Company Project: Entrepreneur/Business Leader Role

Company Project: Entrepreneur/Business Leader Role

Mr. Stewart’s Economic Class

Fall Semester 2016

As the Entrepreneur/Business leader of your company, you will have three primary responsibilities for the project:

1.)Decide what type of business you will be.

2.)Formulate and create a business plan.

3.)Graph your projections for your company.

What Are the Different Types of Business?

There are at least six different types of business you could choose to start:

1. Sole Proprietor– the oldest form of trading there is, it’s also the simplest and the most common type of business you’ll find. The clue is in the name – meaning that you are solely responsible for everything the business does and you’re often known as the proprietor. This is the usual form for small shops and businesses that provide services such as beauticians, hairdressers, photographers, gardeners and so on.

When you start out in business, most often you use your own money to fund the venture. However, as you start to grow, you may need to find funding elsewhere. When this happens you may want or need to enter into another kind of business model:

2. Partnership – these are made up of two or more people and any profits, debts and decisions related to the business are a shared responsibility. These are common for practices that offer services such as accountants, dentists, doctors, solicitors and so on.

3. Company – the correct name for this is a joint stock company and it’s made up of a number of people who put their money together to form a ‘joint stock’ of capital. These people are more commonly known as shareholders and, as the name suggests, they each own a share of the business and each expect a share of the profits too.

Each shareholder puts money into the company and receives a portion of the company – shares – equivalent to what they put in.

Despite each shareholder owning a piece of the company, in law it is seen as a legal entity – the same as an individual – that is entirely separate from the shareholders or members, as they are sometimes known. It can be sued, make a profit or loss, be held responsible for its employees’ actions and go into liquidation – the term used for companies that go bankrupt.

Private Limited Companies
Most small businesses are private limited companies with the shares only available privately, for example, to family members. The shares are not available to buy publically so they cannot be traded on the stock market.

Public Limited Companies
Being a Public Limited Company (PLC) is much more complex and is usually reserved for larger companies. To be called a PLC a company must have, amongst other things, more than one director and a trading certificate from Companies House. PLCs can sell their shares on the stock market so anyone can buy them. Whilst it is easier to raise money using this method it also means that the company accounts are in the public domain. The company must also be audited and make certain information available to Companies House. Plus, PLCs can be bought out by other shareholders.

4. Franchises
A franchise involves you using another company’s successful business model to create your own shop, restaurant etc. Essentially, you buy the franchise and trade off the good name of the company you’ve bought into. For example Subway – you’d find a suitable location, Subway would provide you with their livery, food products and use of trademark. You make money because customers are already familiar with Subway; so you have an instant customer base. Franchises are for a fixed period of time – from five to 35 years – and cover a certain location known as a ‘territory’. You’ll have to pay fees to the franchisor:

• royalties for using the trademark
• fees for the training and advice received

There are specific and complex laws relating to franchise contracts so entering into one is something that needs to be thought about very carefully.

5. Workers Co-operatives
This is a truly egalitarian form of business that is formed to meet the mutual needs of the workers. Each person – from the managing director to the shop floor assistant – is equally important. All decisions are taken democratically and any profits are shared equally or ploughed back into the business. Co-operatives follow seven guiding principles:

• Voluntary and open membership
• Democratic control
• Member economic participation (financial interest)
• Autonomy and independence
• Education, training and information
• Co-operation among co-operatives
• Concern for the community

This should give you a pretty good idea of the ethical and moral stance of a co-operative.

6. Limited Liability Partnerships (LLPs)

LLPs are a relatively new form of business as they’ve only been around since 2001. They are intended to benefit professional partnerships such as lawyers, accountants and the like, who are restricted from forming limited companies due to restrictions from their professional bodies. LLPs operate in much the same way as limited partnerships and allow the members to limit their personal liability if something goes wrong with the business.

So, as you can see, businesses can be simple or complex but, once you know what all the terminology means, you should find it quite easy to decide which kind of business structure will best suit your needs.

Pros and cons of different types of businesses

If you're starting a business, one of the first questions you need to answer is what kind of business you're going to be. By this, I don't just mean what kind of products you'll sell or service you'll provide, but what legal form your business is going to take.

