LESSON 4 THE BUSINESS PLAN
(Business Entities)
“We don't need giant personalities to transform companies. We need
leaders who build not their own egos but the institutions they run.”
―Susan Cain, Quiet: The Power of Introverts in a World That Can't
Stop Talking
Prepared by: NABILLA Faculty of Business, Finance, and Hospitality
MAHSA Business School
Objectives
After completing
this lesson you will i. Describe the advantages and disadvantages of sole proprietorships,
partnership and
be able to:
corporation.
ii. Discuss how growth from within and growth through mergers can
enable a business to expand.
iii Explain how Small Business Administration helps
. small business
iv. Analyze the growth of franchising and franchising advantages and
disadvantages
Business Legal Structures (1 of 3)
• Many businesses, no matter how humble their beginnings, have the potential to
grow into much larger ventures.
• It is important that founders think through every step of the organization’s
development as they form it.
• How the entrepreneur organizes the company—such as the legal structure chosen,
the relationships developed with suppliers, the managers hired—will have vital
impact on its ability to grow.
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Business Legal Structures (2 of 3)
After you pick the kind of business and industry you want to be in and you know where you
fit in the production-distribution chain, you will also have to choose one of the three basic
legal structures:
1. sole proprietorship
2. partnership
3. corporation
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Business Legal Structures (3 of 3)
sole proprietorship - a business owned by one person who has unlimited liability and
unlimited rights to profits.
• This owner earns all the profits from the business and is also responsible for all losses.
• The sole proprietor is personally liable for any lawsuits that arise from accidents, faulty
merchandise, unpaid bills, or other business setbacks.
• This means a sole proprietor could lose not only business assets in a lawsuit, but could be
forced to sell private possessions to satisfy a court judgment.
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Advantages of a Sole Proprietorship
• Ease of start
• Simplicity of registration
• Fewer government regulations
• Rapid decision making
• Greater rights to profits
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Disadvantages of a Sole Proprietorship
• Difficult fund raising
• Significant time obligations and
responsibility
• Unlimited personal liability
• Lack of emotional support
• Taxation of profits
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Partnership (1 of 2)
partnership - a business with two or more owners that make decisions for the
business together and share the profits, losses, assets, and liabilities.
limited partnership - business partnership wherein there is a general partner with
unlimited liability, and one or more limited partners with no official input in daily
operations, and limited liability.
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Partnership (2 of 2)
• As in a sole proprietorship, partners face unlimited
liability in any lawsuits.
• This means that each partner can be held responsible
for paying debts or judgments, even those incurred
by other partners without their knowledge or
agreement.
• One or more general partners manage the company
and assume legal liability.
• There must be at least one general partner who will
be liable for all partnership debts.
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Corporation (1 of 4)
corporation - a legal entity composed of stockholders under a common name.
• A corporation has rights and responsibilities under the law, and it can buy and sell property, enter
into leases and contracts, and be prosecuted.
• Corporations issue stock that is divided among the founders and sold to investors.
• These shareholders then elect a board of directors that is responsible for representing their
interests in the management of the company.
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Advantages of a Corporation
The corporate legal structure offers key advantages:
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Disadvantages of a Corporation
The corporate legal structure offers key disadvantages:
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Contracts: The Building Blocks of Business
contract - an agreement between two or more parties that is enforceable by law.
• Regardless of the type of legal entity you elect to establish, you will need to enter into a
variety of legal contracts.
• Remember that rental leases, any promissory notes or mortgages, advertising or partnership
agreements, are all contracts.
• The power of a contract is that, once the individuals or other entities involved have signed it,
they are obligated to comply with its terms and conditions.
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Working with an Attorney
• There are certain times in the life of an organization when investing in the expense of
professional services is essential, even though the out-of-pocket cost may seem high at
the time.
• Never sign a contract without having an attorney examine it for you.
• Never sign a contract that you have not read completely and carefully, even if your
lawyer tells you it is all right. Ultimately, you are responsible for what you sign.
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Drafting a Contract
Boilerplate language - a standard format for a specific type of legal agreement.
contingency - a condition that must be met in order for something else to occur.
• Consult an attorney if you need to draft—write—a first version of a contract or agreement, with the
understanding that it will need to be developed and rewritten.
• Be certain that you identify and make a list of the key points in advance.
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Letter of Agreement
• letter of agreement a document that puts an oral understanding in writing, in
the form of a business letter.
• Sometimes you will not need a full, formal contract, because the relationship is
going to be brief or the work and money involved are relatively minor.
• The other party must respond to it in writing, either approving it or suggesting
changes, until an agreement is reached.
• However, use this option with care and with legal advice.
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Breach of Contract
signatory - an individual who signs a contract.
breach of contract - the failure of a signatory to perform as agreed.
statute of limitations - the time period in which legal action may be taken.
small claims court - a legal option for solving conflicts involving less than a certain sum of
money.
arbitration - a method of dispute resolution using an arbitrator to act as the decision maker
rather than going to court.
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Bankruptcy
bankruptcy - the legal process in which an individual or business declares the inability or
impaired ability to pay debts as they come due.
• Although entrepreneurs are an optimistic lot, business sometimes does not progress as planned, and
bankruptcy may become the best option.
• Many companies, large and small, have filed for and emerged from bankruptcy.
• For example, General Motors, Macy’s, and Delta Airlines have all done it.
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