Chapter 3
Chapter 3
Chapter 3
Business Formation
Introduction
the simplest structure for two or more people to own a business together
Partnerships can be a good choice for:
businesses with multiple owners
professional groups (like attorneys), and
groups who want to test their business idea before forming a more formal
business.
Partnership Cont’d
Three options:
1. General
the default structure for partnerships
a business entity in which two or more partners agree to share in a company’s
profits, losses, and assets.
all partners are assumed to have certain management responsibilities for running
the organization.
partners take on personal responsibility for the business. That means equal
liability for debts or legal action.
Partners can adjust the split of both profits and liabilities in their partnership
agreement, but an equal split is the default.
pass-through entities, meaning partners pay income taxes on profits at the
personal level.
Partnership Cont’d
2. Limited Partnership
one partner is designated a general partner with unlimited liability.
other partners are limited partners, which means their liability is the same as
their investment.
These limited partners are typically silent partners—they invest in the business
but don’t involve themselves in day-to-day operations.
Limited partnerships are pass-through tax entities, so taxes are paid at the
individual level.
Partnership Cont’d
3. Joint Ventures
formed by two or more people who are working on a single project.
As a result, they’re typically more limited in scope and length of time than a
partnership, which may continue indefinitely.
the necessary elements of a joint venture include:
an express or implied agreement
a common purpose that the group intends to carry out
shared profits and losses; and
each member’s equal voice in controlling the project.
joint ventures are treated differently when it comes to taxes.
Partnerships are pass-through tax entities
while joint ventures can be taxed as a corporation or a partnership.
Limited Liability Company (LLC)
The entrepreneurial process of launching a new venture can be divided into three
key stages of: Discovery; Evaluation; and Implementation. These can be further
sub-divided into seven steps as shown below:
Small Business Failure and Success Factors
2. Inadequate Financing:
Includes improper managerial control as well as shortage of capital.
Lack of adequate funds to begin with, makes unable to afford the facilities or
personnel needed to start up the business correctly.
Although adequate capital available, failure to manage resources wisely,
inability to maintain adequate inventory or keep the balance needed to run the
business.
In General, there are various causes of failure:
Much credit
Fail to plan for the future
Overinvest in fixed assets
Hire the wrong people.
Business Termination VS Failure
Identifying failure factors can discover ways to tilt the scales towards
success.
These success factors are categorized as:-
i. Conducive Environment;
ii. Adequate Credit Assistance;
iii. Markets and Marketing Support.
Conducive Environment
Political, economic, technological and socio-cultural factors
Success Factors Cont’d
Industry ≤5 Br ≤100,000
Micro Enterprise
Service ≤5 Br ≤50,000
Manufacturing Sector
Construction Sectors
Trade Sectors
Service Sectors
Agriculture Sector (Urban Agriculture)
Levels of MSEs in Ethiopia
Start-up
Growth Level
Maturity Level
Growth- Medium Level
Main Supporting Packages for MSEs Development
in Ethiopia
In Ethiopia supporting packages for MSEs includes;
Awareness creation about the sector;
Provision of legal services to form legal business enterprises;
Providing technical and business management training;
Financial support based on personal saving, 20/80 (the beneficiaries are save 20%
and the MFIs provide Loan 80% of the projects);
Facilitate working premises; industry extinction services and;
Bookkeeping and audit services.
Problems of Small Scale Business in Ethiopia
Small scale enterprises find it difficult to get raw materials of good quality
at reasonable prices in the field of production.
Outdated techniques of production Because of their poor financial position
they are not able to buy new equipment, consequently their productivity
suffers.