BGMT 110 University of Maryland Global Campus Week 4 Entrepreneurial Self-Assessment Survey Essay

  

Description

Entrepreneurial Self-Assessment Survey
This is not a testl This survey is for your personal information.
Please answer each of the following questions as honestly as possible.
Strongly Agree
5
4
Somewhat Agree
3
2
Strongly Disagree
1
_____1. I am willing to work 50 hours or more per week regularly.
_____2. My family will support my going into business.
_____3. I am willing to accept both financial and career risks when necessary.
_____4. I don’t need all the fringe benefits provided by conventional employment.
_____5. I would like to take full responsibility for the successes and failures of my business.
_____6. I would experience more financial success by operating my own business.
_____7. I feel a great deal of pride when I complete a project successfully.
_____8. I have a high energy level that can be maintained over a long time.
_____9. I enjoy controlling my own work assignments & making all decisions affecting my work.
____10. I believe that I am primarily responsible for my own successes and failures.
____11. I have a strong desire to achieve positive results even when it requires a great deal of
additional effort.
____12. I have a good understanding of how to manage a business.
____13. I can function in ambiguous situations.
____14. One or both of my parents were entrepreneurs.
____15. I believe that my abilities and skills are greater than those of most of my coworkers.
____16. People trust me and consider me honest and reliable.
____17. I always try to complete every project I start, regardless of obstacles and difficulties.
____18. I am willing to do something even when other people laugh or belittle me for doing it.
____19. I can make decisions quickly.
____20. I have a good network of friends, professionals, and business acquaintances.
TOTAL:_____
Total the numbers you placed before the statements and enter the total in the space provided.
Characteristics of an Entrepreneur
The following list describes some common characteristics of an entrepreneur. The number(s) after each
characteristic indicates the related statement(s) in the assessment form. This list interprets the form qualitatively.
Note that arriving at a conclusive portrait of a typical entrepreneur is very difficult. Therefore, you may score low on
the assessment and still succeed as an entrepreneur.
Works Hard (Statements 1 & 8)
Self-employment requires a great deal of time and effort. The entrepreneur must perform a wide variety of
time-consuming tasks. 77% of all entrepreneurs report working 50 hours or more per week, and 54% say that they
work more than 60 hours per week. Such a time commitment requires that you have a high energy level.
Wants Financial Success (Statement 6) A primary reason that most entrepreneurs have for going into business is
to achieve financial success. If you want to be an entrepreneur, you need to establish a reasonable financial goal
that you want to achieve through self-employment. This goal will help you measure how well you are doing in
fulfilling your personal needs through an entrepreneurial career.
Has Family Support (Statement 2)
A successful entrepreneur needs family support. If you are married, your spouse must believe in your business
because it will require that both of you sacrifice time and money. The stress may create disruptions in family
relationships. If you have children, they will need encouragement in understanding your need to spend so much
time away from the family. The more positive support you receive from your family, the more you can concentrate
on making the business a success.
Is Energetic (Statements 1 & 8)
Self-employment requires long work hours. You will frequently be unable to control the number of hours required to
fulfill all the necessary tasks. The entrepreneur must have a high energy level to respond to the job’s demands.
Has an Internal “Locus of Control’, (Statement 10)
Successful entrepreneurs have an internal locus of control or inner sense of responsibility for the outcome of a
venture. To be an entrepreneur, you should have a strong sense of being a “victor” who is responsible for your
actions. If, however, you often consider yourself a “victim” and blame other people, bad luck, or difficult
circumstances for your failures, entrepreneurship might not be the right career move for you.
Takes Risks (Statement 3)
Entrepreneurs are risk takers. They risk their careers, time and money in order to make a success of their
businesses. To be successful in self-employment, you should feel comfortable taking reasonable risks.
Sacrifices Employment Benefits (Statement 4)
One of the major realities of self-employment is that you won’t receive a regular paycheck. You pay for your own
fringe benefits. A nice office, secretarial assistance, equipment and other features of employment you have grown
to expect are no longer available unless you provide them for yourself.
Has a Need to Achieve (Statements 7 & 11)
Entrepreneurs have a strong need for achievement. They strive to excel and accomplish objectives that are quite
high. You should be willing to set high goals for yourself and enjoy striving to achieve those goals.
Has Business Experience (Statement 12)
An entrepreneur should have extensive business experience to be successful. General management experience is
beneficial because an entrepreneur should know something about all types of management. Formal training and
education in management also are helpful
Is Independent (Statements 5 & 9)
Entrepreneurs like to be independent and in control of situations. Many people who become self- employed
consider the opportunity to be their own boss as one of the major benefits of self-.employment. Although being
independent may not be a major concern for you, it is certainly an aspect of self-employment that you need to feel
comfortable with. If you cannot afford to hire other employees when you begin your business, you may at first be
lonely as a self-employed person.
Has a Self-employed Parent as a Role Model (Statement 14)
Research has shown that entrepreneurs are more likely to have a parent who is self-employed. A parent’s
inspiration and knowledge about operating a business can contribute to an entrepreneur’s success.
Has Self-confidence (Statements 10,15, and 18)
An important characteristic of entrepreneurs is self-confidence. This factor is particularly important when you face
major challenges and difficulties with your business. You need to believe in yourself. Your belief will help you
overcome the problems that inevitably affect all self-employed persons at some point in their careers.
Has Integrity (Statement 16)
People often cite honesty and integrity as characteristics of entrepreneurs. Customers do not want to deal with
business owners who are dishonest and unethical. You should feel positive about your ethical treatment of people
and be committed to conducting your business with the utmost integrity.
Has Determination (Statement 17)
One of the most important characteristics of entrepreneurs is determination. This trait is closely related to
self-confidence. The more you believe in yourself, the more likely you are to continue to struggle for success when
faced with tremendous obstacles. You need determination in order to overcome the problems that beset every new
venture.
Adapts to Change (Statement 13 and 19)
A new business changes rapidly, so an entrepreneur must be able to adapt to change. Two primary skills are
required for adaptation to change: the capacity to solve problems, and the ability to make quick decisions. Another
skill is the ability to learn from your mistakes.
Has a Good Network of Professionals (Statement 20)
An entrepreneur has a good network of professionals. This network provides access to those who can be consulted
for advice, information, and referrals. You should have an extensive network of professionals to whom you can turn
for assistance.
Score
80 – 100
60 – 79
40 – 59
0 – 39
Assessment
You have outstanding ability to be an entrepreneur.
You have satisfactory ability to be an entrepreneur.
Self-employment may not be an appropriate career for you.
You should probably avoid entrepreneurship.
Learning Resource
Pros and Cons of Owning a Small Business
In this resource, you will explore the pros and cons of small business ownership and
evaluate more thoroughly whether starting a business is the right choice for you.
Advantages of Small Business Ownership
Independence
Entrepreneurs are their own bosses. They make the decisions. They choose whom to do
business with and what work they will do. They decide what hours to work, what to pay
themselves and their employees, and when to take vacations. For many entrepreneurs, the
freedom to control their destiny is enough to outweigh any potential risks.
Financial Gain
Entrepreneurship offers a greater potential of achieving significant financial rewards than
does being someone else’s employee. Many entrepreneurs are inspired by the megamillionaire entrepreneurs we see today, such as Elon Musk, Jeff Bezos, and Mark
Zuckerberg.
Control
Entrepreneurship enables one to be involved in the total operation of a business, from
concept to design to creation, from sales to business operations to customer response.
This ability to be totally immersed in a business is very satisfying to entrepreneurs, who
are typically driven by passion and creativity and possess a vision of what they want to
achieve. This level of involvement allows business owners to truly create something of
their own.
Prestige
Starting a business comes with the status of being the person in charge. Some
entrepreneurs are attracted to the idea of being the boss. Pride of ownership can also be
appealing. When someone asks, “Who did this?” the entrepreneur can answer, “I did.”
Equity
Being a successful entrepreneur gives an individual the opportunity to build equity, which
can be kept, sold, or passed on to the next generation. It’s not uncommon for
entrepreneurs to own multiple businesses throughout their lives. They establish a
company, run it for a while, and later sell it to someone else. The income from these sales
can then be used to finance the next venture. If a business owner is not interested in
selling, the goal may be to build something that can be passed down to children to help
ensure their financial future.
Opportunity
Entrepreneurship can create an opportunity for someone to contribute to society. While
most new entrepreneurs help the local economy, a few—through their innovations—
contribute to society on a larger scale.
The small businesses entrepreneurs launch have certain advantages over larger, more
established businesses. Flexibility, generally few employees, and the ability to develop
close relationships with customers are among the key benefits of running small
businesses. The digital communication revolution has significantly lowered the cost of
reaching customers, and this has been a boon to businesses of all sizes.
Disadvantages of Small Business Ownership
As a little boy said when he got off his first roller-coaster ride, “I like the ups, but not the
downs!” There are several drawbacks to owning a small business.
Time
When someone opens a small business, it’s likely, at least in the beginning, that itwill have
few employees. This leaves most of the duties and responsibilities to the owner. Small
business owners often report working more than 80 hours a week, handling everything
from purchasing to banking to advertising. This time commitment can place a strain on
family and friends, and this adds to the stress of launching a new business venture.
Risk
Even if the business has been structured to minimize risk and liability to the owner, risk
cannot be completely eliminated. For example, if an individual leaves a secure job to
follow an entrepreneurial dream and the business fails, this financial setback can be
difficult to overcome. Beyond financial risk, entrepreneurs need to consider the risk from
product liability, employee disagreements, and regulatory requirements.
