8 – Setting up a Small Business Enterprise

Introduction

Indeed, consumer sovereignty has always been valued, as it has been since ancient times. Small enterprises were significantly responsible for the spread of civilization to all four corners of the world at the time. Small companies delivered the benefits of Babylonian astronomy, Greek philosophy, the Jewish calendar, and Roman law to the have-nots. Since then, many developed and developing countries have recognised the critical role of small companies as a source of growth: the former as a complement to huge industries and the latter as a means of rapidly creating new employment opportunities on a broad scale. In Indian history, small enterprises have played a significant role. It thrived in almost every corner of the country: Calcutta, Surat, Madras, and Bombay, and it sank deep into the Indian soil.

On the other hand, the quality of their products and services was not always upheld—this focused attention on the need to safeguard consumers. Small companies gradually became the means of spreading civilization to the four corners of the known world. Indian products, with their highly specialised abilities and prospects, were the focus of attention at home and ruled certain of the country’s business activities until the 18th century. During colonial authority, a country famed for its robust industrial base suffered irreversibly until the late 18th century.

8.1 Steps to Starting a Small Business

Because the location of a business is concerned with the lowest cost, transportation costs are once again a critical factor in site selection. Alfred Weber, a German economist, developed the industrial location theory in 1909. During the early stages of the Industrial Revolution, factories sprouted up where manufactured goods were already being produced. Woollen textiles were created in farmhouses on sheep-breeding farms in these locations. The change occurred in the same region, from a farmhouse to a mill. Because many of these textile mills were located near coalfields, the transition from water-powered to steam-powered mills occurred in the exact location. The same happened when steel manufacturing was relocated from local forges to coal-fired mills.

Mills and factories grew up on coalfields throughout the early Industrial Revolution and stayed there for over a century. These raw material areas were losing their dominance by the end of the nineteenth century. The roads were in poor condition and slow at the start of the Industrial Revolution. Canals were built quickly to transport heavy industrial goods but did not form a well-connected network. By the end of the nineteenth century, railways had grown into large networks, allowing industrial locations to become independent of raw material sources. In the twentieth century, this tendency continued with roads and automobiles, but water transportation, particularly the sea, remained dominant for long-distance delivery of industrial commodities. Weber’s study took place at a time when railway networks had reached their full potential. As a result, he was concerned about the balance between raw material location, the manufactured goods market, and transportation. What exactly is a small business? A small company, often known as a factory or plant, is a single structure or location that produces items.

A firm may own multiple plants in various places. Many factories or plants, as well as several small businesses, make up the industry. Although the location of the industry is a location factor in and of itself, industrial location is primarily concerned with the setting of a single enterprise rather than the entire industry. Although we may use the word site regarding location when genuinely looking at the organisation’s situation, the concepts of site and situation play independent roles. The physical location, or block of land, of a firm or set of enterprises is known as the site. The site has some primary constraints in terms of location.

For instance, there is a plentiful supply of flat land, transportation, power, water, labour availability, and capital and finance facilities.

Sufficient industrial lands will be available in almost all cities, and the city authorities will distribute them. Considering the circumstances, or relative location, is also critical concerning other factories and the industry. Weber, like agricultural and central place location theories, makes assumptions that simplify reality, but unlike these different theories, he does not assume an equal distribution. Instead, he thinks that raw materials are dispersed unevenly in permanent locations.

8.1.1 Assumptions

The following are the numerous assumptions that apply in this situation:

1. Natural resources are distributed unevenly across the plain. Raw resources are concentrated in specific locations.
2. Market size and location are given at predetermined points on the plain.
3. There are fixed labour locations with fixed wage rates and immobile and infinite labour (capitalists love that).
4. The area’s culture, environment, and political system are all the same.
5. Entrepreneurs want to keep production costs as low as possible.
6. There is perfect competition.
7. Land, construction, equipment, and capital costs do not differ by area.
8. On level terrain, there is a uniform system of transportation.

8.1.2 The Source of the Raw Material or the Location of the Market

In the first case, we analyse whether an industry should be located near a raw resource or a market. Because the transportation costs are the same in both directions, you can identify your manufacturing in either location if there is no weight loss or gain in productivity.

A relative weight must be computed because the transportation costs for raw materials and produced items are different.

Weber accomplished this using a material index, which calculates relative weight growth or reduction.

• The final product’s total weight
• The total weight of the materials utilised in the manufacturing process

8.1.3 Material Index

The index will be 1 if the product is a pure substance. If the index is less than one, the finished product has gained weight throughout manufacturing, favouring marketplace production. The weight gain is most likely due to the inclusion of standard components such as water, which can be found almost anywhere. A drink, soft drink, or beer is a product where a small amount of generally dried materials is added to water and bottles to create a considerably heavier and more fragile finished product.

