ENTREPRENEURSHIP AND ITS PREREQUISITES (20)

ENTREPRENEURSHIP: GLOSSARY OF TERMS

Angel investors: Individuals who have capital that they are will­ing to risk. Angels are often successful entrepreneurs who in­vest in emerging entrepreneurial ventures, often as a bridge from the self-funded stage to the point in which a business can attract venture capital.

Assets: Items of value owned by a company and shown on the balance sheet, including cash, equipment, inventory, etc.

Balance sheet: Summary statement of a company’s financial po­sition at a given point in time, listing assets as well as liabilities.

Breakeven point: Dollar value of sales that will cover, but not exceed, all of the company’s costs, both fixed and variable.

Bridge finance: Short-term finance that is expected to be repaid quickly.

Browser: A computer program that enables users to access and navigate the World Wide Web.

Business incubator: This is a form of mentoring in which work­space, coaching, and support services are provided to entre­preneurs and early-stage businesses at a free or reduced cost.

Business plan: A written document detailing a proposed venture, covering current status, expected needs, and projected results for the enterprise. It contains a thorough analysis of the prod­uct or service being offered, the market and competition, the marketing strategy, the operating plan, and the management as well as profit, balance sheet, and cash flow projections.

Capital: Cash or goods used to generate income. For entrepre­neurs, capital often refers to the funds and other assets invested in the business venture.

Cash flow: The difference between the company’s cash receipts and its cash payments in a given period. It refers to the amount of money actually available to make purchases and pay current bills and obligations.

Cash flow statement: A summary of a company’s cash flow over a period of time.

Collateral: An asset pledged as security for a loan.

Copyright: Copyright is a form of legal protection for published and unpublished literary, scientific, and artistic works that have been fixed in a tangible or material form. It grants exclusive rights to the work’s creator for a specified period of time.

Corporation: A business form that is an entity legally separate from its owners. Its important features include limited liabil­ity, easy transfer of ownership, and unlimited life.

Depreciation: The decrease in the value of assets over their ex­pected life by an accepted accounting method, such as allocat­ing the cost of an asset over the years in which it is used.

E-commerce: The sale of products and services over the Inter­net.

Entrepreneur: A person who organizes, operates, and assumes the risk for a business venture.

Equity: An ownership interest in a business.

Home-based business: A business, of any size or type, whose pri­mary office is in the owner’s home.

Income statement: Also known as a “profit and loss statement,” it shows a firm’s income and expenses, and the resulting profit or loss over a specified period of time.

Intangible assets: Items of value that have no tangible physical properties, such as ideas.

Internet: The vast network of networks connecting millions of individual and networked computers worldwide.

Inventory: Finished goods, work in process of manufacture, and raw materials owned by a company.

Joint venture: A legal entity created by two or more businesses joining together to conduct a specific business enterprise with both parties sharing profits and losses.

Liabilities: Debts a business owes, including accounts payable, taxes, bank loans, and other obligations. Short-term liabilities are due within a year, while long-term liabilities are due in a pe­riod of time greater than a year.

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THE IMPORTANCE OF GOVERNMENT POLICIES

Entrepreneurial activity leads to economic growth and helps to reduce poverty, create a middle class, and foster stability. It is in the interest of all h governments to implement policies to foster entrepreneurship and reap the benefits of its activity.

Thomas A. Garrett, a senior economist with the Federal Reserve Bank of St. Louis, says that government policies can be categorized as “active” or “passive” depending on whether they involve the gov­ernment in determining which types of businesses are promoted. Active policies, such as targeted tax breaks, help specific forms of businesses, while passive policies help create an environment that is friendly to entrepreneurs without regard to specific firms.

Both active and passive policies are effective in promoting small business, Garrett says, but passive policies promote entrepreneur­ship most broadly. “It is this entrepreneurial-friendly environment that will allow any individual or business—regardless of size, loca­tion or mission—to expand and to thrive,” he says.

