Entrepreneurs & Business Organizations

What it takes and what are the pros and cons of different types of legal

business structures

What does it take to start a business?

• Entrepreneurs: someone who takes on risk & responsibility of starting a business with the expectation of making a profit.

• Social entrepreneurs: someone who takes on the responsibility and risk of starting a business with the goal of affecting positive social change for the benefit of the greater good.

What does it take to start a business?Business Entrepreneurs

http://www.bing.com/videos/search?q=enterpreneurs&FORM=HDRSC3#view=detail&mid=F7E299633B072A585F5EF7E299633B072A585F5E

• Innovative and creative thinkers – they come up with that new “big idea”

• Most successful entrepreneurs are extremely hard-working and persistent – they don’t give up easily, but are able to adjust business strategies.

What does it take to start a business (Cont.)

• What makes them successful:• Ambition: Extremely drive people able to

see big picture and stay focused on end result.

• Self-Confidence: They believe in themselves and have an inner certainty that they can achieve their goals.

• What makes them successful:• A Willingness to Take Risks: Unafraid to risk

time, money and energy on new ideas – don’t let fear of failure prevent them from taking risks.

• Energy and Self Discipline: Thrive on hard work – are tireless because they are focused on what the love.

What does it take to start a business? (Cont.)

What does it take to start a business? (Cont.)

• What makes them successful:• Perseverance: Obstacles are viewed as

challenges and opportunities.

• Problem Solving Ability: Tireless in finding solutions – they keep at it until they have come up with a fix.

Business Entrepreneurs (Cont.)

• What makes them successful (cont.):• Organizational Skills: Manage time,

resources and people effectively.

• Ability to Motivate Others: Know how to inspire others; empower others and incorporate them in a shared vision.

Risks & Rewards

Entrepreneurs & the Community• Many entrepreneurs also take satisfaction in knowing

that they are contributing to the economy.

• New businesses can breathe economic life into depressed areas, creating new jobs and helping to support existing businesses.

• Successful business owners often become community leaders who invest in community projects and give to local charities.

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Rights of Business• Right to own property & enter into/enforce contracts.

• Right to advertise: 1st Amendment did not originally protect right of businesses to advertise. In recent decades, courts have ruled that advertising is “commercial speech.”

• Few restrictions, except for ads for things like alcohol and tobacco

• Right to hire and fire employees: Most states have “employment at will” regulations – protect business’ right to hire/fire employees as needs change.

• Also protects employee’s right to quit for any reason. Main exception is when contract exists between business & employee. Unless contract states otherwise, employee cannot be fired until contract ends.

Rights of Business (Cont.)• Right to screen employees:– Businesses have legal obligation to provide safe

workplace for employees & clients. • Can perform background checks & drug testing on job

applicants & employees.

• Right to be fairly compensated for property: – 5th Amendment prohibits government from taking

private property for public use without paying fair compensationn -- applies to businesses & individuals. • Ensures that business owners and shareholders don’t lose

their investment should the govt. need to take over property.

Intellectual Property• Patent, copyright, & trademark laws

protect exclusive rights to intellectual property.

• Trademark - distinctive name or symbol that identifies a firm and its products or services and is legally registered as property of that firm.

• Other forms of protected intellectual property include trade secrets, company logos, designs, & inventions— any intellectual product that has commercial value.

Responsibilities of Businesses

• Obtaining licenses and permits: – Intended to ensure public safety.

• Businesses that use or store hazardous materials required to get fire dept. permit.

• People practicing certain trades or professions -- plumbers, electricians & doctors -- must be licensed.

• Paying taxes: – May include income, sales & property taxes.

• Dealing honestly: – Subject to prosecution of fraud if Intentionally misrepresent facts,

conceal info., publish false or misleading ads, or otherwise try to cheat people.

Responsibilities of Businesses (cont.)

• Honoring contracts: – Once entered into, contracts are legally binding. – Obligation to honor contracts with customers, suppliers, & others.

When broken, injured party may take legal action.

• Creating an equal opportunity workplace: – Discrimination on basis of race, gender, age, ethnicity, religion, or

disabilities is illegal.

• Protecting whistle-blowers:– In the past, employees who reported misconduct to authorities could be

fired for speaking out. Federal & state laws now protect them from retaliation.

• Ensuring product safety:– Federal & state laws govern product safety. If product found unsafe or

defective, manufacturer may be held liable for harm it may have caused.

It May be Legal, but, is it Ethical?

• In free enterprise system, businesses are legally permitted to do many things:– Cosmetics companies can test products on animals, farmers use

pesticides, retail stores can pay wages too low to live on.– BUT, does that mean businesses should do these things?