Uncertainty
Even though the business may be successful at the start, external factors such as
downturns in the economy, new competitors entering the marketplace, or shifts in
consumer demand may stall the business’ growth. Even entrepreneurs who go through a
comprehensive planning process will never be able to anticipate all the potential changes
in the business environment.
Financial Commitment
Even the smallest business venture requires capital to start. For many people launching
small businesses, their initial source of funding is personal savings, investments, or
retirement funds. Committing personal assets to a business venture makes them
unavailable for personal or family needs. In most cases in which a small business receives
start-up funding through a loan, the entrepreneur must secure that loan by pledging
personal assets, such as a home. Risking equity based on the value of one’s own home is a
financial commitment not all entrepreneurs are willing to make.
In spite of these potential risks, most small business owners are pleased with their
decision to start a business. A survey conducted by the Wall Street Journal and Cicco and
Associates Inc. (n.d.) indicates that small business owners and top-level corporate
executives agree overwhelmingly that small business owners are more satisfied with their
work than their corporate executive counterparts.
Why Some Ventures Fail
The odds that entrepreneurs’ businesses will survive long-term are not high. According to
the US Small Business Administration, about half of all new establishments survive five
years or longer, and about one-third survive 10 years or longer. The probability of survival
increases with a firm’s age.
It’s essential to understand how and where things go wrong—such information can offer
valuable lessons on what to avoid. There are six main reasons an entrepreneur’s business
may fail.
Lack of Planning
Starting a business without planning where you want to go is like starting a car journey
with no idea of your final destination and no map; you’re bound to get lost. Before
starting out, entrepreneurs should have a clear understanding of what they want to
accomplish and how they plan to do so.
Failure to Delegate
Within every business, someone needs to focus on the bigger picture and have an
overview of everything happening both internally and externally to the company. That
person should be the company’s founder, but it may not be feasible for the founder to
have the time for all the accounts and to actually lead. Company heads should delegate
and outsource tasks that can be done by others to free themselves up to concentrate on
the bigger picture.
Unwillingness to Change
Small businesses can’t afford to stand still while the market and consumer trends
continually evolve. Entrepreneurs should construct their firms so they are forwardthinking and innovative, continually anticipating the future.
Forgetting That Cash Is King
A small business needs to monitor its cash flow closely. As soon as it loses track of the
money, it’s vulnerable to failure. Entrepreneurs should plot and analyze their accounts
payable and receivable to ensure their small businesses stay on the right financial track.
New companies should not expect massive profits from the outset, but they should not
accept losses, either.
Lack of Objective Targets
Failing to gauge the success of campaigns, products, or services can be disastrous for a
small business. Is a company’s PR campaign really worth the investment? Does Twitter
really direct traffic to the company’s website? If company heads know what to measure—
and they do it well—they’ll know how successful they are.
Failure to Ask the Right Questions
It’s difficult for a small business start-up to know which questions to ask (and to whom).
There are numerous resources, including the US Small Business Administration, local
economic development agencies, and chambers of commerce, which are great places to
start. For entrepreneurs just starting out, a big part of the process is figuring out what
they don’t know, and there are organizations that can help them do that.
While avoiding these pitfalls won’t guarantee entrepreneurial success, knowing what not
to do can help new business leaders be proactive and focus on the most important things.
Important Considerations
The entrepreneur’s challenge is to balance decisiveness with caution—to be capable of
seizing an opportunity, but also well-informed enough not to assume unnecessary risk.
Preparatory work includes evaluating market opportunities, developing products or
services, preparing detailed business plans, determining how much capital is needed, and
making arrangements to obtain that capital.
Economists have analyzed a range of entrepreneurial successes and failures and identified
key issues that up-and-coming business owners should consider carefully before
launching a new enterprise. Taking these issues into account can reduce risk; ignoring
them can contribute to failure. If you’re considering entrepreneurship, think about the
answers to the following questions:
What is your incentive for starting a business? Is it profit alone? Are you prepared to
spend the time and money necessary to get your business started?
Many entrepreneurs do acquire great wealth. But money is almost always tight
in the early phases of a new business. Many entrepreneurs don’t even take a
salary until they can do so and still leave the firm with a positive cash flow.
Will the products or services your business will provide differentiate your company
from others in the market? Who is your ideal customer? Who is your competition?
Do you plan to compete solely based on price?
Price is important, but most economists agree that it’s very risky to compete
on price alone. Large firms that produce huge quantities of consumer items
have the advantage of being able to lower costs.
How much will it cost to get your business off the ground? Do you have a realistic
vision of your enterprise’s potential? Will you need a loan? How long will it take to
make your product or service available? How long will it take to start making a
profit?
Insufficient operating funds are the cause of many business failures.
Entrepreneurs often underestimate their start-up costs and overestimate their
sales revenues when creating their business plans. Some analysts advise
entrepreneurs in the planning stages to add 50 percent to their final cost
estimates and to reduce their sales projections. Would-be entrepreneurs need
to closely examine their cash-flow projections to make informed decisions
about whether to launch a new business.
Other Key Decisions and Planning
Entrepreneurs should take advantage of all of the informed advice they can get. Experts
can help with many decisions regarding financing, taxes, insurance, location analysis, and
supplier relationships. Some bankers and insurance agents will give advice at no charge to
encourage a relationship. There are even experts to help with planning itself.
Ultimately, the business approach an entrepreneur adopts will be based on personal,
informed judgment. Those with the best prospects for success will gather as much
information and advice as possible before making crucial business decisions.
Ten Steps to Starting a Business
This resource describes best practices for launching a small business. The details,
agencies, and contacts necessary to become an entrepreneur will vary from state to state,
so additional research may be required for different circumstances. But the steps detailed
here generally apply to most new businesses.
Starting a business involves planning, making key financial decisions, and satisfying a set
of legal requirements. These ten steps can help you plan, prepare, and manage your new
business.
Step 1: Write a Business Plan
A business plan generally contains the following elements:
executive summary
company description
market analysis
organization and management
service or product line
marketing and sales
funding request
financial projections
appendix
Step 2: Get Business Assistance and Training
Take advantage of any free training and counseling services that are available in your
community, on topics ranging from preparing a business plan to securing financing to
expanding or relocating a business.
Step 3: Choose a Business Location
Get advice on how to select a customer-friendly location and comply with zoning laws.
Choosing a business location is perhaps the most important decision a small business
owner will make, so it requires precise planning and research. Potential entrepreneurs
should evaluate their demographics, assess supply chains, scope the competition,
determine how to stay on budget, learn state laws and tax requirements, and much more.
Here are some tips to help you choose the right business location:
Determine Your Needs
Most entrepreneurs choose a location that provides the most exposure to potential
customers. There are additional, less obvious factors to consider.
Brand image. Is the location consistent with the image you want to project?
Competition. Are the businesses around you complementary or competitive?
Local labor market. Do potential employees live near the business? What will their
commute be?
Plan for growth. If you anticipate growing your business, look for a building that has
extra space should you choose to expand.
Proximity to suppliers. They need to be able to find you easily.
Safety. Consider the area’s crime rate. Will employees feel safe alone in the building
or walking to their vehicles?
Zoning regulations. These determine whether you can conduct your type of business
in certain properties or locations. You can determine how property is zoned by
contacting your local planning agency.
Evaluate Your Finances
Besides determining what you can afford, you will need to be aware of other financial
considerations:
Hidden costs. Very few spaces are ready for a business, let alone the specifics of
yours. Include in your calculations the costs of renovation, decorating, IT system
upgrades, and so on.
Taxes. What are the income and sales tax rates for your state? What about property
taxes? Could you pay less in taxes by locating your business across a nearby state
line?
Minimum wage. Many states have a higher minimum wage than the federal one.
Research the US Department of Labor’s list of minimum wage rates by state.
Government economic incentives. Your business location can determine whether
you qualify for government economic business programs such as state-specific small
business loans and other financial incentives.
Is the Area Business-Friendly?
Understanding the laws and regulations imposed on businesses in a particular location is
essential. As you grow your business, it can be advantageous to work with a small
business specialist or counselor. Research the programs and support your state
government and local community may offer small business owners. Many states offer
online tools to help start-up businesses succeed. Local community resources such as SBA
offices, small business development centers, women’s business centers, and other
government-funded programs are specifically designed to meet the needs of small
businesses.
The Bottom Line
Do your research. Talk to other business owners and potential co-tenants. Consult the
small business community and use available resources, such as free government-provided
demographic data, to help you make informed decisions.
Step 4: Finance Your Business
The SBA offers a variety of loan programs for very specific purposes. Take time to study
the programs described on this SBA website (https://www.sba.gov/fundingprograms/loans)
loans.
to learn more about which types of businesses qualify for different
Step 5: Determine the Legal Structure of Your Business
Decide which form of business ownership is best for you: sole proprietorship, partnership,
limited liability company (LLC), corporation, S corporation, benefit corporation, nonprofit,
or cooperative.
Determine Your Federal Tax Obligations
Your form of business determines which taxes you must pay and how you must pay them.
Most businesses must file annual income tax returns, pay quarterly estimated taxes, and
collect and pay employment taxes for owners and employees.
The IRS details here (https://www.irs.gov/businesses/small-businesses-selfemployed/business-taxes#self)
structures.
the specific tax requirements for different business
State Income Taxes
Nearly every state levies a business or corporate income tax. Like federal taxes, your state
tax requirement depends on the legal structure of your business. For example, if your
business is an LLC, the LLC is taxed separately from the owners of the business, while sole
proprietors report their personal and business income on the same form.