Among the most successful strategies for encouraging entrepre­neurship and small business are changes in tax policy, regulatory policy, access to capital, and the legal protection of property rights.

Tax Policy: Governments use taxes to raise money. But taxes increase the cost of the activity taxed, discouraging it somewhat. Therefore, policymakers need to balance the goals of raising revenue and pro­moting entrepreneurship. Corporate tax rate reductions, tax credits for investment or education, and tax deductions for businesses are all proven methods for encouraging business growth.

Regulatory Policy: “The simpler and more expedited the regulatory process, the greater the likelihood of small business expansion,” says Steve Strauss, a lawyer and author, who specializes in entrepreneur­ship. Reducing the cost of compliance with government regulations is also helpful. Governments can, for example, provide one-stop service centers where entrepreneurs can find assistance and allow electronic filing and storage of forms.

Access to Capital: Starting a business takes money. There are re­quired procedures and fees as well as the initial costs of the new enterprise itself. Therefore, the most important activity a govern­ment can undertake is to assist potential entrepreneurs with finding money for start-ups.

In the United States, the Small Business Administration (SBA) helps entrepreneurs get funds. The SBA is a federal agency whose main function is guaranteeing loans. Banks and other lenders that partici­pate in SBA programs often relax strict loan requirements because the government has promised repayment if the borrower defaults. This policy makes many loans available for risky new businesses.

Legal Protection of Property Rights: Small business can thrive where there is respect for individual property rights and a legal sys­tem to protect those rights. Without property rights, there is little incentive to create or invest.

For entrepreneurship to flourish, the law needs to protect intel­lectual property. If innovations are not legally protected through patents, copyrights, and trademarks, entrepreneurs are unlikely to engage in the risks necessary to invent new products or new meth­ods. According to the World Bank report, “Doing Business 2007: How to Reform,” new technologies are adopted more quickly when courts are efficient. “The reason is that most innovations take place in new businesses—which unlike large firms do not have the clout to resolve disputes outside the courts.”

Creating a Business Culture: Governments can also show that they value private enterprise by making it easier for individuals to learn business skills and by honoring entrepreneurs and small business owners. Policy makers can:

• Offer financial incentives for the creation of business incubators. These usually provide new businesses with an inexpensive space in which to get started and services – such as a copier and a fax machine – which most new businesses couldn’t otherwise afford. Often busi­ness incubators are associated with colleges, and professors offer their expertise.

• Make information available. In the United States, for example, the SBA has many offices, making publications widely accessible. Its “Small Business Answer Desk” (telephone: 800-827-5722) and its Web site (www.sba.gov) answer general business questions. Its online business tutorials are available to anyone with Internet access (http://sba.gov/training/coursestake.html).

• Enhance the status of entrepreneurs and businessmen in the so­ciety. Governments might create local or national award programs that honor entrepreneurs and call on business leaders to serve on rel­evant commissions or panels.

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ENTREPRENEURSHIP AIDS THE ECONOMY

Most economists agree that entrepreneurship is es­sential to the vitality of any economy, developed or developing.

Entrepreneurs create new businesses, generating jobs for themselves and those they employ. In many cases, entrepre­neurial activity increases competition and, with technological or operational changes, it can increase productivity as well.

In the United States, for example, small businesses provide approximately 75 percent of the net new jobs added to the American economy each year and represent over 99 percent of all U.S. employers. The small businesses in the United States are often ones created by self-employed entrepreneurs.

“Entrepreneurs give security to other people; they are the generators of social welfare,” Carl J. Schramm, president and chief executive officer of Ewing Marion Kauffman Founda­tion, said in February 2007. The foundation is dedicated to fostering entrepreneurship, and Schramm is one of the world’s leading experts in this field.

Others agree that the benefits of small businesses go beyond income. Hector V. Baretto, administrator of the U.S. Small Business Administration (SBA), explains, “Small businesses broaden the base of participation in society, create jobs, decen­tralize economic power, and give people a stake in the future.”

