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Business Discussion 3

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INSTRUCTIONS DISCUSSION 3

After reading the chapters in this module, review the following (2) topics below. Choose and post your response to one (1) topic. l

#1	Chapter 8 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	A Lone Wolf? As a very independent person, you started a business and it is very successful. You are looking at expanding to another location in the same city but cannot afford that total expense right now. An opportunity exists to partner with another small firm that has complementary products. Discuss the advantages and disadvantages of such an alliance.
#2	Chapter 9	E-Commerce Growth and Opportunity Discuss how particular businesses would benefit from e-commerce and others might not.

In order to earn the full
points
for this assignment, you must:

· Begin your post with Chapter # and topic

· Clearly and accurately explain your answer based on factual information. (25 points)

· Include examples, illustrations and/or applications in your answer. If you copy information from the Internet, you must cite your source. (25 points)

CHAPTER

8
The Organizational
Plan: Teams, Legal

Structures, Alliances,
and Directors

LEARNING OBJECTIVES

By studying this chapter, you should be able to…
8-1 Describe the characteristics and value of a strong management

team.
8-2 Explain the common legal forms of organization used by small

businesses.
8-3 Identify factors to consider in choosing among the primary legal

forms of organization.
8-4 Discuss the unique features and restrictions of six specialized

organizational forms.
8-5 Understand the nature of strategic alliances and their uses in

small businesses.
8-6 Describe the effective use of boards of directors and advisory

boards.

8-1 BUILDING A
MANAGEMENT TEAM (slide 1 of 2)

• Management team – Managers and other key persons who give a
company its general direction.
• In general, the management team consists of individuals with

supervisory responsibilities, as well as nonsupervisory personnel who
play key roles in the business.

• Investors consider the quality of a new venture’s management to be
one of the most important factors in decisions to invest.

• One reason that a management team often can bring greater strength
to a venture than an individual entrepreneur can is that a team can
provide a diversity of talent to meet various managerial needs.

• In addition, a team can provide greater assurance of continuity,
since the departure of one member of a team is less devastating to
a business than the departure of a single owner.

• The competence required in a management team depends on the
type of venture and the nature of its operations.

8-1 BUILDING A
MANAGEMENT TEAM (slide 2 of 2)

• In many cases, a startup owner stacks the
management team with family and friends, rather than
seeking balanced expertise.
• The upside to this is that:

• The owner knows these people well and trusts them.
• They often work for less compensation.
• They are more likely to make personal sacrifices to keep the

business alive.
• The downside to this is that:

• The team can quickly become very homogeneous.
• The team lacks complementary strengths.
• The team entertains feelings of entitlement.
• The team carries the baggage of family dysfunction into the

enterprise.

8-1a Achieving Balance

• Not all members of a management team need
competence in all areas—the key is balance.
• Example: If one member has expertise in finance, another

should have an adequate marketing background.
• A diversity in perspectives and work styles enables the

completion of complex tasks.
• A functionally diverse and balanced team will be more

likely to cover all the business bases, giving the
company a competitive edge.

• A small firm can enhance its management by drawing
on the expertise of competent insiders and outside
specialists.

8-1b The Solo Startup
Is Still an Option

• Despite the advantages of forming a team to
start a business, The Wall Street Journal has
reported that the number of small business
owners who are choosing to go it alone is
increasing significantly.
• Research shows that 44 percent of successfully

funded startups are run by a single entrepreneur.
• Emerging technologies make this option

increasingly manageable today.

8-1c Expanding Social Networks
(slide 1 of 2)

• Management team members can connect the
enterprise with a social network that provides access
to a wide range of resources beyond the reach of
individual team members.
• Social network – An interconnected system of relationships

with other people.
• Small business owners in the process of launching a

startup use their networks:
• To access information or get advice.
• To gain introductions to other people.
• To obtain money, business services, physical facilities and

equipment, help with personal needs, and other forms of
assistance.

8-1c Expanding Social Networks
(slide 2 of 2)

• Social media tools can be very helpful in attracting
customers, connecting with peers, and sharing advice
about common problems.

• Small business owners are finding that they can use
social media tools to build an active and robust social
network to increase their social capital.
• Social capital – The advantage created by an individual’s

connections within a social network.
• The principle of reciprocation can be extremely helpful

in adding to whatever social capital you already have.
• Reciprocation – A powerful sense of obligation to repay in

kind what another has done for or provided to us.

8-2 COMMON LEGAL
FORMS OF ORGANIZATION

• The most basic forms of organization used by
small businesses are the:
• Sole proprietorship.
• Partnership.
• C corporation.

8.1 Forms of Legal Organization for Small Businesses

8.2 Percentage of Small Businesses by Legal Form of Organization

8-2a The Sole Proprietorship
Option (slide 1 of 2)

• Sole proprietorship – A business owned by one
person, who bears unlimited liability for the enterprise.

• Advantages:
• An individual proprietor has title to all business assets.
• He or she receives all of the firm’s profits.
• Forming a sole proprietorship is the simplest and cheapest

way to start operation.
• The owner holds title to all of the firm’s assets.
• The owner is free from interference by partners, stakeholders,

and directors.

8-2a The Sole Proprietorship
Option (slide 2 of 2)

• Disadvantages:
• An individual proprietor is subject to the claims of creditors.
• He or she must assume all losses, bear all risks, and pay all

debts.
• The owner bears unlimited liability.