Consult the SBA website to determine specific state tax obligations
(https://www.sba.gov/business-guide/manage-your-business/pay-taxes#section-header3)
.
Step 6: Register a Business Name (“Doing Business As”)
Register your business name with your state government. Naming your business is an
important branding exercise, but if you choose to name your business as anything other
than your own personal name, then you’ll need to register it with the appropriate
authorities. This process is known as registering your “Doing Business As” (DBA) name.
Step 7: Get a Tax Identification Number
Learn which tax identification number you’ll need to obtain from the IRS and your state
revenue agency. An Employer Identification Number (EIN) is also known as a Federal Tax
Identification Number, and it is used to identify business entities. Generally, businesses
need an EIN. You may apply for one in various ways, including online.
The IRS has more information about EINs here (https://www.irs.gov/businesses/smallbusinesses-self-employed/employer-id-numbers) .
Step 8: Register for State and Local Taxes
Register with your state to obtain a state tax identification number, workers’
compensation, unemployment, and disability insurance. An accountant or lawyer can
explain your state’s requirements for filing various forms for tax purposes.
Step 9: Obtain Business Licenses and Permits
Obtain a list of the federal, state, and local licenses and permits required for your
business.
Federal Licenses and Permits
If your company is involved in activities supervised and regulated by a federal agency (e.g.,
alcohol, firearms, commercial fishing) you may need a federal license or permit to do
business. For example, if your business broadcasts information by radio, television, wire,
satellite, or cable, you may be required to obtain a license from the Federal
Communications Commission. Or if you import or transport animals, animal products,
biologics, biotechnology, or plants across state lines, you’ll need to apply for a permit from
the US Department of Agriculture (USDA).
Visit the SBA’s website (https://www.sba.gov/business-guide/launch-yourbusiness/apply-licenses-and-permits)
for more information on licenses and permits.
State Licenses and Permits
In addition to federal licenses and permits, virtually every business needs some form of
state license to operate legally. Requirements vary depending on the type of business you
operate, where it’s located, and what government rules apply.
To help you identify the specific state licenses or permits (https://www.sba.gov/businessguide/launch-your-business/apply-licenses-and-permits)
your business may need, visit
the State Business License Office for the area in which your business is located.
Step 10: Understand Employer Responsibilities
Learn how to hire employees legally by consulting with an accountant and lawyer to get
expert advice on employee law. Many organizations such as SCORE
(https://www.score.org/?gclid=CPD99_K9zNACFQ5Efgod7SMO_A)
offer free advice
on your responsibilities as an employer. The steps below cover the actions you must take
during the hiring process to ensure you are compliant with key federal and state
regulations.
Set up records for withholding taxes.
Obtain employee eligibility verification.
Register with your state’s new-hire reporting program.
Obtain workers’ compensation insurance.
Post required notices.
File your taxes.
Get organized and keep yourself informed.
In addition to requirements to retain employee payroll records for tax purposes, certain
federal employment laws also require you to keep additional employee records.
Complying with employee protection measures such as equal opportunity and fair labor
standards is also essential, along with statutes and regulations for minimum wage,
overtime, and child labor.
See the US Department of Labor’s Employment Law Guide
(http://webapps.dol.gov/elaws/elg/)
for information on these statutes and regulations.
Create Your Business Plan
In many ways, a business plan is a map that depicts what you will sell and to whom, how
you will run your business, who you will rely on, and where you will be located. In this
resource, you’ll learn how the components of a well-crafted, solid business plan can help
entrepreneurs successfully launch a business and accomplish their goals.
The steps are described in the order in which they would appear in an actual business
plan.
Executive Summary
This section is often considered the most important part of a business plan. It describes
what your business does, where you want to take it, and why your idea will be successful.
If you are seeking financing, the executive summary is your first opportunity to pique a
potential investor’s interest.
Since the executive summary highlights the biggest strengths of your overall plan, write it
after all your other sections are complete.
Based on your business’ maturity, there are some key points you should include in this
section.
If You Have an Established Business
If you are an established business, include the following information:
The mission statement. This summarizes the purpose of your business; it should be
between several sentences and a paragraph long.
Company information. This is a short statement that details when your business was
formed, the names of the founders and their roles, the number of employees, and
your business location(s).
Growth highlights. Include examples that illustrate the growth of your company,
such as financial or market highlights (e.g., “XYZ firm increased profit margins and
market share year-over-year since its founding”). Graphs and charts can be helpful in
this section.
Your products/services. Briefly describe the products or services you provide.
Financial information. If you are seeking financing, include any information about
your current bank and investors.
Summary of future plans. Explain where you would like to take your business.
With the exception of the mission statement, all the information in the executive
summary should be kept as concise as possible, and the document should not run longer
than one page. The executive summary is the first section of your business plan most
people will see, so make each word count.
If You Have a Start-Up or New Business
If you are just starting a business, you won’t have as much information as an established
company. Focus instead on your experience and background and the decisions that led
you to start this particular enterprise. Demonstrate that you have done a thorough market
analysis to prove the viability of your idea. Convince your reader that you can succeed in
your target market and then address your longer-term plans.
Company Description
Provide a high-level overview of the elements of your company that will make it
succeed. The goal is to help potential investors quickly understand the goal of your
business and its unique proposition. Your company description should do the
following: Describe the nature of your business and list the marketplace needs you
aim to address.
Explain how your products and services meet those needs.
List the specific consumers, organizations, and businesses that your company will
serve.
Describe the competitive advantages that will make your business a success, such as
your location, expert personnel, efficient operations, or ability to bring unique value
to your customers.
Market Analysis
Use this section to illustrate your industry and market knowledge as well as any of your
relevant research findings and conclusions.
What to Include in Your Market Analysis
Industry description and outlook: Describe your industry, its current size, historic
growth rate, and other relevant trends and characteristics (e.g., life cycle stage,
projected growth rate). List the major customer groups within your industry.
Information about your target market: Describe your target market and explain why
it would want to buy from you. Narrow your market to a manageable size; trying to
appeal to too many people can make it appear you are overreaching. Provide your
research, including the following information about the market you will target:
Distinguishing characteristics. What are the critical needs of your potential
customers? Are they being met? What are the demographics of the group, and
where are they located? Are there any seasonal or cyclical purchasing trends
that may affect your business operations?
Size. Provide data about the annual purchases your market makes in your
industry. What is the forecasted market growth for this group?
Market share. What amount of market share and number of customers do you
expect to gain in your defined geographic area? Describe how you came up with
these numbers.
Pricing and gross margin targets. Define your pricing structure, gross margin levels,
and any discounts you plan to offer.
Competitive analysis. Explain what customer needs are being ignored by your
competitors. Creating a niche for your business is essential. Your competitive
analysis should identify your competition by product line or service and market
segment. Assess the characteristics of the competitive landscape (e.g., market share,
strengths and weaknesses, barriers to market entry, etc.). Show potential investors
that you can strategize in your chosen market and you don’t intend to try to become
a jack-of-all-trades.
Regulatory restrictions. Include any customer or governmental regulatory
requirements that will affect your business and how you will comply with them.
Organization and Management
Who will do what in your company? What are their backgrounds, and why are you
bringing them into your company? What will they be responsible for? Potential investors
want to know who the decision makers will be, so provide detailed descriptions of each
division or department and its function. Include your company’s organizational structure,
details about company ownership, profiles of your management team, and the
qualifications of your board of directors.
Service or Product Line
Describe your service or product, emphasizing the benefits to potential and current
customers. Explain how your particular product will fill a need for your target
market. This section should include the following: A description of your
product/service. Detail the specific benefits of your product or service from your
customer’s perspective. Discuss your ability to meet consumer needs and emphasize
any advantages your product may have over that of the competition. Address the
current development stage your product (e.g., idea, prototype, testing) is in.
Details about your product’s life cycle. Include information about where your
product or service is in its life cycle as well as any factors that may influence its
cycle in the future.
Intellectual property. If you have any existing, pending, or anticipated copyright or
patent filings, list them here. Also disclose whether any key aspects of a product
may be classified as trade secrets. Finally, include any information pertaining to
existing legal agreements, such as nondisclosure or non-compete agreements.
Research and development (R&D) activities. Outline any R&D activities you are
planning or currently engaged in. What results do you anticipate? Also address the
R&D activities of other businesses in your industry.
Marketing and Sales
Marketing is the process of creating customers, and customers are the lifeblood of your
business. Use this section to comprehensively define your marketing strategy and then
your sales strategy. This includes describing how you plan to actually sell your product.
Funding Request
If you are seeking funding for your venture, use this section to outline your needs,
including
your current funding requirements;
any anticipated funding requirements during the next five years;
how you intend to use the funds you receive; and
any future strategic financial situational plans, such as buyouts, debt repayment
plans, or selling your company.
When outlining your funding requirements, include the amount you want now and the
amount you anticipate needing in the future. Also include the time period that each
request will cover, the type of funding you are requesting (e.g., equity, debt), and the
terms you prefer. Is the funding request for capital expenditures? Working capital? Debt
retirement? Acquisitions? Whatever it is, include it in this section.
Financial Projections
This section should include the critical financial statements that will make your business
as financially transparent as possible. Develop this section after analyzing your market and
setting clear objectives. This will allow you to allocate your resources efficiently.
