Unit 3

The establishment of a business

Introduction
One of the first decisions that you will have to make as a business
owner is how the company should be structured. This decision will have
long-term implications, so consult with an accountant and attorney to
help you select the form of ownership that is right for you.


Upon completion of this unit you will be able to:
Identify and compare the legal form of ownership of business
Describe business objectives and stakeholder objectives
Demonstrate an understanding of business ethics and social
Objectives
responsibility
Discuss the location of the business.


Cronje .Gj de et al (2012) 7th edition impression: Introduction to
Business Management, Oxford University Press. Cape Town.

Prescribed reading

 Surridge, M and Andren, G, (2014). Business Studies, Philip Allan

Publishers

Additional reading

The legal forms of ownership of business

One of the first decisions that you will have to make as a business
owner is how the company should be structured. This decision will have
long-term implications, so consult with an accountant and attorney to
help you select the form of ownership that is right for you. In making a
choice, you will want to take into account the following:

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Your vision regarding the size and nature of your business.
The level of control you wish to have.
The level of “structure” you are willing to deal with.
The business’s vulnerability to lawsuits.
Tax implications of the different ownership structures.
Expected profit (or loss) of the business.
Whether or not you need to re-invest earnings into the business.
Your need for access to cash out of the business for yourself.
Sole Proprietorships
The vast majority of small business start out as sole proprietorships.
These firms are owned by one person, usually the individual who has
day-to-day responsibility for running the business. Sole proprietors own
all the assets of the business and the profits generated by it. They also
assume complete responsibility for any of its liabilities or debts. In the
eyes of the law and the public, you are one in the same with the
business.

Advantages of a Sole Proprietorship

Easiest and least expensive form of ownership to organize.
Sole proprietors are in complete control, and within the parameters of
the law, may make decisions as they see fit.
Sole proprietors receive all income generated by the business to keep or
reinvest.
Profits from the business flow-through directly to the owner’s personal
tax return.
The business is easy to dissolve, if desired.
Disadvantages of a Sole Proprietorship
Sole proprietors have unlimited liability and are legally responsible for
all debts against the business. Their business and personal assets are at
risk.

May be at a disadvantage in raising funds and are often limited to using

funds from personal savings or consumer loans.
May have a hard time attracting high-caliber employees, or those that
are motivated by the opportunity to own a part of the business.
Some employee benefits such as owner’s medical insurance premiums
are not directly deductible from business income (only partially
deductible as an adjustment to income).
Federal tax forms for Sole Proprietorship (only a partial list and some
may not apply)
Form 1040: Individual Income Tax Return
Schedule C: Profit or Loss from Business (or Schedule C-EZ)
Schedule SE: Self-Employment Tax
Form 1040-ES: Estimated Tax for Individuals
Form 4562: Depreciation and Amortization
 Form 8829: Expenses for Business Use of your Home
Employment Tax Forms
Partnerships
In a Partnership, two or more people share ownership of a single
business. Like proprietorships, the law does not distinguish between the
business and its owners.
The Partners should have a legal agreement that sets forth how
decisions will be made, profits will be shared, disputes will be resolved,
how future partners will be admitted to the partnership, how partners
can be bought out, or what steps will be taken to dissolve the
partnership when needed; Yes, it’s hard to think about a “break-up”
when the business is just getting started, but many partnerships split up
at crisis times and unless there is a defined process, there will be even
greater problems. They also must decide up front how much time and
capital each will contribute, etc.

Advantages of a Partnership
Partnerships are relatively easy to establish; however, time should be
invested in developing the partnership agreement.
With more than one owner, the ability to raise funds may be increased.
The profits from the business flow directly through to the partners’
personal tax returns.
Prospective employees may be attracted to the business if given the
incentive to become a partner.
The business usually will benefit from partners who have
complementary skills.
Disadvantages of a Partnership
Partners are jointly and individually liable for the actions of the other
partners.
Profits must be shared with others.
Since decisions are shared, disagreements can occur.
Some employee benefits are not deductible from business income on
tax returns.
The partnership may have a limited life; it may end upon the
withdrawal or death of a partner

Business ethics and social responsibility.

Business decisions related to ethics impact the daily lives of
professionals and consumers. Many people are employed at
organizations that sell or provide goods and services. Professionals like
lawyers and accountants are bound by codes of conduct from
professional societies, and other professionals must practice sound
business ethics in their role and with co-workers, clients and the public.

Consumers interact with the brands and people in a business, and these
exchanges affect the success of the business. For example, small
businesses depend on reputation and trust among people in the
community. By treating employees and customers well, businesses can
gain the community’s support.
Unethical business practices can have the opposite effect on customers.
False or discriminatory advertising, negative treatment of employees
and ignoring safety concerns in products can undermine consumer
confidence. Legal action can also result.

