CHAPTER 4-5

Starting and Growing a

Business
Facilitator: Naya Hapsari, M.Sc.

1
 Introduction 1 of 2
Comparison of Sole Proprietorships,
Partnerships/S Corporations and C Corporations

Jump to Appendix 1 long image description

 Introduction 2 of 2
Structure Ownership Taxation Liability Use
Sole One owner Individual Unlimited Owned by a single
Proprietorship income individual/easiest way to
taxed conduct business
Partnership Two or more Individual Somewhat Easy way for two
owners owners’ limited individuals to conduct
income business
taxed
Corporation Any number of Corporate Limited Legal entity with
shareholders and shareholders or
shareholder stockholders
taxed
S Corporation Up to 100 Taxed as a Limited Legal entity with tax
shareholders partnership advantages for restricted
number of shareholders
Limited Unlimited Taxed as a Limited Avoid personal lawsuits
Liability number of partnership
Company shareholders
 Sole Proprietorships
Businesses owned and operated by one individual; the
most common form of business organization in the
United States
• Many focus on services rather than manufacturing
• Typically employ fewer than 50 people
• Comprise nearly three-quarters of all U.S. companies
• Women business owners less likely to get access to
credit
Advantages of Sole Proprietorships
Advantages
• Ease and cost of formation
• Allows a high level of secrecy
• Owner keeps all profits
• Flexibility and control of the business
• Government regulation is minimal
• Taxes paid only once
• Can be dissolved easily
Disadvantages of Sole Proprietorships
Disadvantages
• Unlimited liability
• Scarce external funding
• Owners need diverse skills
• Success is tied to the owner
• Lack of qualified employees
• Higher taxation rate
 Finding Talented Employees
Sole proprietorships have greater difficulty attracting
talented employees

• Large corporations such as

McDonald’s have better
profits and more job
opportunities
• Difficult to match the wages

© Blend Images/Alamy
and benefits offered by large
corporations
• Little chance for
advancement within sole
proprietorship Sole proprietorships often have greater
difficulty attracting talented employees
because of competition from larger companies.
 Entrepreneur

© Image Source

Many local restaurants are sole proprietorships.

 Partnerships
A form of business organization defined by the Uniform
Partnership Act as “an association of two or more
persons who carry on as co-owners of a business for
profit”
• One way to minimize the disadvantages of sole
proprietorship and maximize its advantages is to
have more than one owner
• Typically larger than sole proprietorships, but smaller
than corporations
 Types of Partnerships
General Partnership
– Involves a complete sharing in both the management
and the liability of the business
Limited Partnership
– Has at least one general partner, who assumes
unlimited liability, and at least one limited partner
whose liability is limited to his or her investment in the
business
Articles of Partnership
– Legal documents that set forth the basic agreement
between partners
 Advantages of Partnerships
Advantages
• Easy to organize
• Availability of capital
and credit
• Combined

© Ben Margot/AP Images

knowledge and skills
• Swift decision
making
• Government In 1996, Stanford students Sergey Brin and Larry
regulations are few Page partnered to form the search engine Google,
now named Alphabet, as part of a research project.
The company was incorporated in 1998 and is now
the world’s top search engine.
 Disadvantages of Partnerships
Disadvantages
• Unlimited liability
• Responsible for each others’ decisions
• A new agreement is needed if the partnership
changes
• Difficult to sell a partnership interest
• Distribution of profits may be uneven
• Cannot find external funding as easily as large
corporations
 Partnerships and Taxes
Partnerships are quasi-taxable organizations
ü Partnerships do not pay taxes, but do file a tax
return providing information on profitability and
distribution of profits
ü Partners report their share of the profits and pay
taxes at the income tax rate for individuals
 Keys to Success in Business Partnerships
Ø Keep profit sharing equitable based on contributions.
Ø Partners should have different skill sets or resource
contributions.
Ø Ethics and compliance are required.
Ø Must maintain effective communication skills.
Ø Maintain transparency with stakeholders.
Ø Must be realistic in resource and financial management.
Ø Previous experience related to business is helpful.
Ø Maintain life balance in time spent on business.
Ø Focus on customer satisfaction and product quality.
Ø Maintain resources in line with sales and growth
expectations and planning.
 Corporations
Corporation
– A legal entity, created by the state, whose assets and
liabilities are separate from its owners
– Has many of the rights, duties and powers of a
person
Ø Can own and transfer property

