CHAPTER 5: HOW TO FORM A BUSINESS LECTURE NOTES
BUS 384
Arizona State University
Spring 2022
Chapter 5: How to Form a Business
Business Structure Selection
The choice of an applicable corporate form for a business is a crucial task during the business formation
process. It means crucial regarding the business everyday business, the amount of business risk, which the
owners have to take, taxation of business revenue. Some of the most common business structures are sole
proprietorship, partnership, corporation and limited liability company (LLC).
Sole Proprietorship
The simplest economic business structure is sole proprietorship. The business is a sole proprietorship
owned and managed by one individual who takes all liabilities and assets of the business.
• It’s very easy to establish and gives an owner full command.
• Therefore profits is considered as personal income and taxed up accordingly.
• The business owner has a waistcoat of business debts and obligations that is unlimited personally.
• Individual funds of the owner as a source of finance, at the same time, may become difficult to accumulate
the amount of investment capital.
Partnership
In a partnership two , or more individuals both own some of the assets of the business. Partnerships can
also be general ones, where all the partners are jointly liable for the debt as well as share management
functions or limited ones, where at least one partner is to have limited liability and also no management
powers at all.
• It enables collective agency and assets, supporting decision making and capital accumulation.
• In order to pay tax since the profits are seen as personal income to the partners.
• A general partnership arrangement places an unlimited personal liability on each partner for the
debts of the business, a source of huge risk.
• These bring the possibilities of conflicts to the partners, the agreement and of a partnership is
therefore necessary.
Corporation
A corporation is a body corporate independent of the owners (shareholders) and given limited liability. It is
more complicated and costly to build as compared to the rest of the structures.
• Shareholders are not fully liable to the corporate debts and liabilities. The argue that the personal
assets of the shareholders are protected from the claims from the corporation.
• Raising capital via the sale of stock is a lot more easy.
• Levels of taxation that companies face signify double taxation whereby a corporation is taxed on
its profits and shareholders must pay taxes for dividends received.
• Laws govern the business operations also within it, there is an annual need of meetings and
attention record keeping.
Limited Liability Company (LLC)
The LLCs offer characteristics of two diverse companies, that is, the limited liability from a corporation and
the tax advantages and flexibility to operate the way it seems fit in a partnership.
• The members of the LLC have limited liability extent only to the LLC’s debts that they have
contributed to, or if members do not act responsibly and cause harm to business activities.
• Profits and losses can go through untaxed to the owners.
• There is more level of being flexible in the management and business organisation system.
• Some states levy supplementary taxes on LLC’s that are definitely a negative.
Considerations for Business Structure Selection
When selecting a business structure, consider the following:
• Legal Liability: If the business entails a high risk factor then a structure that offers limited liability
would be a better option.
• Tax Implications: Legal forms have some structures which are heavily taxed, others, on the other
hand, are completely unknown as income could flow through to owners.
• Cost of Formation and Ongoing Administration: Corporations and LLCs need formal registration;
they are also subject to ongoing reporting. The partnership and sole proprietorship operations are
cheaper to set up.
• Control and Management: In case you have in mind achieving absolute control over the business
there are two forms of the business, namely sole proprietorship and the limited liability company. In
a corporation the shareholders elect a board of directors to supervise policies making decisions.
• Future Needs and Flexibility: Some structures improvement and importing more owners. Think
about where your business is headed long term.
The appropriate business structure choice is critical. It impacts the legal liability, tax burden, the control
over the business and the possibility to acquire the capital. One is advised to seek assistance from a
business advisor or attorney to know the implications of each structure and choose the best method.
Market Research Methods
Market research covers all types of businesses to know about the target market, competitors and the trends
prevailing in the market. It assists them in arriving at sound decisions bearing in mind the factors they need
to consider when producing their products, managing their prices, and sales where applicable. Market
research methods can be classified into primary and secondary research methods.
Primary Research Methods
In primary research, fresh data is collected from the original source. It assists companies to understand the
likes, driving force and opinions of the customers.Common primary research methods include:
1. Surveys: Questionnaires are standardized questionnaire collections given to a haphazardly chosen
segment of the objective populace. They can be done online, face to face or via phone.
• Surveys give quantifiable feedback which is easy to quantify.
• They are cost-efficient particularly when done through online media.
• The manner in which the results are produced, quality of the results, mainly depends on the
survey design and the representativeness of the sample.
2. Interviews: They are in their format a kind of one to one discussion between the research and the
interviewee whereby it is often done in a real setting or through a phone conversation or even online
through a video call.
• The data obtained from interviews is qualitative and deep.
• They promote deeper understanding of complicated matters and discovering of emerging fields.
• They also are not convenient and quite costly to carry out.
1. Focus Groups: The focus groups have moderated discussions among selected few participants, about 6-
10 people.