• Unlimited liability – Liability on the part of an owner that extends
beyond the owner’s investment in the business.

• A sole proprietor is not an employee of the business and
cannot benefit from the advantage of many tax-free fringe
benefits, such as insurance and hospitalization plans.

• The death of the owner terminates the legal existence of the
business.

8-2b The Partnership Option (slide 1 of 6)

• Partnership – A legal entity formed by two or more co-owners to
operate a business for profit.

• Benefits:
• Owners can set it up quickly, avoiding many of the legal requirements

involved in creating a corporation.
• The workload, as well as the emotional and financial burdens of the

enterprise, are shared.
• Management talent that might otherwise break the budget is gained.
• Companionship is added to life in a small business.

• Potential problems:
• The owners share unlimited liability.
• Personal conflicts are common.
• Decision making is more complicated because leadership is shared.
• The owners must share their equity position in the business, which

dilutes the control of each partner.

8-2b The Partnership Option (slide 2 of 6)

CHOOSING A PARTNER
• Any person capable of contracting may legally become

a business partner.
• Individuals may become partners without contributing

capital or having a claim to assets if the decision is
made to close the business down.
• Such persons are partners only with regard to management

and profits.
• Forming a partnership involves consideration not only of

legal issues but also of personal and managerial factors.
• A strong partnership requires partners who are honest,

healthy, capable, and compatible.

8-2b The Partnership Option (slide 3 of 6)

• The following are suggestions for forming a partnership:
• Choose your partner carefully.

• Goals, values, and work habits must be compatible, and skills
should be complementary before committing to the deal.

• Team up with a person you can trust.
• Be open, but cautious, about partnerships with friends.
• Test-drive the relationship, if possible.

• Try more limited forms of business collaboration first.
• Create a shared vision for the business.

• Before joining forces, discuss the expectations of all partners,
planned division of work, anticipated vacation time, and the
sharing of profits and losses.

• Prepare for the worst.
• From the beginning, have an exit strategy.

8-2b The Partnership Option (slide 4 of 6)

RIGHTS AND DUTIES OF PARTNERS
• A written partnership agreement should be drawn up before the

venture is launched.
• Partnership agreement – A document that states explicitly the rights

and duties of

partners.

• Unless the articles of the partnership agreement specify

otherwise, a partner is generally recognized as having certain
implicit rights.
• Partners share profits or losses equally, unless they have agreed to a

different ratio.
• These rights are also balanced against serious liabilities, such as

joint and several liability.
• Joint and several liability – The liability of each partner resulting

from any one partner’s ability to legally bind the other partners.

8-2b The Partnership Option (slide 5 of 6)

TERMINATION OF A PARTNERSHIP
• Death, incapacity, or withdrawal of a partner

ends a partnership and requires liquidation or
reorganization of the business.
• Liquidation often results in substantial losses to all

partners.
• When one partner dies, loss due to liquidation may be

avoided if the partnership agreement stipulates that
surviving partners can continue the business after buying
the decedent’s interest.

• This option can be facilitated by having each partner carry
life insurance that names the other partners as beneficiaries.

8-2b The Partnership Option (slide 6 of 6)

• When a partner decides to leave the business,
the other partners should take several
measures as part of a sound response plan:
• Cut off the departing partner’s access to bank

accounts, physical facilities, and company assets to
avoid loss or damage to equipment critical to the
business.

• Quickly assess that partner’s role in the enterprise,
and take steps to fill his or her shoes to get the
business back to normal as soon as possible.

• Once these very pressing matters are under control,
sort out any legal issues that remain.

8-2c The C Corporation Option
(slide 1 of 6)

• Corporation – A business organization that
exists as a legal entity and provides limited
liability to its owners.
• Legal entity – A business organization that is

recognized by the law as having a separate legal

existence.

• This means that the corporation can file suit and be sued,
hold and sell property, and engage in business operations
that are stipulated in the corporate charter.

• In other words, a corporation is a separate entity from the
individuals who own it, which means that the corporation, not
its owners, is liable for the debts of the business.

8-2c The C Corporation Option
(slide 2 of 6)

• C corporation – An ordinary corporation, taxed by the federal
government as a separate legal entity.

THE CORPORATE CHARTER
• To form a corporation, one or more persons must apply to the

secretary of state (at the state level) for permission to incorporate.
• After completing preliminary steps, including payment of an

incorporation fee, the written application is approved by the
secretary of state and becomes the corporate charter.
• Corporate charter – A document that establishes a corporation’s

existence.

8-2c The C Corporation Option
(slide 3 of 6)

• A corporation’s charter should be brief, in accordance with state
law, and broad in its statement of the firm’s power.

• Details should be left to the corporate bylaws, which outline the
basic rules for ongoing formalities and decisions of corporate life,
including the following:
• The size of the board of directors.
• The duties and responsibilities of directors and officers.
• The scheduling of regular meetings of the directors and shareholders.
• The means of calling for a special meeting of these groups.
• Procedures for exercising voting rights.
• Restrictions on the transfer of corporate stock.