Now, this may sound like a question that shouldn't be very important to a very small business. After all, if you're going to be a consultant or a graphic designer or an electrical contractor, why bother dealing with the government? Who needs to pay a few hundred dollars in corporation or legal fees?

But choosing a legal form affects how much you pay in taxes, who can invest in your company, and most importantly, your personal financial security.

Three things to keep in mind when choosing a legal form are:

• Liability. Legally, corporations are individual entities. As such, the corporation — not individual shareholders — are responsible for the actions of the business. In other words, if something goes very wrong, and a corporation is sued, only the assets of the corporation are at stake — not the owners' personal assets. (There are some exceptions to this rule, but generally, your personal liability is greatly limited.)

• Double taxation. No one likes paying taxes, and you certainly don't want to pay taxes twice — once on income for the business and then again when that income is distributed as profits to you. Instead, look for a legal form that allows for the profits of the company to "pass through" to the owners, without having to pay corporate taxes first.

• Ownership. Certain legal business forms limit the number or type of people who can invest in your company. If you're seeking a large number of investors or international investors, find a corporate structure that permits such stockholders.

It's always best to sit down with an attorney — and possibly an accountant — and discuss the best corporate structure for your specific business.

When you do meet with an attorney, these are the legal structures you'll consider:

• Sole Proprietorship. A business owned by one person with no formal legal structure.

Advantages: It's simple. Just start your business; there's no additional paperwork. You don't file corporate income taxes — just a Schedule "C" with your personal income taxes.

Disadvantages: You have no personal liability protection. If your business is sued, you could lose everything you own — and in some cases, your spouse could lose his or her assets, too.

• Partnership. A business with more than one owner who actively engages in the management of the company.

Advantages: No required legal forms (although you'd be well advised to draw up a partnership agreement). No double taxation — profits pass through to the partners.

Disadvantages: Each partner has unlimited personal liability, even for actions taken by other partners. Be warned: if you go into business with others, you've got a partnership in the eyes of the law whether or not you've drawn up any paperwork.

• Limited Liability Company (LLC). A legal form that provides liability for the company's owners without requiring incorporation. LLCs have become the form of choice for many small companies.

Advantages: Personal liability protection for all owners and pass through profits without corporate taxes. Another benefit: Profits can be distributed unequally — a 60% shareholder can take only 10% of the profits. This allows more flexibility for tax planning and for rewarding owners who bear more management responsibilities.

Disadvantages: LLC laws vary by state; you are likely limited in the number of owners (investors) you can have, and some states do not permit international investors.

• "S" Corporation: A type of corporation that provides personal liability but permits pass through taxation.

Advantages: This used to be the most popular choice for small companies, and lawyers and accountants are very familiar with laws relating to S corporations.

Disadvantages: You cannot distribute profits unevenly as you can with LLCs. You pay state corporate fees.

• "C" Corporation: A corporate form that allows for the most investors and significant liability protection.

Advantages: No limit to the number of people who can own stock. Legal form for companies that are going to be publicly traded.

Disadvantage: Double taxation.

What is a business plan and why do I need one?

A business plan precisely defines your business, identifies your goals and serves as your firm's resume. Its basic components include a current and pro forma balance sheet, an income statement and a cash flow analysis. It helps you allocate resources properly, handle unforeseen complications, and make the right decisions.

Because it provides specific and organized information about your company and how you will repay borrowed money, a good business plan is a crucial part of any loan package.
Additionally, it can tell your sales personnel, suppliers and others about your operations and goals.

You must formulate and create a business plan for your company.

Use these sites to formulate your plan:

How to Create the Financial Projections for Your Business Plan

With a good business plan, you can land investors and help your company grow. Learn why thefinancial section of the plan is so important, and get tips on what information to include.

OVERVIEW

If you want to convince investors and lenders to commit to your vision and your company, awell-organized strategic business plan is a must. It shows the company's potential anddemonstrates how the business will create a return on the investment requested. The financialsection of that plan is critical to convincing investors that the company has reliably estimated itscosts and revenue potential and that it offers a plausible asset and debt structure.Your accounting unit will prepare your balance sheet and income statement (profit and loss), butyou'll need to know the details intimately to write the plan's three-to-five-year financialprojections, to be prepared to discuss the content with potential investors, and to translate theplan into action.