• Corporate responsibility: Idea that businesses should take responsibility for impact of actions on society.– Means looking beyond firm’s responsibility to its shareholders &

considering needs of its stakeholders. • Stakeholder -- anyone who has interest in, or is affected by, a

company’s actions. Stakeholders include employees, customers, suppliers, competitors & the community in which business operates.

May be Legal, but is it Ethical?• Growing number of businesses striving to be good “corporate

citizens” by considering the interests of stakeholders. – Stonyfield Fram gives 10 % of its profits to groups that work to protect

the environment.

• Many companies address issues of corporate responsibility by creating codes of business ethics.– Business ethics: principles of right & wrong that guide actions of a

company and its employees.

• Ethical business practices are important to clients & consumers. – Firms with reputation for high ethical standards attract talented

employees, giving them competitive edge in the market.

Sole Proprietorships

• One Owner, One Operator

• In a sole proprietorship, the owner of the business—the proprietor—earns all profits & is responsible for all debts.

• This form of business can be simple to establish and easy to manage, with relatively low start-up costs.

Sole Proprietorships: 7 out of 10

• The ease of starting a sole proprietorship is probably why about 7 out of 10 businesses are organized this way.

• Form of business that appeals to people who have a marketable skill or trade and want to work for themselves rather than a boss. – A sole proprietor might be a plumber, a pet sitter,

a caterer, a farmer, a consultant, or an artist.

Advantages of Sole Proprietorship• Ease of start-up: Little paperwork involved in starting a sole

proprietorship.

– business license or business permit -- legal document allowing business to operate in that state, city, or town.

– zoning permits -- Local governments often designate certain areas, or zones, for specific business purposes.

– business name registration -- proprietor must submit a “doing business as” form to the local government office.

Advantages of Sole Proprietorship• Few restrictions: least regulated form of business.

– Some regulations apply to specific industries. E.g., any food service business subject to health dept. regulations.

• Full decision-making power: S.P. makes all business decisions w/out having to consult partners/shareholders.– Freedom to make decisions quickly in response to market

changes can be great advantage business.

• Full profits and individual taxation: S.P. keeps all profits after taxes. – Pay personal income tax on earnings, business itself pays no

taxes.

• Ease of closing: Can dissolve businesses easily if choose to do so. However, they must pay off business debts and taxes.

Disadvantages of Sole Proprietorships

• Unlimited liability:• S.P.’s full responsibility for paying debts their businesses take on.

– If not enough assets to repay debts, owner must use personal assets (car, home, or bank account). • Many S.P.’s reduce liability by organizing as limited liability company – “LLC’s”.

LLC pays personal income tax on profits, but, liability limited to whatever he/she has invested in company.

• Limited growth potential:– Because success rests on one person—often novice entrepreneur with limited assets

—investors may be reluctant to lend -- growth often depends on reinvestment of profits.

• Limited life: – Almost always cease to operate if owner dies, goes bankrupt, or is unable to run

business - lack of permanence may discourage potential employees, may also make lenders reluctant to loan.

Partnerships: Multiple Owners, Shared Profits

• Partners (2 or more) share profits & liabilities.– Family-owned businesses, small stores,

farms & medical practices common examples of business partnerships.

– Law firms, accounting firms, and money-management firms also frequently form partnership agreements.

• Partnerships may be formed by oral agreement, but usually draw up written legal agreement.

Partnerships (Cont.)

3 most common partnerships:• General partnership: – Co-owners have unlimited liability for debts. Owners, or

general partners, active in business ops.

• Limited partnership: – At least one general partner & one or more limited partners –

limited partners contribute financially but leave day-to-day ops to general partners (a.k.a. silent partners).• Main advantage for limited partner is limited liability - can

lose only amount invested in business.

Partnerships (Cont.)

• Limited liability partnership: – Co-owners allowed to operate like general

partners while enjoying limited liability. LLP best when all partners want active role in managing business. Professionals, such as attorneys, doctors, dentists & accountants, often form LLPs.

Advantages of Partnerships• Like S.P.’s, partnerships offer entrepreneurs a number of

advantages:• Ease of start-up. Same business permits required for S.P.’s also

required for a partnership.– Recommended that they draw up Articles of partnership

that specify each partner’s• contribution in assets and labor.• share of the profits and losses.• authority and duties.• how partners will settle disagreements.• what happens in event that a partner dies or leaves.• how assets will be divided if business fails.

• If articles of partnership not drawn up, most states have guidelines regarding partner rights & responsibilities that automatically go into effect.

Advantages of Partnerships (cont.)• Few restrictions:

– However, like sole proprietorships, must meet industry-specific regulations, such as health codes.

• Shared decision-making power:– “Two heads are better than one”

• Specialization:– Partners bring different areas of expertise; one may be good at managing

people, another may be marketing whiz.

• Individual taxation:– Partners share profits according to arrangement they made; each pays income

taxes on his or her share; no taxes on business itself.