Ø Can enter into contracts

Ø Can sue and be sued in court

– Account for the majority of all U.S. sales and income

 Stock and Dividends
Corporations are typically owned by many
individuals and organizations who own shares
of the business.
– Stock
• Shares of the corporation that may be bought or sold
• Can also be gifted or inherited

– Dividends
• Profits of a corporation that are distributed in the form of cash
payments to the stockholders
 Creating Corporations
• Incorporators create the corporation
• Follow state procedure of chartering the
corporation
• Incorporators file legal articles of incorporation
with the state
• State issues a legal corporate charter to the
company
• Owners establish bylaws and elect board of
directors
 Types of Corporations
Domestic Corporation
– If conducting business in the state in which it is
chartered
Foreign Corporation
– If conducting business outside the state in which it is
chartered
Alien Corporation
– If conducting business outside the nation in which it is
incorporated
 Private Corporations and Initial Public
Offering
Private Corporation
– Owned by just one or a few people who are closely
involved in managing the business
– None of their stock is sold to the public
– Private companies are not required to disclose
financial information publicly
Initial Public Offering (IPO)
– Selling a corporation’s stock on public markets for the
first time
– Done when a private corporation wishes to “go
public” or to raise additional capital and expand
 Public Corporations
Public Corporations
– A corporation whose stock anyone may buy, sell, or
trade
– Two types of public corporations
§ Quasi-Public

Ø Owned and operated by the government

Ø Provides a service but often operates at a loss

§ Nonprofit

Ø Focuses on providing a service rather than making a profit

Ø Not owned by the government

 Board of Directors
A group of individuals, elected by the stockholders to
oversee the general operation of the corporation, who
set the corporation’s long-range objectives
ü Board is responsible for meeting objectives on schedule
ü Legally liable for mismanagement or misuse
ü An important duty is to hire corporate officers
• Inside directors are employees of the company
• Outside directors are people unaffiliated with the
company
 Preferred and Common Stocks
Preferred Stock
– A special type of stock whose owners, though not
generally having a say in running the company, have
a claim to profits before other stockholders do
Common Stock
– Stock whose owners have voting rights in the
corporation, yet do not receive preferential treatment
regarding dividends
• May vote by proxy; allows stockholders to assign their voting
privilege to someone else
• Have preemptive rights; they can buy any new shares of
stock the company issues
 Preferred Stock
ü Owners of preferred stock have first claim to
profits
ü Dividend payments on preferred stocks are
usually a fixed percentage of the initial issuing
price (set by the board of directors)
§ If a share of preferred stock originally cost $100 and
the dividend rate was stated at 7.5%, the dividend
payment will be $7.50 per share per year
 Advantages of Corporations
Advantages
• Limited liability
• Ease of transfer of ownership
• Perpetual life
• Securing funding is easier than for other forms of
business
• Expansion potential
 Disadvantages of Corporations
Disadvantages
• Double taxation
• Expensive to form
• Disclosure of information to the government and the
public
• Owners and managers are not always the same and
can have different goals
 Questions
• Berdasarkan jenis kepemilikan, terdapat 2 macam
perusahaan. Langkah awal apa yang harus dilakukan
perusahaan pribadi jika ingin bertransformasi menjadi
perusahaan publik? Apa keuntungan yang akan didapat?
• Koperasi merupakan bentuk usaha yang banyak
terbentuk di Indonesia, dan merupakan salah satu contoh
dari Cooperative Organization. Dalam bentuk usaha
Cooperative, bagaimanakah sistem perpajakannya?
• Kondisi apa yang memutuskan suatu perusahaan public
corporation beralih ke private corporation?
 IPO Requirements (Indonesia)