Financial Statements

This Quick-Read assumes you have a marketing plan in place with three-to-five-year projectionsfor sales and costs of sales, and a personnel plan projecting numbers of employees and wages.In this Quick-Read you will find:

Why the financial section of the business plan is vital for both investors andentrepreneurs.

Guidelines for preparing the financial projections.

A well-written strategic business plan is essential to the capital-raising process for a growingcompany. Banks and investors won't provide money for an operation that doesn't have a clearplan to assure return on investment and growth. The plan helps management focus on the growthof the company and decide how that growth will be achieved.Prospective investors will be especially attentive to the financial section of the plan. Because toomuch or too little outside funding will inhibit return on investment and growth, funding needsmust be projected as precisely as possible. This requires dependable and reliable financialstatements.You'll need to prepare spreadsheets projecting monthly figures for the next year and annualfigures for the following two to four years, starting with your current income statement, cashflow statement and balance sheet. You should add rows for financial ratios that you orprospective investors are likely to care about, for example, debt to equity, assets to liabilities. Ifyou start with the income statement projections, you'll find that the numbers are well suited forre-use in the monthly and annual projections for the cash flow statement and the annual balancesheets.Specialized business-plan software can be purchased to create pro forma (projected) financialstatements based on past financials, but you probably will be able to predict future performanceas well as the software by examining the history of each line entry to determine if it is steadilyrising or rising on a curve. Unlike most software, you will be able to factor into your projectionsvariables you know will change. (Be sure to make a note for each significant controlling factor,to explain deviations to the readers.) You may want to graph the past numbers to make the trendseasier to see.

As you draft your forecasts, do not include outside funding. Write in all the expenditures youneed to maximize realistic long-term growth, and let the projected deficit grow. The cumulativedeficit will determine just how much funding you need; and once you know that, you can decidewhere to turn for it.Your pro forma financials should provide clear answers to the fundamental questions:

What major capital purchases will be needed? Property? Equipment? When?

What changes will be needed in operating cost expenditures? When?

What personnel-cost changes are expected? When?

When will the operation break even?Once you have drafted the pro forma financials, you should look for potential problems. What ifyou lose your biggest customers? What if your raw goods prices rise faster than expected? Writecontingency plans, and consider adding a "contingencies" line to your balance sheet. Potentialinvestors know bad things can happen, and most will be impressed, not turned off, if you showyou are prepared for problems.The financial projections provide a valuable budget and planning tool. Try varying productiondetails. What happens if you plan to sell fewer units at higher quality and/or provide morecustomer support for a higher price? What if you lease or finance significant capital purchasesinstead of paying cash?Once you know how much money you will need and when, you can make the most effectivedecision regarding how much financing to seek from whom. Should you take out loans forspecific capital purchases using the purchased property itself as collateral? Can you get by onrelatively inexpensive loans, or will you need to pursue more expensive venture capital fromoutside investors? The cost of capital will have a great effect on the remaining importantprojection you need to supply: the breakeven analysis. In this breakeven analysis and adjusted cash flow projections, you also should stress your planfor cashing out the investors and paying off the debt. Of all the specifics of the business,investors are most interested in their return on investment and the timing of the pay-out. Lendersalso want to know how long there will be an outstanding debt and how high it will be. Byaddressing these concerns directly and prominently, you reassure investors that you have theirinterests as a top priority.If you project rapid growth and good profits, graphingyour cumulative debt/cash flow situation to show yourbreakeven point will make the strongest possibleimpression on readers. It will make it clear at a glancewhen you will be able to pay off investors, and it willemphasize your coming financial strength.After completing your plan, have others review it beforesending it to investors. This will give you an objectiveviewpoint on how the plan will come across todisinterested individuals. Other entrepreneurs, youraccountant and business advisers are in the best positionto provide constructive comments.

REAL-LIFE EXAMPLE