BUSINESS ENTRY OPTIONS

BY DR S SENA
 INTRODUCTION
• A number of businesses are
started each year,
• When starting a business there are
chances that, you have thought of
owning your won business or you
know someone who has one,
• One key success in starting a
business is understanding how to
get the resources you need,
• You may take a partner or find
other ways of obtaining money,
• To stay in business you may need
help from someone with more
expertise than you have in certain
areas, or you may need to raise
money to expand.
• You can form a business in one
of several ways, the major
forms of business ownership
are:
–Sole ownership,
–Partnerships,
–Cooperatives, and
–Franchise
 Sole proprietorship
• The vast majority of small businesses
start off as sole proprietorships,
• These firms are owned by one
person, usually the individual who
has day-to-day responsibility for
running the business,
• Sole proprietors own all the assets of
the business and the profits
generated by the business
• They also assume complete
responsibility for any of its
liabilities or debts,
• Legally the owner is the same as
the business, anything that he
does in the name of the business
bears on him
 Advantages of sole
proprietorship
• Easiest and least expensive form of
ownership to organise,
• Sole owners are in complete control,
and within the parameters of the law,
may make decisions as they see fit,
• Sole proprietors receive all income
generated by the business to keep or
reinvest,
• Profits from the business flow-
through directly to the owner’s
personal tax return,
• The business is busy to dissolve, if
desired, and
• Leaving a legacy- business owners
have something to leave behind
for future generations.
 Disadvantages
• Not everyone is equipped to own
and manage a business and keep it
going, the cost of inventory,
supplies, insurance, advertising,
rent, computers, utilities etc
maybe too much to cover alone,
• Unlimited liability/the risk of personal
losses
–The responsibility of business owners
for all of the debts of the business, you
have unlimited liability i.e. Any debts or
damages incurred by the business are
your debts and you must pay them,
even if it means selling your home, car
or whatever you own.
–This is a serious risk that requires not
only thought but also discussion with a
lawyer, insurance company and other
consultants,
• when you work for others, it is
their problem if the business is not
profitable. When you own your
own business, you and the
business are considered one.
• Limited financial resources
–Funds available to the business
are limited to the funds that the
sole owner can gather
• Management difficulties
–All businesses need management,
i.e. Someone must keep inventory
records, accounting records, tax
records etc,
–Sole proprietors often find it
difficult to attract good, qualified
employees to help run the business
because of lower salaries offered
and benefits than offered by larger
companies.
• Overwhelming time commitment
–Its hard to own a business, manage
it, train people and have time for
anything else in life, a sole
proprietor has no one with whom
to share the burden
–It affects the owner’s social and
family life.
• Few fringe benefits
• If you are your own boss, you lose the
fringe benefits that often come from
working for others,
• You have no paid health insurance, no
paid disability insurance, no sick leave
and no vacation pay.
• Limited Growth
–Expansion is often slow since a sole
proprietorship relies on its owner for
most of its creativity, business know-
how and funding.
• Limited life span
–If the sole proprietor dies, is
incapacitated, or retires, the
business no longer exists, unless
it is sold or taken over by the
sole proprietor’s heirs.
Cases for sole proprietorship
• Think and do research of the
following former business people:
–Makoni- of Makoni Township in
Chitungwiza,
–Kadhani – Bus company
–Kambasha Bus Services
 PARTNERSHIPS
• A partnership is a legal form of
business with two or more owners,
• There are several types of
partnerships:
–A general partnership
A partnership in which all owners
share in operating the business and in
assuming liability for the business’
–A general partner is an owner who has
unlimited liability and is active in
managing the firm.
–A limited partnership
A partnership with one or more
general partners and one or more
limited partners
A limited partner is an owner who
invests money into the business but
does not have any management
responsibility or liability for losses
beyond the investment
–Master Limited Partnership
A partnership that looks much
like a corporation (in that it
looks like a corporation and is
traded on a stock exchange)
but is taxed like a partnership
and thus avoids the corporate
income tax.
–Limited liability partnerships
A partnership that limits
partners’ risk of losing their
personal assets to only their
acts and omissions and to the
acts and omissions of people
under their supervision
 Advantages of partnerships
• There are many advantages to having one
or more partners in a business,
• Your partner can cover for you when you
are sick or go on vacation,
• Your partner maybe skilled in inventory
control and accounting while you do the
selling or servicing,
• A partner may also provide additional
money, support and expertise,
• More financial resources
–When two or more people pull
their money and credit together,
it is easier to pay the rent,
utilities, and other bills incurred
by the business, a limited
partnership is especially
designed to help raise money
• Shared management and
pooled/complimentary skills and
knowledge
–It is simply much easier to manage
the day-to-day activities of a
business with carefully chosen
partners,
–Partners give each other free time
from the business and provide
different skills and perspectives,
• Some people find that the
best partner is a spouse, that
why many husband and wife
teams are found managing
restaurants, service shops, and
other businesses
• Longer survival
–Partnerships are four times as likely to
succeed as sole proprietorships,
–Being watched by a partner can help a
business person become more
disciplined.
