978-0134728391 Chapter 3 Part 1

Chapter 3: Entrepreneurship, New Ventures, and Business

Ownership

Chapter Overview

Have you ever wanted to be your own boss? Think of going to work when you want to. Think of

how it would be to call your own shots. Although it’s anything but easy, starting your own

business can be rewarding. The U.S. economic system welcomes entrepreneurship and offers

various forms of business ownership. This chapter discusses small business, its importance to the

U.S. economy, and the popular areas of small business. It looks at:

 Key characteristics of entrepreneurial personalities and activities

 Business plans

 Start-up decisions made by small businesses

 Sources of financial aid available

 Trends in small business start-ups

 Key reasons for success and failure among small businesses

Finally, the chapter discusses different forms of business ownership and the advantages and

disadvantages of each, as well as the basic issues involved in managing a corporation and special

issues related to corporate ownership.

Learning Objectives

3-1. Define small business, discuss its importance to the U.S. economy, and explain popular

areas of small business.

3-2. Explain entrepreneurship and describe some key characteristics of entrepreneurial

personalities and activities.

3-3. Describe distinctive competence, the business plan and the start-up decisions made by

small businesses and identify sources of financial aid available to such enterprises.

3-4. Discuss the trends in small business start-ups and identify the main reasons for success

and failure among small businesses.

3-5. Explain sole proprietorships, partnerships, and cooperatives and discuss the advantages

and disadvantages of each.

3-6. Describe corporations, discuss their advantages and disadvantages, and identify different

LIST OF IN-CLASS ACTIVITIES: Instructor’s Choice

Activity

Description

Time Limit

1. Ice-Breaker: The Role

of Small Business

Students discuss the role of small business

in their communities.

15 min.

2. Up for Debate: The

Wide World of Risk

Students are divided into groups to

discuss ways in which the entrepreneurial

spirit has been evident throughout U.S.

history, and how entrepreneurship is

valuable to an economic system.

30 min.

3.Small-Group

Discussion:

Entrepreneurship and the

Growth of Businesses

Groups of students weigh the importance

of entrepreneurship in the development of

fast-growing businesses.

20 min.

4. Small-Group

Discussion: What’s the

Next Big Thing?

Groups of students design a new business

and identify possible products/services

being sold as well as possible customers.

45 min.

5. Small-Group

Discussion: How Can We

Succeed in the Software

Industry?

Students identify the factors that help a

company in the software industry become

a success.

30 min.

6. Class Discussion:

Conjuring Up Profits?

Students identify what makes a successful

company, at least in terms of usage,

financially successful.

30 min.

CHAPTER OUTLINE

Learning Objective 3-1:

Define small business, discuss its importance to the U.S. economy, and explain popular

areas of small business.

What Is a “Small” Business?

A small business is independent (that is, not part of a larger business) and has relatively little

influence in its market. The U.S. Department of Commerce and the Small Business

Administration (SBA), define the size of a business based on its industry and the number of

employees. According to SBA standards, a small business can have as many as 1,500 employees.

A. The Importance of Small Business in the U.S. Economy

Most U.S. businesses employ fewer than 20 people, and most U.S. workers are employed by

small firms. The contribution of small business can be measured through its impact on job

creation, innovation, and its importance to big business.

1. Job Creation. Small businesses are an important source of new jobs; in recent years,

2. Innovation. Small business produces 16 times as many patents per employee as large

patenting firms.

3. Contributions to Big Business. Most products made by big businesses are sold to

consumers by small ones.

B. Popular Areas of Small-Business Enterprise

Major small-business industry groups include the following:

1. Services. This is the fastest-growing segment of small business at approximately 56%.

2. Retailing. Retailers, which sell products made by other firms directly to consumers,

4. Wholesaling. Wholesalers buy products in bulk from manufacturers and sell them to

retailers; wholesalers are the middlemen. About 5 percent of all firms are in this

category.

5. Finance and Insurance. These firms account for about 4 percent of all firms with fewer

6. Manufacturing. More than any other industry, manufacturing lends itself to big

business. Still, about 4 percent of firms with fewer than 20 employees are involved in

manufacturing and may outperform big firms in innovation-driven industries.

