Chapter 1 Setting Up a Business
When asked what they want to do in the future, most aspiring students
of business would answer, “set up a business and be my own boss.” What,
then, are the major forms of business in a market economy There are
four, namely, sole proprietorship,partnership, corporation and franchising.
Sole Proprietorship
Asole proprietorship is a business owned and controlled by one person.
In the United States, quite contrary to the general impression that it
is a country made up of giant corporations , sole proprietorships account
for about three-quarters of all businesses. They concentrate in restaurants,
street corner grocery stores, florists, beauty saloons, drug stores,
farms and similar businesses.
Advantage
The advantage of sole proprietorships are many fold. Following are
their major appeals.
1. Simple to Establish
In the United States, it often takes just a few minutes to set up a
new sole proprietorship. Just pay a small fee, get the necessary state
and local licensesor permits, and
you are the owner and boss of a new business. The procedures for setting
up a sole proprietorship in china have also been simplified a great deal
in he recent years.
2. Freer In Decision-Making
Compared with other types of business, a sole proprietorship has greater
freedom in deciding on business policies and operations. As a sole
proprietor, you make your own decisions on the type of goods(or
services) you want to offer at the price you feel appropriate. You don’t
have to consult with anyone else on when to open and close, whom to employ
as your assistant, and when to take a week off for a holiday in Greece.
3. Easy Keep Operational and Financial Secrecy
Like successes in battlefields, successes in business are sometimes
based on secrecy. If you work as a company manager, however, you can
hardly keep your business strategies secret. But if you are a sole proprietor
, your don’t have to report to shareholders or board
directors. Nobody can discover the operational or financial
information of your business unless you have an incurable urge to impress
others.
4. Less Tax Burden
Compared with other forms of business, sole proprietors are the luckiest
businessmen in terms of tax burden. In the US, for example, the tax rates
for sole proprietors are often only half of those for corporations.
5.Exclusive Use of Profits
Employees, be they general managers or blue-collar workers, often have
the feeling of “making bridal dresses for others.” This
is why so many people choose to be their own boss. As a sole proprietor,
if you work hard and make a small fortune, you can take all the profits
and don’t have to share them with anyone else. This is perhaps the most
appealing feature of being a sole proprietor.
Disadvantages
Being a sole proprietor does not mean you are free from problems.
Following are some of the disadvantages.
1.Unlimited Liability
This is the worst nightmare for every sole proprietor. Liability here
means obligation to pay one’s debts. A sole proprietor has, by law, unlimited
liability, which means if he goes bankrupt, he may, in order to pay his
debt, lose not only his business but part or all of his personal properties.
2.Limited Access to Capital
It might be easier for a sole proprietor to get a bank loan , because
he has personal as well as business assets behind him.
But compared with corporations, which can get financing not
only from banks but also from shareholders, sole proprietorships’ access
to capital is rather limited and therefore it is more difficult to secure
additional capital.
3.Limited Managerial Expertise
Many sole proprietors may be experts in one field or another, but seldom
have the expertise in every aspect of managing a modern business, which
involves at least marketing, financing and human resources
management. Therefore, sole proprietors have to make extra efforts in
order to run their business well and often spend longer hours on work.
Partnership
Those who believe that “two heads are better than one” often
choose working in a partnership rather than running their business alone.
A partnership, as defined by the US Uniform Partnership Act, is “an association
of two or more persons to carry on as co-owners of a business for profit.”
Although partnerships can be formed upon oral agreement, most partnerships
have a written contract which stipulates the duties of each partner,
the way to share profits and losses, and in case of dissolution,
the method to divide assets and/or liabilities.
Partnerships are typically found in businesses such as law
firms, accounting firms, and dental clinics which provide professional
services in specialized areas. Insurance firms (e.g. Lloyd’s of London),
advertising firms, real estate firms, and management
consulting firms are also common examples of partnerships.
Although all are called partners, some members of
a partnership may be very active in the management of the firm and therefore
take unlimited liability, while others choose to stay away from management
and assume only limited liability. The former are referred to as general
partners and the latter as limited partners.
In each partnership, however, there must be at least one general partner.
Advantages
Running a partnership has several advantages.
1. Improved Access to Capital and Credit
Compared with a sole proprietorship, a partnership has more sources
of capital and credit. First of all, more capital is contributed by the
partners and more funds can be arranged from friends and investors. Secondly, suppliers are
more likely to extend credit because most partnerships
have more than just one general partner, which means more people are
personally responsible for the debts.
2. Greater Possibility for Good Management
Partners may bring to the firm different talents and expertise and
can therefore make better decisions and manage the firm on a sounder
basis.
