Establishing a Business - Chapter 3

Lecture Overview

• Focus on establishing a business after deciding to become an entrepreneur.
• Objectives of the chapter:
  • Understand and discuss key considerations for choosing a form of business.
  • Distinguish between different forms of business enterprises in South Africa.
  • Explain the objectives, importance, and need for a business plan.
  • Evaluate and give an overview of a business plan.
  • Identify factors considered by entrepreneurs when choosing a business location.

Key Considerations for Choosing a Business Form

1. Legal or Juristic Personality:

   • Some businesses (e.g., companies) are considered separate legal entities.
   • Others (e.g., sole proprietorships, partnerships) are not.

2. Continuing or Perpetual Existence:

   • Sole proprietorships and partnerships usually cease with the owner’s death or exit.
   • Companies often have perpetual existence.

3. Limited Liability:

   • Owners of companies have limited liability.
   • Owners of sole proprietorships or partnerships have unlimited liability.

4. Degree of Control:

   • Sole proprietors have total control.
   • In partnerships and companies, control is shared.

5. Potential for Capital Acquisition:

   • Easier for companies (more shareholders) than for sole proprietorships.

6. Compliance with Legal Formalities and Regulations:

   • Varies by business type; companies face stricter regulations.

7. Tax Considerations:

   • Companies are taxed separately from owners.
   • Sole proprietorships’ profits are taxed as personal income.

8. Transferability of Interests:

   • Easy for public companies (via stock market).
   • More complicated for private companies and partnerships.

Forms of Business Enterprises

Sole Proprietorships

• Advantages:
  • Easy to create and manage.
  • Total decision-making authority.
  • Few legal restrictions.
  • Easy to discontinue.
• Disadvantages:
  • Unlimited personal liability.
  • Limited skills and capital.
  • Lack of business continuity.

Partnerships

• Advantages:
  • Easy to form.
  • More skills and capital.
  • Minimal legal formalities.
• Disadvantages:
  • Unlimited personal liability.
  • Potential for conflicts.
  • Lack of business continuity.
  • Difficulty in transferring interests.

Close Corporations

• Benefits: Separate legal personality, limited liability, perpetual existence.
• Downsides: Membership limited to 10, strict accountability, no longer registrable in South Africa.

Companies

• Types: Public, private, state-owned, non-profit.
• Advantages:
  • Can raise large amounts of capital.
  • Limited liability.
  • Separate ownership and control.
  • Perpetual existence.
• Disadvantages:
  • High operational costs.
  • Complex legal regulations.

Business Trusts

• Not a juristic person but treated as a separate entity for tax purposes.
• Flexible, limited liability, easy to form.
• Potential conflicts, legal formalities.
• Absence of strict regulations.

Cooperative Societies

• Democratic control (one person, one vote).
• Voluntary association to meet common economic needs.
• Shared advantage and decision-making.

Developing a Business Plan

• Definition: A written document identifying and describing a new business opportunity.
• Objectives:
  • Identify the business opportunity.
  • Present a plan for exploiting the opportunity.
  • Attract investors and secure financing.

Importance of a Business Plan

• Motivates and focuses the management team.
• Attracts key employees.
• Shows potential to investors, banks, and strategic partners.
• Required for obtaining financing and large contracts.

Key Components

1. Executive Summary: Brief overview, usually written last.
2. General Description of the Venture: Business nature, ownership, control.
3. Products and Services Plan: Details on products/services offered.
4. Marketing Plan: Marketing strategy, target market.
5. Management Plan: Organization structure, key personnel.
6. Operating Plan: Daily operations, facilities, equipment.
7. Financial Plan: Projections, funding requirements.
8. Supporting Documents: Resumes, legal documents, product pictures.

Factors for Evaluating Business Plans

• Capital: Initial investment by the entrepreneur.
• Collateral Security: Assets to be used as security for loans.
• Character: Borrower’s credit history and reliability.
• Conditions: Loan terms, interest rates.

Location of a Business

• Factors to Consider:
  • Source and accessibility of raw materials.
  • Availability of labor.
  • Proximity to market.
  • Costs and availability of utilities (power, water).
  • Transport facilities.
  • Regulations and tariffs.
  • Attitude of local authorities.
  • Social environment and climate.
  • Personal preferences.

Chapter Summary

• Legal forms of business: Characteristics, advantages, disadvantages.
• Importance and elements of a business plan.
• Location factors for establishing a business.
• Questions and interactions encouraged via Blackboard for further discussion.