8. Other. The remaining 4 percent or so of small businesses with fewer than 20 employees

are in other areas, including research and development laboratories and independent

media companies.

KEY TEACHING TIP

 The definition of small business is different depending on whom you consult. The

textbook defines a small business as one that (a) is independent (not part of a larger

business) and (b) has little influence in its market. The U.S. Small Business

Administration defines companies with as many as 1,000 employees as “small,”

depending on industry, whereas the U.S. Department of Commerce considers a business

“small” if it has fewer than 500 employees.

QUICK QUESTION

 In what ways is entrepreneurship an important part of our economic system?

Use In-Class Activity 1: Ice-Breaker: The Role of Small Business

Time Limit: 15 minutes

Learning Objective 3-2:

Explain entrepreneurship and describe some key characteristics of entrepreneurial

personalities and activities.

Entrepreneurship

Entrepreneurs are people who assume the risk of business ownership. Entrepreneurship is the

process of seeking business opportunities under conditions of risk. Many entrepreneurs are

driven to launch new businesses by the goal of gaining independence from working for

somebody else and securing a financial future for themselves. Many such entrepreneurs,

however, may not aspire to grow the businesses much beyond their capacity to run them.

A. Entrepreneurial Characteristics

Successful entrepreneurs are often distinguished from others through a set of characteristics,

including:

1. Resourcefulness

2. A concern for customer relations

3. A desire for autonomy

KEY TEACHING TIPS

 Ask how many students want to launch a business. (Typically, one-third to one-half of

each class will raise their hands.) Call on these students to share their interests, including

type of business and timeframe. You can then use their personal goals to illustrate

concepts for each section you teach.

 Remind students that the goals of an entrepreneur can range from independence and

financial security to growth and expansion, even to transform the venture into a large

business.

QUICK QUESTIONS

 What are some local examples of businesses that fit into the following small-business

industry groups: services, retailing, manufacturing, and transportation?

 What are some common characteristics shared by all entrepreneurs?

Use In-Class Activity 2: Up for Debate: The Wide World of Risk

Time Limit: 30 minutes

Use In-Class Activity 3: Small-Group Discussion: Entrepreneurship and the Growth of

Businesses

Time Limit: 45 minutes

Learning Objective 3-3:

Describe the distinctive competence, business plan and the start-up decisions made by

small businesses and identify sources of financial aid available to such enterprises.

Starting and Operating a New Business

Entrepreneurs must make a number of decisions when they start their business. They must decide

whether to buy an existing business or to start one from scratch. In addition, they must determine

starting a small business is a well-crafted business plan.

A. Understanding Distinctive Competencies

An organization’s distinctive competencies are the aspects of business that the firm performs

better than its competitors. The distinctive competencies of small business usually fall into

three areas:

1. Identifying Niches in Established Markets: An established market is one in which

2. Identifying New Markets: Successful entrepreneurs excel at discovering whole new

3. First-Mover Advantages: A first-mover advantage is any advantage that comes to a firm

because it exploits an opportunity before any other firm does. The ability to move quickly

is key to taking advantage.

B. Crafting a Business Plan

A business plan summarizes business strategy for the new venture and shows how it will be

implemented.

1. Setting Goals and Objectives: A business plan should discuss the entrepreneur’s goals

2. Sales Forecasting: The sales forecast requires that the entrepreneur demonstrate an

understanding of the market, the strengths and weaknesses of existing firms, and the means

by which the new venture will compete. The sales forecast impacts many of the other

decisions regarding the business.

3. Financial Planning: This is the entrepreneur’s plan for turning all activities into dollars. It

C. Starting the Small Business

Small business owners begin by understanding the true nature of their businesses.

1. Buying an Existing Business: Existing businesses have already proven their ability to

2. Franchising: A franchise agreement involves two parties, a franchisee (the local owner)

and a franchiser (the parent company). Franchisees benefit from the parent corporation’s

experience and expertise. The franchiser may pick the store location, negotiate the lease,

purchase equipment, and supply financing. Franchisees invest in ready-made businesses

3. Starting from Scratch: Risks with this approach are greater than with buying an existing

business. However, starting from scratch does allow the entrepreneur the satisfaction to

grow an idea into a successful business. An entrepreneur must identify who and where the

customers are, how much customers will pay for the product, how much of the product

should be expected to sell, who the competitors are, and why customers will purchase this

product rather than the competitors’ products.