Entrepreneurs innovate and innovation is a central ingredient in economic growth. As Peter Drucker said, “The entrepre­neur always searches for change, responds to it, and exploits it as an opportunity.” Entrepreneurs are responsible for the commercial introduction of many new products and services, and for opening new markets. A look at recent history shows that entrepreneurs were essential to many of the most signifi­cant innovations, ones that revolutionized how people live and work. From the automobile to the airplane to personal computers – individuals with dreams and determination de­veloped these commercial advances.

Small firms also are more likely than large companies to pro­duce specialty goods and services and custom-demand items. As Schramm has suggested, entrepreneurs provide consum­ers with goods and services for needs they didn’t even know they had.

Innovations improve the quality of life by multiplying con­sumers’ choices. They enrich people’s lives in numerous ways – making life easier, improving communications, providing new forms of entertainment, and improving health care, to name a few.

Small firms in the United States, for instance, innovate far more than large ones do. According to the Small Business Administration, small technology companies produce nearly 13 times more patents per employee than large firms. They represent one-third of all companies in possession of 15 or more patents.

According to the 2006 Summary Results of the Global En­trepreneurship Monitor (GEM) project, “Regardless of the level of development and firm size, entrepreneurial behav­ior remains a crucial engine of innovation and growth for the economy and for individual companies since, by definition, it implies attention and willingness to take advantage of unex­ploited opportunities.” The GEM project is a multi-country study of entrepreneurship and economic growth. Founded and sponsored by Babson College (USA) and the London Business School in 1999, the study included 42 countries by 2006.

International and regional institutions, such as the United Nations and the Organization for Economic Cooperation and Development, agree that entrepreneurs can play a crucial role in mobilizing resources and promoting economic growth and socio-economic development. This is particularly true in the developing world, where successful small businesses are primary engines of job creation and poverty reduction.

For all of these reasons, governments may wish to pursue policies that encourage entrepreneurship.

In summary these are the contributions of an entrepreneur to the economy:

1.    Employment generation

2.    National income

3.    Balanced regional development

4.    Dispersal of economic power

5.    Better standards of living

6.    Creating innovation

“I had to make my own living and my own opportunity! But I made it! Don’t sit down and wait for the opportunities to come. Get up and make them!” (Madam C. J. Walker)

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THE STRENGTHS OF SMALL BUSINESS

Any entrepreneur who is contemplating a new venture should examine the strengths of small businesses as compared to large ones and make the most of those competitive ad­vantages. With careful planning, an entrepreneur can lessen the advantages of the large business vis-à-vis his operation and thereby increase his chances for success.

The strengths of large businesses are well documented. They have greater financial resources than small firms and therefore can offer a full product line and invest in product development and marketing. They benefit from economies of scale because they manufacture large quantities of products, resulting in lower costs and potentially lower prices. Many large firms have the credibility that a well-known name provides and the support of a large organization.

How can a small firm possibly compete?

In general, small start-up firms have greater flexibility than larger firms and the capacity to respond promptly to industry or community developments. They are able to innovate and create new products and services more rapidly and creatively than larger companies that are mired in bureaucracy. Whether reacting to changes in fashion, demographics, or a competitor’s advertising, a small firm usually can make decisions in days - not months or years.

A small firm has the ability to modify its products or services in response to unique customer needs. The average entrepreneur or manager of a small business knows his customer base far better than one in a large company. If a modification in the products or services offered — or even the business’s hours of operation — would better serve the customers, it is possible for a small firm to make changes. Customers can even have a role in product development.