3. Definite Legal Framework
Over the past few centuries, a definite legal framework has developed
for partnerships and, therefore, setting legal problems concerning partnerships
is relatively simpler than solving problems of other forms of business.
4. Better Prospects for Growth
With increased capital and credit, better management and a more definite
legal framework, a partnership stands a better chance to survive possible
setbacks and has better prospects to expand and grow.
Disadvantages
The major disadvantages of a partnership are follows.
1. Unlimited Liability
Like sole proprietors, general partners are personally responsible
for any debt they owe and may lose all their personal property if the
partnership goes
broke.
2. Internal Conflicts
Two heads are commonly believed to be better than one, but unfortunately
it is not always true in reality. As the saying goes, “too many cooks
spoil the broth.” The partners may have differences
in opinion or run into serious conflict of interest this will surely
hurt the operation and well-being of the firm.
3.Problem of Continuity
A partnership is easy to form, but may be difficult to maintain. If
one partner dies, retires or simply wants to withdraw his/her capital,
the partnership will have to break up unless the remaining partners are
able and willing to buy out the leaving partner’s share. Or they may
have to find a new partner, which may turn out to be difficult, because
the newcomer has to be acceptable to all of the remaining partners.
Corporation
A partnership can raise more capital than a sole proprietorship,
but if your business keeps growing and needs huge sums of capital, you
may have to choose a different form. Besides, if you remain a general
partner, unlimited liability may get on your nerves now and then. If
you have such problems, a corporation may be the answer.
To form a corporation, at least three incorporators are
needed. The incorporators are also called stockholders or shareholders,
because they hold shares, which represent ownership of the company. They
own the company and therefore have the right to elect a board of directors.
The board of directors then choose a president, who in turn appoints
other senjor officials of the company. All these officials, including
the president, are responsible to the board for the day-to-day management
of the company.
Corporations are the backbone of modern economies, although in number
corporations account for only a small percentage of all business firms.
In the US, for example, corporations account for only 20% of all business
firms, but contribute nearly 90% of all sales revenues and
provide jobs for approximately 70% of all American workers.
A corporation is a legal person, which means it is
treated like a private person under the law. It can receive, own and
transfer property, enter into contracts, sue and be
sued.
Advantages
Compared with sole proprietorships and partnerships, corporations have
many advantages.
1. Limited Liability
Owners, i.e. shareholders, of a corporation are not personally responsible
for its losses. If the company goes bankrupt, its creditors
can take away the assets of the company but not the personal property
of the owners.
2. Easy to Expand
Corporations can issue bonds or shares of their stock
to the public, thus raising large sums of funds. In addition, using their
relatively huge assets as collateral, corporations may
be able to take out large loans from banks or other financial institutions.
Therefore, it is relatively easy for corporations to finance expansion.
3. Separated Ownership and Management
In medium-size and large corporations, the shareholders are not responsible
for the daily management. Such duties are delegated to the managers of
the company, who are usually professional managers with expertise in
marketing, production, accounting, law, etc. as a result, the management
as a whole is more efficient.
4. Continuous Life
For a sole proprietorship or a partnership, the death of the owner
or the departure of one or more partners may mean the termination of
the business. The life of a corporation is much more resilient,
because its ownership, which is in the form of its stock, is divisible
and transferable. So long as a company is profitable, the change-of-hands
of the shares of its stock has little impact on the life of the company. Disadvantages
Every coin has two sides, and a corporation is no exception. The main
disadvantages of corporations are listed below.
1. Double Taxation
In the US, corporations with more than 35 stockholders have to pay federal
and state taxes on their profits, which are heavier than those for sole
proprietorships and partnerships. In addition if stockholders receive dividends from
their companies, they have to pay personal income taxes.
This is called double taxation.
2. High Organizing
Each corporation must pay a fee to get a license (called corporate
charter in the US) from the government and has to make annual
payment to renew it. High organizing costs also result from the fact
that in the US, government regulations are much more comprehensive and
strict for corporations than for sole proprietorships or partnerships.
There are special laws, for example, for corporations to comply with
if they want to sell their operations, which the government has the right
to examine to see if a company observes regulations regarding environment,
consumer protection, industrial relations , etc. this incurs additional
cost.
3. Lack Of Secrecy
Unlike sole proprietorships or partnerships, every corporation must
publish an annual report on its financial position to its stockholders.
If required by its stockholders, a corporation may have
to release statements on important issues such as executive salaries,
plans for developing new products, opening new plants or closing existing
ones, etc., thus making secrecy of strategic company plans as well as
financial situation impossible.