D. Financing the Small Business

Many sources for business financing are available. Personal resources account for more than

two-thirds of all money invested; smaller portions of funding come from banks, independent

investors, and government loans.

1. Venture capital companies are groups of investors seeking to profit on companies with

rapid growth potential; money is invested in return for partial ownership. Small business

investment companies are licensed to borrow money from the SBA and invest it in or loan

it to small businesses.

2. SBA Financial Programs: Under the SBA’s 7(a) loans program, small businesses may

Development Center (SBDC) program.

3. Other sources of financing include overseas financing and online companies that focus on

small businesses.

KEY TEACHING TIPS

 Make sure that students understand that, as a general rule, the more resources required,

the harder it is to start a new business.

 Remind students that the odds for success are greater when buying an existing business

than building one from scratch. An existing business provides a tested system, trained

employees, a recognized name, and established suppliers.

 Remind students that personal resources account for over two-thirds of all of the money

invested in new small businesses; half of that is used to purchase existing businesses.

QUICK QUESTIONS

 What is the purpose of a business plan?

 What are some of the advantages and disadvantages of franchising (to the franchisee)?

 Where can a person find money to start a new venture?

 What is the main reason that most venture capital companies invest in new businesses?

 What types of assistance can an entrepreneur expect from the Small Business

Administration?

Use In-Class Activity 4: Small-Group Discussion: What’s the Next Big Thing?

Time Limit: 45 minutes

HOMEWORK

Franchises

Now is a good time to assign Application Exercise 10 from the end-of-chapter materials in the

textbook. The assignment asks students to research a popular food industry franchise analyzing

the requirements to purchase as well as the up-front and ongoing cost.

At-Home Completion Time: 30 minutes

Learning Objective 3-4:

Discuss the trends in small business start-ups and identify the main reasons for success and

failure among small businesses.

Trends, Successes, and Failures in New Ventures

A. Trends in Small-Business Start-Ups

Several factors account for the thousands of new business start-ups in the United States each

year.

1. Emergence of E-Commerce: The rapid emergence of electronic commerce is the most

2. Crossovers from Big Business: Many businesses are started by individuals who leave

positions in large corporations to put their experience to work for themselves.

3. Opportunities for Minorities and Women: The number of businesses started by

minorities and women is growing rapidly.

4. Global Opportunities: Many entrepreneurs are finding business opportunities throughout

the world.

5. Better Survival Rates: New businesses now have a better chance of survival than ever

before; the SBA estimates that over half of all new businesses can expect to survive for

four years. One third make it for ten years or more.

B. Reasons for Failure

Four general factors contribute to small-business failure:

1. Managerial incompetence or inexperience

2. Neglect

C. Reasons for Success

Four general factors contribute to small-business success:

1. Hard work, drive, and dedication

2. Market demand for the products or services being provided

3. Managerial competence

4. Luck

KEY TEACHING TIPS

 Emphasize to students that electronic commerce is the most significant trend among

small-business start-ups. You might want to ask them for examples of recent successful

e-commerce start-ups, such as Facebook, Twitter, and SnapChat..

 Although starting a new business is risky, make sure you tell students that the small-

business failure rate has declined since the 1980s. The SBA estimates that one third of all

new start-ups now survive ten years.

QUICK QUESTION

What do people with big-business experience bring to a new venture?

Use In-Class Activity 5: Small-Group Discussion: How Can We Succeed in the Software

Industry?

Time Limit: 30 minutes

Learning Objective 3-5:

Explain sole proprietorships, partnerships, and cooperatives and discuss the advantages

and disadvantages of each.

Noncorporate Business Ownership

A. Sole Proprietorships

A sole proprietorship is owned and usually operated by one person; about 74 percent

of all U.S. businesses are sole proprietorships though they provide only 4 percent of total

business revenues.