Another strength comes from the involvement of highly skilled personnel in all aspects of a start-up business. In particular, start-ups benefit from having senior partners or managers working on tasks below their highest skill level. For example, when entrepreneur William J. Stolze helped start RF Communications in 1961 in Rochester, New York, three of the founders came from the huge corporation General Dynamics, where they held senior marketing and engineering positions. In the new venture, the marketing expert had the title “president” but actually worked to get orders. The senior engineers were no longer supervisors; instead, they were designing products. As Stolze said in his book Start Up, “In most start-ups that I know of, the key managers have stepped back from much more responsible positions in larger compa­nies, and this gives the new company an immense competitive advantage.”

Another strength of a start-up is that the people involved — the entrepreneur, any partners, advis­ers, employees, or even family members — have a passionate, almost compulsive, desire to succeed. This makes them work harder and better.

Finally, many small businesses and start-up ventures have an intangible quality that comes from people who are fully engaged and doing what they want to do. This is “the entrepreneurial spirit,” the atmosphere of fun and excitement that is generated when people work together to create an opportunity for greater success than is otherwise available. This can attract workers and inspire them to do their best.

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INTELLECTUAL PROPERTY: A VALUABLE BUSINESS ASSET

Intellectual property is a valuable asset for an entrepreneur. It consists of certain intellectual creations by entrepre­neurs or their staffs that have commercial value and are given legal property rights. Examples of such creations are a new product and its name, a new method, a new process, a new promotional scheme, and a new design.

A fence or a lock cannot protect these intangible assets. In­stead, patents, copyrights, and trademarks are used to pre­vent competitors from benefiting from an individual’s or firm’s ideas.

Protecting intellectual property is a practical business de­cision. The time and money invested in perfecting an idea might be wasted if others could copy it. Competitors could charge a lower price because they did not incur the startup costs. The purpose of intellectual property law is to encour­age innovation by giving creators time to profit from their new ideas and to recover development costs.

Intellectual property rights can be bought, sold, licensed, or given away freely. Some businesses have made millions of dollars by licensing or selling their patents or trademarks.

Every entrepreneur should be aware of intellectual property rights in order to protect these assets in a world of global markets. An intellectual property lawyer can provide infor­mation and advice.

The main forms of intellectual property rights are:

·         Patents: A patent grants an inventor the right to exclude others from making, using, offering for sale, or selling an invention for a fixed period of time - in most countries, for up to 20 years. When the time period ends, the pat­ent goes into the public domain and anyone may use it.

·         Copyright: Copyrights protect original creative works of authors, composers, and others. In general, a copy­right does not protect the idea itself, but only the form in which it appears - from sound recordings to books, computer programs, or architecture. The owner of copy­righted material has the exclusive right to reproduce the work, prepare derivative works, distribute copies of the work, or perform or display the work publicly.

·         Trade Secrets: Trade secrets consist of knowledge that is kept secret in order to gain an advantage in business. “Customer lists, sources of supply of scarce materials, or sources of supply with faster delivery or lower prices may be trade secrets,” explains Joseph S. Iandiorio, the founding partner of Iandiorio and Teska, an intellectual property law firm. “Certainly, secret processes, formu­las, techniques, manufacturing know-how, advertising schemes, marketing programs, and business plans are all protectable.”

Trade secrets are usually protected by contracts and non-disclosure agreements. No other legal form of protection ex­ists. The most famous trade secret is the formula for Coca-Cola, which is more than 100 years old.

Trade secrets are valid only if the information has not been revealed. There is no protection against discovery by fair means such as accidental disclosure, reverse engineering, or independent invention.

Trademarks: A trademark protects a symbol, word, or design, used individually or in combination, to indicate the source of goods and to distinguish them from goods produced by others. For example, Apple Computer uses a picture of an apple with a bite out of it and the symbol (®) which means registered trademark. A service mark similarly identifies the source of a service. Trademarks and service marks give a business the right to prevent others from using a confusingly similar mark.

In most countries, trademarks must be registered to be en­forceable and renewed to remain in force. However, they can be renewed endlessly. Consumers use marks to find a spe­cific firm’s goods that they see as particularly desirable — for example, Barbie dolls or Toyota automobiles. Unlike copy­rights or patents, which expire, many business’s trademarks become more valuable over time.