Source: https://gopublic.idx.co.id
 Joint Venture and S Corporation
Joint Venture
– A partnership established for a specific project or for a limited
time
– Control can be divided equally, or one partner may control
decision making
– Used for ventures that call for large investments, such as
development of new products

S Corporation
– Corporation taxed as though it were a partnership with
restrictions on shareholders
– Eliminates double taxation and retains the limited liability benefit
– Very popular with entrepreneurs, representing nearly half of all
corporate filings
Limited Liability Company and Cooperatives

Limited Liability Company (LLC)

– Form of ownership that provides limited liability and taxation like
a partnership but places fewer restrictions on members
– Considered a blend of the best characteristics of corporations,
partnerships and sole proprietorships

Cooperatives or Co-ops
– Organizations composed of individuals or small businesses that
have banded together to reap the benefits of belonging to a
larger organization
– Set up not to make money as an entity, but so members can
become more profitable or save money
 Mergers
The combination of two companies (usually
corporations) to form a new company
ü Horizontal merger
♦ Firms that make and sell similar products to the same
customers merge

ü Vertical merger
♦ Companies operating at different but related levels of an
industry merge

ü Conglomerate merger
♦ Firms in unrelated industries merge
 Trends in Business Ownership 1 of 2
Acquisition
– The purchase of one company by another, usually by
buying its stock

Corporate raider
– A company or individual who wants to acquire or take over
another company and first offers to buy some or all of its
stock at a premium in a tender offer

Poison pill
– The firm allows stockholders to buy more shares of a
stock at lower prices than the current market value to
head off a hostile takeover
 Trends in Business Ownership 2 of 2
Shark repellant
– Management requires a large majority of stockholders to
approve a takeover

White knight
– A more acceptable firm that is willing to acquire a
threatened company
 Questions
• Jika dua perusahaan merger, bagaimana posisi
saham di bursa efek? Menggabungkan value dua
perusahaan lama, atau dengan nama baru? Dan
valuenya bagaimana?
• Tantangan komunikasi muncul sebagai salah
satu faktor utama yang menyebabkan kegagalan
sinergi perusahaan ketika perushaan selesai
merger atau akuisisi. Bagaimana sebuah
perusahaan mengatasi itu?
• Apa saja pertimbangan-pertimbangan apabila
suatu perusahaan ingin melakukan merger atau
akuisisi?
 Leveraged Buyout
A purchase in which a group of investors borrows money
from banks and other institutions to acquire a company
(or a division of one), using the assets of the purchased
company to guarantee repayment of the loan
ü Mergers and acquisitions (particularly the merger mania in the late
20th century) have been criticized

ü Executives have to focus excessively on avoiding takeovers, not

on managing the business
 Part 2
CHAPTER 4
Options for Organizing Business
CHAPTER 5
Small Business, Entrepreneurship, and
Franchising
 The Nature of Entrepreneurship
Entrepreneurship
– The process of creating and managing a business to
achieve desired objectives
Ø Entrepreneurship movement is accelerating, and many new
small businesses are emerging

Ø Technology is now easier to obtain by a small business

§ Websites, podcasts, online videos, social media, cellular phones,

and expedited delivery services

Ø Growing trend among small businesses is social

entrepreneurship

§ Social entrepreneurs are individuals who use entrepreneurship to

address social problems
Great Entrepreneurs of Innovative Companies
Company Entrepreneur
Hewlett-Packard Bill Hewlett, David Packard
Walt Disney Productions Walt Disney
Starbucks Howard Schultz
Amazon.com Jeff Bezos
Dell Michael Dell
Microsoft Bill Gates
Apple Steve Jobs
Walmart Sam Walton
Google Larry Page, Sergey Brin
Ben & Jerry’s Ben Cohen, Jerry Greenfield
Ford Henry Ford
General Electric Thomas Edison
 What Is a Small Business?
Small Business
– Any independently owned and operated business
that is not dominant in its competitive area
Ø “Smallness” is relative

Ø Employees less than 500 people

Small Business Administration (SBA)

