Foundations of Business Chapters 6, 7, 8, 10, 12

Sole Proprietorship

A business owned by only one person

Accounts for 72% of all U.S. businesses

Advantages of a Sole Proprietorship

• Complete control for the owner

• Easy and inexpensive to form

• Owner gets to keep all the profits

Disadvantages of a Sole Proprietorship

• Unlimited liability for the owner

• Complete responsibility for talent and financing

• Business dissolves if the owner dies

General Partnership

A business owned jointly by two or more people

Accounts for about 10% of all U.S. businesses

Advantages of a General Partnership

• More resources and talents come with an increase in partners

• Business can continue even after the death of a partner

Disadvantages of a General Partnership

• Partnership disputes

• Unlimited liability

• Shared profits

Limited Partnership

Has a single general partner who runs the business and is responsible for its liabilities, plus any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment

Partnership Agreement

Specifies everyone’s rights and responsibilities

(See notes for what it includes)

Unlimited Liability

A person is personally responsible for all the debts and obligations of a business

Corporation

A legal entity that’s separate from the parties who own it

The shareholders who invest by buying shares of stock

Advantages of a Corporation

• Limited liability (most important)

• Easier access to financing

• Unlimited life for the corporation

Shareholders

Invest money in a business by buying shares of stock

Board of Directors

A group of people (primarily from outside the corporation) who are legally responsible for governing the corporation, but not for the daily operations

Chief Executive Officer (CEO)

The top executive of a business

Limited Liability

Shareholders are not responsible for the obligations of the corporation and can lose no more than the amount that they have personally invested in the company

Continuity

Because the corporation has a legal life separate from the lives of its owners, it can (in theory) exist forever

Agency Problem

A conflict of interest inherent in a relationship in which one party is supposed to act in the best interest of the other

Ex. Managers are more interested in career advancement than the overall profitability of a company, while stockholders might care more about profits without regard for the well-being of employees

“Double Taxation”

Income is taxed twice — once at the corporate level and again at the individual level when it is distributed as dividends

Limited Liability Company (LLC)

A business structure that combines the tax treatment of a partnership with the liability protection of a corporation

Not-for-Profit Corporation (nonprofit)

An organization formed to serve some public purpose rather than for financial gain

Enjoys favorable tax treatment

Cooperative

A business owned and controlled by those who use its services

Individuals and firms who belong to the cooperative join together to market products, purchase supplies, and provide services for its members

Merger

Occurs when two companies combine to form a new company

Acquisition

The purchase of one’s company by another with no new company being formed

Hostile Takeover

Occurs when a company is purchased even though the company’s management and Board of Directors do NOT want to be acquired

Complementary Products

Items that go well together or enhance each other when used or purchased together

Motivation to conduct a merger or acquisition

Synergy

A whole that is greater than the sum of its parts

A benefit that occurs through a merger or acquisition that would not be possible without it

Entrepreneur

Innovators who start companies to create new and improved products

One who starts a business

Entrepreneurship characteristics (3)

1. Innovation

2. Running a business

3. Risk taking

Entrepreneurial

Describes someone that challenges the status quo and tries new ways to solve a problem

Risk

Something you can guess the results of, a kind of probability

Uncertainty

A kind of knowledge problem that doesn’t have probabilities and can’t really be guessed

Small Business Administration (SBA)

A government agency that helps small businesses with resources and support by reducing the risks

• Guarantees some bank loans

• Provides free business consulting

• Provides training

4 reservations (fears) that prevent people from starting a business

• Money

• Security

• Competition

• Lack of ideas

Founding team

A group of people who start a business together and work as a team

Organization Lifestyle phases (4)

1. Startup

2. Growth

3. Mature

4. Decline/rebirth

Startup phase

Characterized by large amounts of uncertainty

Growth phase

Founders have figured out how to provide the product profitably and are implementing systems to find more research customers

Mature phase

Occurs when growth slows and focus is more on optimization and resource allocation rather than exploring how to create additional value

Decline/rebirth stage

Decline - occurs when there is negative growth/profits

Rebirth - they attempt to change what they do and find new customers

Knowledge problems

Problems regarding uncertainty experienced by entrepreneurs during the startup or rebirth stage

• Complexity

• Ambiguity

• Equivocality

Complexity

Occurs because of the number of variables that make up a problem and the number of interactions between those variables that could influence outcomes

Ambiguity

Occurs when there isn’t enough clarity around what is important or even what might happen

Equivocality

Occurs when there are multiple meanings or interpretations of what is important and what is possible

Value

A subjective term that represents the perceived importance or preference of a good or service

Lifestyle businesses (small businesses)

Tend to create value for a niche group of customers that benefit from their service

High-growth ventures

Tend to create value for much larger sized markets and become or are acquired by large and often publicly-traded corporations

Social Entrepreneurship

Seeks to use a startup or company to not only generate enough profit, but also enough social and/or environmental impact

Triple bottom line

Social entrepreneurship want to see social, environmental, and economic success

Considers people, the planet, and profits

Digital entrepreneurship

A term that has surfaces as a result of the increase in the use of technological advances that can be used to start a new venture

