who claim they
are or allow others to think of them as partners. Such
individuals may assume some of the responsibilities of
general partners.
The difference between General partnership and Limited
partnership is that general partners have the right to
participate actively in the management affair of the business.
If the assets available in the business are not sufficient, debt
coverage goes to the extent of their personal assets. The
partner faces the risk of implied authority. i.e the partner is
liable for the wrongful acts of a copartner in the operation
18 of the business. 18
 Cont.…

But in the case of Limited partnership, partners

cannot take part on the management of the
business and their act does not bind the firm since their
liability is limited, their rights are also restricted.
The liability of the limited partners is limited to the
extent of their investment in the firm If the business
fails, creditors cannot claim their personal property.
They do not play an active role in the operations
of the business. Basically limited partners are needed
to increase the capital of the business.

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 Cont.…
Advantages of partnership
Ease of starting
Increased source of capital: Partnership can offer creditors
less risk than a sole proprietorship.
Combined managerial skill: Improved decision making potential
Definite legal status.
Personal supervision
Motivation of important employees
Reduced risk
Tax advantage over a corporation
Disadvantages of partnership
Unlimited liability
Risk of implied authority
Lack of harmony.
Lack of continuity/instability
Investment withdrawals difficulty /frozen-investment/
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 Corporation
 It is also known as Joint Stock Company. A corporation is an
artificial person authorized and recognized by law, with
distinctive name, a common seal, comprising of transferable
shares of fixed values, carrying limited liability and having a
perpetual or continued or uninterrupted succession life.
Characteristics of Corporation
1. Separate legal entity
 It can sue or be sued.
 It has the right to manage its own affairs.
 Shareholders cannot be liable for the acts of the corporation
2. Limited liability: Since the corporation has separate legal
entity its debts are its own. The assets and liabilities, rights
and obligations incidental to the company‘s activities are
assets and liabilities, rights and obligations respectively of the
21 company and not of its members. 21
 Cont.…
3.Transferability of shares: It is easy to transfer ownership in a
corporation. A stockholder may sell stock to another person and transfer the
membership and membership interest freely without consulting other
stockholders.
4. Perpetual existence: Death, insanity, retirement and withdrawal of
shareholders will not affect the company.
5. Common seal: A corporation has a common seal with the name of the
company engraved on it, which is used as a substitute for its signature
through it acts through its agents.
6. Separation of ownership from management: All shareholders, large
in numbers, do not have the opportunity of managing the day-to-day
activity of the corporation. A company cannot, as an artificial person,
manage itself. It must therefore have managers, or directors.
7. Supervision: While it exists, it is subject to detailed regulation; for
instance, it must prepare and deliver to the registry annual accounts
and an annual return.
8. Written Constitution: These include the Article of Association and
the Memorandum of Association.
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 Cont.…
Advantages of a corporation
 Financial strength
 Limited liability
 Scope of expansion =>Corporations have greater potential than
sole proprietorship or partnerships
 Managerial efficiency.
 Ease in transferring ownership
 Legal entity status: A corporation can purchase property,
make contracts, sue and be sued in the corporate name.
Disadvantages of a corporation
 Difficulty of formation-It is time consuming and cumbersome.
 Lack of owner‘s personal interest-These forms of
organizations are managed by directors, hired officials, and
employees who may not be expected to have such an interest in
the success of the business as the individual owner or partner
23 would have in his own business. 23
 Cont.…
 Delay in decision-making
 Oligarchy and fraudulent management-Although in theory
it is said democratic principles are followed in the
management of the companies, in practice the concentration
of managing power is in the few hands of managing
directors, thus, leading to oligarchy of managing or rule by few.
 Lack of secrecy- Large companies suffer from lack of
