Reading: Lesson 4 - Entrepreneurs and Proprietorships

5.4.1 - Entrepreneurs and Proprietorships

1. CHARACTERISTICS OF ENTREPRENEURS

1.  Many businesses start as entrepreneurial ventures. You learned earlier that an entrepreneur is a person who assumes the risk of starting, owning, and operating a business for the purpose of making a profit. Entrepreneurs expend months—or even years—putting forth an effort before they earn a profit. About half of all new businesses end within the first four to five years. Businesses often fail for financial reasons, but many closings of young firms occur because the owners are not well suited to manage an entrepreneurial venture. Some entrepreneurs who are eventually successful previously experienced unsuccessful business start-ups. They learn from their mistakes and start over.
   
2. Entrepreneurs must determine if they want to work for themselves as opposed to building a business working with others. Entrepreneurs who prefer self-employment enjoy the freedom and independence of decision making that comes with being their own boss and making their own management decisions. Entrepreneurs need a specific set of management skills. They must be self-starters who have plenty of energy and enjoy working on their own. They must be able to take charge of situations and work hard for long periods to meet their goals. Entrepreneurs are also creative thinkers, often coming up with new ideas and new ways to solve management problems. They must be able to create a plan for their business. In addition, most successful entrepreneurs are able to grow their businesses by managing people. As a result, they are often community leaders. You may have met some entrepreneurs at school, religious, charity, or business events.
   
3. Entrepreneurship is not just for business start-ups. Many managers in large companies realize that they must be innovative to compete against smaller, more nimble businesses. To keep their businesses on the cutting edge and to encourage their creative employees, some employers support intrapreneurs. An intrapreneur is an employee who is given funds and freedom to create a special unit or department within a large company to develop a new product, process, or service. Although the parent company finances the new venture, intrapreneurs enjoy the freedom of running their operations with little or no interference from upper managers.
   
4. Some of the largest corporations in the United States provide intrapreneurship opportunities. Major corporations such as 3M, General Electric, Google, and IBM have captured the entrepreneurial talents of employees. Employees benefit because they risk neither their salaries nor personal savings to launch a new business. Employers benefit by keeping creative employees who might have started successful competing businesses. Furthermore, employers and consumers benefit because new and better products, processes, and services are introduced at a quickened pace.
   
5. Intrapreneurs are often given greater freedom to manage than traditional workers or managers. These individuals must be able to drive change forward inside of a business. They must be able to plan and communicate their plan to others. They must organize the resources necessary to champion new ideas. And it is vital that they be able to work with others inside and outside of the business to reach the project goals.

2. PLANNING A BUSINESS

1. For business start-ups, the management planning process requires the preparation of a business plan. A business plan is a written document that describes the nature of the business, the goals and objectives, and how the goals and objectives will be achieved. The business plan for a new venture requires a great deal of careful thought. Investors—who may be family, friends, and bankers— evaluate business plans to ensure the entrepreneur is organized well enough to receive start-up funds. Investors will have greater assurance when they see an evaluation of potential problems and solutions. Too many entrepreneurs fail for one of three reasons: (1) they did not prepare a business plan, (2) their plan was unrealistic, or (3) they wrote the plan only because a lender, such as a bank, required it.
   
2. By developing a workable business plan, entrepreneurs become aware of their risks. As a result, they may be able to anticipate problems and take preventive action. The business plan also causes the aspiring business owner to become more realistic about the processes and responsibilities of ownership.
   
3. A business can have one of many ownership structures. Each of these structures has implications for both management decisions and management style. One of the very first management decisions a business owner must make is what legal form of ownership to adopt. The form of ownership selected depends on several considerations, such as the nature and size of the business, the capital needed, local tax laws, and the financial responsibility the owner is willing to assume. The three legal forms of business ownership are proprietorships, partnerships, and corporations. Proprietorships and partnerships share a common characteristic. They both place owners in the position to receive all of the profits, but at the same time, they take on all of the financial risks.
   

3. THE NATURE OF PROPRIETORSHIPS

1. The most common form of business organization is the proprietorship, of which there are over 23 million in the United States. A business owned and managed by one person is known as a proprietorship, or sole proprietorship, and the owner-manager is the proprietor. In addition to owning and managing the business, the proprietor often performs the day-to-day management tasks that make a business successful, with the help of hired employees. Under the proprietorship form of organization, the owner provides expertise, money, and management. For assuming these responsibilities, the owner is entitled to all profits earned by the business.
   
