Henry F. Henderson, Jr
Many of the nation's most successful entrepreneurs got their start operating part-time businesses. Henry Henderson, president and chief executive officer of Henderson Industries, is a case in point.
Following his graduation from Alfred University in 1950, Henderson joined Richardson Scale Company. In 1954, while still employed at Richardson, he founded H. F. Henderson Industries as a part-time manufacturing firm. By 1967, business at HI had become so brisk that Henderson was able to leave Richardson and give HI his full-time attention.
Henderson Industries is a small, high-tech firm that manufactures electronic controls and material-handling equipment. It has produced control panels for the nuclear power industry and New York City's Transit Authority, and material-handling equipment for the Space Shuttle program.
In 1983 HI received national attention when it entered into a contract with the Ta Chung Hua Rubber Tire Company to design and manufacture rubber tire control consoles and material-handling equipment. When it did so, HI became the first black-owned corporation in the United States to do business with China.
Hank Henderson has received many honors and awards for his achievements. In 1983 Henderson was made a Commissioner of the Port Authority of New York and New Jersey, and in May of 1986 he was made chairman of the Governor's Commission on International Trade. An accomplished pilot and world traveler, Henry Henderson's journey from part-time businessman to a community leader stands as a shining example of the fulfillment of the American dream.
Starting A Small Business
There are many aids for people who want to start a small business. Through the Small Business Administration, established in 1953, the federal government provides help in the form of literature and counseling through 110 offices in 100 cities throughout the country. Professional small business consultants can also be hired to help potential entrepreneurs make the necessary decisions.
The overall message from people who give advice on the subject is to get all the information you can before you decide.
Risks And Benefits Of Starting A New Business
Unfortunately, the record shows that two out of three new businesses fail within their first four years. According to a 1982 President's report, The State of Small Business, the share of small business output has been declining since the early 1960's. Large companies, in part due to their efficiency, have taken over markets that previously belonged to small businesses. Nevertheless, estimates for 1976 showed that small businesses, defined by the Internal Revenue Service as businesses having fewer than 500 employees, accounted for 39 percent of all the goods and services produced in America.
According to the report, small businesses face many other problems. Bad economic times affect small business more than they do big business. In addition, small business profits tend to fall faster, and small businesses are more likely to fail. According to the President's report, "The larger the firm, the better the chance it has of surviving." The report also said, "A firm with 21-50 employees has a 54 percent chance of surviving four years. A firm of under 20 employees has a 37 percent chance of surviving four years."
As a member of a student company, will you be an entrepreneur? The answer is "yes and no." Yes, if you develop an idea and turn it into a successful product. Yes, if you help manage company resources properly. And yes, even if in spite of your best efforts, your company does not make a profit. Remember, the entrepreneur does run the risk of failing.
In class, however, you will take few personal risks, and in that way your student company experience does not simulate the real challenge that faces business people who organize as sole proprietors or as partners with their personal finances at stake.
What are the problems that face small business now? In January, 1985 the National Federation of Independent Business reported that the four top problems facing small business at that time were taxes, slow sales, the high cost of borrowing money and competition from other businesses. On the bright side, the innovativeness of entrepreneurs in small businesses is likely to enable a small business to react quickly and successfully to changing times. The report points out that 80 percent of new jobs are provided by businesses with 100 or fewer employees. Small businesses produce twice as many innovations per employee as larger firms. Those innovations are the source of new jobs and new opportunities for entrepreneurs.
Large and small businesses organize in different ways to meet their objectives. As you will learn later in the chapter, risk is diffused in corporations. Corporate leaders may risk their own jobs when they make major decisions that affect the future of the corporation negatively. But even if they lose their jobs, they have not lost personal investments. Because of the tremendous resources available to big business, a major failure in a large corporation is less likely to close that business than a similar disaster in a small business. But risk and size are only part of the story.
