Fourth Edition
PART 1 . . . . . . . . . . . . . . . . . . . . . . . .
Understanding the Contemporary
Business Environment
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Chapter 4
Entrepreneurship and
Small Business
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4-2
“Entrepreneurs are simply those
who understand that there is little
difference between obstacle and
opportunity and are able to turn
both to their advantage.”
~ Victor Kiam
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4-3
Key Topics
Small business and its importance in the economy
Sole proprietorships, partnerships, and corporations
Creating and managing corporations
Corporate trends and issues
Starting and funding a small business
Pros and cons of franchising
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4-4
What Is “Small Business”?
Independently owned and
managed business that does
not dominate its market
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Small business plays a critical role
in the U.S. economy.
Job Creation
Innovation
Importance to
Big Businesses
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4-6
The Labor Force Reflects the
Importance of Small Business
11.00
Percentage of All U.S. Workers
Percentage of All U.S. Businesses
86.09
2.00
0.20
Under
20
2099
100499
Total Employees
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25.60 29.10
25.50
12.70
7.10
0.10
500- 1000 or
1000 more
Under
20
2099
100499
500- 1000 or
1000 more
Total Employees
4-7
Popular Areas of Small Business Enterprise
Services
Retailing
Construction
Financial
Manufacturing
5%
Finance &
Insurance
Other
10%
1.7%
Wholesale
8%
Insurance
Wholesaling
Transportation
Manufacturing
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Construction
10%
Retailing
22.7%
Services
37.6%
Transportation
5%
4-8
Types of Business Organizations
Type of Business
73%
7%
20%
Sales Revenue
89%
5%
6%
Sole Proprietorship
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Partnership
Corporations
4-9
Comparative Summary: Three Forms of Business
Business
Form
Liability
Continuity
Management
Investment
Sources
Proprietorship
Personal,
limited
Ends with death
or decision of
owner
Personal,
unrestricted
Personal
General
Partnership
Personal,
unlimited
Ends with death
or decision of
any partner
Unrestricted or
depends on
partnership
agreement
Personal by
partner(s)
Corporation
Capital
invested
As stated in
charter,
perpetual or for
specified period
of years
Under control of Purchase of
board of
stock
directors, which
is selected by
stockholders
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Sole Proprietorships
Advantages:
Freedom
Disadvantages:
Unlimited Liability
Simple to form
Limited resources
Low start up costs
Limited fundraising
capability
Tax benefits
Lack of continuity
Unlimited Liability
Legal principle holding owners responsible
for paying off all debts of a business
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4 - 11
Partnerships
Advantages:
Disadvantages:
More talent and money
Unlimited Liability
More fundraising
capability
Disagreements among
partners
Relatively easy to
form
Lack of continuity
Tax benefits
Unlimited Liability
Legal principle holding owners responsible
for paying off all debts of a business
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Remember…
“When two men in business always
agree, one of them is unnecessary.”
William Wrigley Jr.
But…
An exit plan is still crucial!
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4 - 13
What is a Corporation?
“An artificial being, invisible, intangible, and
existing only in contemplation of the law.”
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4 - 14
Corporations
Advantages:
Disadvantages:
Limited Liability
Double Taxation
Continuity
Fluid control
Stronger fundraising
capability
Complicated and
expensive to form
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Types of Corporations
Closely Held (Private) Corporation
Publicly Held (Public) Corporation
S Corporation
Limited Liability Corporation (LLC)
Professional Corporation
Multinational or Transnational Corporation
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Stockholders
Owners of Corporations
Stock: Share of ownership in a corporation
Common Stock
Preferred Stock
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Corporate Governance Hierarchy
Stockholders
Board of Directors
Officers
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Special Issues in Corporate Ownership
Joint Ventures &
Strategic Alliances
Employee Stock
Ownership Programs
(ESOPS)
Institutional
Ownership
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Special Issues in Corporate Ownership
Mergers &
Acquisitions
(M&As)
Divestitures
& Spin-offs
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Entrepreneurship vs. Small Business
Entrepreneur: Accepts the
risks and opportunities of
creating, operating and
growing a new business
Small Business Owner:
Does not have plans for growth
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Trends in Small Business Start-ups
Emergence of
E-commerce
Crossovers From
Big Business
Opportunities for
Minorities & Women
Global
Opportunities
Increased
Survival Rates
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Percentage
E-commerce Continues to Grow Rapidly
$20,000
$18,000
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
$17,387
$12,090
$7,924
$4,828
$2,444
1997
1998
1999
2000
2001
Year
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Reasons for Success and Failure
Reasons for Failure
Poor management
Neglect
Weak control systems
Insufficient capital
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Reasons for Success
Hard work, drive,
dedication
Market demand
Strong management
Luck!!!
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Getting Started
Buying an
Existing
Business
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Starting
From
Scratch
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Financing the Small Business
Personal resources
Loans
Venture capital companies
Small-business investment companies
Small Business Association (SBA)

Financial aid and management advice
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4 - 26
FRANCHISING
An Ownership Opportunity
Advantages
Proven business
opportunity
Access to
management
expertise
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Disadvantages
Start-up costs
On-going
payments
Management rules
and restrictions
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Chapter Review
Define small business and explain its importance to the
U.S. economy.
Describe sole proprietorships, partnerships, and
corporations, and explain the advantages and
disadvantages of each.
Identify the different types of corporations.
Describe the start-up decisions made by small
businesses and the potential sources of financial aid
and management advice.
Identify the advantages and disadvantages of
franchising.
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