2. If no debts are owed, a proprietor has full claim to the assets, or property owned by the business. If the proprietor has business debts, however, creditors have first claim against the assets. A creditor is a person or business to which money is owed. The Figure below shows a simple financial statement for Jennifer York, who is the proprietor of a small retail grocery store and fruit market. 
   

   
   

3. This financial statement, known as a statement of financial position or balance sheet, indicates that the assets of the business are valued at $218,400. Because York has liabilities (money owed by a business) amounting to $14,400, the balance sheet shows her capital as $204,000 ($218,400 − $14,400). In accounting, the terms capital, net worth, and owner’s equity are interchangeable and are defined as assets less liabilities. If there are profits, York gets the total amount. She must also absorb losses. Because she owns the land and the building, she does not have to pay rent, although she must pay the cost of maintenance and taxes for the property. The fact that over 70 percent of all businesses in the United States are proprietorships indicates that this form of organization has definite advantages. As a potential sole proprietor you would need to evaluate the advantages and disadvantages below.
   

4. Self Management - There can be a great deal of pride and satisfaction in being one’s own boss and being responsible only to oneself. The proprietor can be inventive and creative in working out ideas to make the business a success. Proprietors must be able to manage their time and keep driving toward goals. Any profit earned belongs to the sole proprietor. As a result, the owner is more likely to work overtime and to think continually of how the business can operate more efficiently. At the same time, proprietors may not have all of the skills or expertise necessary to manage a business. To avoid failure, sole proprietors must also be willing to solicit advice from others.
   

5. Relationship Management - Because most proprietorships are small, the proprietor and the employees know one another personally. This relationship can lead to mutual understanding and a feeling of “family” as employer and employees work side by side in daily business activities. However, this can sometimes lead to difficult management decisions when the proprietor must determine solutions to problems such as who should receive raises or be promoted, or who may need to be laid off. Sole proprietors often develop close relationships with their customers as well.

6. Speed of Making Decisions - Sole proprietors can make rapid decisions with out consulting others. If a sudden opportunity to buy merchandise or equipment arises, or if the owner wishes to change the location of the business or to sell on credit terms rather than on a cash basis, there are no other business owners to consult before taking such action. Thus, the management of a proprietorship is flexible and can adjust rapidly to changing conditions. Funds, or capital, are needed both to operate and grow a business. Financial assistance on a large scale may be difficult to obtain by a single owner. Therefore, expansion of the business may be slowed because of the owner’s lack of capital.
   

7. Freedom from Red Tape - A sole proprietor can often begin or end business activities with a minimal level of formal documents; sole proprietorships can be organized without a lot of legal documents or government red tape. In some types of businesses, however, such as restaurants, it is necessary to obtain licenses before operations can begin. The continuing operation of a sole proprietorship depends on the longevity of the proprietor. If the owner becomes unable to work because of illness or dies, the business would have to close.
   

8. Liability - For most sole proprietorships, the income tax rates are lower than for the corporation form of business, which is explained later in the chapter. While they can keep all of the profits after taxes, sole proprietors assume a great deal of risk because they incur unlimited losses if the business fails. If the business fails and the owner is unable to pay the debts of the business, the creditors have a claim against the owner’s personal assets, not just the assets of the business. The sole proprietor may therefore lose not only the money invested in the business but also personal possessions, such as a car or home.
   

9. Businesses that are primarily concerned with providing services are well suited to the proprietorship form of organization. Dentists, accountants, landscape gardeners, carpenters, painters, barbers, beauty salons, website developers, and computer consultants are examples of businesses frequently organized as proprietorships.
   

10. Another type of business generally well suited to proprietorship is the kind that sells merchandise or services on a small scale. Newspaper and magazine stands, roadside markets, family restaurants, flower shops, gasoline stations, small grocery stores, delivery services, and many web-based businesses that sell crafts or gourmet foods are examples. In general, the type of business that can be operated suitably as a proprietorship is one that (1) is small enough to be managed by the proprietor or a few people hired by the proprietor and (2) does not require a large amount of capital.
    

11. Not all proprietors run full-time businesses. Many people run part-time businesses out of an office or their home. According to the IRS, more than 20 million individual taxpayers file a Schedule C form (tax form for businesses other than corporations). Up to a third of all proprietorship's are part-time.
    

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