Most products, such as metal recovered from an ore, lose weight throughout production. As a result, their material index will be greater than one, preferring the raw material location.

The material index helps estimate the difference in unit transportation costs between raw materials and final products. The index number determines a relative weighting, which is then applied to the isotims’ spacing/radius. The locational triangles on the handout are minor instances of many materials being weighted.

While drawing items and isodapanes for two sites is simple, the spatial model becomes more complex as more material locations and marketplaces are included. It provides a practical approach for estimating the most minor cost location.

In addition to weight loss or increase, the material index and weighting of transportation costs can account for loss or gain in transportation, as well as characteristics such as perishability, fragility, and danger.

8.1.4 The Need for a Business Location

The following situations necessitate the use of Plant Location:

1. Whenever a new business venture is to be launched.
2. In the case of an established business, the need for a new location occurs as it expands, decentralises, or diversifies to meet increased demand for its products.
3. When the present factory is unable to extend its lease.
4. When an unfavourable location is to be decommissioned.
5. When a manufacturer notices a market shift, raw material depletion, changes in transportation facilities, or new procedures that necessitate a changing location.
6. When new branches will be opened to increase production or distribution volume, or both.

Steps in Choosing a Business Location:

1. Selecting a location
2. Choosing a neighbourhood or community
3. Choosing the ideal location, and
4. Choosing the best location

The following are the steps to beginning a small business:

1. Examine yourself and your goals.
2. Schedule a meeting with yourself to brainstorm fresh ideas.
3. Seek advice from publications and agencies.
4. Schedule a meeting with yourself to make a decision.
5. Pick a line
6. Choose your ownership structure (sole proprietorship, partnership, cooperative, or company (private/public)).
7. Decide whether to buy an existing business or establish one from scratch.

8.2 Organizational Type Determination

A new entrepreneur can choose from various organisations to match his needs, aspirations, tastes, and designs. He can form a sole proprietorship, a joint partnership, a limited liability company, or a corporation.

8.2.1 Sole Proprietorship as a Business Entity

The simplest and most common type of business structure is a sole proprietorship. One of the most important reasons is that it is the least regulated of all corporate arrangements. The typical unincorporated one-person business is a sole proprietorship. The business is owned by the owner for legal and tax purposes. It doesn’t exist outside of the owner’s mind. The business’s responsibilities are personal to the owner, and the business ceases to exist when the owner dies. On the other hand, the profits are all personal to the owner, who has complete control over the business.

Advantages

The following are some of the benefits of starting a business as a sole proprietor:

1. Owner Control: The most enticing feature of the sole proprietorship as a business structure is the owner’s entire control over the company. There is complete flexibility to operate the business however one wishes, subject only to economic considerations and limited legal limits. Many believe this feature alone is sufficient to overcome the inherent limitations of this business model.
2. Organizational Simplicity: This is linked to the sole proprietorship’s organisational simplicity. There are no legal requirements for how the firm should be run except for keeping adequate records for tax purposes.
3. The Least Regulated of All Enterprises: As previously stated, sole proprietorships are the least regulated of all businesses.
4. Registration with Local Agencies: Finally, for I.D. numbers and the collection of sales and other taxes, it may be essential to register with local, state, and federal tax bodies. From a legal sense, little else is required to start a business as a sole proprietorship aside from these few easy registrations.
5. Tax Benefits: A last and significant benefit of a sole proprietorship is the variety of tax benefits accessible to a person. The sole proprietorship’s losses and profits are considered personal to the owner. The losses are deducted directly from any other income the owner earns, and the profits are taxed only once at the owner’s marginal rate. In many cases, this may offer unique advantages over the taxation of partnerships or the double taxation of corporations, especially in the early phases of a business.

Disadvantages

The following are some of the drawbacks of operating a firm as a lone proprietor:

1. Sole Proprietorship Asset Risk: The most essential aspect to consider before adopting this business structure is that the sole proprietorship puts the sole owner’s personal and corporate assets at risk.
2. If the business’s creditors’ demands exceed the assets formally placed in the business’s name, the creditors may pursue the single proprietor’s assets.
3. The Difficulty of Obtaining Loans: The possible difficulty in acquiring business loans is a second major disadvantage of the single proprietorship as a business structure.
4. Lack of Consistency: Another drawback of a single proprietorship is the lack of continuity that comes with the business structure. The business will cease to exist once the proprietor passes away. Of course, the business’s assets and obligations will transfer to the owner’s heirs. Still, the owner’s experience and knowledge of how the company was successfully run will typically die with him. Small sole proprietorships are rarely profitable after the owner passes away.