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SOURCES OF FINANCING

Many entrepreneurs struggle to find the capital to start a new business. There are many sources to consider, so it is important for an entrepreneur to fully explore all financing options. He also should apply for funds from a wide variety of sources.

Personal savings: Experts agree that the best source of capital for any new business is the entrepreneur’s own money. It is easy to use, quick to access, has no payback terms, and requires no transfer of equity (ownership). Also, it demonstrates to potential investors that the entrepreneur is willing to risk his own funds and will persevere during hard times.

Friends and family: These people believe in the entrepreneur, and they are the second easiest source of funds to access. They do not usually require the paperwork that other lenders require. However, these funds should be documented and treated like loans. Neither part ownership nor a decision-making position should be given to these lenders, unless they have expertise to provide. The main disadvantage of these funds is that, if the business fails and money goes lost, a valuable relationship may be jeopardized.

Credit cards: The entrepreneur’s personal credit cards are an easy source of funds to access, especially for acquiring business equipment such as photocopiers, personal computers, and printers. These items can usually be obtained with little or no money paid up front and with small monthly payments. The main disadvantage is the high rate of interest charged on credit card balances that are not paid off in full each month.

Banks: Banks are very conservative lenders. As suc­cessful entrepreneur Phil Holland explains, “Many prospective business owners are disappointed to learn that banks do not make loans to start-up businesses unless there are outside assets to pledge against borrowing.” Many entrepreneurs simply do not have enough assets to get a secured loan from a lending institution.

However, if an entrepreneur has money in a bank savings account, she can usually borrow against that money. If an entrepreneur has good credit, it is also relatively easy to get a personal loan from a bank. These loans tend to be short-term and not as large as business loans.

Venture investors: This is a major source of funding for start-ups that have a strong potential for growth. However, venture investors insist on retaining part ownership in new businesses that they fund.

·                     Formal institutional venture funds are usually limited partnerships in which passive limited partners, such as retirement funds, supply most of the money. These funds have large amounts of money to invest. How­ever, the process of obtaining venture capital is very slow. Several books, such as Galante’s Venture Capital & Private Equity Directory, give detailed information on these funds.

·                     Corporate venture funds are large corporations with funds for investing in new ventures. These often provide technical and management expertise in addition to large monetary investments. How­ever, these funds are slow to access compared to other sources of funds. Also, they often seek to gain control of new businesses.

·                     Angel investors tend to be successful entrepreneurs who have capital that they are willing to risk. They often insist on being active advisers to businesses they support. Angel funds are quicker to access than corporate venture funds, and they are more likely to be invested in a start-up operation. But they may make smaller individual investments and have fewer contacts in the banking community.

Government programs: Many national and regional governments offer programs to encourage small- and medium-sized businesses. In the United States, the Small Business Administration (SBA) assists small firms by acting as a guarantor of loans made by private institutions for borrowers who may not otherwise qualify for a commercial loan.

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THE ENTREPRENEUR’S NEED FOR CAPITAL

New businesses rarely show a profit in the early months of operation. Generating sales takes time, and receipts are not usually sufficient to offset start-up costs and monthly expenses. Therefore, entrepreneurs need to estimate how much money they need and then raise that amount to transform their dream into a reality.

It doesn’t necessarily take a lot of cash to create a successful business. In the mid-1970s, Steve Jobs and Steve Wozniak started Apple Computer by selling a Volkswagen microbus and a Hewlett-Packard scientific calculator to raise $1,300 — enough for a makeshift production line. In 1997, Bill Martin and Greg Wright used the free Internet connections in their college dorm rooms and $175: $75 for a New Jersey partnership fee, $70 to register their Web domain name, and $30 for a month’s hosting fee — to start www.ragingbull.com, which is now a suc­cessful financial Web site.