8-2c The C Corporation Option
(slide 4 of 6)

RIGHTS AND STATUS OF STOCKHOLDERS
• Ownership in a corporation is evidenced by shares of

stock owned by a stockholder.
• An ownership interest does not confer a legal right to act for

the firm or to share in its management.
• It does, however, provide the stockholder with the right to

receive dividends in proportion to the shares of stock owned,
but only when the dividends are properly declared by the firm.

• Ownership of stock typically carries a preemptive right.
• Preemptive right – The right of stockholders to buy new shares

of stock before they are offered to the public.

8-2c The C Corporation Option
(slide 5 of 6)

LIMITED LIABILITY OF STOCKHOLDERS
• Stockholders’ financial liability is restricted to the amount of

money they invest in the business.
• Creditors cannot require them to sell personal assets to pay the

corporation’s debts.

DEATH OR WITHDRAWAL OF STOCKHOLDERS
• Unlike a partnership interest, ownership in a corporation is readily

transferable.
• An exchange of shares of stock is sufficient to transfer an ownership

interest to a different individual.
• To prevent any negative repercussions from the death of a

majority stockholder, legal arrangements should be made at the
outset to provide for management continuity by surviving
stockholders and fair treatment of a stockholder’s heirs.

8-2c The C Corporation Option
(slide 6 of 6)

MAINTAINING CORPORATE STATUS
• To retain its standing as a separate entity, a

corporation must:
• Hold annual meetings of both the shareholders and the board

of directors.
• Keep minutes to document the major decisions of

shareholders and directors.
• Maintain bank accounts that are separate from owners’ bank

accounts.
• File a separate income tax return for the business.

8-3 CONSIDERATIONS IN CHOOSING
AN ORGANIZATIONAL FORM

• The key factors in choosing an organization are:
• The initial organizational requirements and costs.
• The liability of the owners.

• Piercing the corporate veil – A situation in which a court
concludes that incorporation has been used to perpetuate a
fraud, skirt a law, or commit some wrongful act, and it
removes liability protection from the corporate entity.

• The continuity of the business.
• The transferability of ownership.
• Management control.
• Its attractiveness for raising capital.
• Income tax considerations.

8.3 Comparison of Basic Legal Forms of Organization (slide 1 of 2)

8.3 Comparison of Basic Legal Forms of Organization (slide 2 of 2)

8-4 SPECIALIZED LEGAL
FORMS OF ORGANIZATION

• The majority of small businesses use one of the three
major ownership structures—the sole proprietorship,
partnership, or C corporation.

• However, other specialized forms of organization are
also used by small firms, including:
• The limited partnership.
• The S corporation.
• The limited liability

company.

• The professional corporation.
• The nonprofit corporation.
• The B corporation.

8-4a The Limited Partnership

• Limited partnership – A partnership with at least one
general partner and one or more limited partners.
• General partner – A partner in a limited partnership who has

unlimited personal liability.
• Limited partners – A partner in a limited partnership who is not

active in its management and whose liability is limited to his or
her investment.

• If a limited partner becomes active in management, however, his or
her limited liability is lost.

• To form a limited partnership, partners must file a
certificate of limited partnership with the proper state
office, as state law governs this form of organization.

8-4b The S Corporation

• S corporation (subchapter S corporation) – A corporation that
offers limited liability to its owners and passes taxable income or
losses on to stockholders.

• To obtain S corporation status, a corporation must meet certain
requirements, including the following:
• The corporation must be domestic.
• The corporation can have no more than 100 stockholders.
• All stockholders must be individuals or certain qualifying estates and

trusts.
• Only one class of stock can be outstanding.
• It must not be an ineligible corporation.

• Because an S corporation does not pay income taxes but instead
passes taxable income or losses on to the stockholders, this allows
stockholders to receive dividends from the corporation without
double taxation on the firm’s profit.

8-4c The Limited
Liability Company

• Limited liability company – A form of organization in which owners
have limited liability but pay personal income taxes on business profits.

• A limited liability company can have an unlimited number of owners,
or “members,” and these may include other limited liability
companies and non-U.S. entities.

• This form differs from the C corporation in that it avoids double
taxation.
• Like S corporations, limited liability companies are not taxed but simply

pass their income on to their owners, who pay taxes on it as part of their
personal income.

• Compared to most other forms of organization, the limited liability
company is easier to set up, is more flexible, and offers some
significant tax advantages.
• Thus, according to many attorneys, the limited liability company is

usually the best choice for new businesses.

8-4d The Professional Company

• Professional corporation – A form of
corporation that shields owners from one
another’s liability and is set up for individuals in
certain professional practices.
• The term professional usually applies to those

individuals whose professions require that they
obtain a license before they can practice.

• Examples: Doctors, chiropractors, lawyers, accountants,
engineers, and architects.

8-4e The Nonprofit Corporation

• Nonprofit corporation – A form of corporation for enterprises
established to serve civic, educational, charitable, or religious
purposes; not for generation of profits.

• The IRS will not grant this option to a sole proprietorship or
partnership.

• In the application process, the officers need to submit articles of
organization that spell out and limit the range of activities of the
enterprise.

• For a tax exemption to be granted, the organization must pass the
organizational test.
• Organizational test – Verification of whether a nonprofit organization

is staying true to its stated purpose.
• A nonprofit corporation must establish a board of directors or

trustees to oversee its operations, and if it should dissolve, it is
required to transfer its assets to another nonprofit corporation.

8-4f The B Corporation

• B corporation – A form of corporation that
creates a positive social or environmental
impact while maintaining high standards of
transparency and accountability.

