chapter 3

I. Introduction to Entrepreneurship and Small Business

• Widespread Interest: Nearly two-thirds of U.S. youth are interested in entrepreneurship.

• Broader Importance: Understanding small businesses benefits everyone—as customers, investors, or clients.

II. Defining and Understanding Small Business

• Definition Challenges:
  

  • U.S. Department of Commerce: Fewer than 500 employees.

  • SBA: Varies by industry (e.g., up to 1,500 for manufacturers).

  • Textbook: Independently owned with limited market influence.

• Economic Importance:
  

  • 85.43% of U.S. businesses have 20 or fewer employees.

  • 23.52% of workers are in firms <20 employees; 29.62% in 20–99.

• Innovation & Job Creation:
  

  • Small firms produce 16× more patents per employee than large ones.

  • Examples of once-small innovators: Apple, Facebook, Amazon, Dell, Netflix.

• Support for Big Business:
  

  • Provide retailing, services, coding, raw materials, and data storage.

• Popular Sectors:
  

  • Services (56.2%), Retail (13.69%), Construction (9.57%)

  • Wholesaling (5.28%), Finance/Insurance (6.6%), Manufacturing (3.05%), Transportation (2.91%)

III. Entrepreneurship: Characteristics and Goals

• Definition: Entrepreneurs pursue opportunities and accept risks in business ventures.

• Goals:
  

  • Independence and financial security.

  • Growth into large-scale enterprises (start-ups).

• Traits of Entrepreneurs:
  

  • Resourceful, customer-focused, desire independence.

  • Passion often interpreted as risk tolerance.

• Modern Image:
  

  • Shift from lone operator to networked, strategic leader.

• **Case Study – Lynsi Snyder (In-N-Out Burger):
  

  • Family-owned, non-franchised, consistent menu.

  • Focus on quality, employee pay, and conservative growth.

  • Maintains core values over expansion or profit.

IV. Starting and Operating a New Business

• Technology’s Role:
  

  • Internet and social media lower startup barriers.

• Startup Planning:
  

  • Define vision.

  • Choose method: buy existing, franchise, or build from scratch.

  • Seek expert advice and secure financing.

• Distinctive Competencies:
  

  • Niches: Serve underserved markets (e.g., Netflix, Warby Parker).

  • New Markets: Bring products to new regions (e.g., Bic).

  • First-Mover Advantage: Beat larger firms to market (e.g., semiconductors).

• Business Plan:
  

  • Crucial for direction and investors.

  • Includes goals, strategy, financial forecasts (budgets, breakeven analysis, statements).

• Entry Options:
  

  • Buy Existing Business (35%): Lower risk, proven model.

  • Franchise:
    

    • Franchisee (owner) + Franchiser (brand).

    • Pros: Support, brand, lower failure rate.

    • Cons: High fees, limited control.

  • Start from Scratch (62%): High risk, full control, unproven.

V. Financing the Small Business

• Common Sources:
  

  • Personal funds, family, and friends (2/3 of startups).

  • Banks (prefer established businesses).

  • Investors (require detailed plans).

  • Government (SBA loans and guarantees).

• Special Financing Options:
  

  • Venture Capital: For high-growth potential; investors get equity.

  • SBICs: SBA-licensed firms investing in small businesses (e.g., Apple, FedEx).

  • MESBICs: Focused on minority-owned firms.

  • SBA Loan Programs:
    

    • 7(a) loans, microloans, 504 fixed-interest loans.

    • Support services like SCORE and SBDCs.

  • Microlending: Example – Tala’s mobile lending to underserved, with 85% repayment rate.

VI. Trends, Successes, and Failures in New Ventures

• Trends:
  

  • E-commerce dominance.

  • Corporate professionals becoming entrepreneurs.

  • Diverse Ownership:
    

    • +60% Black-owned businesses.

    • +44% Hispanic, +41% Asian-owned businesses.

    • 12 million women-owned businesses with $1.8 trillion in revenue.

  • Growing international entrepreneurship.

  • Improved survival: 50% last 4+ years, 33% last 10+ years.

• Causes of Failure:
  

  • Inexperience, neglect, poor systems, undercapitalization.

• Success Factors:
  

  • Dedication, market demand, competence, and luck.

  • Example: Clean Harbors grew through EPA contract opportunities.

VII. Forms of Noncorporate Business Ownership

1. Sole Proprietorship

• Definition: One-person ownership (72% of U.S. businesses, but only 4% of total revenue).

• Pros: Simple, full control, tax advantages.

• Cons: Unlimited liability, limited resources, succession challenges.

2. Partnership

• Definition: Two or more owners.

• Types:
  

  • General Partnership: Shared ownership and liability.

  • Limited Partnership: Silent investors with limited liability.

• Pros: Shared responsibilities and resources.

• Cons: Liability risks, continuity issues, potential conflict.

3. Cooperative

• Group-owned and operated for mutual benefit (e.g., Ocean Spray).

VIII. Corporate Forms of Ownership

1. Corporation

• Definition: Legal entity separate from its owners.

• Pros: Limited liability, easy capital raising, continuity.

• Cons: Expensive, complex, double taxation.

• Types of Corporations:
  

  • Private: Few shareholders, not publicly traded.

  • Public: Shares traded on stock exchanges.

  • S Corporation: Pass-through taxation, IRS ownership restrictions.

  • Professional Corporation: For licensed professions.

  • LLC: Hybrid structure—limited liability, no double tax, flexible management.

IX. Managing Corporations

• Ownership: Shareholders.

• Governance:
  

  • Board of Directors: Sets policies.

  • Officers (e.g., CEO): Handle operations.

• Profits: Distributed to shareholders as dividends.

X. Special Ownership Situations

• Strategic Alliance: Cooperation without merging.

• Joint Venture: Two or more firms create a new business together.

• ESOP: Employees acquire partial ownership.

• Institutional Investors: Large organizations with significant stock holdings.

• Mergers/Acquisitions: Combining or purchasing firms.

• Divestitures/Spin-offs: Selling or separating parts of a business.