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Entrepreneurship and SMEs
Sergey Anokhin, Ph.D.
Kent State University
January 13, 2009
Presentation highlights
• Small business
• Global changes affecting small businesses
• Tools of SMEs:
– Business incubators
– Business information centers
• Types of ownership
Typical small businesses
• Services
– Convenience stores, restaurants, laundries, gas
stations
• Professional practices
– Accounting firms, dentists, pharmacies, attorneys
• Entertainment
– Theaters, music stores, beauty salons
• Niche manufacturers
• Stats
– About 97% of businesses are small, collectively
responsible for about 40% of the U.S. GDP
Small business
• Most businesses start small:
– Target a particular niche with one product
– Financial issues: those backed by VCs and angels
typically get their money in (small) installments
– Risks of making irreversible investment: generic, not
specialized equipment – hard to establish sustainable
competitive advantage. Never buy new…
– Carefully paced commitment: secure customers first
– Stay below the big guys’ radar
• Many businesses (lifestyle) never grow
significantly
Competitive implications
• ‘Lean and mean’,
• Flexible and fast, but
• Lacking power to compete with larger
rivals
• Early growth may cause more problems
than generate extra income
Competitive challenges for small
businesses
• Growth of chains
– Can you beat them? Yes you can
• Emergence of a global economy
– The world is flat: opportunities and threats
– Global markets: huge opportunities for arbitrage:
example Ukraine
– Differences in demographics across the world
• Expansion of IT and the Internet
– More competitors, often from cheap labor countries
– Internet sales: global market penetration, inexpensive
global exposure (email, teleconferencing, etc.)
Amazon.com, Ebay.
Organizational response to the
challenges
• Keep it small to stay below the radar
• Form alliances with established
corporations
– Standard practice in many industries (biotechpharma). Lucent example
• Form SME networks
– Very active in Europe. Sweden example
Gov’t-sponsored tools to deal with
the competitive challenges
• Incubators: make cost structure favorable,
provide expert advise, networking
opportunities, help avoid costly resource
commitments
• SCORE: Service Corps of Retired
Executives
• Business Information Centers
• Chambers of Commerce
Challenges with internationalization
• Obtaining adequate info about exporting
• Identifying viable sales prospects abroad
• Understanding business protocols in other
countries
• Selecting multiple target markets on the
basis of available information
• Overcoming trade barriers
Gov’t-sponsored tools to deal with
internationalization challenges
• SBA’s Office of International Trade
• SBA Guide to Exporting
• Trade missions sponsored by the
Department of Commerce
• Not specific to small businesses: trading
blocks, WTO, NAFTA, EU, the euro
Deciding on the ownership
structure
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Liability of owners
Cost of formation and record keeping
Continuity of business
Transferability of interest
Capital requirements
Management control
Distribution of profits and losses
Tax implications
Basic ownership structures
• Sole proprietorship
• Partnership
– General
– Limited
– Limited liability partnership
• Corporation
– C-Corp
– S-Corp
• Limited liability company
Sole proprietorship
• Pros
– Easy, inexpensive
– Full control
– Minimal legal
restrictions/requiremen
t, compliance is easy
– No unemployment
taxes, no workers’
compensation
insurance
• Cons
– Personal liability
– No easily available
long-term financing
– No one to share the
burden with
– Illness/death of the
proprietor effectively
dissolve the business
Partnerships
• Pros
–
–
–
–
Easy to establish
Limited paperwork
Shared responsibilities
Easier to obtain
financing
– Sharing the risks with
the government
• Cons
– Unlimited personal
liability
– Bounded by actions of
other partners
– Divided authority
– Loss of a partner may
dissolve the business
– Difficult to end
Partnerships (cont’d)
• Limited partnerships ease some cons:
– Personal protection for limited partners
• …but creates its own problems:
– More expensive to set up
• Limited liability partnerships:
– Less regulation on the ownership, capital
structure, and division of profits
– Newer legal form, few precedents
General (C) Corporation
• Pros
– Lifespan independent
of founders/owners
– Tax-deductible
benefits
– Protection of personal
assets
– Easy transferability of
interest
– Easy to raise capital
• Cons
– Considerable start-up
expenses
– Complicated
legislation / cost of
compliance
– Dual taxation (profits
and dividends)
– Limited scope of
activities (those
defined in charter)
S Corp
• Pros
– No double taxation
– Sharing risks with the
government if losses
occur
• Cons
– Imperfect protection of
personal assets
– Cannot own stock if
you are nonresident
alien (on a
nonimmigrant visa)
– Complicated
maintenance of status
Limited liability company
• Pros
– No double taxation
– Sharing risks with the
government
– Personal assets
protected
– Simpler to operate
than a corp
– Less formalities
• Cons
– Different rules apply in
different states
– Newer legal form, few
precedents
Questions?