The very nature of the corporate business environment may not be suited to the independent personality and motivation of the typical entrepreneur. Large corporations may want bright and creative entrepreneurial talent to develop new or improved products or services. But large corporations, with their established procedures and layers of management authority, are seen as limiting innovation and the freedom the independent entrepreneur seeks.
Where is entrepreneurship most likely to be welcomed? The answer is in small business. In fact, the word "entrepreneur" is frequently used to define a small business owner, since the owners of small businesses usually carry out many of the functions of those businesses themselves. In a large business the tasks of organizing and operating are done by many hired managers.
Forms Of Business Organization
Steven Jobs and many other entrepreneurs have organized their companies as corporations. A corporation is one kind of business organization. Other kinds of business organizations are sole proprietorships and partnerships.
Business Organizations, 1985 | ||
Form | Number (thousands) | Percent of Total |
Sole Proprietorship | 11,929 | 70.5 % |
Partnerships | 1,714 | 10.1 % |
Corporations | 3,277 | 19.4 % |
Source: Statistical Abstract, 1989 |
Sole Proprietorship. A sole proprietorship is a business owned by one person. As indicated in the table above, sole proprietorships are the most numerous kind of business organization, but most are very small. The reason for their popularity is that they are the easiest and least costly to organize.
There are other advantages. Sole proprietors own all the profits of their enterprises, and they are their "own bosses," free to make whatever changes they please. They have minimal legal restrictions and do not have to pay the special taxes placed on corporations. Sole proprietors also have the opportunity to achieve success and recognition through their individual efforts.
There are also disadvantages. A very serious one is the unlimited liability that each proprietor faces. All debts and all problems associated with the business belong to the owner. If a business fails, the owner must personally assume the debts. This could mean the loss of personal property such as automobiles, homes and savings. A second disadvantage of the sole proprietorship is that it has limited capital. The money that a proprietor can raise is limited by the amount of his or her savings and ability to borrow. Also, when the owner dies, the business dies. Other disadvantages may include lack of opportunities for employees, limitations of size and growth and lack of management resources.
Partnership. A partnership is a business organization that is owned by two or more persons. Partnerships offer certain advantages over sole proprietorships:
· Partners bring additional funds to a proprietorship.
· Partners can bring fresh ideas and talents to business organizations.
· Like the sole proprietorship, partnerships are relatively easy to form and are not subject to special taxation.
Partnerships have the following disadvantages:
· In many cases, each of the partners is subject to unlimited liability. Partners are individually responsible for all the debts of the business. In other words, if the business were to fail, itscreditors (those to whom money is owed) would have the right to recover their money from any, or all, of the partners.
Such was the case with Harold Nodough, Gloria Poor and Jack Rich who owned the Trio Dress Shoppe as a partnership. Under the terms of their partnership agreement, Nodough and Poor were each entitled to 40 percent of the profits, while the remaining 20 percent went to Rich. Last month the firm collapsed. After selling off everything it owned, the company still owed its creditors $10,000. Since Nodough and Poor had no assets of their own, the creditors recovered the total amount from Jack Rich's personal bank account.
Partnership agreements, however, can be designed to limit the liability of each partner so that investors like poor Mr. Rich can be protected.
· Anytime a partner dies or withdraws from the business, the partnership is legally terminated. If the business is to continue, a new partnership agreement must be drawn up.
· The amount of capital that a partnership can raise is limited. Exactly what that limit is will depend on the earnings of the business, the wealth of the partners, and their ability to borrow.
· Partners may disagree, causing management conflicts that could threaten the firm's existence.
Corporation. A corporation is a business organization created under a government charter. Ownership of a corporation is represented by shares of stock, and for that reason corporate owners are known asstockholders.
One feature of the corporation is that the courts treat it as a legal person. It can, for example, sue or be sued and enter into contracts, and it must pay taxes.