• Increased growth potential: – Each bring financial assets – as well as those of family & friends; banks see

less risk in lending money & suppliers more willing to extend credit.

Disadvantages of Partnerships• Unlimited liability for general partners:

– Unless it’s an LLP, at least one partner—general partner—has unlimited liability for debts. General partners coud lose what they’ve invested & their personal assets.

• Conflict between partners: – Partners may disagree about management style, work habits,

ethics, or general goals & direction.

• Continuity issues:– If one partner dies or decides to leave, remaining partners need

to buy out former partner’s share

Venture Capital• Sometimes S.P.’s or partners need more financial

capital to grow business than they can provide on their own.

• One way to raise funds is to seek Venture capital:– Money from individual investor or organization that

invests in promising new businesses in exchange for share of ownership.

– Another common way to raise money is to sell shares to the public on the stock market.• In either case, this is the time for the company to be

reorganized as a corporation.

Corporations

• Treated under law as single body with its own powers, separate from its owners.

• Can enter into contracts, buy & sell property, just as individuals.

• Owned by shareholders. • Business looking to expand may

choose corporate status.– May offer from several thousand

to several million shares of stock – can bring $ millions or even $ billions in new financial capital.

Corporations (Cont.)

• Two kinds of business corporations: – Privately held corporation:• Owned by individual or small group. Allows select

group of people, often members of family, to purchase stock – not usually for sale to general public. A.k.a “closely held corporation”.

– Publicly held corporation:• If grows significantly, may become, or may be sold to, a

publicly held corporation.• offers stock for sale to the general public and has many

shareholders.

How Corporations are Organized• Hierarchy with different levels of employees.

• Every employee reports to higher-level employee; that person reports to even higher-level employee, etc...

• Board of Directors:– Sits at top of hierarchy, elected by & reports to

shareholders.– Oversees management, establishes corporate policy &

makes sure company’s resources are managed effectively.– Board often made of “inside” & “outside” directors.• inside director: from within firm, such as company’s

founder or senior-level manager.• outside director: from outside firm - can provide

independent perspective.

How Corporations are Organized (cont.)

• One of board’s most important responsibilities is to select the chief executive officer. – CEO is highest-ranking person in charge of managing a corporation.

• CEO appoints other corporate officers—senior executives who oversee specific areas of the business. – These corporate officers, along with other senior executives,

make up senior management. – Reporting to them is middle management - includes vice

presidents, department heads & managers of various ranks.• Middle management responsible for supervising day-to-day

activities.

How corporations are Organized

Advantages of a Corporation• Limited liability:– A corporation’s owners—the shareholders—are

liable only for amount they have invested.

• Growth potential:– Because corporations can use the sale of stock to

raise financial capital, they have far greater potential for growth than other forms of business.• Google IPO in 2004 -- 22 million shares sold - raised

about $1.2 billion.

Advantages of a Corporation (cont.)• Professional management:– Corporations run by professional managers - often

specialized in particular area, e.g. finance or public relations. With expertise, corporations can increase efficiency to level often not possible in smaller organizations.

• Long life:– Unlike sole proprietorships & partnerships, corporations

continue to exist when founders die or owners sell their shares.

Disadvantages of Corporations• Complexity of start-up: Must comply with Specific and

complex procedures to become a corp.– Must develop prospectus– Obtain business license– Must develop Articles of incorporation, also known as a

corporate charter• corporate charter details the company’s objectives, structure, and

planned operations. Also specifies number of shares of stock that may be issued. Must be approved by state officials.

– Must create corporate bylaws, or rules that govern the management of the corporation. • How to conduct shareholder meetings, elect directors, what

officers the organization will have & their duties.

– Must hold a meeting of shareholders to elect a board of directors.

Disadvantages of Corporations• Issue stock certificates to shareholders.

– stock certificate - legal document certifies ownership of specific number of shares.

• Loss of control:– Decisions once made by founder become responsibility of board of

directors & professional management team. • More government regulation:

– required to hold annual shareholder meetings and must maintain detailed records of business transactions. Publicly held corporations must also file regular reports with SEC.

• Double taxation:– Heavier taxes than S.P.’s or partnerships. As legal entities, corporations

required to pay taxes on profits. – Shareholders must pay income tax on dividends. – Taxation at corporate level and again at shareholder level known as

double taxation.

Multinational Corporations

• MNC’s have existed since the 1600s - English and Dutch trading companies first established outposts in the East Indies.

• In past few decades, # of global businesses has skyrocketed.– In 1990, about 3,000 multinational corporations. In 2003, more

than 63,000, with 821,000 branches & 90 million employees around the globe.

– MNC’s typically have HQ in “home” country & operate production facilities or deliver services in at least one other country. • Each branch of a multinational must obey laws of the country in which

it is located, including tax laws.