8.2.2 Choosing a Business Entity: Joint Venture

A partnership is a legal arrangement in which two or more people join forces to carry on a trade or business. Each partner provides the partnership money, property, work, and expertise in exchange for a share of the company’s earnings and losses. A partnership is usually founded on some agreement but must not be a formal document. It might even be a simple oral agreement between the partners; however, this is not advised. A partnership is not formed by a simple joint undertaking to share expenses nor by a simple co-ownership of maintained, leased or rented property.

For legal and tax purposes, the following factors are usually considered:

• The partners’ conduct in carrying out the partnership agreement’s provisions,
• The parties’ relationship,
• Each party’s abilities and contributions to the partnership and
• Each partner controls the partnership income and the purposes for which the income is used.

Advantages

The following are some of the benefits of forming a cooperative partnership:

1. Greater Business Credit Possibility: Because the credit potential of the many partners is pooled, a partnership has an intrinsically more excellent business credit opportunity than a sole proprietorship.
2. Tax Benefits: Operating a firm as a partnership rather than a corporation, just as with a sole proprietorship, may offer tax advantages. As with the distribution of corporate profits in the form of dividends to shareholders, the profits created by a partnership may be disbursed directly to the partners without incurring any double tax burden. Partnership income is taxed at the same rates as individual income. This element, however, may prove to be a negative depending on each partner’s specific tax circumstances.
3. A Simple Business Structure: A partnership is a standard business structure for two or more people who want to share in the work and the earnings. It can potentially be a more straightforward company organisation than a corporation. Partnerships require fewer start-up costs and are subject to less regulation.

Disadvantages

The following are some of the drawbacks of forming a joint partnership:

1. Potential for Partner Conflict: The downsides of the partnership structure of business begin with the possibility of partner conflict. The partnership has spawned more arguments than any other type of corporate organisation. This is usually due to the lack of a firm original partnership agreement that spells out the partners’ rights and responsibilities.
2. Unlimited Personal Liability: Another downside of the partnership form is that each partner is personally liable for the partnership’s debts in an unlimited amount. A partnership’s potential liability is even higher than a sole proprietorship’s.
3. Legal Exposure: Besides the business risks of personal financial liability, personal legal liability is possible for another partner’s negligence. Furthermore, each partner may be held accountable for the carelessness of a partnership employee if the negligence occurs during the partnership’s ordinary course of business. The potential for responsibility based on the actions of others broadens the associated dangers once more. Of course, general liability insurance can help mitigate this disadvantage by protecting each partner’s personal and partnership assets to some extent.
4. Lack of Continuity: The partnership, like the single proprietorship, lacks the benefit of continuity. When one of the partners dies, the partnership typically ends automatically. In such a case, unless the partnership agreement specifies particular means under which the partnership may be sustained, a final accounting and split of assets and liabilities is usually required.

8.2.3 Choosing a Business Entity: Limited Liability Corporation or Limited Liability Partnership (LLC)

A limited liability company is a cross between a corporation and a partnership. It has the characteristics of both a partnership and a corporation. The limited liability company is a relatively new corporate structure. It has only been available as a type of business in all 50 states and Washington, D.C., for a few years. Its distinguishing feature combines a corporation’s restricted personal liability with a partnership’s tax advantages. A limited liability company comprises one or more members/owners who actively oversee the company’s operations. Non-member management may also be employed to manage the business.

Advantages

Members/owners of such a firm have limited responsibility comparable to that of a corporation’s shareholders. Their risk is often restricted to the amount of money they put into the limited liability business. It is easier to recruit investors to a limited liability corporation than a standard partnership because none of the members will have personal liability and may not be needed to conduct any managerial activities directly. Members will share in the limited liability company’s potential profits and tax benefits but will bear fewer financial risks. The income and losses of the limited liability corporation pass directly to each member and are taxed only at the individual level because it is usually treated as a partnership.

This corporate organisation also has the advantage of having a somewhat flexible management structure. Finally, limited liability businesses have more freedom than corporations when allocating revenues and losses to their members/owners.

Disadvantages

Even though the business form is similar to a partnership in operation, a limited liability company’s members/owners still have the potential for dispute. State law establishes limited liability corporations, typically by submitting official Articles of Organization of a Limited Liability Company to the relevant state authorities in the founding state. Limited liability companies (LLCs) are a more complicated kind of business than a sole proprietorship or a traditional partnership. They have more documentation obligations than an essential partnership, but not as many as a corporation. A limited liability company is subject to significantly more state laws than a sole proprietorship or a partnership in terms of establishment and operation. The limited liability firm, like traditional partnerships, has an inherent lack of continuity.