– An independent agency of the federal government
that offers managerial and financial assistance to
small businesses
 Women- and Minority-Owned
Businesses

Women-owned Businesses
– Responsible for employing millions of workers
– Women own more than 9 million businesses
nationwide
Minority-owned Businesses
– Growing faster than other classifiable firms
– Represent 28.6% of all small businesses
 Innovation
ü Small firms produce more than
half of all innovations
ü Small firms make up
approximately 2% of franchises
ü Many of today’s largest
businesses started off as small
firms that used innovation to

© Matthew Chattle/Alamy Stock Photo

achieve success
ü Entrepreneurs provide fresh
ideas and usually have greater
flexibility to change than large E-commerce site Etsy sells homemade
firms and vintage items. This small firm
became publicly traded in 2015 and was
valued at over $3 billion.
Industries that Attract Small Business 1 of 2
Retailing and Wholesaling
– Retailers acquire goods from producers or
wholesalers and sell them to consumers
– Wholesalers supply products to industrial, retail, and
institutional users for resale or for use in making
other products
Services
– Service sector includes businesses that do not
actually produce tangible goods (80% of U.S. jobs)
Industries that Attract Small Business 2 of 2
Manufacturing
– Manufacturing goods can provide unique
opportunities for small businesses (like customizing
products for customers)
High Technology
– High technology describes businesses that depend
heavily on advanced scientific and engineering
knowledge
 Sharing Economy
Sharing Economy
– An economic model involving the sharing of
underutilized resources
– Entrepreneurs earn income by renting out an
underutilized resource such as lodging or vehicles
– Uber is an example
– Referred to as the “gig economy”
– Are workers independent contractors or
employees?
 Small-Business Ownership
Advantages
• Independence
• Costs
• Flexibility
• Focus
• Reputation
Disadvantages
• High stress level
• High failure rate
• Undercapitalization
• Managerial inexperience or incompetence
• Inability to cope with growth
Successful Traits of Young Entrepreneurs
Trait Definition
Intuitive Using one’s intuition to derive what’s true without
conscious reasoning
Productive Being able to produce large amounts of something
during a specific time period
Resourceful Understanding how to use and spend resources wisely
Charismatic Having the ability to inspire others behind a central vision
Innovative Being able to come up with new and creative ideas
Risk-taker Having the ability to pursue risky endeavors despite the
possibility of failure
Persistent Continuing in a certain action in spite of obstacles
Friendly Being able to have mutually beneficial interactions with
people
 Advantages of Independence
Independence
– To do better for themselves than they could do by
remaining with their current employer or by changing
jobs
– To choose whom they work with, the flexibility of
where/when to work, and the option to work in a
family setting
 Advantages of Costs
Costs
– Spend less money on wages/salaries, rent, utilities,
etc.
– Use external firms to handle accounting, advertising,
and legal counseling
– Friends and family volunteer time to work on projects
Advantages of Flexibility, Focus, and Reputation
Flexibility
– Small size allows flexibility to adapt to changing
market demands
– Usually only one layer of management (the owner) so
decisions can be made and executed quickly
Focus
– Focus efforts on a precisely defined market niche (a
specific group of customers
Reputation
– Because of capacity to focus on narrow niches, can
develop enviable reputations for quality and service
 High Stress Level
Disadvantages
• Likely to provide a living for its owner, but not much
more
• Ongoing worries about competition, employee
problems, new equipment, expanding inventory, rent
increases, or changing market demand
• Small-business person is often the owner, manager,
sales force, shipping and receiving clerk,
bookkeeper, and custodian
• Multitasking can result in long hours for most owners
 High Failure Rate
Half of all small businesses fail within five
years
Disadvantages
• Undercapitalization
• The lack of funds to operate a business normally
• Too many entrepreneurs think that all they need is the
money to get started
• Managerial inexperience or incompetence
• Just because an entrepreneur has a brilliant vision, it
does not mean he or she has the knowledge or
experience to manage
• Inability to cope with growth
• Growth requires owner to give up some direct authority
 Starting a Small Business 1 of 2