Relating Business Ethics and Social Responsibility

Business leaders and organizations can examine how their decisions
relate to social responsibility, which is a general concept that can
include social as well as cultural, economic and environmental issues.
By integrating business ethics and principles of social responsibility,
organizations can make a difference in the world and enhance their
reputation.

Some companies have adopted the social entrepreneurship model of

business that focuses on applying practical, innovative and sustainable
approaches to benefit society. The shoe retailer TOMS is one of the
most popular examples of the social entrepreneurship model. For every
pair of shoes sold, the company provides a new pair of shoes to children
in developing countries.

Another example of combining business ethics and social responsibility

is by focusing on benefiting the environment. Forbes notes some of the
reasons why Seventh Generation, a Burlington, Vermont-based company
that produces and distributes green products, was recognized as the
best company for the environment.

Selling products such as biodegradable, vegetable-based cleaning

products, chlorine-free tampons and paper towels and natural lotion
baby wipes.
Developing an employee bonus program that awards workers who figure
out how to make the company’s goods even more sustainable.
Having an LEED-certified building where more than a quarter of the
company’s fleet is comprised of low-emissions cars and more than a
quarter of the energy burned in manufacturing its products comes from
renewable energy.
Business Ethics and Corporate Social Responsibility
Definition and Characteristics
Corporate social responsibility is similar to ideas of social responsibility
for individuals and businesses. Some sources provide similar definitions
for the two terms, but corporate social responsibility is a specific
business approach that began in the 1950s and 1960s, with definitions
expanding in the ensuing decades.

There is no universally accepted definition of corporate social

responsibility, according to the Journal of Business Ethics, but two
features can be used to differentiate corporate social responsibility
from other activities: 1) They partly or entirely benefit society and/or
general interests; and 2) they are not obligated by law. Other aspects
of corporate social responsibility can vary.
Domains include environmental friendliness, community support, local
products promotion, fair employee treatment and more.
Stakeholders include employees, suppliers, customers, communities,
the environment, investors and regulators.
Policies and activities include cause-related marketing (marketing
programs that combine sales objectives and helping worthy causes),
sponsorship (connecting worthy causes to a brand or organization for
money) and corporate philanthropy (charitable donations).
Some organizations engage in corporate social responsibility activities
for intrinsic reasons: to help out and make societal contributions.
Another motive is extrinsic, which relates to a company expecting
financial or other benefits for socially responsible behavior. Many
studies reflect positive organizational outcomes for corporate social
responsibility activities, the Journal of Business Ethics reports. Finally,
a third motive for corporate social responsibility activities is meeting
societal expectations and stakeholder pressure.

Interaction
According to a paper in Procedia Economics and Finance, corporate
social responsibility is a subset of business ethics. This conclusion was
made when viewing corporate social responsibility under the normative
stakeholder theory, or a philosophy that “affirms that business
corporations are ‘morally’ responsible to look after the concerns of a
larger group of stake holders which could include owners, customers,
vendors, employees and community rather than its stockholders.” Some
sources define stakeholders as groups that the organization depends on
for its existence.

In this context, corporate social responsibility becomes synonymous

with the duties and relationship between the business and the
environment that facilitates its existence. And thus, it is not enough to
cover certain ethical practices in businesses. For instance, corporate
social responsibility does not include the ethicality of how the
organization pursues profits or subscribes to political associations.

Corporate social responsibility is related to business ethics, but the

former is a narrow topic within the latter area. Businesses should use
corporate social responsibility along with processes like corporate
governance, corporate outreach and politics, business process redesign
and corporate strategy to reconcile with the ethicality of doing
business, according to Procedia Economics and Finance.

Applying Ethics to a Career in Business

Business professionals should have a solid grasp of ethical practices for
their careers. Grace College’s business programs are rooted in sound
moral and ethical approaches to business, with a focus on Christian
servant leadership.

Grace’s fully online Bachelor of Science in Business Administration

focuses on the skills and tools graduates need to adapt and excel in the
business world. This GOAL (Grace Opportunities for Adult Learners)
program is designed for students balancing personal commitments while
 pursuing an education. It is priced substantially below most degree
completion programs and can be completed in as little as 16 months.

Grace’s fully online Master of Business Administration provides students

with a strong foundation in marketing, accounting, finance and human
resources as well as coursework in entrepreneurship. This program can
help graduates pursue leadership opportunities in business.

Location of the business.

Positioning has always been an important element of setting up a
business. Your success as a business depends on how well you are
positioned to be found. Positioning includes various factors, from
location to the price of your product or service to the message you use
to promote the business, online and offline.

You’ve probably heard the classic advice, “Location, Location,

Location.” The importance of the location of your business cannot be
stressed enough, despite the rise of technology, virtual communication
and cloud businesses. A business’s address is an important factor in the
way that business is perceived.