8.2.4 Choosing a Legal Entity: Corporations

A company is a legal entity controlled by the laws of the state in which it was formed and the laws of the state or states where it conducts business. In recent years, many small enterprises have adopted corporations as their preferred company structure. Corporations are often more complicated than sole proprietorships or partnerships. In addition, corporations are subject to significantly more governmental rules regarding formation and operation. The following discussion is intended to help potential business owners better understand how this business operates.

A company is a man-made entity. It comes into being by submitting Articles of Incorporation to the appropriate state authorities. This establishes the corporation’s legal existence and allows it to conduct business. The Articles of Incorporation are a public record of a corporation’s formalities. After the corporation has been granted permission to conduct business by the state, it is expected to adopt corporate bylaws or internal rules of operation. The corporation’s bylaws lay out the specifics of the organization’s functioning and management. Corporations are divided into two types: C-corporations and S-corporations. These prefixes refer to the United States Tax Code chapter that specifies the taxon sequences for either type of corporation. In general, these sorts of businesses are formed and run similarly.

The capacity to be recognised as an S-corporation by the Internal Revenue Service of the United States is subject to specific rules. Furthermore, the tax status of these two types of corporations differs significantly. These distinctions will be discussed further. Unless otherwise stated, the basic structure and organisational regulations outlined below apply to both forms of organisations.

C-Corporation: The corporate organisational structure is made up of the following tiers in its most basic form:

1. Shareholders: individuals who own stock in a company but do not participate in the company’s direct management other than by choosing directors and voting on key corporate matters.
2. Directors: who may or may not be shareholders but do not own any part of the company as directors. They are jointly responsible, as members of the corporation’s board of directors, for making important business decisions, including choosing the corporation’s officers.
3. Officials may be shareholders and directors but do not own any of the company’s assets as officers. Officers (usually the president, vice president, secretary, and treasurer) oversee the company’s day-to-day operations.

S-Corporation: An S-corporation is a type of corporation that can be used for particular tax benefits. The Internal Revenue Service came up with it. State corporate statutes are unaffected by S-corporation status. Its goal is to give small businesses the option of being treated like a partnership at the federal level while still enjoying many of the benefits of a corporation. It is similar to a limited liability company in many ways. The fundamental distinction is in the requirements a business must complete to be classified as an S-corporation under federal law. To qualify as an S-corporation under current IRS guidelines, a company must meet the following criteria:

• There can’t be more than 75 stockholders.
• It must have only one class of stock, and all shareholders must be residents and citizens of the United States.
• Shareholders must agree to the S-corporation status;
• The IRS must be notified of the S-corporation status election;

Except for taxation, the S-corporation has all of the advantages and disadvantages of a typical corporation. S-corporation shareholders are taxed in the same way as partnership partners are. In an S-profit, the corporate body distributes a corporation’s losses and deductions to individual shareholders. As a result, an S-corporation is not subject to double taxation. Furthermore, unlike a regular corporation, S-corporation stockholders can deduct any corporate losses on their tax returns.

Advantages

The following are some of the benefits of doing business as a corporation:

1. One of the most significant benefits of the corporate form of business organisation is the opportunity for restricted responsibility for the corporation’s founders and stockholders. Generally, each owner’s liability for corporate obligations is limited to the amount of money he or she has invested in the company. The owners’ assets are not at risk if the corporation collapses unless it is simply a shell for a one-person firm or is significantly undercapitalized or underinsured. The only amount the stockholders will lose is their investment. As the company grows, this factor becomes increasingly crucial in attracting investors.
2. A business entity can exist indefinitely. A company can theoretically exist indefinitely. This could be a significant advantage if the business’s ownership is likely to change. Changes that would dissolve or end a partnership will frequently have no impact on the corporation. This consistency can help you develop a consistent business image and a long-term relationship with people in your sector.
3. A shareholder of corporate stock may sell, trade, or give away his or her stock without the consent of the other shareholders, in contrast to a partnership where no one may join without the permission of the other partners. The new owner of such stock becomes a new company owner in proportion to the stock acquired.

Disadvantages

The following are some of the downsides of doing business as a corporation:

1. Individual Control: Because of a corporation’s organizational structure, a certain amount of personal control is unavoidably lost when a company is formed. As the board of directors’ appointees, the officers are responsible for the board’s actions.
2. Technical Formalities: For a business to benefit from corporate life, the technical formalities of corporation establishment and operation must be carefully followed. Corporate meetings are becoming more formal and frequent at the shareholder and director levels. Furthermore, the cost of forming a corporation is higher than creating a sole proprietorship or a partnership. The initial state fees for registering a corporation with a state can be as high as $900.00 for a company with a small amount of capital. They are also subject to more government regulation than any other commercial entity. These issues have the potential to overwhelm a struggling small firm.
3. Finally, when a corporation’s profits are paid to its shareholders as dividends, they are taxed twice.