Historical Financial Data
If you own an established business, supply historical data related to your company’s
performance. Most creditors request such data from the past three to five years,
depending on the length of time you have been in business. Typical financial documents
to include are your company’s income statements, balance sheets, and cash flow
statements for each year you have been in business. Often, creditors are also interested in
any collateral you may have that could be used to ensure your loan, regardless of the
stage of your business.
Prospective Financial Data
All businesses, whether starting up or expanding, will be required by their creditors to
supply prospective financial data. Most of the time, creditors will want to know what you
expect your company to be able to earn within the next five years. Each year’s documents
should include forecasted income statements, balance sheets, cash flow statements, and
capital expenditure budgets. Make sure that your projections match your funding
requests; creditors will be on the lookout for inconsistencies.
Appendix
Your appendix should not be included in the main body of your business plan; provide it
on an as-needed basis. This section may contain your credit history, résumés of company
leaders, letters of reference, and any other information a lender may request. Specific
creditors may require this information to make lending decisions, so it’s important to be
able to provide it upon request.
Any copies of your business plan should be controlled; keep a distribution record of who
you share it with. This will allow you to update and maintain it on an as-needed basis.
Putting It Together: Entrepreneurship
We began this module by considering the contributions of entrepreneurs not only to the
economy, but also to our daily lives. Think for a moment about how far entrepreneurs
have taken us, our economy, and the world. For example, from two brothers who owned a
bicycle shop in Dayton, Ohio inventing the airplane to goals of space tourism
(https://youtu.be/b2xYwVOJB-U)
The Wright Brothers
Small Business
.
Small businesses and entrepreneurs fuel the economic engine of the US. Without them,
financial growth and recovery from cyclical downturns would be impossible. Small
businesses make valuable contributions to the larger economy by creating jobs and
providing opportunities for individuals to achieve financial success and independence.
Large businesses depend upon their smaller counterparts for support by purchasing their
component parts, services, and product distribution.
Entrepreneurs
Entrepreneurs are creative, risk-taking, determined individuals who, even after suffering
setbacks, refuse to give up on their dreams and business aspirations.
Advantages, Disadvantages, and Considerations
There are both advantages and disadvantages to small business ownership. Individuals
must weigh the pros and cons to decide whether it is the right path for them. Time,
lifestyle, finances, stress, and independence are just a few of the factors involved in
making that decision. We would like to think that every business venture will be as
successful as Apple or Starbucks, but the fact is that many start-ups don’t make it.
Knowing why businesses fail is key to effective planning and avoiding common pitfalls. If
you know where the land mines are, you can work your way around them to get to the
other side of the field.
Steps to Starting a Business
There’s a series of procedures and steps that every business owner must go through to
establish their business. Additional steps depend on the nature of the business and its
location.
Business Plans
A good, comprehensive, well-researched business plan can be an invaluable roadmap to
business success. The components should cover everything from financial projections to
physical location to products and services. Having a complete and thorough plan is
essential to the success of any business venture—small or large. Remember, businesses
never plan to fail, but they do fail to plan.
References
Cicco and Associates Inc. (n.d.). Type E personality—Happy days—Entrepreneurs top
satisfaction survey. Retrieved from http://entrepreneuronline.com/mag/article/0,1539,226838%E2%80%93-3-,00.html
Licenses and Attributions
Chapter 8: Entrepreneurship (https://courses.lumenlearning.com/wmopenintrobusiness/chapter/why-it-matters-8/)
by Linda Williams and Lumen Learning from
Introduction to Business is available under a Creative Commons Attribution 4.0
International (http://creativecommons.org/licenses/by/4.0/)
license. UMGC has
modified this work and it is available under the original license.
© 2021 University of Maryland Global Campus
All links to external sites were verified at the time of publication. UMGC is not responsible for the validity or integrity
of information located at external sites.
Learning Resource
Entrepreneurs
Entrepreneurs are the fuel that drives small businesses and, in turn, much of the US and
the world’s economies. In this resource you’ll learn how their creativity and willingness to
take risks have generated jobs, personal wealth, and national economic prosperity.
What Is an Entrepreneur?
Entrepreneurs typically originate new ideas, services, and processes. They identify unmet
market needs and the corresponding business opportunities that will meet those needs.
Their willingness to take risks makes them more likely to exploit the opportunities they
find. Entrepreneurs head up their own businesses and oversee their operations, assuming
all of the risks and rewards that may result from the venture, idea, or service they have
created.
In this video (https://youtu.be/R8TTzUo8DwI) , you’ll see the example of David Fox, a
school teacher who travels to toy fairs pitching his ideas in hopes of landing a deal that
will turn his big dreams into reality.
Types of Entrepreneurs
No two entrepreneurs are alike. Anyone with an entrepreneurial spirit who is willing to go
out on a limb and assume the risk of starting a new business has unique reasons for doing
so. That said, it is possible to generally classify entrepreneurs into the following broad
categories: lifestyle entrepreneurs, social entrepreneurs, and serial entrepreneurs.
The Lifestyle Entrepreneur
Lifestyle entrepreneurs create or modify businesses to better their own lifestyles rather
than to pursue profit. The entrepreneur’s own life—rather than the business—is the
venture. These individuals want to lead fulfilling lives by cultivating their passions for their
chosen activities. Unlike other entrepreneurs, who create businesses in pursuit of financial
gain, lifestyle entrepreneurs put their passions before profits by attempting to integrate
their personal interests into their businesses.
Consider an attorney who puts in 80 hours of work a week for a multinational corporation
and thus has little time for anything else. If this person is a lifestyle entrepreneur, the
individual may choose to leave the corporate world behind to establish a small law
practice in a rural town, enabling a more flexible schedule that allows time for family,
friends, and other interests.
The Social Entrepreneur
Social entrepreneurs act as agents of change for society by building companies that solve
problems, hire people in need, or both. Celebrity chef Jamie Oliver is a good example of a
social entrepreneur. In 2002, Oliver launched his company, Fifteen Cornwall, to give
disadvantaged youths (ages 16–24) a means to create better futures for themselves by
offering them culinary training and experience. The restaurant initiative was named for
the 15 young people who originally entered apprenticeships under Oliver’s program. The
program and restaurant closed in 2019.
The Serial Entrepreneur
A serial entrepreneur continually generates new ideas and launches new businesses with
them. In contrast to an entrepreneur who takes an idea, turns it into a business, and then
remains involved in the day-to-day operations over the long term, a serial entrepreneur is
primarily interested in the initial creative stages of inventing and then launching an idea,
leaving it to someone else to run. Then the serial entrepreneur moves onto the next big
thing.
One of the most famous serial entrepreneurs of our time is Elon Musk. He is the founder,
CEO, and CTO of SpaceX; cofounder of Tesla Motors; cofounder and chairman of
SolarCity; cochairman of OpenAI; cofounder of Zip2; and founder of X.com, which has
merged with PayPal. In addition to his current business pursuits, Musk envisions a highspeed transportation system known as the Hyperloop, and he has proposed a supersonic
jet aircraft with electric-fan propulsion.
Musk perceives his business ventures—most notably SolarCity, Tesla Motors, and SpaceX
—as supporting his view of a transformed way of life for humanity, and his ultimate goal is
to enable the possibility of sustaining human life on Mars. As of 2018, Musk had a net
worth of $21B.
Traits of an Entrepreneur
Despite their differences, entrepreneurs have some traits in common:
Creativity. Conceptualizing an idea for a product or concept that doesn’t exist is
essential to being an entrepreneur, and it takes exceptional creativity to do that.
Some entrepreneurs identify problems and then invent a means for solving them.
Other times they wait for technology to catch up with their creative vision. This was
the case for movie director James Cameron, who said he postponed creating his
blockbuster film Avatar until the technology he needed to make the movie became
available. Other entrepreneurs have taken something that already exists and created
a new use or new market for it. One example of the latter is Art Fry, who came up
with a very practical and popular use for an otherwise failed product.
Art Fry and the Post It Note
Art Fry
In 1968, a scientist working at 3M inadvertently developed a new type of adhesive
while trying to develop a very different product. A use for the reusable, pressuresensitive adhesive created by accident eluded scientists at 3M, and its inventor
didn’t know how to promote it. Then, Art Fry, another 3M employee, heard about it
and came up with the idea of using the adhesive to anchor his bookmark to his
book. Fry developed his idea of a self-adhesive, reusable notepad using the yellow
scrap paper in his lab, and the now-ubiquitous Post-it note was born.
Risk tolerance. Successful entrepreneurs tolerate risk and accept that it is a
necessary part of any business venture—no matter how well-conceived or planned.
Failure is not uncommon among start-up businesses.
Persistence and resilience. Businesses take time to grow; very few are profitable
right away. They often encounter setbacks and failures along the way. Successful
entrepreneurs persevere through unexpected challenges and bounce back despite
adversity. Some of the most famous and accomplished entrepreneurs experienced
significant initial failures. For example, Walt Disney’s first animation company went
bankrupt, and he was reportedly turned down hundreds of times when trying to
secure financing for Disney World.
Flexibility. Even the most well-planned business will encounter unexpected
developments and challenges. There will inevitably be changes in the market,
technology, and customer tastes that are beyond any entrepreneur’s expectations.
Responding quickly to unexpected changes can be key to a business’s survival. For
example, when Netflix launched, the company offered a subscription-based DVD
home-delivery service. But in a short time, technology and consumer behavior
changed: DVD use was declining and digital on-demand viewing was growing.
Netflix adapted by expanding its offerings to include online options. Thanks to the
flexibility of Netflix’s entrepreneurs, the company is now a leader in video
entertainment, while video rental companies like Blockbuster have shut their doors.