8-5 FORMING STRATEGIC
ALLIANCES

• Strategic alliance – An organizational relationship that links two
or more independent business entities in a common endeavor.

• Without affecting the independent legal status of the participating
business partners, a strategic alliance provides a way for
companies to improve their individual effectiveness by sharing
certain resources.

• Alliances can take many forms.
• Alliances provide a way for small businesses to become more

competitive:
• By accessing another firm’s first-rate resources.
• By expanding the market range for products or services offered.
• By combining advertising efforts.
• By reaching crucial economies of scale.
• By sharing risks that might prove crippling if borne by a single small

company.

8.4 Most Popular Small Business Alliances by Type

8-5a Strategic Alliances
with Large Companies

• Benefits:
• The complementary skills and expertise of the partnered firms

can promote the competitive edge of both (or all) parties.
• Forming an alliance with a large company may offer a boost to

status and market access.
• Risks:

• The small company may be squeezed financially.
• Partnering with a large firm may result in smothering

bureaucratic complications.
• The parties’ strategic priorities may not mesh.
• Large companies can wield enormous power over small

companies.
• Some large firms have a track record of misbehavior as

partners.

8-5b Strategic Alliances
with Small Companies

• About half of all small businesses maintain one
or more strategic alliances with companies that
are smaller or equal in size.
• These partnerships have been found to be more

flexible, dedicated, creative, and understanding of
the needs of small businesses.

8-5c Setting Up and Maintaining
Successful Strategic Alliances (slide 1 of 2)

• An alliance strategy can be powerful for growing
companies.
• It spreads the risk of entering new markets.
• It helps small players with unattractive balance sheets appear

stable to the end buyer.
• It can provide a fast track to reaching the critical mass required

for pre-sale and post-sale support.
• Working closely with other companies can also

introduce significant hazards.
• Because alliance partners are in a unique position to learn

about your strategy and customer base, they can become
competitors overnight.

• Thus, it is crucial to select partners with care and include an “easy
out” clause in the contract, in case the alliance does not go well.

8-5c Setting Up and Maintaining
Successful Strategic Alliances (slide 2 of 2)

• While strategic alliances often are not easy to
set up, they can be even more difficult to
maintain.
• Entrepreneurs can improve their chances of

creating and maintaining a successful alliance by:
• Establishing productive connections.
• Identifying the best person to contact.
• Being prepared to confirm the long-term benefits of the

alliance.
• Learning to speak the partner’s “language.”
• Ensuring a win-win arrangement.
• Monitoring the progress of the alliance and making any

necessary changes.

8-6 MAKING THE MOST OF A
BOARD OF DIRECTORS

• Board of directors – The governing body of a
corporation, elected by the stockholders.
• In entrepreneurial firms, the board of directors tends to be

small (usually five or fewer members).
• The board chooses the firm’s officers, sets or approves

management policies, considers reports on operating results
from the officers, and declares any dividends.

• Corporations are required by law to have a board of directors.
• Research shows that smaller companies that appoint

entrepreneurs to their boards experience increased
performance along multiple dimensions.

8-6a Selection of Directors

• An entrepreneur who is attempting to assemble a
cooperative and experienced group of directors needs
to consider the value of an outside board.
• Objectivity is a valuable contribution of outside directors.

• They can look at issues more dispassionately than can insiders
who are involved in daily decision making.

• The nature and needs of a business help determine
the qualifications required in its directors.

• After deciding on the qualifications to look for, a business
owner must seek suitable candidates as board members.
• Effective directors are honest and accountable, offer valuable

insights based on business experience, and enhance the
company’s credibility with its stakeholders.

8-6b Contributions of Directors

• Boards of directors can assist small businesses by
offering objective counsel and assistance to their chief
executives.

• Directors can fill gaps in the expertise of a
management team and monitor its activities.

• An active board of directors serves management by:
• Reviewing major policy decisions.
• Advising on external business conditions and on proper

reaction to the business cycle.
• Providing informal advice from time to time on specific

problems that arise.
• Offering access to important personal contacts.

8-6c Compensation of Directors

• The compensation paid to board members varies greatly, and
some small firms pay no fees at all.

• If compensation is provided, it is usually offered in the form of an
annual retainer, board meeting fees, and pay for committee work
(evaluating executive compensation, nominating new board
members, and overseeing the work of the company’s auditors).
• Annual retainers for board work typically range from $5,000 to $10,000,

and board meeting fees can run from $500 to $2,000 per meeting.
• These costs are usually in addition to reimbursements for travel

expenses related to board meetings and the financial burden of
providing directors and officers liability insurance, which protects
board members if they should be sued in the course of carrying
out their duties as directors.

• Sometimes, board members are also given a small percentage of
the company’s profits as a bonus for their participation.

8-6d An Alternative:
An Advisory Board

• Some individuals are reluctant to join a board
of directors because outside directors may be
held responsible for harmful or illegal company
actions, even though they are not directly
involved in wrongdoing.
• Thus, many small companies use an advisory board

as an alternative to a board of directors.
• Advisory board – A group that serves as an alternative to

a board of directors, acting only in an advisory capacity.
• In other words, it has no legal authority over the owner or the

company.

