ENTREPRENEURSHIP

Lecture No: 17

Resource Person:

Malik Jawad SaboorAssistant Professor

Department of Management SciencesCOMSATS Institute of Information Technology

Islamabad.

Previous Lecture Review

• Entrepreneurs in Action

• Video on Google Boys

Objectives

• Guidelines for Preparing Business Plan• Tips on Preparing Business Plan • Explain the advantages and the disadvantages of

the three major forms of ownership• The Sole Proprietorship• The Partnership• The Corporation.

Guidelines for Preparinga Business Plan

• Remember: No one can create your plan for you.• Potential lenders want to see financial projections,

but they are more interested in the strategies for reaching those projections.

• Show how you plan to set your business apart from competitors; don’t fall into the “me too” trap.

• Identify your target market and offer evidence that customers for your product or service exist.

Tips on Preparinga Business Plan

• Make sure your plan has an attractive cover. (First impressions are crucial.)

• Rid your plan of all spelling and grammatical errors.

• Make your plan visually appealing. • Include a table of contents to allow readers to

navigate your plan easily. • Make it interesting.

(Continued)

Tips on Preparinga Business Plan

• Your plan must prove that the business will make money (not necessarily immediately, but eventually).

• Use spreadsheets to generate financial forecasts.• Always include cash flow projections. • Keep your plan “crisp” – between 25 and 50 pages

long.• Tell the truth – always.

(Continued)

Presenting the Plan

• Demonstrate enthusiasm, but don’t be overemotional.

• Know your audience thoroughly. • “Hook” investors quickly with an up-front

explanation of the venture, its opportunities, and its benefits to them.

• Hit the highlights; focus on the details later.• Keep your presentation simple – 2 or 3 major

points.

Presenting the Plan

• Avoid overloading your audience with technological jargon.

• Use visual aids.• Close by reinforcing the nature of the opportunity. • Be prepared (with details) for potential investors’

questions.• Follow up with every investor to whom you make

your presentation.

(Continued)

Choosing a Form of Ownership

• There is no one “best” form of ownership.• The best form of ownership depends on an

entrepreneur’s particular situation.• Key: Understanding the characteristics of

each form of ownership and how well they match an entrepreneur’s business and personal circumstances.

Factors Affecting the Choice

• Tax considerations• Liability exposure• Start-up and future capital

requirements• Control• Managerial ability• Business goals• Cost of formation

Major Forms of Ownership

• Sole Proprietorship• Partnership• Corporation

Advantages of the Sole Proprietorship

• Simple to create• Least costly form to begin• Profit incentive• Total decision-making authority• No special legal restrictions• Easy to discontinue

Disadvantages of the Sole Proprietorship

• Unlimited personal liability• Limited skills and capabilities• Feelings of isolation• Limited access to capital• Lack of continuity

Liability Features of the Basic Forms of Ownership

Sole Proprietorship

Claims of Sole Proprietor’s CreditorsClaims of Sole Proprietor’s Creditors

Sole Proprietor’s Personal AssetsSole Proprietor’s Personal Assets

Partnership

• An association of two or more people who co-own a business for the purpose of making a profit.

• Always wise to create a partnership agreement.

• Best partnerships are built on trust and respect.

ELEMENTS OF GOOD PARTNERSHIP AGREEMENT

• What is the financial contribution of each partner?

• What is the division of work between the partners?

• What constitutes income in the partnership? • What property is included in the partnership

and how is it defined?• How will/can partnership property be used by

individual partners?

• How will bank accounts be set up and how will accounting and tax matters be handled?

• How will disputes related to the partnership be resolved?

• What happens if one partner dies or becomes disabled or incapacitated?

• What happens if one partner wants to leave the partnership?

• How will sale of the business be handled?

ELEMENTS OF GOOD PARTNERSHIP AGREEMENT

Advantages of the Partnership

• Easy to establish• Complementary skills of partners• Division of profits• Larger pool of capital• Ability to attract limited partners

Types of Partners

• General partners– Take an active role in managing a business.– Have unlimited liability for the partnership’s debts.– Every partnership must have at least one general

partner.• Limited partners– Cannot participate in the day-to-day management

of a company. – Have limited liability for the partnership’s debts.

Advantages of the Partnership

• Easy to establish• Complementary skills of partners• Division of profits• Larger pool of capital• Ability to attract limited partners• Little government regulation• Taxation

Disadvantages of the Partnership

• Unlimited liability of at least one partner• Capital accumulation• Difficulty in disposing of partnership interest• Lack of continuity• Potential for personality and authority

conflicts• Partners bound by law of agency

Liability Features of the Basic Forms of Ownership

Partnership

Claims of Partnership’s CreditorsClaims of Partnership’s Creditors

Partnership’s AssetsPartnership’s AssetsGeneralPartner’sPersonalAssets

GeneralPartner’sPersonalAssets

GeneralPartner’sPersonalAssets

GeneralPartner’sPersonalAssets

Corporation

• A separate legal entity from its owners.• Types of corporations:• Publicly held – a corporation that has a large

number of shareholders and whose stock usually is traded on one of the large stock exchanges.

• Closely held – a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends.

Advantages of the Corporation

• Limited liability of stockholders• Ability to attract capital• Ability to continue indefinitely• Transferable ownership

Liability Features of the Basic Forms of Ownership

Corporation

Claims of Corporation’s CreditorsClaims of Corporation’s Creditors

Corporation’s AssetsCorporation’s Assets

Shareholder’sPersonal AssetsShareholder’sPersonal Assets

Shareholder’sPersonal AssetsShareholder’sPersonal Assets

BarrierBarrierBarrier

Barrier

Disadvantages of the Corporation

• Cost and time of incorporating• Double taxation• Potential for diminished managerial

incentives• Legal requirements and regulatory “red

tape”• Potential loss of control by founder(s)

You Be The Consultant..

CASE STUDY

YOU BE THE CONSULTANTLouise Tallman spent much of her childhood playing and working in her mother and aunt’s antique shop. Her interest, involvement, and love of antiques led her to attend a school of art and design. Upon graduation, Louise decided to start her own antique shop and is in the process of completing her business plan.

Q1. What are the questions that you would pose to Louise in order to help her select the form of ownership for her antique shop? Please explain the relevance of each question and answer, to determination of the suggested form of ownership.

Lecture Review

• Explain the advantages and the disadvantages of the three major forms of ownership

• The Sole Proprietorship• The Partnership• The Corporation.

Reference: Essentials of Entrepreneurship & Small Business Management, Zimmer, Scarborough &Wilson, 5th Edition