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Lecture 5 Building Businesses

Lecture 5 Building Businesses. Small Business in America. Small Businesses. Small Businesses are the Backbone of the United States Economy Since 1970, the Number of Small Businesses in the U.S. Economy Has Been Growing Faster than the Labor Force

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Lecture 5 Building Businesses

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  1. Lecture 5 Building Businesses

  2. Small Business in America

  3. Small Businesses Small Businesses are the Backbone of the United States Economy Since 1970, the Number of Small Businesses in the U.S. Economy Has Been Growing Faster than the Labor Force The Annual Number of New Business Launches Continues to Increase

  4. Definition of Small Business • Small Business Administration Definition • Very Detailed and Complex • Independently Owned and Operated • Not Dominant in the Field of Operation • Number of Employees, Dependent on the Industry • Total Annual Sales Revenue, Dependent on the Industry

  5. SBA General Guidelines • Manufacturing • Fewer than 500 Workers • Wholesalers • Fewer than 100 Workers • Retailers • Less than $6 Million in Annual Sales • Agricultural • Less than $750,000 Annual Revenue

  6. Basic Facts Firms with Fewer than 20 Employees : 90 Percent 100 Employees : 98 Percent One Person Businesses (no Employees) More than 20 Million Businesses Sales Registered by Small Businesses Almost 50 Percent of All Sales New Jobs Generated Between 60 and 80 Percent Predominance of Jobs for Minorities

  7. Percentage by Industry

  8. Contributions Creating New Jobs Small Businesses Dominate Industries with Strongest Employment Growth Creating New Industries Many Successful High Tech Firms Began as a Small Business Creating New Products and Services Small Firms Develop Twice as Many Innovations per Employee than as Larger Firms

  9. Small Business Owners Rewarded by chance to work on something new and creative Thrive on the challenge of building a larger, more profitable business Enjoy chance to balance work and personal life Hard Workers20% Idealists24% Optimizers21% Jugglers20% Sustainers15% High energy people who enjoy handling every detail of their own business Get personal satisfaction from being a business owner

  10. Small Business and Women More than 10.6 Million Women-owned Businesses in the U.S. Employ Almost 19.1 Million People Forty-eight Percent of U.S. Businesses Owned by Women One in Five Held by Minority Women Enjoy Established Support Networks Small Business Administration Help Programs Nonprofit Support Organizations

  11. Small Business and Minorities • Number of Minority-owned Businesses Has Outpaced Overall Growth • Immigrants Are More Likely to Own a Small Business than Other Minorities • 15 Percent Are Immigrant Owned • Minorities Face Considerable Obstacles • Tendency Towards Smaller Scale • Have Difficulty Attracting Investors • Have Difficulty Getting Bank Loans

  12. Home-Based Businesses • Approximately Half of All Small Businesses Are Home-based • Home-based Firms Have Doubled in Number Since 1980 • The Internet Positively Influenced Home-based Firms by Increasing the Competitiveness of Small Businesses • Three in Five Small Businesses Have an Internet Presence

  13. Home-Based Businesses • Benefits • Greater Flexibility • Less Commuting • Lower Operating Costs • Drawbacks • Isolation • Less Visibility

  14. Small Business Failures Management Shortcomings Strength in one Business Area Offset by Shortcomings in Other Critical Areas Inadequate Financing High Start-up Expenses, Uneven Cash Flows, and High-interest Financing Government Regulation Much Paperwork and Limited Resources to Handle Tax and Regulatory Burdens

  15. Failures by Numbers By the 10-year Mark of Opening a Small Business, 82 Percent of the Businesses Have Already Closed Permanently Within Two Years 33 Percent of Businesses Closed After Four Years 50 Percent of Businesses Closed Within Six Years 60 Percent of Businesses Closed

  16. Business Failures

  17. Fostering Success • Factors to Consider Before Launching a New Business • Personal Financial Situation and the Need for Additional Funds • Concerns About Exposure to Personal Liability and Risk • Management Skills and Limitations • Potential of Working with Partners or Others in the Business

  18. Issues of a Small Business

  19. Legal Forms of Ownership

  20. Forms of Ownership

  21. Sole Proprietorship • A Business Owned and Operated by One Person, where the Owner Acts Freely with a Different Name • Firm not Separate from the Owner • The Owner Is Responsible for All Operations of the Business and Assumes All the Business Risks • All Income and Expenses Pass-through and Are Filed as Part of the Owner's Personal Income Tax Return

  22. Advantages • Easy to Form and Operate • Only Requires a Business License • No Legal Documents Necessary • Owner Is the Manager and Director • Owner Makes All Decisions • Owner Keeps All the Profits • All Financial Information Can Be Kept Secret

  23. Disadvantages • High Costs and Time Commitments • Funding Can Be Difficult to Obtain • Owner Is Responsible for All Aspects of the Business • Owner Is Personally Responsible for All Debts with their Personal Assets • Whoever Sues the Business Actually Sues the Owner • Owner Does not Participate in Tax-free Fringe Benefits

