A discussion 300-350words
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Lecture7PA3150SmallBusiness.pptxSmall business
PA 3150
Historical perspective
Small Business - 18th century America
The first small business owners were pioneers who overcame great hardships to carve a life out in the American wilderness.
Small farmers
Taverns, public houses, etc.
Small business – 19th century America
Small agricultural enterprises
Small merchants, independent craftsman, and business men/women
Small business – 20th century America
Carry over from the late 19th century –
In many industries, small enterprises had trouble raising sufficient funds and operating on a scale large enough to produce most efficiently all of the goods demanded by an increasingly sophisticated and affluent population.
In this environment, the modern corporation, often employing hundreds or even thousands of workers, assumed increased importance.
Small business in America today
American economy has a wide range of enterprises
One person sole proprietorships to some of the world’s largest corporations.
America has always been viewed as a land of opportunity.
If you have a good idea, some determination, and the willingness to work hard – you could start your own business and prosper.
This thinking is what we call entrepreneurship today -
Small business workforce
99% of all independent enterprises in the US employ fewer than 500 people
52% of all workers in the US are working for small businesses (SBA, 2017)
September 2020 – 47.5%
19.6 million Americans work for companies employing fewer than 20 workers
18.4 million work for firms with 20-99 employees
14.6 million work for firms with 100-499 employees
By contrast – 47.7 million Americans work for firms with 500 or more employees
(United states department of state, 2017)
Common misconception is that the US economy is dominated by huge corporations.
Most people like dealing with local small businesses
Building small businesses has always been the backbone of the American Dream
Small business and the us economy
Produced over three-fourths of the economy’s new jobs between 1990-1995 and slightly less from 2010 – 2016
In general, small business provides an easier entry point in the economy
Example – women, minorities, veterans, etc.
Women in the small business market rose to 8.1 million between 1987-1997
Over 35% percent of all proprietorships were owned by women by the year 2000
US Small Business Administration (SBA) offers support programs for minorities
SBA offers programs in which retired entrepreneurs offer management assistance for new and faltering businesses.
October is national women’s small business month – according to the 2019 State of Women-Owned Business Report, the number of women –owned businesses climbed 21% between 2014-2019.
Small business and global trade
The US Census Bureau noted the following for small businesses in the international trade arena for 2015 –
Small companies comprised 97.6% of all identified exporters and 97.2% of all identified importers
(SBECOUNCIL.ORG, 2017)
Many small businesses think they are too small to compete in the world market. In fact, 97 percent of all exporters are small businesses. Small business exporters are taking advantage of the world market and selling billions of dollars of goods and services overseas every year. In fact, 70% of all exporters have fewer than 20 employees.
Small business strengths
Benefiting the local community – getting to know the consumer – personal touch
Few layers of management – no bureaucracy
Lower overhead
Financial flexibility
Flexibility with changing conditions and can respond quickly
Active members of their local communities and therefore, reflect something much closer to the local culture than major corporations
Technology is no longer just for large businesses – social media, e-commerce, etc.
Small business: challenges and risks
How often do small businesses fail?
About two-thirds of businesses survive 2 years in business
Half of all businesses will survive 5 years
One-third of businesses will survive 10 years
Most frequent reason for small business failure?
Cash flow problems for 82% of businesses
Invoices not being paid on time
Poor business location
Lack of experience
Loan payments
Seasonal businesses
Not keeping adequate records
Lack of management skills
What are the biggest challenges of running a small business?
Economic uncertainty
Cost of health insurance benefits
Decline in customer spending
How much startup capital does a small business need?
According to the Wells Fargo Small Business Index, $10,000 is the average amount of startup capital required
The most common forms of business enterprises
Sole proprietorships
Partnerships
Limited Liability Company
Corporations
Net profit margin is the percentage of revenue left after all expenses have been deducted from sales.
The measurement reveals the amount of profit that a business can extract from its total sales. The net sales part of the equation is gross sales minus all sales deductions, such as sales allowances.
Sole proprietorship
Simplest business form
Easy to setup and nominal cost
Register his or her name
Secure local licenses
Not a legal entity
Refers to a natural person who is personally responsible for its debts
Can operate under their own name or a fictitious name (trade name) – it is not separate
Sole proprietorship advantages and disadvantages
Advantages
Owners can establish a sole proprietorship instantly, easily, and inexpensively.
Sole proprietorships carry little, if any, ongoing formalities.
A sole proprietor need not pay unemployment tax on himself or herself (although he or she must pay unemployment tax on employees).