Key Terms

advisory board
B corporation
board of directors
C corporation
corporate charter
corporation
general partner
joint and several liability
legal entity
limited liability company
limited partners
limited partnership
management team
nonprofit corporation

organizational test
partnership
partnership agreement
piercing the corporate veil
preemptive right
professional corporation
reciprocation
S corporation (Subchapter S

corporation)
social capital
social network
sole proprietorship
strategic alliance
unlimited liability

�CHAPTER�8��The Organizational Plan: Teams, Legal Structures, Alliances, and Directors

LEARNING OBJECTIVES

8-1 BUILDING A �MANAGEMENT TEAM (slide 1 of 2)
8-1 BUILDING A �MANAGEMENT TEAM (slide 2 of 2)

8-1a Achieving Balance

8-1b The Solo Startup �Is Still an Option
8-1c Expanding Social Networks (slide 1 of 2)
8-1c Expanding Social Networks (slide 2 of 2)
8-2 COMMON LEGAL �FORMS OF ORGANIZATION
8.1 Forms of Legal Organization for Small Businesses
8.2 Percentage of Small Businesses by Legal Form of Organization
8-2a The Sole Proprietorship Option (slide 1 of 2)
8-2a The Sole Proprietorship Option (slide 2 of 2)

8-2b The Partnership Option (slide 1 of 6)
8-2b The Partnership Option (slide 2 of 6)
8-2b The Partnership Option (slide 3 of 6)
8-2b The Partnership Option (slide 4 of 6)
8-2b The Partnership Option (slide 5 of 6)
8-2b The Partnership Option (slide 6 of 6)

8-2c The C Corporation Option �(slide 1 of 6)
8-2c The C Corporation Option �(slide 2 of 6)
8-2c The C Corporation Option �(slide 3 of 6)
8-2c The C Corporation Option �(slide 4 of 6)
8-2c The C Corporation Option �(slide 5 of 6)
8-2c The C Corporation Option �(slide 6 of 6)
8-3 CONSIDERATIONS IN CHOOSING AN ORGANIZATIONAL FORM
8.3 Comparison of Basic Legal Forms of Organization (slide 1 of 2)
8.3 Comparison of Basic Legal Forms of Organization (slide 2 of 2)
8-4 SPECIALIZED LEGAL �FORMS OF ORGANIZATION

8-4a The Limited Partnership
8-4b The S Corporation

8-4c The Limited �Liability Company

8-4d The Professional Company
8-4e The Nonprofit Corporation
8-4f The B Corporation

8-5 FORMING STRATEGIC ALLIANCES
8.4 Most Popular Small Business Alliances by Type
8-5a Strategic Alliances �with Large Companies
8-5b Strategic Alliances �with Small Companies
8-5c Setting Up and Maintaining Successful Strategic Alliances (slide 1 of 2)
8-5c Setting Up and Maintaining Successful Strategic Alliances (slide 2 of 2)
8-6 MAKING THE MOST OF A BOARD OF DIRECTORS

8-6a Selection of Directors
8-6b Contributions of Directors
8-6c Compensation of Directors

8-6d An Alternative: �An Advisory Board

Key Terms

CHAPTER

9
The Location Plan

LEARNING OBJECTIVES

By studying this chapter, you should be able to…
9-1 Describe the five key factors in locating a brick-and-

mortar startup.
9-2 Discuss the challenges of designing and equipping

a physical

facility.

9-3 Recognize both the attraction and the challenges of

creating a home-based startup.
9-4 Understand the potential benefits of locating a

startup on the Internet.

9-1 LOCATING THE BRICK-AND-
MORTAR STARTUP

• The choice of a location for a physical facility is
often a one-time decision, but a small business
owner may later relocate a venture to reduce
operating costs, be closer to customers, or tap
other advantages.

9-1a The Importance of
the Location Decision

• Brick-and-mortar facility – The traditional physical facility from
which businesses have historically operated.

• The importance of the initial decision as to where to locate a brick-
and-mortar facility is underscored by both the high cost of such a
place and the hassle of pulling up stakes and moving an
established business.

• Also, if the site is particularly poor, the business may never
become successful, even with adequate financing and superior
managerial ability.

• The choice of a good location is much more vital to some
businesses to others.
• Example: The location decision for an apparel store would be much

different than the location decision for a painting contractor’s office.

9-1b Key Factors in Selecting
a Good Location (slide 1 of 9)

• Five key factors guide the location selection
process:
1. Customer accessibility.
2. Business environment conditions.
3. The availability of resources.
4. The entrepreneur’s personal preference.
5. Site availability and costs.

9.1 Factors in Determining a Good Business Location

9-1b Key Factors in Selecting
a Good Location (slide 2 of 9)

• Relevant questions to ask when making the
location decision include the following:
• Neighbor mix: Who’s next door?
• Security and safety: How safe is the neighborhood?
• Services: Does the city provide reliable trash

pickup, for example?
• Past tenants’ fate: What happened to previous

businesses in that location?
• Location’s life-cycle stage: Is the area developing,

stagnant, or in decline?

9-1b Key Factors in Selecting
a Good Location (slide 3 of 9)

CUSTOMER ACCESSIBLITY
• Customer accessibility is a key location factor in

industries with high transportation costs, as well as
those that must provide handy access for targeted
customers to avoid losing those customers to more
conveniently located competitors.