Business Organizations, 1985 (dollars) | ||
Form | Total Receipts (billions of dollars) | Percent of Total |
Sole Proprietorship | 5.8 % | |
Partnerships | 4.0 % | |
Corporations | 8,398 | 90.2 % |
Source: Statistical Abstract, 1989 |
Although corporations are outnumbered by about four to one by sole proprietorships, they dominate American business. Corporations are so important because of the advantages they offer over sole proprietorships and partnerships:
· Limited liability. Unlike the owners of proprietorships and partnerships, who can be held personally liable for the debts of their firms, the most that corporate shareholders can lose (i.e., theirliability) is limited to whatever they paid for their shares of stock. Limited liability is thought to be so important that corporations in most English-speaking countries outside of the United States add the abbreviation "Ltd." (for Limited) to their company name.
· Ease of transfer. Stockholders can enter or leave a corporation at will simply by buying or selling shares of stock in that corporation.
· Unlimited life. When the corporate stockholders die, their shares of stock are passed on to their heirs. Meanwhile, the corporation is free to conduct business as usual.
· Tax advantages. In certain instances individuals can reduce their tax liability by incorporating.
With all these advantages you might wonder why there are so many more unincorporated businesses than incorporated ones. The answer has to do with the disadvantages of the corporation:
· It is difficult and expensive to organize a corporation. The process of obtaining a charter usually requires the services of a lawyer. Most small firms prefer to avoid these expenses by forming proprietorships and partnerships.
· Corporations are subject to special taxes. The federal government, along with many state and local governments, taxes corporate income in addition to the taxes paid by shareholders on their dividends.(Dividends are the portion of a corporation's profits that are distributed to the stockholders.)
· Corporations whose stock shares are sold to the public give up their right to privacy. The law requires that these large,open (orpublic) corporations disclose information about their finances and operations to anyone interested in reading about them. The purpose of this legislation is to give people information about companies in which they might invest. But information that helps investors may also be of value to the competition. For that reason, some corporations have chosen to remain closed (orprivate) corporations rather than disclose information they would prefer to keep secret.
Special Types Of Business Organizations
Not all business organizations fall neatly into the categories that we have described. Other types of business organization are described below.
The S corporation — the corporation for small business.A small business can enjoy many of the advantages of the corporation without being subject to corporate taxes if it organizes as anS corporation. S corporations take their name from a Congressional addition to the income tax law known as Sub-chapter S.
Unlike a regular corporation whose profits are subject to the corporation income tax and the individual income tax, S corporations are taxed like a partnership. That is, profits or losses are allocated to the stockholders in proportion to the number of shares they hold and are reported on their regular tax return.
Hurley Burleigh owns 25 percent of the shares of Blye's Barley, Inc. Blye's is an S corporation. Last year, the firm earned a profit of $60,000. Since his share of the profits came to $15,000, Burleigh reported that amount as income on his tax return.
In order to qualify for S corporation status, a firm must not have more than 35 stockholders and cannot own more than 80 percent of another corporation. As with regular corporations, the services of a lawyer are usually needed to organize an S corporation.
Not-for-profit corporations. As the name suggests,not-for-profit corporations do not seek to earn a profit. Rather, they serve particular educational, social, charitable or religious purposes. Since they earn no profits, they are not subject to income taxes. Some not-for-profit corporations you may be familiar with are the American Red Cross, the March of Dimes and Junior Achievement.
Government-owned corporations. Federal, state, and local governments own and operate corporations. In most instances these were created to provide services that private enterprise was unable or unwilling to offer. The U.S. Postal Service, the Federal Deposit Insurance Corporation, Amtrak, some metropolitan rapid transit services, and other publicly owned utilities are examples ofgovernment-owned corporations.
Cooperatives. Cooperatives (or co-ops) are associations of individuals or companies organized to perform business functions for their members. You may already be familiar with:
· Housing co-ops, multiple dwelling units owned by their tenants.
· Consumer co-ops, retail businesses owned by members who share in the profits and/or purchase goods and services at lower cost.
· Producer co-ops, companies that manufacture and market products on behalf of their members. One of the largest of these is Ocean Spray Cranberries, Inc. This cooperative of nearly a thousand cranberry and citrus growers from around the country has annual sales of nearly $500 million.