Owners may freely mix business and personal assets.
Disadvantages
Owners are subject to unlimited personal liability for the debts, losses, and liabilities of the business.
Owners cannot raise capital by selling an interest in the business.
Sole proprietorships rarely survive the death or incapacity of their owners and so do not retain value.
Partnership
Created when two or more persons engage in a business enterprise for profit
Offers its multiple owners flexibility and relative simplicity of organization and operation
In limited partnerships, a partnership can even offer a degree of liability protection
Can be formed with a handshake – partnership agreements are preferred
Often times are formed accidentally through oral agreements
The cost to have an attorney draft a partnership agreement can vary between $500 to $2,000
Partnerships Advantages and disadvantages
Advantages
Owners can start partnerships relatively easily and inexpensively.
Partnerships do not require annual meetings and require few ongoing formalities.
Partnerships offer favorable taxation to most smaller businesses.
Partnerships often do not have to pay minimum taxes that are required of LLCs and corporations.
disadvantages
All owners are subject to unlimited personal liability for the debts, losses, and liabilities of the business (except in the cases of limited partnerships and limited liability partnerships).
Individual partners bear responsibility for the actions of other partners.
Poorly organized partnerships and oral partnerships can lead to disputes among owners.
The lack of liability protection is simply not an acceptable risk that I could ever recommend that a business owner undertake.
Limited liability company (LLC)
Considered as a hybrid business form – liability protection of a corporation with the tax treatment and ease of administration of a partnership
Offers liability protection to its owners for company debts and liabilities
Can be taxed either as a partnership (a member managed LLC) or like a corporation (manager managed LLC)
Can create a board of directors and have a president and officer much like a corporation
Flexibility of formalities – such as periodic meetings of their membership
Business Angel Investor
An individual investor
May be willing to invest in early-stage or start-up businesses, as well as established companies
Investment amounts: £10k - £100k, sometimes a bit more, groups could go up to £1m
Have experience and contacts to contribute
May be willing to be "hands-off" or "hands-on" adding important skills
Entrepreneurs. These angels are (or have been) successful in their own businesses and like investing in other entrepreneurial ventures. Entrepreneurs who are familiar with your industry make excellent investors.
Venture Capital
A company or business rather than an individual
Seldom interested in early-stage, unless compelling reasons (eg. high tech with already successful founders)
Investment amounts: £1M +
Have contacts
Require seat on board
Business Angel Investor
An individual investor
May be willing to invest in early-stage or start-up businesses, as well as established companies
Investment amounts: 10k - 100k, sometimes a bit more, groups could go up to 1m
Have experience and contacts to contribute
May be willing to be "hands-off" or "hands-on" adding important skills
Entrepreneurs
These are (or have been) successful in their own businesses and like investing in other entrepreneurial ventures. Entrepreneurs who are familiar with your industry make excellent investors.
Venture Capital
A company or business rather than an individual
Seldom interested in early-stage, unless compelling reasons (eg. high tech with already successful founders)
Investment amounts: 1M +
Have contacts
Require seat on board
LLC Advantages and disadvantages
advantages
LLCs do not require annual meetings and require few ongoing formalities.
Owners are protected from personal liability for company debts and obligations.
LLCs enjoy partnership-style, pass-through taxation, which is favorable to many small businesses.
Disadvantages
LLCs do not have a reliable body of legal precedent to guide owners and managers, although LLC law is becoming more reliable as time passes.
An LLC is not an appropriate vehicle for businesses seeking to become public eventually, or to raise money in the capital markets.
LLCs are more expensive to set up than partnerships.
LLCs usually requires annual fees and periodic filings with the state.
Some states do not allow the organization of LLCs for certain professional vocations. (e.g., lawyers, doctors, architects, chiropractors) – licensed professionals
A professional limited liability company (“PLLC”) is a business entity designed for licensed professionals, such as lawyers, doctors, architects, engineers, accountants, and chiropractors. While many businesses choose to form a limited liability company (“LLC”) because of the tax, limited liability, and other benefits, some states don’t allow LLCs to be owned by professionals whose occupation requires a license. In these states, licensed professionals who want the benefits of an LLC must form a PLLC instead.
Corporation
A corporation is a body – it is a legal person in the eyes of the law
It can bring lawsuits, buy and sell property, contract, be taxed, and even commit crimes
Protect its owners from personal liability for corporate debts and obligations – within limits
Has a perpetual life – shareholders can pass on or leave a corporation, can transfer their shares to others
Owned by its shareholders, managed by its board of directors, and operated by its officers
Ideal vehicle for raising investment capital
Must observe particular formalities- formal vote, record minutes, etc.