© Atomazul/Shutterstock

Some entrepreneurs choose to start their businesses from scratch so

they can run their businesses as they see fit. While they might start
off small and struggle to attract customers, they are not limited by the
restrictions of a franchise agreement.
 Starting a Small Business 2 of 2
1. Start with a concept or general idea
2. Create a business plan
3. Devise a strategy for planning and
development
4. Make decisions
ü Form of ownership
ü Financing
ü Acquire existing business or start new?
ü Buy a franchise?
 The Business Plan
A precise statement of the business rationale and a
step-by-step explanation of how it will achieve its goals
ü Acts as a guide and reference document
• Explanation of the business

• Analysis of competition

• Income/expense estimates

• Establish strategy for acquiring sufficient funds to keep the

business going

• Revised periodically to ensure the firm’s goals and

strategies adapt to changes in the environment
 Questions
• Salah satu kunci sukses dalam berbisnis adalah
melalui Business Plan. Elemen-elemen apa
sajakah yang harus diperhatikan dalam membuat
Business Plan? Dan dalam situasi seperti apa
Business Plan harus disesuaikan ulang?
 Forms of Business Ownership
After developing a business plan, the
entrepreneur has to decide on an appropriate
legal form of business ownership
ü Sole Proprietorship
ü Partnership
ü Corporation
 Financial Resources
ü Often, the small-business owner has to put up
a significant percentage of the necessary
capital
• Cash money
• Obtain capital

© Ariel Skelley/Getty Images

ü Financing options:
• Equity financing
• Debt Financing Small-business owners often use
debt financing from banks or the
Small Business Administration to
start their own organization.
 Equity Financing
ü Referred to as equity financing because the owner uses
real personal assets rather than borrowing funds from
outside sources to get started in a new business
ü Can also obtain equity financing by finding investors for
their operations and selling stock in the business to
family members, friends, employees or other investors
 Venture Capitalists
Persons or organizations that agree to provide
some funds for a new business in exchange for
an ownership interest or stock
ü Venture capitalists hope to purchase the stock of a
small business at a low price and then sell the
stock for a profit after the business has grown
successful

ü Although this form of equity financing has helped

many small businesses, they require that the small-
business owner share the profits of the business
(and sometimes the control, as well) with the
investors
 Debt Financing 1 of 3
New businesses sometimes borrow more than half
of their financial resources
• Banks are the main suppliers of external financing
• Federal level: the Small Business Administration
(SBA) offers financial assistance to qualifying
business
• Look to family and friends as sources for long-term
loans or other assets for an ownership interest in
the business
- State the agreement clearly in writing before money
changes hands
 Debt Financing 2 of 3
Collateral
• A financial interest in the property or fixtures of the
business, to guarantee payment of the debt

Mortgage
• May have to provide personal property as collateral,
if the business fails then they may eventually
claim/sell the collateral

Line of Credit
• An agreement by which a financial institution
promises to lend a business a predetermined sum
on demand
 Debt Financing 3 of 3
Trade Credit
• Suppliers allow the business to take possession of
the needed goods and services and pay for them at
a later date/installments

Bartering
• Trading their own products for the goods and
services offered by other businesses
Starting from Scratch vs. Buying an
Existing Business

ü Starting from scratch can be expensive and requires

promotional efforts to familiarize customers with the
business
ü Existing businesses have the advantage of a built-in
network of customers, suppliers, and distributors
• Reduces some of the guesswork inherent in starting a new
business
• Entrepreneur who buys an existing business also takes on any
problems the business already has
 Franchising
Franchise
• A license to sell another’s products or to use
another’s name in business, or both