BUSINESS ENVIRONMENT CONDITIONS
• Business environment factors affecting the location

decision are climate, competition, legal requirements,
and the tax structure.

9-1b Key Factors in Selecting
a Good Location (slide 4 of 9)

• Although most state and city governments go to great
lengths to support startups, nearly all cities have
regulations that restrict new business operations under
certain circumstances.
• Zoning ordinances – Local laws regulating land use.
• These ordinances often apply to factors related to:

• Traffic and parking.
• Signage.
• Nonrelated employees working in a home.
• The use of a home more as a business than as a residence.
• The sale of retail goods to the public.
• The storage of hazardous materials and work-related equipment.

9-1b Key Factors in Selecting
a Good Location (slide 5 of 9)

AVAILABILITY OF RESOURCES
• Availability of resources, such as raw materials and

crucial suppliers, can be important to location
decisions.
• Proximity to important sources of raw materials and an

appropriate labor supply are particularly critical considerations
in the location of most manufacturing businesses.

• Access to key suppliers influences site selections for retail
outlets and restaurant operations.

9-1b Key Factors in Selecting
a Good Location (slide 6 of 9)

• Availability of suitable labor can also be important to
location decisions.
• The suitability of the labor supply for a manufacturer depends

on the nature of its production process.
• Labor-intensive operations need to be located near workers with

appropriate skills and reasonable wage requirements.
• A history of acceptable levels of labor productivity and peaceful

relations with employers in a particular area is beneficial to
almost any production operation.

• Companies that depend on semiskilled or unskilled workers
usually locate in an area with surplus labor, while other firms may
need to be close to a pool of highly skilled labor.

• Access to good transportation is important to many
companies, particularly retail stores and small
manufacturers.

9-1b Key Factors in Selecting
a Good Location (slide 7 of 9)

PERSONAL PREFERENCE OF THE ENTREPRENEUR
• The entrepreneur’s personal preference is a practical

consideration in selecting a location.
• Despite a world of alternatives, small business owners often

choose to stay in their home community, which may offer certain
unique advantages that cannot be found elsewhere.
• The entrepreneur may generally appreciate and feel comfortable with

the atmosphere of his or her home community.
• It may be easier to establish credit with hometown bankers who know

an entrepreneur’s personal background and reputation.
• Having personal connections in the local business community can

lead to invaluable business advice.
• The small business owner probably will have a better idea of their

local residents’ tastes and preferences than would an outsider.
• Friends and relatives in the community may be quick to buy the

product or service and spread positive reports about it to others.

9-1b Key Factors in Selecting
a Good Location (slide 8 of 9)

SITE AVAILABILITY AND COSTS
• Once an entrepreneur has settled on a certain area for

his or her business, a specific site must still be chosen.
• If an entrepreneur’s top location choices are

unavailable, other options must be considered.
• One alternative is to share facilities with other enterprises.

• Business incubator – A facility that provides shared space,
services, and management assistance to new businesses.

• The purpose of business incubators is to see new businesses hatch,
grow, and then move on, so the situation is temporary by design.

• Alternatives that are more permanent are the shared-office
arrangement and “co-working” movement, which involves
shared working spaces that allow workers to work and connect
in the same location.

9-1b Key Factors in Selecting
a Good Location (slide 9 of 9)

• Assuming that suitable building space is available, the
entrepreneur must decide whether to lease or buy.
• Although most small business owners choose to purchase,

there are a number of benefits to leasing:
• A large outlay is avoided.
• Risk is reduced by minimizing investment and by postponing

commitments for space until the success of the business is
assured and facility requirements are better known.

• It is usually more affordable to lease in a high-image area than to
buy in a prime location.

• The entrepreneur can focus on running the business rather than
managing a property.

• However, there clearly are disadvantages to leasing as well.
• A well-selected purchased property appreciates in value.
• No permission is needed to make changes or additions to the property.

9-2 DESIGNING AND EQUIPPING
THE PHYSICAL FACILTIES

• A well-written location plan should describe the
physical space in which the business will be
housed and include an explanation of any
equipment needs.
• The plan may call for a new building or an existing

structure, but ordinarily a new business that needs
physical space will occupy an existing building,
perhaps after some minor or major remodeling.

9-2a Challenges in Designing
the Physical Facilities

• The general suitability of a building depends on the functional
requirements of the business.
• It should not be too large and extravagant nor too small and restrictive.

• Important factors to consider include:
• The age and condition of the building.
• Potential fire hazards.
• The quality of heating and air conditioning systems.
• The adequacy of lighting and restroom facilities.
• Appropriate entrances and exits.

• The comfort, convenience, and safety of the business’s
employees and customers must not be overlooked.

• The square feet of office area per employee has decreased in
recent years.

• Office configurations have also gone through a substantial
transformation, with a shift toward open designs.

9-2b Challenges in Equipping
the Physical Facilities (slide 1 of 3)

• The final step in arranging for physical facilities
is the purchase or lease of equipment and
tools.
• Research has shown that, overwhelmingly, owners

of small businesses would rather own their
equipment than lease it.

9.2 Small Business Owners Choose Buying over Leasing

9-2b Challenges in Equipping
the Physical Facilities (slide 2 of 3)

MANUFACTURING EQUIPMENT
• Machines used in factories can include either general-

purpose or special-purpose equipment.
• General-purpose equipment – Machines that serve many

functions in the production process.
• General-purpose equipment requires minimal investment and is

easily adapted to various operations.
• General-purpose equipment also offers flexibility.