• No special taxes
–As with sole proprietorships, all profits
of partnerships are taxed as the
personal income of the owners, and the
owners pay the normal income tax on
that money
 DISADVANTAGES OF
PARTNERSHIPS
• Anytime two people have to
agree, there is the possibility of
conflict and tension,
• Partnerships have caused splits
among families, friends, and
marriages,
• Unlimited liability
–Each general partner is liable for the
debts of the firm, no matter who was
responsible for causing those debts,
–You are liable for your partner’s
mistakes as well as your own,
–Like sole proprietors, general partners
can lose their homes, cars and
everything else they own if the
business loses a lawsuit or goes
bankrupt.
• Division of profits
–Sharing risks means sharing
profits, and that can cause
conflicts,
–There is no set system for
dividing profits in a partnership,
so profits are not always divided
evenly
• E.g. Two people form a
partnership in which one puts
more money and the other puts
more hours working in the
business. Each may feel justified in
asking for a bigger share of the
profits--- imagine the resulting
conflicts.
• Disagreements among
partners
–Disagreements over money are
just one example of potential
conflict in a partnership,
–Who has final authority over
employees,
–Who hires and fires employees,
–Who works what hours,
–What if one partner wants to buy
expensive equipment for the firm
and the other partner disagrees,
All terms of the partnerships must
be spelt out in writing to protect all
parties and minimise
misunderstandings
•Difficult to terminate
–Once you have committed
yourself to a partnership, it is
not easy to get out of it (other
than by death)
–Questions about who gets what,
and what happens next are
often difficult to solve when the
 FRANCHISE
• A franchise agreement is an
arrangement whereby someone with
a good business idea (the franchisor)
sells the rights to use the business
name to sell a product or service (the
franchise) to others (the franchisee)
in a given territory
• Some of the best-known franchises
are McDonald’s, 7-Eleven and Holiday
Inn
 Advantages
• Franchising has penetrated every
aspect of global business life by
offering products and services that
are reliable, convenient, and
competitively priced.
• Management and marketing
assistance
–A franchisee has a much greater
chance of succeeding because
he has an established product
–Some franchisors provide help
for choosing a location,
promotion and all phases of
•It is like having your own
store with fulltime
consultants available when
you need them
•Franchisors provide
intensive training
• Personal ownership
–A franchise operation is still is still
your store, and you enjoy much of
the incentives and profits of any
sole proprietor
–You are still your own boss,
although you must follow more
rules, regulations and procedures
than you would with your own
• Nationally recognised name
–With an established franchise,
you get instant recognition and
support from a product group
with established customers from
around the world
• Financial advise and assistance
–A major problem with small businesses
is arranging financing and learning to
keep good records
–Franchisee get valuable assistance and
periodic advice from people with
expertise
 —Franchisors will at times
provide financing to potential
franchisees they feel will become
valuable parts of the franchise
system
• Lower failure rate
–Historically failure rate of
franchises has been lower than
Disadvantages of franchising
• Large start up costs
–Most franchises will demand a fee just
for the rights to the franchise
• Shared profit
–The franchisor often demands either a
large share of the profits in addition to
start up fees or a percentage
commission based on sales, not profit-
• Management regulation
–Management ‘assistance’ has a way
of becoming managerial orders,
directives and limitations
–Franchisees feeling burdened by
the company’s rules and regulations
may lose the spirit and the
incentive of being their own boss
with their own business
• Coattail effects
–What happens to your franchise if
fellow franchisees fail– you could be
forced out of business even if your
particular franchise has been profitable
–This is often referred to as a coattail
effect- the action of other franchisees
clearly have an impact on your future
growth and level of profitability
–Franchisees must also lookout for
competition from other franchisees
• Restrictions on selling
–Unlike owners of private businesses,
who can sell their companies to
whomever they choose on their own
terms, many franchisees face
restrictions in the reselling of their
franchises
—In order to control the quality of
their franchisees, franchisors often
insist on approving the new owner,
who must meet their standards.
• Fraudulent franchisors
–There has been complaints about
franchisors that delivered little or
nothing of what they promoted
•Cooperatives
–A business owned and
controlled by the people who
use it- producers, consumers, or
workers with similar needs who
pull their resources for mutual
gain
–Some people form cooperatives
to give members more economic
power than they would have as
individuals.
–Small businesses often form
cooperatives to give them more
purchasing, marketing or
product development strength