Chapter 1

Entrepreneurship and Starting a

Small Business
Learning Objectives
1. Explain the traits a successful entrepreneur
possesses.
2. Discuss the types of business ownership and
the advantages and disadvantages of each.
3. Describe the alternatives to starting your
business from scratch.
4. Understand how a business can grow
through mergers, acquisitions, and buyouts.
5. Describe the five main areas of focus when
starting a small business.
Introduction to Entrepreneurship
Turn a passion into a business.
What does it take to be an Entrepreneur?
The job-creating power of entrepreneurs.
Common characteristics of entrepreneurs:
* Self-directed.
* Self-nurturing.
* Action-oriented.
* Highly-energetic.
* Tolerant of uncertainty.
Introduction to Entrepreneurship (cont.)

Many entrepreneurs take the risk for:

Opportunity
Profit
Independence
Challenge
 BONUS CASE 1-1
1154 Lill Studio: You Still Going Around with
that Old Bag? (Video Case)
Types of Business Ownership
Sole Proprietorships
One person
Advantages
Easy to start, easy out; you are your own
boss; you retain all profit; and no special
federal taxes
Disadvantages
Limited financial resources; skill gaps;
unlimited liability; lack of fringe benefits; a
limited lifespan
Types of Business Ownership
Partnership: Legal form of business with two or
more owners.
Partnerships:
General partnership: A partnership in which
all owners share in operating the business
and in assuming liability for the businesss
debts.
Limited partnership: A partnership with one
or more general partners and one or more
limited partners.
Types of Business Ownership (cont.)
General partner: An owner (partner) who has
unlimited liability and is active in managing
the firm.
Limited partner: An owner who invests
money in the business but does not have any
management responsibility or liability for
losses beyond the investment.
Types of Business Ownership (cont.)

Limited liability: Means limited partners are

not responsible for the debts of the business
beyond the amount of their investment. Their
liability is limited to the amount they put into
the company; their personal assets are not at
risk.
Types of Business Ownership (cont.)
Master limited partnership (MLP): Structured
much like a corporation in that it acts like a
corporation and is traded on the stock
exchanges like a corporation, but taxed like a
partnership and thus avoids the corporate
income tax.
Types of Business Ownership (cont.)
Limited liability partnership (LLP): LLPs limit
partners risk of losing their personal assets to
only their own acts and omissions and to the
acts and omissions of people under their
supervision
Types of Business Ownership (cont.)
Partnerships
Advantages:
More financial resources and pooled
knowledge
Disadvantages
Division of profits; unlimited liability for each
general partner; conflicts among partners;
difficult to get out of the relationship
Types of Business Ownership (cont.)
Corporations
Corporate governance: The processes,
customs, policies, laws, and institutions
affecting the way in which a corporation is
directed, administered, or controlled.

Board of directors: The group ultimately

responsible for the decisions of a business.
Types of Business Ownership (cont.)
C-Corporations
Owners not liable for debts (stockholders are the
corporate owners).
S-Corporations
Government created, paperwork taxed like sole
proprietor
Have restrictions(no more than 100
shareholders- citizens only-only one class of
stock- no more than 25% of income comes from
passive sources (rent-interest).
Types of Business Ownership (cont.)
Limited Liability Corporations (LLCs)
Ownership rules are flexible; cannot sell
stock; more paperwork; double taxation
Double taxation: Occurs when the owners of
the corporation are taxed twice-once when the
corporation itself gets taxed and a second time
.when the dividends are taxed
Franchises and Cooperatives
Franchises
Established product
Financial assistance
Lower failure rate
Large start-up costs
Must share profit
Tight restrictions
Franchises and Cooperatives
Buying an Existing Business
Existing customer base
Inventory
Location
Franchises and Cooperatives
Cooperatives:
A business owned and controlled by the people
who use it- producers, consumers, or workers
with similar needs who pool their resources
for mutual gain.
Different kind of organization
More economic power
Ex: Farm cooperative
Corporate Expansions
Mergers and acquisitions

Merger: The result of 2 firms forming one

company.

Acquisition: One companys purchase of the

property and obligations of another company.
Corporate Expansions
3 major types of mergers:
Vertical: The joining of 2 firms involved in
different stages of related businesses
Horizontal: Joins 2 firms in the same
industry and allows them to diversify or
expand their products.
Conglomerate: Unites firms in completely
unrelated industries.
 Hostile takeover: Attempts by the bidder to
acquire a firm against the interest of the latters
management.
Types of Buyouts
Leveraged(LBO): An attempt by employees,
management, or a group of investors to
purchase an organization primarily through
borrowing.

Management Buyout: When employees of the

company get together to purchase the business.
Getting Started in your own Business
Five main areas of focus:
Planning, financing, marketing, managing
employees, accounting

Businesses fail due to:

Lack of planning or marketing
Unrealistic financial expectations
Wrong business partner
Lack of business knowledge
Getting Started in your own Business
Planning
Business plan: Detailed written statement
that describes the nature of the business, the
target market, the advantages the business
will have in relation to competition, and the
resources and qualifications of the owner(s).
Intrapreneuring: The process of continuing to
innovate a small business
Financing
Venture capitalists: A company that has money
to invest in small and large businesses, and in
return for its investment will generally take a
stake in the business.
Angel investors: Individuals, usually wealthy,
who invest their own money in a business for a
share of the company.
Small Business Administration (SBA): U.S.
government agency that advises and assists
small businesses by providing management
training and financial advice and loans.
Getting Started in your own Business
Knowing Your Customers (Marketing)
Know and fill market needs
Market: Consists of people with unsatisfied
wants and needs who have both the resources
and the willingness to buy.
Managing your Employees
Small company employees more satisfied
Getting Started in your own Business

Record Keeping
Effective systems save grief
More time to focus on business
Computers simplify process