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ND – Business Economic Development. Lim Sei Kee @ cK. Starting a business - objectives of startups. What motivates someone to become an entrepreneur?
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ND – Business Economic Development Lim SeiKee @ cK
Starting a business - objectives of startups • What motivates someone to become an entrepreneur? • The chance to earn significant profits, buy a yacht, take numerous holidays, buy designer goods and send the kids to the best private schools.
Every business starts small. • But by taking on some calculated risks, a lot of determination and some luck, a start-up business can become very large, profitable and valuable. • However, not every entrepreneur wants to build a big business and earn a fortune.
The objectives when starting a business can be broadly split into two categories: • Financial objectives, and • Non-financial objectives
Financial objectives • Most business start-ups begin with one main financial objective – to survive. • Because a large percentage of new businesses do not survive much beyond their launch. • The entrepreneur discovers that the business idea is not viable – the business cannot be run profitably or it runs out of cash. • Start-ups have a high failure rate.
To survive, a business needs to have: • Sufficient sources of finance (e.g. cash, a bank overdraft, share capital) • A viable business model – i.e. one which can make a profit
If survival can be assured, then profit is the next most important financial objective for a new business. • A profit is earned when the revenue of the business exceeds the total costs. • The entrepreneur can choose to reinvest (“retain”) the profit in the business, or take it out as a personal payment or dividend.
For many small business owners, profit is the return for all the hard work and riskstaken. • Profit is the reward for taking a risk and making an investment. • Ideally, the profit earned is sufficient to provide the entrepreneur with enough income to live.
However, it is important to appreciate that, to make a sustainable profit, a new business needs to be able to: • Add value • Sell into a large enough market
Another financial objective is personal wealth. Some entrepreneurs have an objective that goes beyond wanting to earn an adequate income. • They aim to build a valuable business that can substantially increase their personal wealth.
Non-financial objectives • Contrary to popular belief, starting a business is not always about financial objectives. • Very often a new business is started with other, non-financial objectives in mind.
More control over working life • Need a more flexible and convenient work schedule • Want to escape an uninteresting job or career • A desire to pursue an interest or hobby • Fed up with being told what to do – want to be the boss! • Want the feeling of personal satisfaction from building a business • Want a greater share of the rewards from the effort being put in – compared with simply being paid by an employer
Types of business organization • Sole proprietorship • Partnership • Private limited company • Public limited company
Organization - Sole Trader • Advantages of setting up as a sole trader are: • Total control of the business by the owner. • Cheap and easy to start up • Keep all the profit • Business affairs are private
Disadvantages of being a sole trader are: • Unlimited liability • Can be difficult to raise finance • Can be difficult to enjoy economies of scale, i.e. lower costs per unit due to higher levels of production • There is a problem of continuity if the sole trader retires or dies
Organization - Partnerships • A partner is normally set up using a Deed of Partnership. This contains: • Amount of capital each partner should provide (i.e. starting cash). • How profits or losses should be divided. • How many votes each partner has (usually based on proportion of capital provided). • Rules on how to take on new partners. • How the partnership is brought to an end, or how a partner leaves.
Advantages of setting up a partnership are: • Spreads the risk across more people • Partner may bring money and resources to the business (e.g. better premises to work from) • Partner may bring other skills and ideas to the business • Increased credibility with potential customers and suppliers
Disadvantages of becoming a partnership are: • Have to share the profits • Less control of the business for the individual • Disputes over workload • Problems if partners disagree over of direction of business
Organization - Limited Companies • A limited company is a business that is owned by its shareholders, run by directors and most importantly whose liability is limited. • Limited liability means that the investors can only lose the money they have invested and no more. This encourages people to finance the company, and/or set up such a business, knowing that they can only lose what they put in, if the company fails.
Advantages of setting up a limited company (plc) are: • For people or businesses who have a claim against the company, “limited liability” means that they can only recover money from the existing assets of the business. • It is easier to raise money through other sources of finance e.g. from banks
Disadvantages of setting up a limited company (plc) are: • Costly and complicated to set up • Certain financial information must be made available for everyone, competitors and customers included • Shareholders in public companies expect a steady stream of income from dividends • Threat of takeover
Organization - Franshises • A franchise is where a business sells a sole proprietor the right to set up a business using their name. • The franchisor is the business whose sells the right to another business to operate a franchise • A franchise is bought by the franchisee – once they have purchased the franchise they have to pay a proportion of their profits to the franchiser on a regular basis.
Advantages of setting up as a franchisee are: • The franchisee is given support by the franchiser. • Less investment is required at the start-up stage since the franchise business idea has already been developed • A franchise allows people to start and run their own business with less risk. The chance of failure among new franchises is lower as their product is a proven success and has a secure place in the market
Disadvantages of setting up as a franchisee are: • Cost to buy franchise – can be very expensive • Have to pay a percentage of your revenue to the business you have bought the franchiser from. • Have to follow the franchise model, so less flexible.
Start a business in Brunei • All businesses in Brunei Darussalam must be registered with the Registrar of Companies and Business Names at the Attorney General’s Office. • The proposed names of business or company must be submitted to the Registry of Companies and Business Names for approval and a fee of B$5.00 is imposed for each proposed name. • [Source: http://www.mofat.gov.bn/index.php/investing-in-brunei-darussalam/setting-up-businesses]
Reasons to start a business • BUSINESS AND INVESTMENT INCENTIVES • His Majesty’s government has announced the reduction of the corporate income tax rate from 30% to 22% for the financial period 1 January 2010 onwards • Corporate tax relief of up to 5 years for companies that invest B$500,000 to B$2.5 million in approved ventures • 8-years tax relief for investing more than B$2.5 million • An 11-year tax break if the venture is located in a high-tech industrial park • Exemption from import duties on machinery, equipment, component parts, accessories, building structures and raw materials
Activity • 1. Do you want to start a business? Why or why not? • 2. Which of the business organizations is the best – Discuss. • 3. How can a sole trader raise capital for the business? • 4. How can a limited company raise capital for a business?
To be discussed next week • Read on : Onebiz, online biz licensing system.