Passion. When successful entrepreneurs are asked how they tolerate taking
significant risks regarding the uncertainty, demands, and setbacks of launching a
business, many say a driving passion behind their ideas helps. Like persistence and
resilience, passion can help fuel an entrepreneur through good times and bad, and it
can be a key ingredient in the success of any start-up.
Why People Choose to Become Entrepreneurs
What inspires people to strike out on their own and start a business? Perhaps they have
been laid off one or more times. Perhaps they are frustrated with their current jobs and
don’t see any better career prospects on the horizon. Sometimes they realize their jobs
are in jeopardy; an employer may be contemplating cutbacks that could eliminate some
positions or limit career or salary prospects. Perhaps they have already been passed over
for promotion, or there are no opportunities that speak to a set of interests and skills.
Others become entrepreneurs because they are disillusioned by the bureaucracy or
politics involved in getting ahead in an established business or profession. Or they are
tired of promoting the product, service, or way of doing business that they are working to
support.
And some are actually repulsed by the idea of working for someone else. They object to
systems in which reward is often based on seniority rather than accomplishment, or
where they have to conform to a specific corporate culture. They may be born
entrepreneurs.
The following is an excerpt from an interview with small business owner Julia Scheer who
talks about her lifelong desire to own her own business, long before she opened Puzzles,
Pranks & Games in Kitty Hawk, NC:
I don’t think I ever considered not owning my own business. My father was an
entrepreneur and built his business from a hole in the wall to a very successful multilocation business just a block from the White House on Pennsylvania Avenue in
Washington, DC. The whole family was involved in the business in some way. My
mother did all the bookkeeping, my father ran the business, and when I was old
enough to get a job, I went to work for him. It wasn’t always easy for the family. We
didn’t take vacations like everybody else, sometimes we didn’t have as much money
as everybody else, and some of my friends didn’t understand why my father didn’t
have a “real job.” But, I believe that entrepreneurship can be an inherited trait. My
great-grandfather was a clockmaker in Germany, my grandfather owned a jewelry
store in Richmond, Virginia, my father had his business, my sister owned her own
business, and now here I am running my own business. For me and my family,
entrepreneurship is like breathing. (Holden, n.d.)
No one reason is more valid than another, and none guarantees success. But a strong
desire and commitment to start a business, combined with a good idea, careful planning,
and hard work, can lead to a very engaging and profitable endeavor.
This video (https://youtu.be/jrOXnWs8km0)
is an example of the entrepreneurial spirit
in action.
References
Holden, J. (n.d.) Why People Choose to Become Entrepreneurs. Retrieved from
http://iipdigital.usembassy.gov/st/english/publication/2008/06/2008060321232
4eaifas0.1164362.html#ixzz4Q5OAnyh4
Licenses and Attributions
Chapter 8: Entrepreneurship (https://courses.lumenlearning.com/wmopenintrobusiness/chapter/why-it-matters-8/)
by Linda Williams and Lumen Learning from
Introduction to Business is available under a Creative Commons Attribution 4.0
International (http://creativecommons.org/licenses/by/4.0/)
license. UMGC has
modified this work and it is available under the original license.
© 2021 University of Maryland Global Campus
All links to external sites were verified at the time of publication. UMGC is not responsible for the validity or integrity
of information located at external sites.
Learning Resource
Which Organizational Type Is Right for You?
The organizational type you select for your business—sometimes called a legal structure—
can significantly affect your taxes and income. In this resource, you’ll learn about the key
factors that business owners should consider when choosing which organizational type is
right for them.
Important Considerations
One of the first and most important decisions a business owner makes is selecting an
organizational form. The following are some common organizational types:
Sole proprietorship
General partnership
Franchise
Limited partnerships and limited liability partnerships (LP & LLP)
Limited liability company (LLC)
C corporation
S corporation
Each form of ownership has advantages, disadvantages, risks, and rewards that can
determine a business’s chances for long-term success. The following considerations are
important when selecting a form of ownership:
Costs of a Start-Up
Establishing a business can require as little as printing up some business cards or as much
as hiring a corporate attorney to draft charters, agreements, and articles of incorporation.
As the form of business ownership becomes more complex, the associated costs increase.
Each business owner must decide how much time and money to invest before getting the
business up and running.
Control vs. Responsibility
One of the primary reasons people give for wanting to start their own business is to be
independent and their “own boss.” Different legal structures provide business owners with
more or less control and authority over their enterprises. There are trade-offs in each
case. For example, if you’re the sole proprietor of a business with no employees, you
retain all control, but you also assume all the work and responsibility. Other forms of
business (such as partnerships) may require relinquishing some control, but in return, the
responsibility (and liability) may be spread among several principals.
Profits: To Share or Not to Share
Many first-time business owners look to people like Bill Gates, Oprah Winfrey, or Ben &
Jerry and aspire to their level of wealth and success. How a business’s profits are shared
(or not shared) is determined by its legal structure. Some owners are willing to share their
profits in exchange for assistance and support in establishing and running their business.
Other business owners make the conscious decision to limit the scope and nature of their
business to avoid having to bring in others, thereby retaining all of the income themselves.
Taxation
When planning to launch a new business, many people instinctively seek the advice of an
attorney as their first step. However, legal advice is not necessary in the initial planning
stages. Regardless of how large or small your business is going to be, it’s much more
important to first get the advice of a seasoned tax professional such as a certified public
accountant (CPA).
Each form of business ownership is treated differently by the IRS and state and local
taxing authorities. Depending on the legal structure of a business, the owner may be
taxed at a lower rate than someone working for a large company, or the owner might see
business income taxed twice, sometimes with additional specialty taxes imposed by
government agencies. Business owners need to decide how heavy a tax burden they are
willing to bear is during planning —not on Tax Day.
Entrepreneurial Ability
At some point you’ve probably known people with a particular knack for doing something
(like fixing cars or baking bread) and advised them to start a business. But if you are a
talented cake decorator, does that mean you also have the requisite knowledge, skills, and
abilities to open and run a successful commercial or retail bakery? It’s often easier said
than done.
Many businesses fail not due to an owner’s lack of enthusiasm and/or talent, but due to a
lack of knowledge and expertise in translating an interest or hobby into a commercial
enterprise. Performing an honest and accurate appraisal of one’s skills, background, and
entrepreneurial abilities before launching a business can prevent disappointment and
failure later on.
Risk Tolerance
Everyone’s tolerance for risk is different. Some people enjoy the rush of skydiving and
roller coasters, while others prefer to stick to keep their feet on the ground. In business,
one’s degree of risk tolerance should be compatible with the form of ownership being
considered. For example, a 45-year-old entrepreneur with dependents might seek to
protect accumulated assets (real estate, savings, retirement, etc.) and therefore select a
legal structure that carries less personal financial risk. Prospective business owners must
gauge what they are willing to risk losing and choose a form of business accordingly.
Financing
Few business owners start a business with lottery winnings or many years’ savings. Many
seek funding from a bank, venture capitalist, private investor, or credit union to get their
businesses off the ground. Lenders may be one of the greatest influences on the choice of
business ownership—even more than an owner’s preference or ambition.
Since there is risk inherent in any business venture, especially start-ups, lenders often
require a business to be structured in a way that most assures the repayment of funds
(whether the business makes it or not). Even businesses that have been established for a
long time may be forced to change their legal structure when seeking funding to expand
their operations. If an owner anticipates needing funding at any point during the life of
the business, selecting a form of ownership that best suits the lender’s requirements from
the start is a wise decision.
Continuity and Transferability
Finally, business owners need to consider if they want their businesses to carry on after
their leadership. If an owner is looking to start a business that can be passed on to
children or other family members, then the legal structure of the business is extremely
important. Certain organizational types “die” with the owner, so it’s crucial for the owner
to decide how and whether a business will persist and/or be sold to new owners.
These are just some of the considerations business owners must weigh when selecting a
form of business ownership. Many of these issues require owners to look far into the
future of their businesses and imagine all of the possibilities associated with being selfemployed. Although it is possible to change legal structure once a business is established,
the more complex a business’s operations are, the more complex the change will be. In
some cases, the complexity of the situation can prevent the owner from making the
change that’s desired. Considering as many of these factors as possible from the outset
can save countless hours and great expense down the road.
In the coming sections we will explore the possible legal structures a business owner can
choose and look at the advantages and disadvantages of each. We will begin with the
simplest of all organizational types: the sole proprietorship.
Sole Proprietorships
A sole proprietorship is the simplest and most common legal structure of a company. It’s
an unincorporated business owned and operated by one individual in which there is no
distinction between the business and the owner. If you own a sole proprietorship, you are
entitled to all profits and are responsible for all of your business’s debts, losses, and
liabilities.
Forming a Sole Proprietorship
You don’t have to take any formal action to form a sole proprietorship. As long as you are
the only owner, this status automatically arises from your business activities. In fact, you
may already own a business without knowing it. If you are a freelance writer, for example,
you are a sole proprietor.
But as is the case when you own any type of business, you may need to obtain necessary
licenses and permits. For example, certain businesses, like ones that sell alcohol or
firearms, require a federal license or permit. Some states have requirements for other
specific types of companies. And some professionals, such as certified public accountants
(CPAs) may be subject to licensing or certification requirements before they can promote
themselves as engaging in a specific business or trade. Regulations for different types of
professions and businesses vary by industry, state, and locality.