• The outputs generated from focus groups are qualitative data on information about the group
dynamics.
• They facilitate brainstorming through collaboration.
• They are hard to manage and sometimes most people would need trained moderators to help
manages the same groups.
2. Observation: The definition of observation is researching customers in their natural habitat, without direct
involvement of any sort.
• With observation, one gets empirical, no-varnish evidence customer life.
• It has found to be a productive tool in studying customer engagements with products or services.
• It can be problematic to make inferences or generalize from observational data.
3. Experiments: To find what causes what in a phenomenon, experiments manipulate variables to
observe a change in relationship between them.
• Experiments are well able to give nearly conclusive evidence of any causal relationship.
• They can also be costly and labor-intensive to conduct.
• The obtained outcomes can sometimes not be generalized to real-life activities.
Secondary Research Methods
Secondary research is about to analyze the data already collected by third parties. It assists organizations
in gaining knowledge on market trends, industry statistic as well as competitor performance.Common
secondary research methods include:
1. Industry Reports: Industry reports offer a general insight of an industry in Market size, trends and
projections.
• Industry reports give key information about the competitive framework and the prevailing
conditions in an industry.
• They can be costly at times with respect to the source as well as the level of detail.
1. Government Publications: Government agencies usually issue various reports and statisti c values
concerning different branches of industry and economic indicators.
• Data from government publications are most often reliable and credible.
• They usually come cheap or free.
2. Competitor Analysis: Competitor analysis is about analysing the products, pricing, promotional strategies
and distribution channels carried out by the competition in the industry.
• Competitor analysis makes is easier for corporations to uncover prospects and threats in the
market.
• Collecting and analyzing the competitor’s data can be laborious.
3. Online Databases and Research Tools: There are many online databases and research facilities
whereby anyone can access a plenty of information which may include news reports, college assignments
and market states.
• The variety of resources available via online databases is impressive.
• Some databases may be accessible on a subscription basis or for a price; this content may not be
available for free.
4. Internal Data: Businesses are able to analyse their own internal data which includes sales data and
customer feedback and website analytics to understand customer preferences and market trends.
• The internal data is readily accessible and which is business specific.
• It possibly will not be satisfactory for obtaining a broader perspective on the market environment
or competitors’ strategies.
Effective Business Plan Development
A business plan establishes a brief description of the idea, projections, and operations of a business. S/he
uses it as a guide and communication tool for stakeholders.Here's how to develop an effective business
plan:
1. Executive Summary: This section introduces the business. It should elucidate the business concept, the
problem resolved, and the uniqueness of the market.
2. Company Description: This section details the business are the nature of business its operations centre
and the market needs that the business is meant to satisfy.
1. Market Analysis: This section presents the field requiring a complete industry awareness, competitors,
and target market assessment. It should deal with trends in the market, customer demand and competitive
environment.
2. Organization and Management Structure: This part describes organizational structure, management
team and their responsibilities of the business. It may, in addition, present details concerning the form of
corporation.
3. Products or Services: Here state the services offered by the business. Detail the advantages of the
products offered, how the market requirement is fulfilled, and any protection rights, if any.
4. Marketing and Sales Strategy: Customer attraction and retention strategies covered in this section. It
should be addressed to pricing, promotional, distributional, and sales strategies.
5. Financial Projections: This section outlines revenue, cost, and profit projections. It should picturize the
profitability of the business.
6. Funding Request: For this if she to be looking for funding then this section should describe the amount of
financing to be raised as well as purpose for which it will be spent and the financing structure.
7. Appendix: An additional part that may comprise resumes, permissions, leases or other important papers.
Funding Options and Considerations
Funding is indispensable in launching and growing a business.Here are some options and considerations:
1. Personal Savings: Most entrepreneurs begin with their savings while others borrow the money,
their savings are their capital. It’s the easiest source to aquire, but also the one with the most risks,
on the personal level.
2. Friends and Family: Friends and relatives can supply capital; they tend to be more lenient in
terms than other professional investors. But it could endanger personal commitments.
3. Bank Loans: Bank loans are a typical comprising share. They need a good credit standing and
usually demand some sort of collateral.
4. Angel Investors: Angel investors are investors who commence an investment buy equity for
startup. They further tend to mentor them and open access to their network.
5. Venture Capital: Venture capitalists choose startups which show promising growth prospects.
These organizations give a lot of capital but demand that the funds come with equity and at times
voting rights.
6. Crowdfunding: Crowdfunding platforms enable firms to source small sums from a huge number
of individuals. They also serve in the purpose of affirming an idea of a business.
7. Grants: Some agencies and organisations doe give grants to particular type of business. Grants
are never paid back but may have conditions and are usually strongly vied for.
When thinking through options for funding, look at the amount needed, the cost of the capital available, the
potential effect that capital would have down the control of the business, and the stage of development of
the business is in. It is very important that one has a good business plan which can get them funding and
that each funding source is carefully thought through.