Entrepreneurial ecosystem

A community or network of people, spaces, and available resources that interact around the creation of new ventures

Coworking spaces

Open areas where entrepreneurs and business professionals can work out of

Incubators

A bunch of offices in the same area that are rented out to particular startup companies

Accelerators

Programs that provide money, space, services, and some sort of training or mentoring to startups selected to participate in their program usually in exchange for equity

Bootstrapping

When the founders use their own funds to start a company

Crowdfunding

A way for people to raise money for their projects or ideas by getting support from a large group of individuals

Ex. Go Fund Me

An entrepreneur might offer tokens of appreciation in exchange for funds

Angel investors

Invest their own money either on their own or with a group of others

Venture capitalists

Invest primarily other people’s money promising high returns in 7-10 years to those individuals who contribute to their fund

Small business

A business that is independently owned and operated, exerts little influence in its industry, and generally has fewer than 500 employees

Why small businesses are important:

• Create jobs

• Spark innovation

• Provide opportunities for many people, including women and minorities, to achieve financial success and independence

Industry

A group of companies that compete with one another to sell similar products

Goods-producing sector

Includes all businesses that produce tangible goods

Involved in manufacturing, construction, and agriculture

Service-producing sector

Includes all businesses that provide services, but don’t make tangible goods

Involved in retail and wholesale trade, transportation, finance, entertainment, recreation, accommodations, food service, and any number of other venture

Retailers

Buy goods from other firms and sell them to consumers (in stores, by phone, through direct mailing, over the Internet)

Wholesalers

Sell products to businesses that buy them for resale or for company use

Ex. A local bakery is acting as a wholesaler when it sells desserts to a restaurant, which then resells them to its customers

Advantages of small business ownership

• Independence

• Lifestyle

• Financial rewards

• Learning opportunities

• Creative freedom and personal satisfaction

Disadvantages of small business ownership

• Financial risk

• Stress

• Time commitment

• Undesirable duties

Business plan

A document that identifies the goals of your proposed business and explains how these goals will be achieved

Financing

The money that you’ll need to get your business off the ground

The key to coming up with a business idea

Identifying something that customers want or filling an unmet need

Intellectual Property

A right that can be protected under the law for an innovative idea

Franchise

When a business allows other people to open up their own versions of that business

A franchiser (the company that sells the franchise) grants the franchisee (the buyer — you) the right to use a brand name and to sell its goods or services

Royalty fee

A payment that someone has to make to the owner of a franchise or intellectual property

Franchise agreement

An agreement between a franchiser and franchisee that sets out all the rules and obligations for both parties

Ex. The foods you can sell, the methods used to store/prepare/serve food, the prices the franchisee charges

Reasons businesses fail:

• Bad business idea

• Cash problems

• Managerial inexperience or incompetence

• Lack of customer focus

• Inability to handle growth

• Failure to adapt

Management

The process of planning, organizing, leading, and controlling resources to achieve specific goals

Plan

Enables you to take your business concept beyond the idea stage

Organize

Put people and other resources in place to make things happen

Leader

Can motivate their team to do well

Control your operations

Measure the results and compare them with the results you had laid out in your plan

Strategic planning

The process of establishing an overall course of action

Mission statement

Describes the purpose of your organization — the reason for its existence

Core values

Fundamental beliefs about what’s important and what is and isn’t appropriate in conducting company activities

SWOT Analysis

Analyze’s an organizations Strengths, Weaknesses, Opportunities, and Threats

Begins with an examination of external factors

External factors

Outside influences that can affect a company in either a positive or negative way

Ex. Economic conditions, competition, emerging technologies, laws and regulations, consumers’ expectations

Internal factors

Strengths and weaknesses that can affect a company in either a positive or negative way

Strengths examples: motivated workforce, state-of-the-art technology, impressive managerial talent, desirable location

Weaknesses examples: poor workforce, obsolete technology, incompetent management, poor location

Goals

Major accomplishments that the company wants to achieve over a long period

Objectives

Shorter-term performance targets that direct the activities of the organization toward the attainment of a goal

Tactical plans

Shorter components of the overall plan

Resources

Inputs put into a business to produce outputs (goods/services)

Ex. People, equipment, money

Operational plans

Short duration plans (1-2 months)

Very detailed action steps

Tactical plans are broken down to operational plans

Contingency planning

A backup plan (or fallback plan) to be prepared for unexpected situations

Crisis management

Prior organization and planning for when an emergency occurs that requires immediate attention

Leading

Providing focus and direction to others and motivating them to achieve organization goals

Leadership style

Way of interacting with and influencing others

Leadership styles:

• Autocratic

• Democratic

• Free-rein

Autocratic style

One person has all the power and makes decisions without much input from others

Democratic style

Manager seeks input from subordinates while retaining the authority to make final decisions

Free-rein style

Managers adopt a “laissez-faire” approach and provide relatively little direction to subordinates

Transaction leaders

Exercise authority based on their rank in the organization

Transformation leaders

Mentor and develop subordinates, providing them with challenging opportunities, working one-on-one to help them meet their professional and personal needs, and encouraging people to approach problems from new perspectives

Controlling

The process of comparing actual to planned performance and taking necessary corrective action