Another consideration: If you choose to operate under a name different from your own,
you will most likely have to file paperwork for a fictitious name (also known as an
assumed name, trade name, or DBA name—short for doing business as). The legal
document necessary to create a fictitious name is usually filed in the records of the
county or city in which you do business. The law requires business owners to inform the
public of a business’s legal ownership in the event that a customer or client wants to
contact (or sue) the person running a specific company.
You must choose an original name; it cannot already be claimed by another business. To
determine the availability of a specific business name, potential business owners may
search databases maintained by the state’s Secretary of State.
Sole Proprietor Taxes
If you decide to become a sole proprietor, you and your business are one and the same.
Therefore, the business itself is not taxed separately—the sole proprietorship income is
your income. It’s your responsibility to withhold and pay all income taxes, including selfemployment and estimated taxes.
Advantages of a Sole Proprietorship
There are some significant advantages to being a sole proprietor:
It is an easy and inexpensive way to establish a business. A sole proprietorship is the
simplest and least expensive legal structure to establish. Legal costs are limited to
obtaining the necessary license or permits.
It gives you complete control over your company. You aren’t required to consult with
anyone else when you want to make changes.
Your company’s tax preparation is simple. Your business is not taxed separately, so
it’s easy to fulfill the tax reporting requirements for a sole proprietorship. The tax
rates are also the lowest of the legal structures. However, sole proprietors are
encouraged to consult a tax adviser regarding taxes they may have to pay once a
former employer is no longer withholding and remitting tax payments on their
behalf.
Disadvantages of a Sole Proprietorship
There are also potential disadvantages to sole proprietorship:
You maintain unlimited personal liability for your business. Because there is no legal
separation between you and your business, you can be held personally liable for all
of the debts and obligations of the business. This risk extends to any liabilities
incurred as a result of employee actions. Individuals running a business as a sole
proprietorship should carefully review their insurance policies on business vehicles
and equipment and verify that they have adequate liability coverage should an
accident occur. Some businesses may require sole proprietors to possess specialized
forms of insurance, such as worker’s compensation, liability, or errors and omissions.
Potential sole proprietors should review their insurance coverage with a reputable
insurance agent to identify potential risks and ensure they are adequately protected.
It can be difficult to raise money. Because you can’t sell stock in the business,
people won’t often invest. Banks are also reluctant to lend to a sole proprietorship
because of the perceived risk and uncertainty regarding the repayment of funds if
the business fails.
It can be a heavy personal burden. The flip side of having complete control over a
company is the pressure it can bring. You alone are ultimately responsible for the
successes and failures of your business.
Example: TW’s Construction
Tom is a construction worker who wants to be his own boss. He decides that, given
the ease of establishing a sole proprietorship, he will pursue this business model. He
doesn’t need to borrow any money to start his business, and since he will be doing
all the work himself, at this point he isn’t worried that this type of ownership will
add additional burdens or stress. He also likes the idea that he is in control of which
jobs he takes and who his customers are.
Tom visits his accountant’s office and asks her about the tax implications of
establishing a sole proprietorship. She explains that when Tom was working for Bob
the Builder, his employer withheld federal and state income taxes from his
paychecks. Bob the Builder sent those funds to the IRS and state department of
revenue on Tom’s behalf. Those were the taxes he got credit for when he filed his
tax return at the end of the year. Bob the Builder also paid half of Tom’s Social
Security and Medicare taxes and paid into the state unemployment insurance fund.
His accountant tells Tom that, as a sole proprietor, he will need to plan for paying his
own taxes throughout the year—not just in April. No one else will withhold or pay
his taxes for him. Tom finds this to be depressing news, but he’s happy to learn that
he may be able to deduct many of the expenses he incurs in the course ofwhile
operating his business. These things include his work van, tools he purchases, office
supplies, and possibly the small office he has set up in his home. Tom’s accountant
recommends that he visit her at the end of each fiscal quarter to ensure he is on
track with maintaining his taxes for the year. Tom schedules the appointments on
the spot.
After leaving his accountant’s office, Tom goes to the courthouse and files his DBA
certificate (for the name of his business), and he officially begins operating as a sole
proprietorship: TW’s Construction. Lastly, he stops by his insurance agent and
makes sure that he has the proper insurance on his vehicles and equipment,
verifying that he has sufficient liability insurance to cover any potential claims
against him.
Tom heads home to start calling homeowners and setting up appointments to bid on
jobs. He has joined the ranks of the self-employed!
Partnerships
In this resource, we’ll examine different types of partnerships and the pros and cons of
each. A partnership is a single business in which two or more people share ownership.
Each partner contributes to all aspects of the business, including money, property, labor,
and skill. In return, each partner shares in the company’s profits and losses.
Because partnerships involve more than one person in decision making, it’s important to
discuss with potential partners a wide variety of issues up front and explore which type of
partnership would best fit your needs. A legal agreement should document how partners
will make business decisions, including how they will divide profits, resolve disputes,
change ownership (i.e., bring in new partners or buy out current partners), and dissolve
the partnership if necessary. Although partnership agreements are not legally required, it
can be extremely risky to operate a business without one.
Types of Partnerships
There are two general types of partnership arrangements:
General partnerships assume that profits, liability, and management duties are
divided equally among partners. If you opt for an unequal distribution, the
percentages assigned to each partner must be documented in the partnership
agreement.
Limited partnerships (also known as a partnership with limited liability) are more
complex than general partnerships. Limited partnerships limit a partner’s liability and
input into management decisions. The extent of such limits depends on the amount
of each partner’s investment. Limited partnerships are generally attractive to
investors looking for short-term projects.
Forming a Partnership
To form a partnership in the US, you must register your business with your state, a
process generally handled through your Secretary of State’s office.
You’ll also need to legally create your business name. For partnerships, a company’s legal
name is the name stated in the partnership agreement. If you choose to operate under a
name different from the one you officially register, you will most likely have to file a
fictitious name. The legal document necessary to create a fictitious name is usually filed in
the records of the county or city in which you do business.
Once your business is registered, you must obtain business licenses and permits.
Regulations vary by industry, state, and locality.
Partnership Taxes
Most partnerships will need to register with the IRS as well as state and local revenue
agencies and obtain a tax ID number or permit. Partnerships must also file an annual
information return to report their income, deductions, and gains and losses. But the
business itself does not pay income tax.
Rather, the business “passes through” any profits or losses to its partners. Partners include
their respective shares of the partnership’s income or loss on their personal tax returns.
Like sole proprietors, partners in a business are responsible for additional taxes, including
income tax, self-employment tax, and estimated tax. Since partnerships can be complex,
it’s crucial that potential partners use the services of tax professionals when establishing
and maintaining their business.
Advantages of a Partnership
There can be some significant advantages to creating a partnership:
As a business structure, it’s easy and inexpensive to set up. Most of the time
required to plan and launch a partnership is spent on developing the partnership
agreement.
It’s a shared financial commitment. In a partnership, each partner is invested in the
success of a business. Partnerships have the advantage of being able to pool their
resources to obtain capital. This can be beneficial in terms of securing credit or
simply multiplying the seed money available.
It can incorporate complementary skills. A good partnership should capitalize on the
unique strengths, resources, and expertise of each partner.
Offering partnership can create incentives for employees. Businesses that are
partnerships can have an advantage over their competitors if they offer their
employees the opportunity to also become partners. Partnership incentives can
attract highly motivated and qualified employees.
Disadvantages of a Partnership
There are also potential disadvantages to business partnerships:
Partners share liability. Like sole proprietors, partners retain full, shared liability for
their company. But unlike sole proprietorships, there is more than one owner in a
business partnership, so partners are not only liable for their own actions, but also
for the decisions of their partners, which could lead to debt. The personal assets of
all partners can be used to satisfy a partnership’s debt, further exposing owners to
risk.
Disagreements among partners could affect business operations. With multiple
partners, there are bound to be disagreements about operations. Partners should
consult one another on all decisions, be willing to make compromises, and resolve
disputes as amicably as possible.
Sharing profits may sow discord. Because partnerships are jointly owned, each
partner shares the business’s profits and debts. An unequal contribution of time,
effort, and/or resources could cause discord among partners when assets and
liabilities are divided.
Example: TW’s Construction or T&T Construction?
For several months, Tom has been operating as a sole proprietorship and enjoying
the control he maintains over his work and finances. Business is picking up, and he
was recently contacted by a construction firm that wants to hire him to provide the
trim carpentry for several large oceanfront homes. Tom mentions this to his friend
Todd, who seems very happy that Tom’s new business venture appears to be
succeeding.
A month later, Todd calls and asks Tom to meet him for dinner. During dinner, Todd
proposes to Tom that the two of them form a general partnership: T&T
Construction. Todd points out that taking on several large jobs as a sole proprietor is
very risky, but —a partnership would mean shared risk and responsibility. Todd also
offers to contribute some initial capital to the proposed partnership to provide
financial support for day-to-day operations. Finally, Todd makes the case that, as a
frame carpenter, he has skills that would complement Tom’s and potentially yield
additional business opportunities.
Surprised by the proposal, Tom tells his friend that he needs some time to think it
over. During the next few days, he calls his accountant to determine how the
partnership would affect his business. He learns that he would have to share both
control of the business and its profits. That doesn’t sound bad to Tom, especially if
the business really grew—which it might, with the addition of Todd’s skills and labor.
Tom is leaning toward accepting Todd’s offer.
