Fourth Edition

PART 1 . . . . . . . . . . . . . . . . . . . . . . . .
Understanding the Contemporary
Business Environment

Copyright ©2003 Prentice Hall, Inc.

Chapter 4

Entrepreneurship and
Small Business

Copyright ©2003 Prentice Hall, Inc. 4-2

 “Entrepreneurs are simply those
who understand that there is little
difference between obstacle and
opportunity and are able to turn
both to their advantage.”
~ Victor Kiam

Copyright ©2003 Prentice Hall, Inc. 4-3

 Key Topics

Small business and its importance in the economy

Sole proprietorships, partnerships, and corporations
Creating and managing corporations
Corporate trends and issues
Starting and funding a small business
Pros and cons of franchising

Copyright ©2003 Prentice Hall, Inc. 4-4

 What Is “Small Business”?

Independently owned and

managed business that does
not dominate its market

Copyright ©2003 Prentice Hall, Inc. 4-5

 Small business plays a critical role
in the U.S. economy.

Job Creation

Innovation

Importance to
Big Businesses

Copyright ©2003 Prentice Hall, Inc. 4-6

 The Labor Force Reflects the
Importance of Small Business
86.09
Percentage of All U.S. Businesses

Percentage of All U.S. Workers

25.60 29.10 25.50
12.70
11.00 2.00 7.10
0.20 0.10
Under 20- 100- 500- 1000 or Under 20- 100- 500- 1000 or
20 99 499 1000 more 20 99 499 1000 more
Total Employees Total Employees
Copyright ©2003 Prentice Hall, Inc. 4-7
 Popular Areas of Small Business Enterprise
Manufacturing
Services 5%
Finance &
Retailing Insurance Other
10% 1.7%
Construction Wholesale
8%
Financial
Insurance
Wholesaling
Transportation Construction Services
Retailing 37.6%
10%
Manufacturing 22.7%
Transportation
5%
Copyright ©2003 Prentice Hall, Inc. 4-8
 Types of Business Organizations

Type of Business
7% 20%
73%

Sales Revenue
89%
5%

6%

Sole Proprietorship Partnership Corporations

Copyright ©2003 Prentice Hall, Inc. 4-9
 Comparative Summary: Three Forms of Business

Business Investment
Liability Continuity Management
Form Sources

Proprietorship Personal, Ends with death Personal, Personal

limited or decision of unrestricted
owner

General Personal, Ends with death Unrestricted or Personal by

Partnership unlimited or decision of depends on partner(s)
any partner partnership
agreement

Corporation Capital As stated in Under control of Purchase of

invested charter, board of stock
perpetual or for directors, which
specified period is selected by
of years stockholders

Copyright ©2003 Prentice Hall, Inc. 4 - 10

 Sole Proprietorships
Advantages: Disadvantages:
Freedom Unlimited Liability
Simple to form Limited resources
Low start up costs Limited fundraising
Tax benefits capability
Lack of continuity

Unlimited Liability
Legal principle holding owners responsible
for paying off all debts of a business
Copyright ©2003 Prentice Hall, Inc. 4 - 11
 Partnerships
Advantages: Disadvantages:
More talent and money Unlimited Liability
More fundraising Disagreements among
capability partners
Relatively easy to Lack of continuity
form
Tax benefits

Unlimited Liability
Legal principle holding owners responsible
for paying off all debts of a business
Copyright ©2003 Prentice Hall, Inc. 4 - 12
 Remember…
“When two men in business always
agree, one of them is unnecessary.”
William Wrigley Jr.

But…
An exit plan is still crucial!

Copyright ©2003 Prentice Hall, Inc. 4 - 13

 What is a Corporation?

“An artificial being, invisible, intangible, and

existing only in contemplation of the law.”
Copyright ©2003 Prentice Hall, Inc. 4 - 14
 Corporations

Advantages: Disadvantages:
Limited Liability Double Taxation
Continuity Fluid control
Stronger fundraising Complicated and
capability expensive to form

Copyright ©2003 Prentice Hall, Inc. 4 - 15

 Types of Corporations

Closely Held (Private) Corporation

Publicly Held (Public) Corporation

S Corporation
Limited Liability Corporation (LLC)
Professional Corporation
Multinational or Transnational Corporation
Copyright ©2003 Prentice Hall, Inc. 4 - 16
 Stockholders
Owners of Corporations

Stock: Share of ownership in a corporation

Common Stock
Preferred Stock

Copyright ©2003 Prentice Hall, Inc. 4 - 17

 Corporate Governance Hierarchy

Stockholders

Board of Directors

Officers

Copyright ©2003 Prentice Hall, Inc. 4 - 18

 Special Issues in Corporate Ownership

Joint Ventures &

Strategic Alliances

Employee Stock
Ownership Programs
(ESOPS)

Institutional
Ownership

Copyright ©2003 Prentice Hall, Inc. 4 - 19

 Special Issues in Corporate Ownership

Mergers &
Acquisitions
(M&As)

Divestitures
& Spin-offs

Copyright ©2003 Prentice Hall, Inc. 4 - 20

 Entrepreneurship vs. Small Business

Entrepreneur: Accepts the

risks and opportunities of
creating, operating and
growing a new business

Small Business Owner:

Does not have plans for growth

Copyright ©2003 Prentice Hall, Inc. 4 - 21

 Trends in Small Business Start-ups

Emergence of
E-commerce
Crossovers From
Big Business
Opportunities for
Minorities & Women
Global
Opportunities
Increased
Survival Rates
Copyright ©2003 Prentice Hall, Inc. 4 - 22
 E-commerce Continues to Grow Rapidly
$20,000
$17,387
$18,000
$16,000
$14,000
Percentage

$12,090
$12,000
$10,000 $7,924
$8,000
$6,000 $4,828
$4,000 $2,444
$2,000
$0
1997 1998 1999 2000 2001
Year
Copyright ©2003 Prentice Hall, Inc. 4 - 23
 Reasons for Success and Failure

Reasons for Failure

Poor management
Neglect
Weak control systems
Reasons for Success
Insufficient capital
Hard work, drive,
dedication
Market demand
Strong management
Luck!!!

Copyright ©2003 Prentice Hall, Inc. 4 - 24

 Getting Started

Buying an Starting
Existing From
Business Scratch

Copyright ©2003 Prentice Hall, Inc. 4 - 25

 Financing the Small Business

Personal resources
Loans
Venture capital companies
Small-business investment companies
Small Business Association (SBA)
 Financial aid and management advice

Copyright ©2003 Prentice Hall, Inc. 4 - 26

 FRANCHISING

An Ownership Opportunity

Advantages Disadvantages
Proven business Start-up costs
opportunity
On-going
Access to payments
management
Management rules
expertise
and restrictions

Copyright ©2003 Prentice Hall, Inc. 4 - 27

 Chapter Review

Define small business and explain its importance to the

U.S. economy.
Describe sole proprietorships, partnerships, and
corporations, and explain the advantages and
disadvantages of each.
Identify the different types of corporations.
Describe the start-up decisions made by small
businesses and the potential sources of financial aid
and management advice.
Identify the advantages and disadvantages of
franchising.
Copyright ©2003 Prentice Hall, Inc. 4 - 28