If your business address is far away from your target audience,

especially if you sell offline, prospects may find it difficult to locate
you. Conversely, if you had a city centre location or one which is well-
regarded as a business centre, prospects be may be more inclined to
convert.

How important is location to your business? These questions can help

you.

Does the success of your company rely heavily on customer traffic?

Is convenience important to you and your employees?
Do you rely on suppliers of goods?
Is brand visibility important for your growth?
What about the legal implications of your location?
The best location can increase brand visibility
Location can also influence a business’s ability to market itself, the
competition it faces from businesses, the total cost of operation, taxes
the business owner has to pay and the regulations they must follow.

Location also matters for marketing. The importance of location goes

beyond your business’ physical location and your website rank in Google
search results. It extends to the placement of your advertisements.

For example, choosing a business address in the City of London will

likely change the perception of your business as it would be seen to be
part of the finance and high growth culture of the area. In the UK, Pall
Mall Estates has workshop space available in a number of major cities,
including London, Bournemouth, Birmingham, and Wellingborough.

Easy access is a huge advantage

Basically, you just want to be wherever your customers are and make it
as convenient as possible to visit you. Location is of utmost importance
especially to businesses that sell goods or services directly to customers
at brick-and-mortar establishments.

Some customers choose to buy from certain companies because of the

perception they have about them. A business in the commercial area of
a city gives the perception that the business is successful and can afford
a good location.

Your business should also consider if parking is available for prospective

customers. Many customers will choose to go somewhere else if it’s too
hard to find parking.

Think about suppliers

Depending on your business, suppliers could influence your location.
Price and quality are pre-requisites in choosing a supplier, but the
speed of delivery has a huge impact on productivity.

For better and quicker businesses operations, it’s important to consider

the location of your company to make it easy for your suppliers to reach
your premises on time to deliver goods and provide the necessary
service for your business to run smoothly. And the closer you are to
your suppliers, the quicker your product can be on the market.

Location will always be important especially for many businesses

despite the rise of remote work, collaboration, telecommuting and
virtual offices.

If your business is conveniently located at the best place to attract

customers, you can be certain of growth, an increase in sales and brand
visibility.

If you’re running a traditional or physical business, your success

primarily depends on your location. Do your research and choose your
location carefully.

Think about the following dynamics when choosing the location of your
new business or when you plan on expanding to other cities.

Your business images

The competition you will face
Growth plans today and tomorrow
 The overall safety and perception of the location
Laws and regulations

Activity 3

 Time Required: 20 minutes

Activity Outline the Business and Stakeholder objectives that you know.

How long?


Feedback

Business objectives and stakeholder objectives

An organization's stakeholders are the individuals or groups that
influence or have an interest in the firm’s actions and decisions. The
major stakeholders in a company include shareholders, government,
employees, customers and creditors/bondholders. They have different
objectives and goals based on their diverse interests in the firm.
Objectives are what the stakeholders seek to achieve. Each stakeholder
looks to protect his own interests by ensuring his objectives have been
met.

Shareholders
Shareholders have a stake in the firm through their share ownership. A
company’s managers act as custodians of the firm on behalf of the
shareholders. They either earn capital gains through the sale of shares
or earn dividends declared by the firm. Their objectives therefore
include but are not limited to share price growth, growth in dividends
and growth in the value of the shares.

Employees
 Employees are the workers employed by the firm. Employees include
both management and subordinate staff. They directly influence the
profits of the firm since they are involved in the day-to-day operations.
Among their top priorities in return for their services include job
satisfaction, remuneration, job security, motivation and self-
actualization. They are also interested in the company’s survival and
growth as their jobs depend on it.

Government
The government is a major player in any business environment as it
plays a regulatory and supervisory role. The government aims to ensure
that all companies abide by the existing legal provisions. Matters such
as tax payment, licensing, standardization and protection of consumer
welfare form part of the objectives of the government with regards to
companies.

Customers
Customers keep companies in business by purchasing their products and
subscribing to their services. They are important players, thus every
business should ensure that it does not compromise their needs.
Customers want to achieve value for their money through quality
products, reliable services, good customer care and fair prices, among
other factors.

Creditors/Bondholders
Creditors provide financing to the company by issuing loans and buying
corporate bonds. They are important as they help to meet the firm’s
capital budgeting needs. Their objectives include receiving repayment
on loan amounts and interests earned. The firm’s credit rating is also of
their primary concern, as they need a guarantee that their money is
secure.

WHAT MANAGEMENT IS
By Joan Magretta (Free Press, 2002)

References

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Unit summary
In this unit you learned that Business decisions related to ethics impact

 the daily lives of professionals and consumers. Many people are

employed at organizations that sell or provide goods and services.
Professionals like lawyers and accountants are bound by codes of
conduct from professional societies, and other professionals must
Summary practice sound business ethics in their role and with co-workers, clients
and the public.
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