But when Tom discovers that he would be held responsible not only for the debts of
the business, but also for the actions of his partner, he sours on the idea. He knows
Todd has made some uninformed business decisions and deals in the past. Under
the proposed general partnership structure, if Todd made similar kinds of decisions
or deals without Tom’s knowledge, Tom could be held liable for any negative
consequences. Tom realizes he’s not willing to accept that kind of risk. He decides to
turn down Todd’s offer and continues to operate his business as a sole proprietor.
Corporations
Although not the most common form of business ownership, corporations account for the
majority of the revenue generated by businesses in the United States. In this resource,
you’ll learn about C corporations, S corporations, and benefit corporations—a newcomer
to the corporate scene.
US courts have extended certain constitutional protections to corporations.
Corporate Rights
Corporations have unique status and rights in the US legal system. The legal provisions for
such entities are extensive, and they include the concept of corporate personhood.
Corporate personhood is the legal notion that corporations—apart from the people
(including owners, managers, or employees) associated with them—have some, though not
all, of the legal rights and responsibilities enjoyed by human beings. For example,
corporations can enter into contracts with other parties and sue or be sued in court in the
same way people or unincorporated associations of persons can.
The basis for allowing corporations to assert protection under the US Constitution is that
they are organizations of people, and people should not be deprived of their
constitutional rights when they act collectively. In this view, treating corporations as
persons is a convenient legal fiction that allows corporations to sue and to be sued; act as
a single entity for easier taxation and regulation; simplify complex transactions that, in the
case of large corporations, would otherwise involve thousands of people; and invoke the
rights of shareholders and associations.
In 2010, the US Supreme Court upheld the rights of corporations to make political
expenditures under the First Amendment in Citizens United v. Federal Election
Commission. Since then, there have been several calls for a US constitutional amendment
to abolish corporate personhood. While the Citizens United majority opinion makes no
reference to corporate personhood or the Fourteenth Amendment, Justice Stevens’
dissent claims that the majority opinion relies on an incorrect treatment of corporations’
First Amendment rights as identical to those of individuals.
The legal status, rights, and responsibilities of corporations continue to evolve in response
to cultural and economic pressures. The forms they take also change, as you’ll see in our
discussion of benefit corporations below.
Corporation (C Corporation)
A corporation is an independent legal entity owned by its shareholders. This means that
the corporation itself, not its shareholders, is legally liable for the actions and debts of the
business. This type of general corporation is called a C corporation because Subchapter C
of Chapter 1 of the Internal Revenue Code lists the general tax rules that affect
corporations and their shareholders.
Operating corporations is more complex than other business structures because they
typically entail costly administrative fees and complex tax and legal requirements. Because
of these issues, established, larger companies with multiple employees are often
corporations.
Corporations can sell ownership shares in the business through stock offerings. When a
corporation “goes public” through an initial public offering (IPO), it can be a major selling
point in attracting investment capital and high-quality employees.
Forming a Corporation
A corporation is formed under the laws of the state in which it is registered. Because
corporations are recognized as entities separate from their owners, establishing one is
much more complex than creating a sole proprietorship or partnership.
Corporations are established when their founders file articles of incorporation with a
state’s Secretary of State office and/or Corporation Commission, which must officially
recognize the new corporation. Some states require corporations to establish directors
and issue stock certificates to initial shareholders during the registration process. This can
make establishing a C corporation expensive. Founders often engage attorneys to draft
and file articles of incorporation, create shareholder agreements, draft stock option
agreements and issue stock, and perform other related tasks on behalf of those forming
the corporation.
As with other forms of ownership, once a corporation is created, founders must obtain the
relevant business licenses and permits. Regulations vary by industry, state, and locality. If
owners are hiring employees, they will need to understand and follow federal and state
regulations for employers.
Corporation Taxes
When someone forms a corporation, a separate tax-paying entity is created. Unlike sole
proprietorships and partnerships, corporations pay income tax on their profits. In some
cases, corporations are taxed twice—first when the company makes a profit, and again
when the company pays dividends to its shareholders. These dividends appear on
shareholders’ personal tax returns and are subject to taxation.
It is important to note, though, that only income paid as dividends is taxed twice. Income
distributed as salary or other compensation is a deduction for the corporation. This means
that the amount of compensation a corporation pays is deducted from the amount of its
corporate income that is subject to taxation.
Just like individuals, corporations are required to pay federal, state, and in some cases,
local taxes. Rather than receiving a Social Security number for taxpayer identification,
corporations obtain a tax ID number when registering with the IRS, and state and local
revenue agencies.
Advantages of a Corporation
Corporations offer owners a variety of favorable tax and investment advantages:
Limited liability. Shareholders’ personal assets are protected from business debts and
any potentially negative fallout from the actions of a corporation. Shareholders can
generally only be held accountable for their investment in a company’s stock.
Ability to generate capital. Unlike sole proprietorships or partnerships, corporations
can raise capital by selling stock.
Favorable corporate tax treatment. Corporations file taxes separately from their
owners. Owners only pay taxes on the corporate profits they receive in the form of
salaries, bonuses, and dividends. Any additional profits are awarded a corporate tax
rate, which is usually lower than a personal income tax rate.
Attractiveness to potential employees. Corporations are generally able to attract and
hire high-quality and motivated employees because they offer competitive benefits
and the potential for partial ownership through stock options.
Disadvantages of a Corporation
Corporations are also more complex to operate, with significant disadvantages:
Time and money. Corporations are costly and time-consuming ventures to start and
operate. Incorporating requires start-up, operating, and tax costs that most other
structures do not need.
Double taxing. In some cases, corporations are taxed twice—first, when the company
makes a profit, and again when dividends are paid to shareholders.
Additional paperwork. Because corporations are highly regulated by federal, state,
and in some cases local agencies, there are increased paperwork and record-keeping
burdens associated with this business entity.
S Corporation
An S corporation (sometimes referred to as an S corp) is a special type of corporation
created through an IRS tax election. An eligible domestic corporation can avoid double
taxation (of both the corporation and its shareholders) by electing to be treated as an S
corporation.
An S corp is a corporation with the Subchapter S designation from the IRS. To have their
business designated as an S corp, owners must first charter their business as a corporation
in the state in which it is headquartered. According to the IRS, an S corporation is
“considered by law to be a unique entity, separate and apart from those who own it.” This
limits the financial liability for which the owner or shareholder is responsible. But that
liability protection is limited—S corps do not necessarily shield owners from all litigation,
such as an employee’s tort actions that result from a workplace incident.
What makes the S corp different from a traditional corporation (C corp) is that profits and
losses can pass through to the shareholders’ personal tax returns. Consequently, the
business itself is not taxed; only the shareholders are. There is an important caveat,
however. Any shareholders who work for the company must pay themselves “reasonable
compensation.” Basically, that means that a shareholder must be paid fair market value for
work, or the IRS might reclassify any additional corporate earnings as “wages.”
Forming an S Corporation
Before a company can form an S corporation, it must determine if the business will qualify
as such under IRS stipulations, and it must first file as a corporation. After a business is
considered a corporation, all shareholders must elect for it to become an S corporation. As
with a C corp, this process can be complex, and it is generally standard practice for an
attorney with experience in corporate matters to guide business owners and shareholders
through the creation and registration of an S corp.
S Corporation Taxes
Like a C corp, S corps need to register with the IRS, state, and local revenue agencies, and
obtain a tax ID number or permit. However, unlike a C corp, all states do not tax S corps
equally.
Although most state taxing authorities tax shareholders in C and S corporations similarly
to how they are taxed by the IRS, some states (like Massachusetts) tax S corps on profits
above a specified limit. Other states don’t recognize S corporations at all, and they treat
the businesses as C corporations, with all of the tax ramifications that accompany them.
Some states (like New York and New Jersey) tax both S corps profits and shareholders’
proportional shares of those profits. Before selecting a corporate structure, business
owners/shareholders should check with an accounting professional to ensure they make
the most appropriate election based on their state corporate tax laws.
Advantages of an S Corporation
Multiple tax advantages are among the most positive features of an S corporation:
Tax savings. One of the most attractive features of an S corp is the tax savings it can
provide to stakeholders and businesses. While members of an LLC are subject to
employment tax on the entire net income of a business, only the wages of an S corp
shareholder who is an employee are subject to employment tax. The remaining
income is paid to the owner as a “distribution,” which is taxed at a lower rate, if at
all.
Business expense tax credits. Some corporate expenses that shareholders or
employees incur can be written off as business expenses. But keep in mind that if an
employee owns 2 percent or more of a company, benefits such as health and life
insurance are deemed taxable income.
Independence. An S corp designation allows a business to have an independent life,
separate from its shareholders. If a shareholder leaves the company, or sells all
relevant shares, an S corp can continue doing business relatively undisturbed.
Maintaining the business as a distinct corporate entity creates clear boundaries
between shareholders and their business that can further protect the interests of
shareholders.
Disadvantages of an S Corporation
Operating an S corp also requires stakeholders to adhere to specific laws and procedures:
Stricter operational processes. As a separate structure, S corps require scheduled
director and shareholder meetings, minutes from those meetings, adoption and
updates to bylaws, stock transfers, and records maintenance.
Shareholder compensation requirements. A shareholder must receive reasonable
compensation. The IRS takes notice of shareholder red flags like low salary/high
distribution combinations, and it could reclassify distributions as wages as a result.
Stakeholders could end up paying higher employment taxes due to an unfavorable
IRS audit.