Multinational Corporations (Cont.)• Advantages of MNC’s:– Global reach means access to more markets - greater

potential for increased sales & growth.– Access to multiple markets also means less likely

MNC will go bankrupt than will smaller firm operating in single market.

– Access to cheaper labor & raw materials than in home countries.

– Locations in multiple countries may also reduce transportation costs.

– For all these reasons, number of global corporations likely to continue to increase.

Franchises• Parent company grants exclusive right to use its trade

name & sell its products in designated location. – Franchiser: grants license to operate an outlet in

return for initial payment & ongoing fees. – Franchisee: Business owner who buys license &

distributes franchiser’s products. – Franchise model well suited to businesses whose

products or services can easily be replicated, or “cloned.”

Franchises (Cont.)• Advantages:

Franchising enables parent company to expand rapidly & more cheaply than if it had to own & operate new outlets itself.

Franchisers help new owners get started with management training, budgets, and advertising campaigns. Record of profitability and a built-in customer base.

Buying a franchise may be less of a financial risk than starting one’s own business.

Franchises (Cont.)• Disadvantages: Franchisers charge high fees for right to use their

name; bigger the name, the more expensive the franchise rights.

Franchisees must also pay royalties, or a percentage of earnings, to parent company.

Franchise owners give up some independence.

• Franchise agreements usually require franchisees to follow strict rules and procedures. For some aspiring entrepreneurs, this lack of independence may be big drawback.

CooperativesShare Ownership for Shared Benefits

• Co-op - owned and operated by group of individuals for their shared benefit. – Some 120 million Americans were members of some type of co-op in

2005.

• Co-ops not in business to make a profit. – Goal is to meet members’ needs for affordable goods & services. Co-

ops run democratically - members elect other members to a board of directors.

• People who join co-ops are consumers looking to increase their buying power.– Consumer co-ops sell goods to members at reduced prices - purchase

bulk quantities at lower cost. Requirements of membership vary. Some require members to work certain number of hours, others require yearly membership. Food co-ops, housing co-ops, and discount price clubs are types of consumer cooperatives.

Cooperatives (Cont.)• Other co-ops provide services instead of goods.

– E.g. health care, childcare & insurance services. – Credit unions, or financial cooperatives, make low-cost loans to their

members. – Electric cooperatives, found in rural areas, provide low-cost electricity to

members. In 2008, electric co-ops delivered electricity to 40 million Americans.

• Producers also form cooperatives. – Most common producer cooperative is agricultural co-op, a.k.a “farm

organization”. – Some ag co-ops function like consumer co-ops, providing farmer members

with low-cost seeds & equipment. Other ag co-ops help to market & sell members’ products.

– Well-known food brands: Sun-Maid, Land O’ Lakes, & Ocean Spray, are agricultural co-ops. Ocean Spray owned by about 750 cranberry & grapefruit growers in U.S. & Canada.

Non Profits Organizations

• Function like a business, but don’t operate for profit.

• Support particular public or private goals – e.g., human rights, the arts, the environment, religion & medical.

• Range from global organizations like Red Cross to local soup kitchens & animal shelters.

Non-Profit Organizations (Cont.)

• Organization: can be organized as a corporation, a cooperative, a trust, or a foundation. Conservation nonprofits are often organized as land trusts

• Often seek nonprofit status from federal govt. – Nonprofits may be tax exempt – income is limited

& restrictions on how they can use earning.– Many are funded through donations.

Non-Profit Organizations (Cont.)• Foundations: Created & supported by donated funds or

property – often created by people who have made fortunes in business.– Bill and Melinda Gates, e.g., have given billions to groups working to

improve health care & education in developing countries & in U.S..• Business associations: Represent interests of businesspeople

in geographical area - often go by title Chamber of Commerce.• Trade associations: represents interests of people working in

particular industry; e.g., Alliance of Automobile Manufacturers & Motion Picture Association of America – use advertising, education & political lobbying to promote their interests.

Non-Profit Organizations (Cont.)

• Professional organizations: Est. standards of training & ethics for professionals in their fields. Also work to improve conditions for people in their profession.– The American Nurses Association, e.g., represents nearly 3

million registered nurses – promotes rights of nurses & lobbies Congress on health care issues affecting nurses.

• Labor unions: Organizations of workers in a specific industry.– Labor unions seek to improve working conditions, wages,

hours & benefits for its members.– Wide range of industries -- actors, miners, police officers &

aerospace workers, e.g., all represented by unions.

Sources of Support

• Small Business Administration “SBA”• Chambers of Commerce• Lawyers -- to help you determine appropriate business

structure and complete all necessary legal steps.• Trade Associations – for industry info. And networking

opportunities• Accountants – for advice and guidance about how to

manage finances and tax obligations• Banks – for loans to lease facilities, purchase

equipment, pay labor costs.

Social Entrepreneurs

• The micro-lending story• http

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