secrecy in their financial affairs.
 Double taxation-First the corporation pays taxes on its profits
and then after it distributed some of these profits to
shareholders, the shareholders pay taxes on the dividends
(income) they receive. A corporation is a separate legal entity;
its earnings are taxed directly and at a relatively high rate.
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 Cooperatives
 It is an organization owned by members/customers who
pay an annual membership fee and share in any profits (if
it is profit making organization). Owners, managers, workers,
and customers are all the same people.
 A cooperative may also be defined as a business owned and
controlled equally by the people who use its services or by the
people who work there.
 A cooperative is an enterprise owned and controlled by all those
who work in it. It has to adopt the following principles:
 Members have an equal vote in decisions.
 Membership is open to everyone who fulfills specified conditions
(e.g. Number of hour worked).
 Assets controlled and usually owned jointly by members.
 Profit shared equally between members with limited interest payment
on loans made by members;
 Members benefit from participation, not investment.
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 Brief summary of the common
business forms of ownership
1. Ownership
Sole Proprietorship Individual
Partnership No Limit On Number Of Partners
Corporation No Limit On Number Of
Shareholders
2. Liability of Owners
Sole Individual Liable For Business Liabilities
Proprietorship
Partnership- All Individuals Liable For All Business
General Liabilities
Partnership- Limited Partners Liable For Amount of Capital
Limited Contribution
Corporation Shareholders Liable For Amount Of Capital
Contribution
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 Cont.…
3. Cost To Start
Sole Proprietorship Trade Name Filing Fees
Partnership- General Partnership Agreement, Legal Costs, Trade Name
Partnership- Limited Filing Fees
More Comprehensive Partnership Agreement
Corporation Created By Statute, Articles Of Incorporation,
Filing Fees, Taxes, Fees for States In Which
Corporation
Registers To Do Business
4. Continuity Of Business
Sole Proprietorship Death Dissolves Business
Partnership- Death/Withdrawal Of 1 Partner Terminates
General Business Unless agreement Stipulates Otherwise
Partnership- Death/Withdrawal Has No Effect On Continuity
Limited
Corporation Death/Withdrawal Of Owner Has No Effect On
27 Continuity 27
 Cont.…
5. Transferability of Interest
Sole Proprietorship Complete Freedom To Sell/Transfer
Partnership- General Partners Can Transfer Only with Consent
General of All Other General Partners
Partnership- Limited Partners Can Sell Interest Without
Limited Consent of General Partners
Corporation-Regular Shareholders Can Sell/Buy Stock At Will. Some
Corporation- S Transfers Might Be Restricted.
Shareholder Can Only Sell Stock To An Individual.
6. Capital Requirements
Sole Proprietorship Raised By Loan Or Increased Contribution By
Individual
Partnership Partnership Loans/New Contributions Require
Change In Agreement
Corporation-Regular Raised By Sale of Stock/Bonds/Borrowing
Corporation- S One Class Of Stock Limited to 75 Stockholders
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 Cont.…
7. Management Control
Sole Proprietorship Owner Makes All Decisions
Partnership- General All Partners Have Equal Control, Majority Rules
Partnership- Limited Only General Partners Have Control Of Business
Corporation Majority Shareholders Have Control. Day-To-Day
Control With Management

8. Distribution Of Profits

Sole Proprietorship Owner Receives All Profits/Losses

Partnership Partnership Depends On Capability of Partners &
Success Of Business
Corporation Limited Owner Liability Is Attractive To Investors

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 Cont.…
9.Tax Attributes
 Sole Proprietorship = Owner
 No Double Tax
 No Capital Stock/Retained Earnings Penalty
 Partnership
 Limited Partners = Share Of Profits But No Liability
 Income Distributed Based On Agreement
 Corporation = Separate Entity
 More Deductions/Expenses Available
 Double Taxation Of Dividends
 Generally, the most attractive form of business ownership meets the
specific needs of the business and its owners in these eight areas:
1.Tax considerations 5.Managerial ability
2.Liability exposure 6.Business goals
3.Start-up and future capital requirements 7.Management succession plans
4.Control 8.Cost of formation
 Business owners may need to make concessions due to the trade-
30 offs associated with eight these factors 30
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