1. Advantages of Sole Proprietorships: Freedom, ease in forming, low start-up costs, and

tax benefits are the advantages of this form of ownership.

2. Disadvantages of Sole Proprietorships: Unlimited liability, lack of continuity, and a

B. Partnerships

A general partnership, the most common type, is a sole proprietorship multiplied

1. Advantages of Partnerships: The ability to grow with the addition of new talent and

money, few legal requirements, and tax advantages are benefits of this form of ownership.

2. Disadvantages of Partnerships: Unlimited liability in that each partner may be liable for

the debts incurred in the name of the partnership, lack of continuity, and difficulty of

transferring ownership are the major drawbacks of this form of ownership.

3. Alternatives to General Partnerships: Because of the disadvantages of partnerships,

general partnerships are the least popular forms of business. Limited partnerships have

been formed to compensate for some of these disadvantages. This type of agreement allows

for limited partners who cannot share in a firm’s management and are liable only to the

limits of a partner’s investment. There is, however, a requirement that there is at least one

general partner who actively manages a firm and has unlimited liability for the debt.

Master Limited Partnerships is a form of ownership that sells shares to investors who are

repaid from the firm’s profits. The master partner retains at least 50 percent ownership and

runs the business.

C. Cooperatives

Cooperatives combine the freedom of sole proprietorships with the financial power

of corporations. These groups of sole proprietorships or partnerships agree to work

together for their common benefit. They give members greater production power, greater

marketing power, or both, though they are limited to serving the specific needs of their

members.

KEY TEACHING TIPS

 Make sure that students understand the different forms of business ownership. For

example, a sole proprietorship is owned and usually operated by one person; 74 percent

of all U.S. businesses are sole proprietorships.

 Students often forget that unlimited liability is a major drawback to a sole proprietorship

and a partnership. With unlimited liability, if the business fails to generate enough

money, bills must be paid out of the owner’s pocket.

 Remind students that a general partnership is a sole proprietorship multiplied by the

number of partner-owners.

QUICK QUESTIONS

 What are some of the advantages and disadvantages of sole proprietorships?

 What are some of the advantages and disadvantages of partnerships?

HOMEWORK

Interview a Sole Proprietor or General Partner

Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as

homework. The assignment asks students to interview the owner/manager of a sole

proprietorship or a general partnership and determine why the person chose that form of

ownership.

At-Home Completion Time: 60 minutes

Learning Objective 3-6:

Describe corporations, discuss their advantages and disadvantages, and identify different

kinds of corporations; explain the basic issues involved in managing a corporation and

discuss special issues related to corporate ownership.

Corporations

Both large and small corporations account for 17 percent of all businesses, but generate about 81

percent of all sales revenues in the United States.

A. The Corporate Entity

Characteristics of corporations include legal status as separate entities, property rights and

obligations, and indefinite life spans. Corporations may sue and be sued; buy, hold, and sell

property; make and sell products to customers; commit crimes, and be tried and punished for

them.

1. Advantages of Incorporation. These include limited liability, continuity, and the ability

to raise money.

2. Disadvantages of Incorporation. Ease of transferring ownership, legal requirements and

regulations, and start-up cost are drawbacks of incorporation. In addition, double taxation

plagues a corporation, because a regular corporation must pay income taxes on profits and

stockholders must pay taxes on income returned by their investments.

B. Types of Corporations

Stock is held by only a few people and is not available for sale to the public in a closely held

(or private) corporation. When shares are publicly issued, the firm becomes a publicly held

C. Managing a Corporation

Once the corporate entity comes into existence, it must be managed by people who

understand the principles of corporate governance. Defined by the firm’s bylaws, corporate

governance involves stockholders, the board of directors, and corporate officers.

1. Stock Ownership and Stockholders’ Rights. Stockholders are the owners of a

corporation. Corporations sell shares, called stock, to investors who then become

stockholders, or shareholders. Profits are distributed among stockholders in the form of

dividends, and corporate managers serve at stockholders’ discretion.

2. Board of Directors. The board of directors is the governing body of the corporation and

communicates with stockholders and other stakeholders, sets policies, and is legally

responsible for corporate actions.