Franchises.A franchise is a license to operate an individually owned business as if it were part of a large chain. Many clothing, real estate, fast food and motel chains are franchise operations.
Franchises provide advantages. Since the money to pay for a new franchise is provided by the franchisee (those who purchase the franchise), franchisors (corporations that sell their franchises to others) are able to expand their operations at little cost to themselves. Franchisors also benefit because franchisees are owners rather than employees of the business. This provides the kind of incentive that can lead to increased sales and profits.
Those who buy franchises also benefit. Many firms provide training programs, financial assistance and other kinds of help in operating and managing the business. Franchisees also benefit from the sales and name recognition generated by the company's advertising campaigns and reputation.
Franchises do have some disadvantages. Franchisors retain a great deal of control over their franchisees. They may dictate how the business is to be operated, the building decorated, even types of uniforms and signs. In addition, many franchisors require that the products must be purchased from the parent company at whatever price it chooses.
Reading For Enrichment
The Body Shop - a Natural Winner!
Juice of a cactus plant from New Mexico, cocoa butter from Tahiti, pineapple juice from Sri Lanka, flower oils from Japan. These are just a few of the exotic substances which go into a range of natural skin and hair care products sold all over the world. It all started in 1976 when the first Body Shop opened in Brighton, with the help of a $6,000 loan from a friendly bank manager. Now the chain comprises over 220 stores, exclusively selling its products in 23 countries. All but eight of the stores are owned by franchisees.
Anita Roddick, Managing Director of Body Shop International pie and one of the world's newest tycoons, admits that in the early days she didn't even know what franchising was! The daughter of Italian immigrants, she taught history at a local secondary school, before going abroad to work first for the International Herald Tribune in their Paris library, then for the International Labour Office in Geneva where she organized seminars on women's rights. On her travels, she developed an interest in local beauty customs and, along the way, got married. She and her husband returned to England and tried running the family restaurant, her first and, so far, only failure! That's when she decided to take a chance on the Body Shop. There is now a worldwide network of stores in Europe, the Far East, Australia and Canada, with an annual turnover of $14.2 million. So far she has avoided the United States. "It's Japan I'm after," says Anita. That's the big challenge for us.'
How Large Corporations Are Organized
Charter and Bylaws. A corporatecharter is a kind of license issued by the state in which a corporation has been created. If your student company is a production company, it too will be issued a charter entitling it to function in a way similar to a corporation. Corporations also are required to have a set of rules by which they operate. These rules are calledbylaws.
Stockholders. The stockholders are the owners of a corporation. If any member of your family owns shares of stock in, for example, the Exxon Corporation, that would make him or her a part-owner of the nation's largest oil company. The number of stockholders in the publicly held corporations (those whose stock is sold to the public) can run into the hundreds of thousands. Some corporations (such as AT&T) are owned by more than a million stockholders.
With thousands of owners scattered from one end of the country to the other, large corporations need some way to operate efficiently. The election by the stockholders of a board of directors accomplishes this goal.
Board of Directors. Corporate boards of directors are elected—usually annually—by the corporation's stockholders. In many ways they are like school boards in local communities. Just as your local school board selects superintendents and principals to operate its schools, so boards of directors choose the president and other officers to run their companies. Decisions about funds for development, how to expand, and what dividends, if any, are to be distributed to the stockholders remain with the directors.
The effect of this arrangement is to separate ownership from management. Those who run the company are responsible to the directors who hired them, rather than to the stockholders directly.
Although ownership and management are separated in a large, open corporation, stockholders can participate indirectly by exercising their right to vote. Stockholders do elect boards of directors and vote on other matters affecting policy.
Corporate elections are unique. Unlike political elections in which everyone can cast a single ballot, stockholders are entitled to one vote for every share they own. For example, if you owned fifty shares of Exxon stock, you could cast fifty votes at every corporate election.
The History of Economic Thought