Franchiser
• The company that sells a franchise
Franchisee
• The purchaser of a franchise
 Questions
• Bagaimana jika franchising ini gagal, bisa kah fanchising
ini menjadi retail untuk mempertahankan bisnisnya? Lalu
bagaimana dengan franchising bertanggung jawab
dengan dengan pemilik modal atau investornya?
• Hal apa saja yang harus diperhatikan oleh pihak
franchisor sebelum membuka cabang baru agar dapat
meminimalisir tingkat kerugian atau kegagalan atau
adakah standar dalam membuka cabang baru?
• Jika kita ingin memulai usaha dengan franchise apa yang
harus diperhatikan untuk memilih perusahaan yang akan
kita ajak kerjasama tersebut?
 Advantages of Franchises
Advantages
• Training and support
• Brand-name appeal
• Standardized quality of goods & services
• National/local advertising
• Financial assistance
• Proven products/format
• Centralized buying power
• Site selection & territorial protection
• Greater chance for success
 Disadvantages of Franchises
Disadvantages
• Fees and profit sharing
• Standardized operations
• Restrictions on purchasing
• Limited product line
• Possible market saturation
• Less freedom in decisions
Fastest Growing and Hottest New Franchises
Top 10 Fastest Growing Franchises Top 10 Hottest New Franchises
Subway Mac Tools
Dunkin’ Donuts Rent-A-Center
Cruise Planners The Grounds Guys LLC
Jimmy John’s Gourmet Sandwiches FirstLight HomeCare
Vanguard Cleaning Systems Hallmark Homecare Inc.
Great Clips Sweet Frog Premium Frozen Yogurt
Taco Bell Fresh Healthy Vending
Bricks 4 Kidz HUMAN Healthy Markets
McDonald’s Green Home Solutions
Sport Clips Engineering for Kids

Sources: “2015 Fastest-Growing Franchise Rankings,” Entrepreneur, http://www.entrepreneur.com/franchises/fastestgrowing (accessed April

10, 2014); “2015 Top Newest Franchises,” Entrepreneur, http://www.entrepreneur.com/franchises/topnew (accessed March 3, 2016).
 Help for Small-Business Managers
Organizations and programs exist to help small-
business managers
ü National publications such as Inc. and Entrepreneur
ü Small Business Administration (SBA)
• Small Business Development Centers (SBDCs)
• Service Corps of Retired Executives (SCORE)
• Active Corps of Executives (ACEs)

ü Small Business Institutions (SBIs)

ü U.S. and local Departments of Commerce
ü Other small businesses
 Demographic Trends
ü Baby boomer generation consists of 75 million
Americans
• Wealthy, but many small businesses do not actively
pursue it
• Travel, financial planning, and health care will continue to
grow as boomers age

ü Millennials/Generation Y number around 83 million

and are not solely concerned about money
• Concerned with advancement, recognition, improved
capabilities
• Need direct, timely feedback and recognition
An Untapped Market for Small Businesses

• Another growing trend is the

growing number of
immigrants living in the U.S.
• Provides another untapped
market for small businesses
• The Latino population is the

© Karin Dreyer/Blend Images

biggest and fastest growing
minority segment in the
United States—and a
lucrative market for
businesses looking for ways
to meet the segment’s many
needs
Technological and Economic Trends
ü Internet usage continues to provide new opportunities
ü Increase in service exports
• Creates new opportunities to expand operations abroad
ü Economic turbulence provides both opportunities and
threats
• Can react quickly to change and can stay close to their
customers
ü Deregulation of the energy market and alternative fuels
• Worldwide energy markets are valued in the hundreds of
billions of dollars
 Making Big Businesses Act “Small”
Continuing success and competitiveness of small
businesses through rapidly changing conditions in the
business world have led many large corporations to take
a closer look at what makes their smaller rivals tick
ü Large firms emulate smaller ones to improve bottom
line
ü Downsizing (right-sizing) – To reduce management
layers, corporate staff, and work tasks to make the firm
more flexible, resourceful, and innovative
ü Intrapreneurs - Individuals in large firms who take
responsibility for the development of innovations within
the organizations
 Reference
Ferrel, O.C., Hirt, Geoffrey A., dan Ferrell, Linda.
2017. Business Foundations: A Changing World,
12th Edition. NY: McGraw-Hill.
 Terima Kasih

Constant and frequent questioning is the first key to wisdom …

[Ibnu Sina]

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