Entrepreneurship

1. Entrepreneurship Chapter 10 Choosing Legal Structures and Distribution Channels Mariotti: Entrepreneurship

2. 4 Types of Business • Manufacturing • Makes products • Rarely sells direct to consumer • Wholesale • Buys products from manufacturers in bulk • Sells smaller quantities to retailers • Retail • Buys products from wholesaler • Sells single items to consumers • Service • Sells time, skills, or expertise • May serve retail, wholesale, or manufacturing clients Marriotti: Entrepreneurship

3. The Production-Distribution Chain • Manufacturer sells in bulk (hundreds) to • Wholesaler who sells quantities (dozens) to • Retailer who sells single pieces (one) to • Consumer Each link along the chain marks up (increases) the price. Marriotti: Entrepreneurship

4. The Markup Is Dictated by the Competition • If you mark up your goods 20% and the competition only marks them up 10%, your customers will buy from the competition. • You must be able to mark up your goods high enough to cover operating costs and make a profit, or you will go out of business. • If you can buy a product at a low wholesale price and customers are willing to pay a retail price that includes a profit, you will have a successful business. Buy low, sell high! Marriotti: Entrepreneurship

5. Gross Profit Margin Gross Profit Per Unit = Retail Price Per Unit – Wholesale Cost Per Unit Gross Profit Per Unit (or Gross Profit Margin): Difference between the price the retailer paid the wholesaler and the price the retailer charges the consumer. Marriotti: Entrepreneurship

6. A Typical Markup • Manufacturer (doubles the cost) $1.00 (cost) $2.00 (price) • Wholesaler (adds 20%) $2.00 (cost) $2.40 (price) • Retailer (doubles the cost) $2.40 (cost) $4.80 (price) • Consumer $4.80 (cost) Marriotti: Entrepreneurship

7. Percentage Markups Wholesale Cost X Markup % = Markup Markup/Wholesale Cost X 100 = Markup % Marriotti: Entrepreneurship

8. Markdowns and Discounts Reasons to markdown inventory: • Reduce storage costs • Make room for new merchandise • Get rid of items that are not selling at the current price Markdowns are expressed as percentages: Markdown/Retail Price X 100 = Markdown % Reasons to offer discounts: • Encourage customers to pay bills sooner • Encourage customers to try new products/services Marriotti: Entrepreneurship

9. Contracts: Building Blocks of Business • Formal written agreement between 2 or more parties • Enforceable in court of law • Contracts define the relationships in the production–distribution chain (between manufacturer, wholesaler, retailer) • Never sign a contract without having a lawyer examine it for you. Ask attorney: • Will this agreement protect my interests? • What what you add, drop, or change? • Never sign a contract without reading and understanding every word. Marriotti: Entrepreneurship

10. A Good Contract Achieves the Four A’s • Avoid misunderstanding—spell out all details, even the obvious. • Assure work—for contract to be binding, parties must exchange something of value or agree not to do something they were legally entitled to do. • Assure payment—specify how/when payment will be made. • Avoid liability—spell out contingencies (unpredictable events, “acts of God”). Marriotti: Entrepreneurship

11. Breach of Contract • Contract is breached (broken) when a signatory (person who signed it) fails to fulfill it. • Injured party may then sue for breach of contract. • Lawsuit is attempt to recover a right or claim through legal action. • Other options: • Small claims court • Arbitration A contract cannot substitute for trust. If you don’t trust someone, don’t expect a contract to protect you. Marriotti: Entrepreneurship

12. Manufacturing: Pros and Cons Pros: • Can build products that don’t exist yet • Can fine-tune design and features of a product • Can obtain patents on new product designs to block competitors Cons: • Expensive to set up and maintain a manufacturing company • Costly to hire and train workers • Have to pay to make the product before it can be sold Marriotti: Entrepreneurship

13. Idea-to-Product Process • Drawings and Specifications—diagrams explaining how to make the product • Parts and Materials List—figure out what materials are needed and where to get them • Prototype—working sample of product • Tooling—making/adapting equipment to produce the product • Setup—each time a batch of product is made, must set up equipment, workers, etc. Marriotti: Entrepreneurship

14. Job Shops • Subcontractors set up to do jobs for manufacturers • Can make a part less expensively • Can deliver a part more quickly • Maintain and provide equipment so manufacturers don’t have to buy/maintain it • Offer manufacturing facilities to companies that don’t have them Marriotti: Entrepreneurship

15. Patents Protect Inventions You need a patent if: • You have invented a product you want to market yourself or sell to a manufacturer. • You believe someone else could sell the product by copying your invention. Patent application must include: • In-depth description of invention. • Drawing of invention. • Completed “Declaration for Patent Application.” • Notarized statement from inventor. • Filing fee to US Patent and Trademark Office. Marriotti: Entrepreneurship

16. JIT Manufacturing • “Just In Time” manufacturing • Developed in Japanese factories • Focuses on making smallest amount of product as needed, quickly and efficiently • Good method for small business • Principles: • Run smallest batches necessary • Reduce setup time/cost to minimum • Schedule production so products finished “just in time” to ship • Stay flexible Marriotti: Entrepreneurship

17. 4 Parts of a Business • Production—making or obtaining product • Financing—securing/using money to develop the business • Marketing—creating ways to get customer interested in product/service • Customer Service—keeping customers happy and loyal Marriotti: Entrepreneurship

18. Registering a Sole Proprietorship • Call chamber of commerce to find out where to register. • Choose name for business. • Fill out “Doing Business As” (DBA) form with name of business and your name. • Conduct name search to make sure no other business in the state is using the name. • Fill out registration form, pay fee. • Have form notarized. Marriotti: Entrepreneurship

19. After Registering a Business . . . Research local regulations that may apply to your business. Obtain any necessary: • Permits • Licenses • Certificates Research employee federal, state, city regulations. Obtain sales tax identification number from state sales tax office. Marriotti: Entrepreneurship

20. Partnerships • Consist of two or more owners who make decisions together, share profits/losses • Partners face unlimited liability in lawsuits • Both fully responsible for all debts, judgments • Exception: limited partnership includes some partners who are not liable and have no say in daily operation of business Marriotti: Entrepreneurship

21. Corporations Pros: • Limited legal liability • Money can be raised through issuing stock • Ownership can be transferred easily; new owner does not personally absorb corporation’s debt Cons: • Profits taxed twice; first as corporate income, then as personal income when distributed to shareholders • Owner can lose control of company to stockholders if they gain more than 50% of stock • More expensive to start than sole proprietorship and partnership Marriotti: Entrepreneurship

22. Types of Corporations • C Corporation —most common type, can sell ownership shares to anyone, use bonds to borrow money. Income taxed twice: 1) as corporate income 2) as personal income when distributed to owners (dividends) • Subchapter S Corporation —limits stockholders to 75; income taxed once, as personal income of owners • Professional Corporation (PC) —used by doctors, lawyers, small groups of professionals • Nonprofit corporation —tax exempt, mission is to improve society; may not sell stock or pay dividends • Limited Liability Company (LLC) —combines features of partnership and corporation; good choice for small business owners seeking liability protection; income taxed once as personal income of owners Marriotti: Entrepreneurship

23. Comparison of Legal Structures Marriotti: Entrepreneurship

24. Nonprofits • 501 (c ) (3) in United States • Tax exempt • Can receive charitable donations • Cannot be owned/bought/sold • May not issue stocks or bonds • Mission driven: must be involved with trying to solve a problem for society • Instead of Unit of Sale, uses Unit of Change to measure success and prove it is succeeding in mission Marriotti: Entrepreneurship