Many entrepreneurs start businesses with $5,000 or less, just enough to establish the business, invest in some inventory, and create some advertising materials. There are many ways to reduce expenses: for instance, by initially working out of one’s home rather than leasing an office or leasing office equipment rather than buying it.

However, all entrepreneurs need to estimate how much cash they need to cover expenses until the business begins to make a profit. For this task, the best financial tools are the income statement and cash flow statement. Cash flow refers to the amount of money actually available to make purchases and pay current bills and obligations. It is the dif­ference between cash receipts (money taken in) and cash disbursements (money spent) over a specific time period.

It is important to attach notes to these forecasts to explain any unusual expenses or assumptions used in the calculations.

·         An income statement sets out all of the entrepreneur’s pro­jected revenues and expenses (including depreciation and mortgages) to determine a venture’s profits per month and year. Depreciation is a method to account for assets whose value is considered to decrease over time.

·         A cash flow statement estimates anticipated cash sales as well as anticipated cash payments of bills. This estimate can be done on a weekly, monthly, or quarterly basis, but experts recommend that it be done at least once every month for the first year or two of a new business. This forecast is used to project the money required to finance the operation annually. By calculating this forecast on a cumulative basis, the entrepreneur can forecast his company’s overall capital needs at start up.

The monthly net cash flow shows how much an entrepreneur’s cash receipts exceed or fall short of monthly cash expenditures. For most of the first year, the monthly expenditures are likely to exceed the receipts. In many cases, goods are shipped out before payment is received. Mean­while, the entrepreneur still has to pay his bills. Therefore, the cumulative cash flow, which adds each month’s total to that of previous months, will result in a growing negative amount.

A critical point for a new business occurs when monthly sales receipts are enough to cover monthly expenses. At this point, the negative cumulative cash flow will begin to decrease and move toward a positive one. The cumulative cash flow amount reached just before it reverses direction indicates approximately how much capital the new business will need.

Financial projections are inevitably somewhat inaccurate simply because every contingency cannot be predicted. For this reason, experts recommend that entrepreneurs add at least 20 percent to the financial needs calculated in the cash flow statement to create a safety net for unforeseen events.

With these estimates, the entrepreneur can seek funding and concentrate more clearly on launching the new business.

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CREATING A BUSINESS PLAN

A comprehensive business plan is crucial for a start-up business. It defines the entrepreneur’s vision and serves as the firm’s resume.

There are many reasons for writing a business plan:

·                     To convince oneself that the new venture is worthwhile before making a significant financial and personal commitment.

·                     To assist management in goal-setting and long-range planning.

·                     To attract investors and get financing.

·                     To explain the business to other companies with which it would be useful to create an alliance or contract.

·                     To attract employees. 

A business plan can help an entrepreneur to allocate resources appropriately, handle unexpected problems, and make good business decisions.

A well-organized plan is an essential part of any loan application. It should specify how the business would repay any borrowed money. The entrepreneur also should take into account all startup expenses and potential risks so as not to appear naive.

However, according to Andrew Zacharakis, a common mis­perception is that a business plan is primarily used for raising capital. Zacharakis, a professor of entrepreneurship at Babson College, suggests that the primary purpose of a business plan is to help entrepreneurs gain a deeper understanding of the opportunity they envision. He explains: “The business plan process helps the entrepreneur shape her original vision into a better opportunity by raising critical questions, researching answers for those questions, and then answering them.”

Some entrepreneurs create two plans: a planning document for internal use and a marketing document for attracting outside investment. In this situation, the information in each plan is essentially the same, but the emphasis is somewhat different. For example, an internal document intended to guide the business does not need detailed biographies of the manage­ment. However, in a plan intended for marketing, the background and experience of management may be the most important feature.

A standard business plan is usually about 40 pages in length. It should use good visual formatting, such as bulleted lists and short paragraphs. The language should be free of jargon and easy to understand.

The tone should be business-like and enthusiastic. It should be strong on facts in order to convince people to invest money or time in the new venture.