A special form: franchising
Franchising is a licensing agreement, under which the franchisor grants
the franchisee the right to sell or use the former’s
product, service or method in return for a royalty from the latter. The
franchisor also assists the franchisee in financing, selecting business
site, organizing, training, purchasing, advertising and other management
activities.
Advantages
Most franchisees feel that have the best of both sole proprietorship
and corporation. If an ordinary person becomes a franchisee of McDonald’s,
for example, he would have instant customer recognition but still enjoy
some independence as a sole proprietor. He would receive training and
guidance from the franchisor. And as a franchisee of an established organization,
he would have less difficulty getting bank loans than a sole proprietor
of a small business.
Disadvantages
However, there are also disadvantages for being a franchisee. First,
while franchise arrangements may reduce risks, they do not guarantee
success. The franchise fee might be so high that the franchisee may find
the business running with no profits or even at a loss. Second, in order
to get the security, the franchisee has to sacrifice some independence.
The franchisor dictates most of details of business operation, including décor,
types of signs, even attire and hairdo of the employees.
1. Cloze
Directions: read the following passage and fill in the blanks with
appropriate words from the list at the end of the passage. Note that
there are more words in the list than the blanks in the passage.
Of the three most basic forms of business 1
,the sole proprietorship
is the easiest to start or to 2.
Its advantages include the fact that
the 3
can keep all the profits, has freedom in business 4
and keep them
in 5.
The owner can also 6
personal satisfaction if the business is a
7
. On the other hand, a sole proprietorship ha limitations in terms of
the 8
and the life of the business, and the owner must 9
unlimited liability
for all 10.
In a partnership, the members fall into basically two types: 11
partners,
who manage the firm and 12
have unlimited liability, and limited partners,
13
liability is confined to their investment in the 14.
Compared with
sole proprietorships, partnerships have 15
access to capital and credit.
Their 16
can also improve because the partners often have diverse and
17
experiences and educational background. The major disadvantage is
that the general partners are 18
for all obligations of the firm.
Nowadays, the 19
business organizations mostly take the 20
of corporation,
because its owners all assume 21
liability and the separation of 22 and
management can greatly improve such organizations’ 23.
By issuing stocks,
their ability to raise capital is greatly 24.
However, corporations also
have problems, the major ones being 25
taxation, lack of business secrecy
and strict government regulations.
4.Translation And Discussion
Directions: translate the following story and the ensuing questions
into English, and then discuss the questions in English. You are encouraged
to add details to the story and ask further questions, which should
also be in English. 创建宏雅
自3年前从轻工学院服装系毕业后，张伟达一直在一家纺织品公司工作，他工作业绩突出，深得上司赏识，去年被提升为部门经理，明年有可能升为分公司负总经理。但是，他老觉得自己知识个为别人做嫁衣的打工仔。在一次老同学聚会上，他发现当年班里公认的才子、现任市经贸委某处副部长的成浩也不甘现状。经过几次深谈，他俩决定一起辞职，成立自己的服装店。
他们给服装店起名为“宏雅”，张伟达和成浩分任正副经理。启动资本为7万元，张伟达出3万，成浩出1万，还有3万是从银行借来的。他们决定从零售开始。进货主要有张伟达负责，因此他经常去广州、上海采购。成浩有时也出去采购，但主要是留在店里负责销售。
由于张伟达熟悉服装流行趋势和市场需求，他进的衣服基本是随进随销。半年下来，两人已经赚了3万，正好还清银行借款。看到业务如此红火，他们决定将隔壁生意清淡的茶叶店铺面盘下来，以扩大自己的营业面积。茶叶店老板周湖生不愿出售自己的铺面，但同意将铺面作价3万元，入股宏雅。此外，他觉得自己不懂服装，不便参加服装店的日常管理，但要求按其股份的50%分享利润（即（3/（3+1+3）*50%*利润））。在权衡利弊之后，张伟达和成浩同意了周湖生的要求，并签了有关协议。 讨论题：
1. 宏雅服装店是什么形式的企业？张伟达、成浩和周湖生之间是什么关系？
2.为什么张伟达和成浩同意了周湖生的入股要求？如果周湖生同意以高于3万元的价格盘出茶叶店铺面，张伟大和成浩是否应买下，而不同意周入股？
3.同向银行借款相比，这种透过入股来筹备资金的做法有何利弊？*
5. Run Your Own Business
Directions: in the exercise, you will set up a business for yourself
and run it using the concepts and principles you learn in this book.
It is hoped that, through such exercise, you will have a better understanding
of how these concepts and principles are applied to the real business
world.
1). In which field will you set up your business Explain your choice.
2). Will your business be a sole proprietorship, a partnership, or a
corporation Explain your decision.