Must meet annual reporting requirements in their state of incorporation and in the states where they do significant business
Corporation advantages and disadvantages
advantages
Owners are protected from personal liability for company debts and obligations.
Corporations have a reliable body of legal precedent to guide owners and managers.
Corporations are the best vehicle for eventual public companies.
Corporations can more easily raise capital through the sale of securities.
Corporations can easily transfer ownership through the transfer of securities.
Corporations can have an unlimited life.
Corporations can create tax benefits under certain circumstances
disadvantages
Corporations require annual meetings and require owners and directors to observe certain formalities.
Corporations are more expensive to set up than partnerships and sole proprietorships.
Corporations require annual fees and periodic filings with the state.
What is a C Corporation?
A C corporation is a legal entity that exists separately from the people who own, manage, control, and operate it.
It can enter into contracts, pay taxes, and is liable for its debts.
A C corporation issues shares of its stock, as evidence of ownership, to the person (s) or entities that contribute the money or business assets the corporation uses to conduct its business.
The stockholders or shareholders own the corporation and are entitled to any dividends the corporation pays. If the corporation liquidates, they are entitled to all of the corporation's assets after all creditors are paid.
Small business and the US government
History of the us small business administration
Concern for small businesses intensified during world war II (1939 – 1945) – Congress created the Smaller War Plants Corporation in 1942 that provided direct loans to private entrepreneurs, encouraged large financial institutions to make credit available to small businesses
After the SWPC dissolved, the Office of Small Business (OSB) in the Department of Commerce also assumed some responsibilities that would later become characteristic duties of SBA. Its services were primarily educational.
SBA’s predecessor was the Reconstruction Finance Corporation (RFC) created by President Herbert Hoover in 1932 to alleviate the financial crisis of the great depression – funding source
Founded on July 30, 1953 - Congress created the Small Business Administration, whose function was to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.”
In 1964, SBA began to attack poverty through the equal opportunity loan (EOL) program. The EOL program relaxed the credit and collateral requirements for applicants living below the poverty level in an effort to encourage new businesses that had been unable to attract financial backing, but were nevertheless sound commercial initiatives.
U.S. Small Business Administration
What We Do
Since its founding on July 30, 1953, the U.S. Small business administration has delivered millions of loans, loan guarantees, contracts, counseling sessions and other forms of assistance to small businesses. SBA provides assistances primarily through its four programmatic functions:
Access to Capital (Business Financing)
SBA provides small businesses with an array of financing for small businesses from the smallest needs in micro-lending - to substantial debt and equity investment capital (venture capital).
Entrepreneurial Development (Education, Information, Technical Assistance & Training)
SBA provides free individual face-to-face, and internet counseling for small businesses, and low-cost training to budding entrepreneurs and established small businesses in over 1,800 locations throughout the united states and US territories.
Government Contracting (Federal Procurement)
In keeping with the mandate of section 15(g) of the small business act, SBA's office of government contracting sets goals with other federal departments and agencies to reach the statutory goal of 23 percent in prime contract dollars to small businesses. This office also provides small businesses with subcontracting procurement opportunities, outreach programs, and training.
Advocacy (Voice for Small Business)
Created in 1978, this office reviews congressional legislation and testifies on behalf of small business. It also assesses the impact of the regulatory burden on behalf of small businesses. Additionally, it conducts a vast array of research on American small businesses and the small business environment. The chief counsel of this office is appointed by the president of the united states.
SBA 10 Steps to start your business
Conduct market research – turn your ideas into a successful business
Write your business plan – road map
Fund your business – your business plan will help you determine how much money you need to start up a business
Pick your business location
Choose a business structure
Choose your business name
Register your business – make it legal and protect your brand
Get federal and state tax IDs – important when opening bank accounts, social security, and employees
Specific licenses and permits for certain industries
Open a business bank account
https://www.sba.gov/business-guide/10-steps-start-your-business/
Introduction to SBA
USA.GOV
How to start your own business
https://www.usa.gov/start-business#item-37087
Local Assistance mentors
https://www.sba.gov/tools/local-assistance
Funding options
https://www.usa.gov/funding-options
TAX WORKSHOPS
https://www.irsvideos.gov/Business/virtualworkshop
Question
If you had the funds and support to start your own business, what would it be?
