Lesson 1

Forms of Small
Business
Enterprise
• Educate students about various forms of
small business enterprises such as sole
proprietorships, partnerships, limited
liability companies (LLCs), and
corporations. Provide clear explanations of
the advantages and disadvantages of each
structure.
• Help students make informed decisions
about the type of business structure that
may be most suitable for their future
entrepreneurial endeavors. Provide
guidance on factors such as liability,
taxation, management, and scalability.

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What is a small and medium-
sized enterprise?

Small and medium-sized enterprises

(SMEs), also called “small and
medium-sized businesses (SMBs),”
are businesses that fall below certain
revenue, assets or employee
thresholds. These limits vary
between countries with professional
and government agencies
determining the thresholds in each
country or region.

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In the United States, the According to the SBA, there
Small Business are more than 31.7 million
Administration (SBA) SMEs in the United States.
determines the official SBA figures ranked the top
guidelines for small and five small business
medium-sized employment industries as:
businesses. It factors in
the type of business,
number of employees,  Health care and social
industry and revenue. assistance
Most companies with less  Accommodation and
than 500 employees are food service
considered to be SMEs.
However, some industries  Retail trade
are allowed up to 1,250  Construction
employees.
 Professional, scientific
and technical services

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 Other designations

Several agencies use other criteria to distinguish small and medium-sized businesses, including:
The SBA generally recognizes businesses with fewer than 10 employees as small offices/home offices
(SOHO).
The U.S. Department of Energy recognizes small and medium-sized manufacturers (SMMs) with gross
annual sales below $100 million, fewer than 500 employees at the plant site and annual energy bills greater
than $100,000 but less than $2.5 million.

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 Qualities of SMEs
• While SMEs exist across industries and vary
significantly, they share some foundational qualities,
including:

 Contributions to the economy: SMEs reportedly

made up 99.9% of U.S. businesses in 2020,
according to the SBA. Their employees account for
about half (47.1%) of the U.S. workforce.

 Drive to innovate SMEs often drive innovation in

the economy. Due to their smaller size, it can be
easier to apply new technologies and develop
systems that improve efficiency and cut costs.

 Financial incentives: Because of the vital role

SMEs play in the economy, they often receive
financial incentives, such as tax breaks and
favorable loan terms, from the government. These
incentives can help offset common challenges of
SMEs to meet their tax obligations, find investors
and remain compliant with government regulations.
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 Features and Characteristics of SMEs as to:

Asset Size or Capitalization

- Small and Medium Enterprises (SMEs) have a few defining
characteristics when it comes to asset size or capitalization.
1. Limited Capital - SMEs typically have a lower level of
capitalization compared to large corporations.
2. Asset Size - The asset size of SMEs is generally smaller
compared to larger enterprises.
3. Self-financing - Due to their size, SMEs often rely on self-
financing or borrowing from friends and family.
4. Risk and Return - SMEs often have a higher risk-return trade-off.
This means they may have the potential for high returns, but also
carry a higher risk due to their limited assets and capital.
5. Growth Potential - Despite their small size, SMEs often have
significant growth potential.
Number of Employees
The mean number of employees, which we view as a
measure of firm size, is reported in Table 4.2 and
Figure 4.2. Overall, the mean number of employees is
12.01 (bottom right cell in Table 4.2), but that number
varies across the three sectors (bottom row of the
table) and as shown in the associated figure, across
countries.
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Table A. Summary Statistics for All Establishments by Employment
Grouping: Philippines, 2021

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How do SMEs typically increase their asset
and capitalization over time?

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SMEs can increase their asset size and capitalization over time through several strategies
1. Reinvestment of profits- is a strategy where businesses use their earnings to reinvest in their own growth. This c
2. Raising capital- refers to the process where Small and Medium Enterprises (SMEs) accumulate funds for growth

3. Improving Operational Efficiency- By streamlining operations and reducing costs, SMEs can increase their profi
4. Innovation and product development- is about creating new products or services, which allows small and mediu
5. Strategic partnerships- involve collaborating with other companies to achieve growth. Small and medium-sized e
6. Government grants and subsidies- are financial assistance programs provided by the government to support th
Types and features of different Business
Organizations
Sole Proprietorship
A sole proprietorship is a business where the owner is the business. It is an unincorporated business with a sing

Partnership
A sole proprietorship consists of a single business owner; partnerships consist of more than one owner. Partner

Corporation
A corporation is a for-profit entity designed to protect the owner(s) from liability in case of a lawsuit. There are tw

Two types of Corporations

C Corp - Large companies, taxed twice (on profits and dividends paid to owners).

S Corp - Smaller businesses, avoid double taxation by passing profits/losses directly to owners' tax returns.
Advantages and Disadvantages of each
type
Advantages of a Sole Proprietorship Advantages of a Corporation
1. Easy Setup
2. Complete Control 1. Unlimited Life Span
3. Quick Start 2. Limited Personal Liability
4. Tax Simplicity 3. Capital Raising Options
Disadvantages of a Sole Proprietorship
5. Unlimited Personal Liability 4. Preferred for Public Companies
6. Business Termination Disadvantages of a Corporation
Advantages of a Partnership
5. Double Taxation
7. Liability Protection
8. Ease of Maintenance 6. Complex Setup and Management
9. Pass-Through Taxation 7. Financial Burden
10.Professional Use
8. Regulatory Constraints
Disadvantages of a Partnership
11.Personal Liability
12.Unlimited Personal Liability
13.Disputes and Litigation
 Basic
Functions in
Business
Organization
Finances

Marketing

Operation
Finance Management
- Involves planning for, obtaining, and managing a company’s funds.
- The Finance functional area is led by the Chief Financial Officer (CFO), who is one of the most important “C-level” ex

Marketing Management

- Consists of all that a company does to identify customers’ needs and design products and services that meet those n
- The Marketing functional area is managed by the Chief Revenue Officer (CRO), which is a relatively new addition to

Operations Management
- Operations is the function of a business that is responsible for creating the goods and services of a business.
- Managed by the Chief Operations Officer (COO)
References
Admin. (2023, December 8). Types of Business Organizations - Advantages and Disadvantage Willcox, Buyck & Williams, PA. Willcox,
and-disadvantages/
Axelton, K. (2023, May 5). Corporation vs. sole proprietorship vs.
partnership. Experian.
https://www.experian.com/blogs/ask-experian/differences-between-corporation-sole proprietorship-partnership/
Business News Daily. (n.d.). Corporation:
Advantages and Disadvantages. Retrieved from https://www.businessnewsdaily.com/15805-corporation-advantages-and
disadvantages.html
Career, I. (2023). Medium
and small enterprises: Definition and examples | indeed.com. Indeed.com. https://www.indeed.com/career-advice/career-development/
small enterprises
De Guzman, S. (2023, December). 2021 Annual survey of Philippine Business and Industry (ASPBI) - all establishments by employmen
Lumen Learning. (n.d.). Functional areas of business | Introduction to
business. https://courses.lumenlearning.com/wm-introductiontobusiness/chapter/reading
functional-areas-of-business/