Legal Registration and Licensing
A business requires legal registration and obtaining relevant licenses as important prerequisites.Here are
the key considerations:
1. Business Name Registration: Select an uncommon yet intriguing name for your business, and get it
registered with the concerned state regulatory body.
2. Legal Structure: Choose the form of business organization, file the articles of incorporation with the state.
Each of these structures has different implications on liability, taxation, and ongoing management.
3. Federal Tax ID (EIN): Almost all businesses require an Employer Identification Number (EIN) from the
IRS which is usually for tax purposes. It basically becomes a federal tax fingerprint for the business.
4. State and Local Taxes: In addition to the business, the nature of your business you might be required to
complete their registration to state tax, unemployment insurance tax and other state and local taxes.
5. Licenses and Permits: It also depends on the type of business that a person operates and the region
where the business is situated that determines the license and permit s. These include, but are not limited,
to professional licenses, health permits, and building permits.
6. Patents, Trademarks, and Copyrights: If your business has a special product, brand or concept, a patent,
trademark or copyright ought to be obtained for its protection.
Building a Strong Brand Identity
Brand identity refers to the visual and conceptional image that a business delivers to the world.Here's how
to build a strong brand identity:
1. Define Your Brand: First, outline your brand values, mission, vision, target market, and USP. This is the
base of your brand personality.
2. Logo Design: Develop a distinctive and identifiable logo for your firm. It is generally the first visual identity
associated with your brand.
3. Color Palette and Typography: Pick a common color tone and typeface for all your marketing materials.
All these components contribute immensely to platforming a stable brand image.
4. Brand Voice and Personality: Determine the brand voice and personality. All your content with the tone
and style of your communication included.
5. Brand Guidelines: In a style guide for your brand style, document all your brand identity elements. This
guarantees uniformity across all the online mediums and contact points.
6. Consistent Application: Make sure your brand is applied consistently not only on the website but on
social media, advertisements, packaging, customer service and everywhere else. Consistency builds brand
recall and confidence.
7. Employee Training: Train your employees to be familiar with your brand and ensure they strategically
emancipate that brand. They contribute a lot to delivering the brand experience to different clients.
The development of a distinctive brand that’s easier to identify in the market includes a coherent consumer
experience. Moreover, the building of a strong brand essentially supports customer loyalty. It is a strategy
that you have to take even if it takes long because it will greatly benefit your business.
Operational Setup and Management
The establishment and organization of practices, are great part of effective business management.Here's a
guide on how to proceed:
1. Location: Choose an attractive location for your business as it should be accessible to the clients and
suppliers, but relatively close to rivals so that you do not need to spend too much on transportation costs.
2. Equipment and Technology: Pinpoint and purchase the right apparatus and technology. It is wise to
consider the differences between owning and contracting.
3. Supply Chain: Create long-term ties with reliable suppliers and implement a coherent inventory
management system.
4. Staffing: Highlight your staffing requirement and hire suitable employees. Create job descriptions,
recruiting process, and training program.
5. Policies and Procedures: Design policies and procedures that offer day-to-day operations direction,
uniformity, and regulation conformance.
6. Performance Metrics: Define critical performance metrics, commonly KPIs, that define the success of
operations.
7. Continuous Improvement: Consistently evaluate the operations in terms of your feedback and
performance measure, respectively.
Marketing and Sales Implementation
Marketing and sales are central in the whole enterprise process and in attracting and retaining the
customer base.Here's how to implement your marketing and sales strategy:
1. Target Market: Clearly define your target market. Know their needs, likes and purchasing habits.
2. Marketing Mix: Design your marketing mix that pertain to product, price, place, and promotion.
Make sure that it fits your brand and speaks to your target audience.
3. Marketing Channels: Choose the best marketing outlets to reach the intended population. Such
could involve social media, email marketing, content marketing, SEO, and the advertisements;
among other forms of marketing.
4. Sales Strategy: Formulate a sales plan which goes well with your marketing plan. It could be
direct sells, retail sells, online sells or even a combination of the three.
5. Customer Relationship Management (CRM): Inherit a CRM system to control customer relations
and information. This way, customer service can be enhanced, a greater retention of customers
can be achieved in addition to more sales growth.
6. Measurement and Analysis: Measure outcome of your marketing and sales activities. For online
marketing, use tools like Google Analytics, and using sales tracking software for sales efforts.
7. Adjustment and Optimization: Based on measurement and analysis, continually tune and fine-
tune your marketing and sales channels to achieve optimal results.
Note that your operational setup and management should be aimed at achieving value efficiency to your
customer. And the objective of your marketing & sales implementation is to help communicate that value to
your target audience and able to convert prospects into consumers. Both involve ceaseless enhancement
as a response to dynamic customer demands and economics.