• Special-purpose equipment – Machines designed to serve
specialized functions in the production process.

• Special-purpose equipment offers a narrower range of possible
applications and, thus, has little or no resale value.

• Special-purpose equipment is more expensive to buy or lease.

9-2b Challenges in Equipping
the Physical Facilities (slide 3 of 3)

RETAILING EQUIPMENT
• Small retailers must have merchandise display racks and

counters, storage racks, shelving, mirrors, shopping carts, cash
registers, and other equipment that facilitates selling.

• Fixtures and other retailing equipment should create an
atmosphere appropriate for customers in the retailer’s target
market.

OFFICE EQUIPMENT
• Every business office—even a home office—needs furniture, filing

and storage cabinets, and other such items.
• Entrepreneurs should choose office equipment (like computers

and communications systems) that reflects the latest advances in
technology applicable to a particular business.

9-2c Business Image

• All new ventures, regardless of their function,
should project an image that is appropriate to
and supportive of the business and its
intentions.

9-3 LOCATING THE STARTUP IN
THE ENTREPRENEUR’S HOME

• Home-based business – A business that
maintains its primary facility in the residence of
the owner.

• Launching a business from home has become
a viable permanent option for an increasing
number of startups.

9-3a The Attraction of
Home-Based Businesses (slide 1 of 2)

• Home-based businesses are started both for financial
reasons and to accommodate family lifestyle
considerations, such as the following:
• To get a business up and running quickly, and with little risk.
• To do something you love to do, and get paid for doing it.
• To be your own boss, and reap the rewards from your efforts.
• To have the flexibility to spend more time with family and

friends.
• To save time and money wasted on daily commutes.

9-3a The Attraction of
Home-Based Businesses (slide 2 of 2)

FINANCIAL CONSIDERATIONS
• Locating a business at home helps increase profits by reducing

costs.
• Starting at home allows you to build your business slowly, without

the pressing burden of having to find the cash to cover rent for
office space every month and pay other expenses.

• It also allows you to deduct costs related to space used in the
home for business from any taxes that may be owed from the
venture’s income, as long as you conform to the rules established
by the IRS.

LIFESTYLE CONSIDERATIONS
• Entrepreneurs who locate business operations in the home are

frequently motivated by the desire to spend more time with family
members.

9-3b The Challenges of
Home-Based Businesses

PROFESSIONAL IMAGE
• Maintaining a professional image when working at home is a

major challenge for many home-based entrepreneurs.
• If clients or salespeople visit the home-based business, it is critical

that a professional office area be maintained.

LEGAL CONSIDERATIONS
• Local laws, such as zoning ordinances, can pose serious problems

for home-based businesses.
• There are also tax issues related to a home-based business.

• Example: A separate space must be clearly devoted to business
activities if an entrepreneur is to claim a tax deduction for a home office.

• Insurance considerations also affect a home-based business.
• A homeowner’s policy is not likely to cover an entrepreneur’s

business activities, liabilities, and equipment.

9-4 E-COMMERCE: LOCATING A
STARTUP ON THE INTERNET

• E-commerce – Electronic commerce, or the
buying and selling of products or services on
the Internet.

• The Internet can significantly boost a small
company’s financial performance.

9-4a Benefits of
E-Commerce for Startups

• E-commerce can benefit a startup in many
ways.
• It allows a new venture to compete with bigger

businesses on a more level playing field.
• The Internet blurs geographic boundaries and

expands a small company’s reach.
• An e-commerce operation can help a startup with

early cash flow problems by compressing the sales
cycle—that is, reducing the time between receiving
an order and converting the sale to cash.

• The shorter cycle translates into quicker payments from
customers and improved cash flows to the business.

9-4b E-Commerce
Business Models (slide 1 of 7)

• A business model is an analysis of how a firm
plans to create profits and cash flows given its
revenue sources, its cost structures, the
required size of investment, and sources of
risk.

• Online companies differ in their decisions
concerning which customers to serve, how
best to become profitable, and what to include
on their websites.

9.3 Basic E-Commerce Business Models

9-4b E-Commerce
Business Models (slide 2 of 7)

TYPE OF CUSTOMERS SERVED
• E-commerce businesses are commonly distinguished

according to customer focus.
• There are three major categories of e-commerce

business models based on the type of customers
served:
1. Business-to-business (B2B).
2. Business-to-consumer (B2C).
3. Consumer-to-consumer (C2C).

9-4b E-Commerce
Business Models (slide 3 of 7)

• Business-to-business (B2B) model – A business
model based on selling to business customers
electronically.
• Example: Hewlett-Packard.
• The dollar amounts generated by firms using a B2B model are

significantly greater than those for firms with a B2C model.
• B2B operations come in all shapes and sizes, but the most

popular form of this strategy emphasizes sales transactions.
• A unique form of B2B trade involves work outsourcing, which

helps connect freelancers and other specialists with
companies that need their services.

9-4b E-Commerce
Business Models (slide 4 of 7)

• Business-to-consumer (B2C) model – A business
model based on selling to final consumers electronically.
• Example: Amazon.
• The B2C model offers three main advantages over brick-and-

mortar retailing:
1. Convenient use.
2. Immediate transactions.
3. Round-the-clock access to a broad array of products and services.