Benefit Corporation
During the past few decades, the boundaries between the public (government), private
(business), and social (nonprofit) sectors have increasingly blurred as pioneering
organizations have merged social and environmental aims with their businesses. Such
organizations may incorporate elements including corporate social responsibility,
microfinance, venture philanthropy, sustainable businesses, social enterprise, privatization,
community development, and others.
Benefit corporations (or B corps) include these types of businesses. A benefit corporation
is a type of for-profit corporate entity that is currently authorized by 30 US states and the
District of Columbia. In addition to generating profit, B corporations must include in their
stated legal purpose the goal of creating a general public benefit, defined as a material
positive impact on society and the environment. Three prominent examples of benefit
corporations include Kickstarter, Patagonia, and King Arthur Flour. Benefit corporations
differ from traditional C corporations in purpose, accountability, and transparency—but
not in taxation.
A benefit corporation’s directors and officers operate their business with the same
authority as they would a traditional corporation, but they are required to consider the
impact of their decisions on society and the environment as well as on shareholders. In a
traditional corporation, shareholders gauge a company’s financial performance; in a
benefit corporation, shareholders take into account a company’s social, environmental,
and financial performance. Transparency provisions require benefit corporations to
publish annual benefit reports of their social and environmental performance using a
comprehensive, credible, independent, and transparent third-party standard.
Forming a Benefit Corporation
New companies can incorporate as benefit corporations in any state in which benefit
corporation legislation has been passed. (Rather than recognizing benefit corporations,
Washington created “social purpose corporations” in 2012 with a similar focus and intent.)
The process of creating a B corp varies by state, but many states require that benefit
corporations
declare a commitment to creating general public benefit,
adopt a third-party standard,
prepare an annual benefit report, and
distribute an annual benefit report to company owners and post it on the company’s
website.
B Corp Certification
A business that wants to take its social and environmental commitment even further can
be certified as a B corporation by the nonprofit organization B Lab. The organization uses
a survey to rate a company’s environmental practices, employee treatment, activism
within its community, and other factors. Businesses that surpass a certain score are
certified by B Lab, which then audits them from time to time to ensure that they are living
up to the movement’s standards.
“[B Lab certification] is like a Good Housekeeping seal of approval,” said David Murphy,
former CEO of Better World Books, in a 2011 Business News Daily interview. “If your
company is a Certified B Corporation, that really says something. You’re there to serve all
those stakeholders, and you’re willing to prove it.”
Benefit Corporation Taxes
Benefit corporations are treated like all other corporations for tax purposes. B corps elect
to be taxed either as C corps or S corps.
Advantages of a Benefit Corporation
Operating a B corp can reap benefits beyond profit-making:
Protection of mission. Becoming a benefit corporation gives companies more
options and protections if they decide to sell or take it public because other factors
besides price (i.e., the public benefit mission) must also be taken into account.
Reputation. Incorporating as a benefit corporation allows a company to stand out as
a business with a social conscience and aspire to a higher standard than solely
maximizing profit for shareholders. For investors and consumers who are committed
to social and environmental responsibility, benefit corporations provide additional
choices.
Creation of value. Because it’s committed to considering other stakeholders’
interests, a benefit corporation may create value via employee engagement and
customer loyalty, thereby improving results for all stakeholders—including owners
and shareholders. Also, certain profit-making opportunities may not be available
without an assured commitment to other stakeholders.
Disadvantages of a Benefit Corporation
Maintaining a B corp requires owners to maintain additional documentation beyond other
corporations:
Transparency and reporting requirements. A benefit corporation must provide an
annual benefit report according to a third-party standard (such as B Lab) and make
the report available on its company website. This enables stakeholders and the
public to assess a company’s performance with regard to its public purpose(s).
Annual fees to retain certified B corp status. If a B corp elects to receive certification
from a third party, such as B Lab, fees for “certified” B corp status are based on
annual sales. To keep its certification, a company must pay a renewal fee each year
and recertify every two years.
Compliance and governance obligations. Most states require publicly traded
companies with a B corp designation to hire a benefit director who is responsible for
ensuring the corporation meets its stated public purpose.
Hybrid Forms of Ownership
The concept of limited liability has given rise to hybrid forms of business ownership such
as LLCs and LLPs. In this section, you’ll learn what these forms are and the pros and cons
of each.
Limited Liability Company (LLC)
A limited liability company (LLC) is a hybrid business structure permitted by individual
state statutes. LLCs are attractive to small business owners because they provide the
limited liability features of a corporation and the tax efficiencies and operational flexibility
of a partnership. Each state may use different regulations to govern the formation and
operation of LLCs, so potential business owners should check their specific state laws if
they are interested in starting a limited liability company.
Owners of an LLC are called members. Most states do not restrict this type of ownership,
so members may include individuals, corporations, other LLCs, and/or foreign entities.
There is no maximum number of members. Most states also permit single-member LLCs.
Unlike corporations, LLCs are not taxed as separate business entities. Instead, all profits
and losses are “passed through” the business to each member of the LLC. LLC members
report profits and losses on their personal federal tax returns, just like the owners of a
partnership would.
Forming an LLC
While each state has slight variations in its rules governing the formation of LLCs, they all
adhere to some general common principles:
LLC names must adhere to three rules: (1) they must differ from any existing LLC
names in a given state, (2) they must explicitly indicate that they are incorporated as
LLCs (e.g., with the words LLC or Limited Company), and (3) they must not include
any words restricted by a given state (e.g., bank or insurance). The chosen LLC name
is automatically registered with a given state when an owner registers the business.
The articles of organization is a simple document that legitimizes an LLC and
includes information such as the business’ name, address, and the names of its
members. In most states, these articles must be filed with the Secretary of State.
However, some states may require owners to file their articles of organization with a
different office, such as the State Corporation Commission, Department of
Commerce and Consumer Affairs, Department of Consumer and Regulatory Affairs,
or the Division of Corporations & Commercial Code.
Most states do not require LLCs to create operating agreements. However, an
operating agreement can be an essential document for multi-member LLCs for
structuring the company’s finances, organization, rules, and regulations. Operating
agreements typically indicate percentage of interests, allocation of profits and
losses, members’ rights and responsibilities, and other important provisions.
Once a business is registered, it must obtain business licenses and permits. These
regulations vary by industry, state, and locality.
Some states, including Arizona and New York, require the extra step of publishing a
statement in a local newspaper that announces the formation of a new LLC.
LLC Taxes
The federal government does not consider an LLC to be a separate tax entity, so the
business itself is not taxed. Instead, all federal income taxes are passed on to the LLC’s
members and paid through their personal income taxes. However, LLCs are taxed by some
states, so businesses should check the laws of their specific state’s income tax agency
beforehand.
Since the federal government does not officially recognize LLCs as business entities for
taxation purposes, all LLCs must file corporation, partnership, or sole proprietorship tax
returns. Certain LLCs are automatically classified and taxed as corporations by federal tax
law.
Advantages of an LLC
LLCs as a form of business possess several attractive monetary advantages:
Limited liability. Members are protected from personal liabilities resulting from the
business decisions or actions of an LLC. This means that if an LLC incurs debt or is
sued, members’ personal assets are usually exempt from any repercussions. This is
similar to the liability protections afforded to the shareholders of a corporation.
Keep in mind that limited liability does indeed mean limited liability—members are
not necessarily shielded from wrongful acts, including those of their employees.
Less record keeping. An LLC’s operational ease is one of its greatest advantages.
Compared to an S Corporation, there is less registration paperwork and there are
lower start-up costs. But it is essential to keep detailed and separate business and
personal financial records. If it appears an LLC is combining personal and business
funds, the business can be legally reclassified and be obliged to assume additional
liability.
Profit-sharing. There are few restrictions on profit-sharing within an LLC; members
distribute profits as they see fit. Members might decide to contribute different
proportions of capital and sweat equity. Consequently, it’s up to the members
themselves to decide who has earned which percentage of profits or losses.
Disadvantages of an LLC
Because LLCs are so distinct from other types of businesses, member should thoroughly
familiarize themselves with their rules:
Possibly limited life. When an LLC is formed, its members must decide on the
duration of the business. If an LLC is formed in a state in which perpetual life is not
permitted, the death or disassociation of a member will necessarily dissolve the LLC,
and the remaining members must fulfill all residual legal and business obligations to
close the company. For this reason, it is important for individuals seeking to use this
form of ownership to verify the requirements for an LLC in the specific state in
which they wish to operate.
Self-employment taxes. Members of an LLC are considered self-employed and must
pay self-employment tax contributions toward Medicare and Social Security. The
entire net income of an LLC is subject to this tax.
Limited Liability Partnership (LLP)
An LLP is a partnership in which some or all partners (depending on the jurisdiction) have
limited liability, which gives the company some elements of both partnerships and
corporations. For example, in an LLP, a single partner is not responsible or liable for
another partner’s misconduct or negligence, although some partners do have a form of
limited liability that is similar to that of a corporation’s shareholders. In fact, some states
require one partner to be a general partner with unlimited liability, making that person
ultimately responsible for the debts of the business and any lawsuits, such as personal
injury or breach of contract.
While corporate shareholders elect a board of directors according the laws of the state
charters under which they operate, the partners in an LLP have the right to directly
manage their own business operations. The board organizes itself according to state law
and hires corporate officers who have the legal responsibility to manage the corporation
in its best interest.
An LLP also has a different level of tax liability compared to that of a corporation. As in a
partnership or LLC, the profits of an LLP are allocated among the partners for tax
purposes, avoiding the problem of double taxation often found in corporations.
Forming an LLP
The steps necessary to form an LLP are simil…
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