The basic elements of a standard business plan include:

1.            Title Page

2.            Table of Contents

3.            Executive Summary

4.            Company Description

5.            Product/Service

6.            Market and Competition

7.            Marketing and Selling Strategy

8.            Operating Plan

9.            Management/Organization

10.         Financing

11.         Supporting Documents

The executive summary is the cornerstone of a good plan. This is the section that people read in order to decide whether to read the rest. It should concisely summarize the technical, marketing, financial, and managerial details. More importantly, it needs to convince the reader that the new venture is a worthy investment.

The company description highlights the entrepreneur’s dream, strategy, and goals.

The product/service section should stress the characteristics and benefits of the new venture. What differentiates it from its competition? Is it innovative?

The financial components of a new venture’s business plan typically include three projections: a balance sheet, an income statement, and a cash-flow analysis. These require detailed estimates of expenses and sales. Expenses are relatively easy to estimate. Sales projections are usually based on market research, and often utilize sales data for similar products and services produced by competitors.

Writing a business plan may seem overwhelming. However, there are ways to make the process more manageable. First, there are many computer software packages for producing a standard business plan. Numerous books on entrepreneur­ship have detailed instructions, and many universities sponsor programs for new businesses.

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CHOOSING A FORM OF BUSINESS

In many countries, entrepreneurs must select a form of organization when they start a small business. The basic forms of organization are sole proprietorships, partnerships, and corporations. Each has advantages and disadvantages. Moreover, the laws and regulations that apply to business owners vary from country to country and by local jurisdiction. Entrepreneurs should consult an attorney or other expert to make sure that they have all the necessary licenses and permits, and are aware of all their legal obligations. In many countries, the local Chamber of Commerce or local business council is also a good source of information.

Sole Proprietorship: In a sole proprietorship, the individual entrepreneur owns the business and is fully responsible for all its debts and legal liabilities. More than 75 percent of all U.S. businesses are sole proprietorships. Examples include writers and consultants, local restaurants and shops, and home-based businesses.

This is the easiest and least expensive form of business to start. In general, an entrepreneur files all required documents and opens a shop. The disadvantage is that there is unlimited personal liability — all personal and business assets owned by the entrepreneur may be at risk if the business goes into debt.

Partnership: A partnership consists of two or more people who share the assets, liabilities, and profits of a business. The greatest advantage comes from shared re­sponsibilities. Partnerships also benefit by having more investors and a greater range of knowledge and skills.

There are two main kinds of partnerships, general partner­ships and limited partnerships. In a general partnership, all partners are liable for the acts of all other partners. All also have unlimited personal liability for business debts. In contrast, a limited partnership has at least one general partner who is fully liable plus one or more limited part­ners who are liable only for the amount of money they in­vest in the partnership.

The largest disadvantage of any partnership is the potential for disagreements, regardless of how well or how long the partners have known each other.

Experts agree that a partnership agreement drawn up by an experienced lawyer is essential to a successful partnership. It is often used to:

·                     create a mechanism for resolving disagreements;

·                     specify each partner’s contribution to the partnership;

·                     divide up management responsibilities; and

·                     specify what happens if a partner leaves or dies.

Corporations: Corporations are recommended for entrepreneurs who plan to conduct a large-scale enterprise. As a legal entity that has a life separate from its owners, a corporation can sue or be sued, acquire and sell property, and lend money.

Corporations are divided into shares or stocks, which are owned by one, a few, or many people. Ownership is based on the percentage of stock owned. Shareholders are not responsible for the debts of the corporation, unless they have personally guaranteed them. A shareholder’s invest­ment is the limit of her liability. Corporations can more easily obtain investment, raise capital by selling stock, and survive a change of ownership. They provide more protection from liability than other forms of business. Their potential for growth is unlimited.

However, corporations are more complex and expensive to set up than other forms of business and are usually subject to a higher level of gov­ernment regulation.