Chapter 5Options for Organizing Small and Large

BusinessesLearning Goals

Distinguish between small and large businesses and identify common industries for small firms.

Discuss the economic and social contributions of small business.

Explain why small businesses fail.

Describe how the Small Business Administration assists small-business owners.

Explain franchising’s benefits for francisors and franchisees.

Summarize the forms of business ownership and the advantages and disadvantages of each form.

Identify the levels of corporate management.

Describe recent trends in mergers and acquisitions.

Differentiate among private, public, and collective ownership.

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MOST BUSINESSES ARE SMALL BUSINESSES

• Eighty-nine percent of firms with employees have fewer than 20.

• Almost half of all sales in the U.S. are made by small businesses.

What Is a Small Business?

• Small Business Administration’s definition: An independently owned and operated firm that is not dominant in its field.

• Small Business Administration has established standards for a variety of industries.

Typical Small Business Ventures

• Compete against the world’s largest corporations.

Typical Small Business Ventures

• Compete against the world’s largest corporations.

• Just over half small businesses are home-based.

• Since 1980, number of people working from home has doubled.

• Rise of the personal computer, Internet, and other communication devices.

• Benefits include lower costs, greater flexibility, freedom from cost of commuting.

• Drawbacks include isolation and less visibility.

• Internet can increase competitiveness of small businesses.

• Three in five small businesses have an Internet presence.

CONTRIBUTIONS OF SMALL BUSINESS TO THE ECONOMY

Creating New Jobs• Three of every four new jobs are created by businesses with fewer than 500 employees.

• Small businesses dominate fields with strongest employment growth.

Creating New Industries• Many of today’s successful high tech firms—Microsoft, Dell, Cisco Systems, Yahoo!,

and Google—began as small businesses.

Innovation• Small firms develop twice as many innovations per employee

as large firms.

WHY SMALL BUSINESSES FAIL• One new business in every three closes permanently within two years.

• By the 10-year mark, 82 percent of all small businesses have closed permanently.

Management Shortcomings• Founders’ strengths in areas such as marketing or interpersonal relations are often offset by shortcomings in areas such as finance or order fulfillment.

Inadequate Financing• Start-up expenses, uneven cash flows, and inadequate or high-interest financing.

Government Regulation• Paperwork and limited resources to handle tax and regulatory burdens.

INCREASING THE LIKELIHOOD OF SMALL BUSINESS SUCCESS

Creating a Business Plan

Business plan A written document that

• Provides an orderly statement of a company’s goals.

• The methods by which it intends to achieve these goals.

• The standards by which it will measure achievements.

Small Business AdministrationSmall Business Administration (SBA) The principle government agency concerned with

helping small U.S. firms and advocate for small businesses within the U.S. government.

Financial Assistance from the SBA

• Provides guarantees for small-business loans by private lenders.

• Licenses Small Business Investment Companies.

Other Specialized Assistance

• Manages set-aside programs for federal contracts for small businesses and manages the Small Business Training Network.

Business IncubatorsBusiness incubator Organization that provides temporary low-cost, shared facilities to

small start-up ventures.

SMALL BUSINESS OPPORTUNITIES FOR WOMEN AND MINORITIES

Women-Owned Businesses

• More than 10.6 million women-owned firms in the U.S. employ almost 19.1 million people.

• Forty-eight percent of U.S. businesses owned by women; one in five of these is owned by minority women.

• Fastest growth occurring in construction, transportation and communications, and agricultural services.

• Have rapidly established support networks.

• Small Business Administration programs

• Nonprofit support organizations

Minority-Owned Businesses

• Growth in number of businesses owned by African Americans, Hispanics, and Asian Americans has outpaced overall growth.

• Immigrants own nearly 15 percent of all small businesses and are more likely to own small businesses than native-born citizens.

• Minority business owners face considerable obstacles:

• Tend to start businesses on smaller scale.

• Have more trouble attracting investors.

• Have harder time getting bank loans.

THE FRANCHISING ALTERNATIVEFranchising Contractual agreement that specifies the methods by which a dealer

can produce and market a supplier’s good or service.

• Generate $1.53 million in sales and employ more than 18 million people in U.S.

Franchising Agreements• Franchisee receives materials, equipment, and training from the franchisor.

• Franchisor provides building plans, site selection help, managerial and accounting systems, and other services to assist the franchisee.

Benefits and Problems of Franchising

• Benefits: prior performance record, proven business model

• Problems: expensive franchise fees and future payments

INCREASING THE LIKELIHOOD OF SMALL BUSINESS SUCCESS

Creating a Business Plan

Business plan A written document that

• Provides an orderly statement of a company’s goals.

• The methods by which it intends to achieve these goals.

• The standards by which it will measure achievements.

ALTERNATIVES FOR ORGANIZING A SMALL BUSINESS

Changing Legal Structures to Meet Changing Needs

• A person considering launching a new business should consider these factors when deciding on the proper form of ownership:

• Personal financial situations and the need for additional funds for the business’s start-up and continued operation.

• Management skills and limitations.

• Management styles and capabilities of working with partners and other members of top management.

• Concerns about exposure to personal liability.

• Form of ownership can be changed.

ORGANIZING AND OPERATING A CORPORATION

Types of Corporations

• Fall into three categories

• Domestic corporation in the state in which it is incorporated.

• Foreign corporation in states in which it does business other than the one in which it is incorporated.

• Alien corporation in countries in which it does business other than where it is incorporated

• A single company can operate under all three of these designations.

The Incorporation Process

Where to Incorporate

• Can incorporate in any state.

• More than half of Forbes 500 companies are incorporated in Delaware.

The Corporate Charter

• Most states requires three incorporators.

• Incorporators file articles of incorporation.

• State grants a corporate charter, a legal document that formally establishes a corporation.

Corporate Management

Stockholder Person or organization who owns shares of stock in a corporation.

Stock Ownership and Stockholder Rights

• Annual meetings, elections of company officers.

• Shares classified two ways

Board of Directors

Board of Directors Governing body of a corporation.

• Hires chief executive officer.

Corporate Officers and Managers

• CEO, chief operating officer, and chief financial officer make most major corporate decisions; CEOs and CFOs personally certify the accuracy of their firm’s financial statements.

Employee-Owned Corporations

• Workers buy shares of stock in the company that employs them.

• Growing popularity: 11,400 firms employing nearly 10 million people.

• Employees share in wealth the company generates.

• Managers want employees to care deeply about company’s success.

Not-for-Profit Corporations

• Not-for-profit corporation Firm pursuing objectives other than returning a profit.

• 1.5 million in the U.S.

• Includes charitable groups, social-welfare and educational organizations, religious congregations, political parties, and labor unions.

• Exempt from paying taxes.

WHEN BUSINESSES JOIN FORCES

Mergers and Acquisitions (M&A)

Merger Combination of two or more firms to form one company.

Acquisition Procedure in which one firm purchases the property andassumes the obligations of another.

Joint Ventures: Specialized Partnerships

• Joint venture Partnership formed between companies for a specific undertaking.

• Example: Transport4, a joint venture among four U.S. pipeline companies to better service oil refineries that use their services.

PUBLIC AND COLLECTIVE OWNERSHIP

Public Ownership• A unit or agency of government owns and operates an organization.

Government-Owned Corporations• Can result when private investors are unwilling to invest in a high-risk but

socially important project.

Customer-Owned Businesses: Cooperatives• Cooperative (co-op) Collective ownership of a production, storage,

transportation, or marketing organization.