• B2C e-commerce businesses face unique challenges—
payment security risks and data breaches, customers who
refuse to purchase a product without first seeing or trying it, etc.

• However, they also enjoy the advantages of tremendous
flexibility by being able to change merchandise mixes and prices
quickly and easily modify the appearance of their online stores.

9-4b E-Commerce
Business Models (slide 5 of 7)

• Many producers and wholesalers today are using a
strategy sometimes referred to as disintermediation.
• Disintermediation – The bypassing of a middleman by a

producer or wholesaler in order to sell its product or service
directly to the final consumer.

• Consumer-to-consumer (C2C) model – A business
model usually set up around Internet auction sites that
allow individuals to list items available for sale to
potential bidders.
• Auction site – Web-based businesses offering participants

the ability to list products for consumer bidding.
• Example: eBay.
• Auction sites generate most of their revenue through listing

fees and commissions.

9.4 Selling Your Item on eBay

Step 1: Set up an eBay seller’s account, which is free of charge.
Step 2: Create a listing for the item to be offered for sale.
Step 3: Manage your listing to see if anyone has bid on or purchased your item.
Step 4: Wrap up the sale with your buyer by communicating with the buyer,

receiving payment, shipping the item, and leaving feedback for the
buyer.

Source: Adapted from “Getting Started Selling on eBay,” http://pages.ebay.com/
help/sell/sell-getstarted.html, accessed January 22, 2018.

9-4b E-Commerce
Business Models (slide 6 of 7)

THE NATURE OF ONLINE PRESENCE
• A second broad way of categorizing e-commerce models relates

to a firm’s intended level of online presence.
• The role of a website can range from merely offering information

(information-based model) and basic content (content-based model)
to enabling complex business transactions (transaction-based
model).

• Information-based model – A business model in which a website
simply offers information about a business, its products, and other
related matters.
• It is typically just a complement to an existing brick-and-mortar

facility.

9-4b E-Commerce
Business Models (slide 7 of 7)

• Content-based model – A business model in which a website
provides information (content) that attracts visitors, usually with
the hope of generating revenue through advertising or by directing
those visitors to other websites.
• The content-based model does not provide the ability to make

purchases.
• Transaction-based model – A business model in which a

website provides a mechanism for buying or selling products or
services.

• Emerging platforms for online ventures include:
• Blogging.
• Podcasting.
• Creating a following on YouTube or Pinterest to generate revenue

from ads and sponsorships, donations, subscription charges, or fees
for access to live events.

9-4c Internet-Based Businesses and
the Part-Time Startup Advantage

• Instead of giving up their existing job, many
entrepreneurs start Internet-based businesses
on a part-time basis while still holding on to
their full-time job.
• This approach reduces the personal risk of the

entrepreneur if the venture should fail.
• On the other hand, holding on to a full-time career

while launching a new venture on the side can be
extremely grueling due to the amount of hours that
must be spent working two careers.

Key Terms

auction sites
brick-and-mortar facility
business incubator
business-to-business (B2B)

model

business-to-consumer (B2C)

model
consumer-to-consumer (C2C)

model

content-based model
disintermediation
e-commerce
general-purpose equipment
home-based business
information-based model
special-purpose equipment
transaction-based model
zoning ordinances

�CHAPTER�9��The Location Plan

LEARNING OBJECTIVES

9-1 LOCATING THE BRICK-AND-MORTAR STARTUP
9-1a The Importance of �the Location Decision
9-1b Key Factors in Selecting �a Good Location (slide 1 of 9)
9.1 Factors in Determining a Good Business Location
9-1b Key Factors in Selecting �a Good Location (slide 2 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 3 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 4 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 5 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 6 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 7 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 8 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 9 of 9)
9-2 DESIGNING AND EQUIPPING THE PHYSICAL FACILTIES
9-2a Challenges in Designing �the Physical Facilities
9-2b Challenges in Equipping �the Physical Facilities (slide 1 of 3)
9.2 Small Business Owners Choose Buying over Leasing
9-2b Challenges in Equipping �the Physical Facilities (slide 2 of 3)
9-2b Challenges in Equipping �the Physical Facilities (slide 3 of 3)

9-2c Business Image

9-3 LOCATING THE STARTUP IN THE ENTREPRENEUR’S HOME
9-3a The Attraction of �Home-Based Businesses (slide 1 of 2)
9-3a The Attraction of �Home-Based Businesses (slide 2 of 2)
9-3b The Challenges of �Home-Based Businesses
9-4 E-COMMERCE: LOCATING A STARTUP ON THE INTERNET
9-4a Benefits of �E-Commerce for Startups
9-4b E-Commerce �Business Models (slide 1 of 7)
9.3 Basic E-Commerce Business Models
9-4b E-Commerce �Business Models (slide 2 of 7)
9-4b E-Commerce �Business Models (slide 3 of 7)
9-4b E-Commerce �Business Models (slide 4 of 7)
9-4b E-Commerce �Business Models (slide 5 of 7)
9.4 Selling Your Item on e Bay
9-4b E-Commerce �Business Models (slide 6 of 7)
9-4b E-Commerce �Business Models (slide 7 of 7)
9-4c Internet-Based Businesses and the Part-Time Startup Advantage

Key Terms

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