  24. Partnership • A Business in which Two or More People Own and Operate the Business • Similar to a Sole Proprietorship but Has More Owners • Owners Assumes All the Business Risks and Are Responsible for All Operations • Risks not Separate from the Owners • Partnership Can Hold Property and Incur Debt in the Company’s Name

  25. Advantages • Easy to Form and Operate • Requires a Partnership Agreement • Partners Co-own the Business • Share in the Partnership’s Decision Making and Management • Greater Financial Resources Available • Owners Share All the Losses • Partners Share Cost and Time Commitments

  26. Disadvantages • Partners Have Unlimited Personal Liability for Actions of Other Partners • Partners May Have Disagreements • Profits Are Shared • Partnerships Are More Difficult to Close Down than Sole Proprietorships • Partners Must Pay Own Income Tax • Must File a Company Informational Tax Return with the IRS

  27. Corporation • A Legal Entity Existing Independently of the Owners – Known as Shareholders • An Artificial Person Created and Operated with the Permission of the State where Incorporated • The Corporation Operates the Business on Behalf of the Owners, Under the Shareholder's Total Control • A Legal Distinction Exists between the Owners and the Business

  28. Articles of Incorporation • A Corporation Is Similar to a Person on Paper and Brought into Existence • Requires at Least 3 Incorporators • Articles of Incorporation Filed to State • State Grants a Corporate Charter • A Legal Document that Formally Establishes the Corporation • Businesses Can Incorporate in Any State • Half of Fortune 500 Companies Are Incorporated in Delaware

  29. Types of Corporations C–Corporations Have Limited Liability Protection and Full Discretion Over the Use of Corporate Profits S–Corporations Have Limited Liability Protection and Less than 100 Shareholders, but Net Income Must Be Stated as Income to the Shareholders Nonprofit Corporations Are Formed for Charitable or Civic Purpose and Are Generally Exempt from Income Tax

  30. Advantages • Liability of Owners Limited to Amount Invested in the Corporation • Ease of Raising Capital for Operations • Sell Ownership of the Company • Lower Tax Rate than Private Owners • Large Size Allows the Hiring of Experts and Talented Employees • Continues to Exist After the Death of their Owners

  31. Disadvantages • More Complicated Structures than Sole Proprietorships or Partnerships • Double Taxation on Profits • Employees Who Are not Owners May not Be Committed to the Business • Published Annual Reports Might Compromise Important Trade Secrets • The Value of the Company Can Change Depending on Stock Market Changes

  32. Categories of Corporations A Corporation Can Be Considered in All Three Categories at the Same Time Domestic Corporation in the State in which the Company is Incorporated Foreign Corporation in States in which the Company Operates Other than the State of Incorporation Alien Corporation in Countries in which the Company Operates Other than the Country of Incorporation

  33. Comparison of Ownership

  34. Franchise A License Giving Access to a Business’ Proprietary Knowledge, Processes, and Trademarks in Order to Operate Under the Business’ Name Popular Method to Start a Business A Business Given the Rights to Use Another’s Business Name and to Sell a Product or Service in a Given Territory

  35. Terms Franchisor A Business Owner Willing to Provide Knowledge and Skills, Allowing Others to Sell Products or Services Franchisee A Party Acquiring a License to Provide Goods or Services from an Established Business Franchise The Business Being Licensed

  36. Advantages • Purchase a Business with a Proven, Good Reputation • Franchisors Supplies Training in Operations and Financial Management • Franchisors often Provide Advertising, Packaging, and Equipment • Franchisee Does not Need Further Spending to Establish the Business

  37. Disadvantages • Franchises Can Be Expensive to Buy • Often Future Monthly Payments • Less Autonomy in Business Decisions • Franchisees May Need to Follow Many Rules Required by the Franchisors • If a Franchisor’s Business Fails, so Will the Franchisee’s Business Fail • Franchisor Is not Obliged to Renew License at the End of the Term

  38. Co-Operative Businesses Owned and Operated by a Group of People with a Strong Common Interest Formed to Give Greater Economic Power to Members Start-up Costs Are Shared Among the Members of the Co-operative Members Own and Control the Business and Make All Business Decisions

  39. Advantages • Members Own and Control the Business • Members Share the Start-up Costs and the Management of the Business • Members Share the Financial Risks • Members May Pay Less for Goods and Services • Members May Receive More for Sales

  40. Disadvantages • Regardless of Involvement, Members Have Only One Vote Each • The Large Number of Members Can Render Decision Making Difficult • Formed to Provide a Service to Members, not a Return on Investment • Members Might Have a Narrow View and May not Want Further Expansion • Internal Conflicts Difficult to Avoid • ,

  41. Businesses Joining Forces • Merger • Combination of Two or More Firms to Form One Company • Acquisition • Procedure in which a Firm Acquires the Property and Obligations of Another Company • Joint Venture • Partnership between Companies for a Specific Purpose

  42. Final Word

  43. Lecture 5 Building Businesses

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