ND – Business Economic

DevelopmentLim Sei Kee @ cK

What motivates someone to become an entrepreneur? 

The chance to earn significant profits, buy a yacht, take numerous holidays, buy designer goods and send the kids to the best private schools.

Starting a business - objectives of startups

Every business starts small.

But by taking on some calculated risks, a lot of determination and some luck, a start-up business can become very large, profitable and valuable.

However, not every entrepreneur wants to build a big business and earn a fortune.

The objectives when starting a business can be broadly split into two categories:

Financial objectives, and Non-financial objectives

Most business start-ups begin with one main financial objective – to survive.

Because a large percentage of new businesses do not survive much beyond their launch.

The entrepreneur discovers that the business idea is not viable – the business cannot be run profitably or it runs out of cash.

Start-ups have a high failure rate.

Financial objectives

To survive, a business needs to have:

Sufficient sources of finance (e.g. cash, a bank overdraft, share capital)

A viable business model – i.e. one which can make a profit

If survival can be assured, then profit is the next most important financial objective for a new business.

A profit is earned when the revenue of the business exceeds the total costs.

The entrepreneur can choose to reinvest (“retain”) the profit in the business, or take it out as a personal payment or dividend.

For many small business owners, profit is the return for all the hard work and risks taken.

Profit is the reward for taking a risk and making an investment.

Ideally, the profit earned is sufficient to provide the entrepreneur with enough income to live.

However, it is important to appreciate that, to make a sustainable profit, a new business needs to be able to:

Add value Sell into a large enough market

Another financial objective is personal wealth. Some entrepreneurs have an objective that goes beyond wanting to earn an adequate income.

They aim to build a valuable business that can substantially increase their personal wealth.

Contrary to popular belief, starting a business is not always about financial objectives.

Very often a new business is started with other, non-financial objectives in mind.

Non-financial objectives

More control over working life

Need a more flexible and convenient work schedule

Want to escape an uninteresting job or career

A desire to pursue an interest or hobby

Fed up with being told what to do – want to be the boss!

Want the feeling of personal satisfaction from building a business

Want a greater share of the rewards from the effort being put in – compared with simply being paid by an employer

Sole proprietorship

Partnership

Private limited company

Public limited company

Types of business organization

Advantages of setting up as a sole trader are:

Total control of the business by the owner. Cheap and easy to start up Keep all the profit Business affairs are private

Organization - Sole Trader

Disadvantages of being a sole trader are:

Unlimited liability Can be difficult to raise finance Can be difficult to enjoy economies of scale,

i.e. lower costs per unit due to higher levels of production

There is a problem of continuity if the sole trader retires or dies

A partner is normally set up using a Deed of Partnership. This contains:

Amount of capital each partner should provide (i.e. starting cash).

How profits or losses should be divided. How many votes each partner has (usually

based on proportion of capital provided). Rules on how to take on new partners. How the partnership is brought to an end, or

how a partner leaves.

Organization - Partnerships

Advantages of setting up a partnership are:

Spreads the risk across more people Partner may bring money and resources to

the business (e.g. better premises to work from)

Partner may bring other skills and ideas to the business

Increased credibility with potential customers and suppliers

Disadvantages of becoming a partnership are:

Have to share the profits Less control of the business for the

individual Disputes over workload Problems if partners disagree over of

direction of business

A limited company is a business that is owned by its shareholders, run by directors and most importantly whose liability is limited.

Limited liability means that the investors can only lose the money they have invested and no more. This encourages people to finance the company, and/or set up such a business, knowing that they can only lose what they put in, if the company fails.

Organization - Limited Companies

Advantages of setting up a limited company (plc) are:

For people or businesses who have a claim against the company, “limited liability” means that they can only recover money from the existing assets of the business.

It is easier to raise money through other sources of finance e.g. from banks

Disadvantages of setting up a limited company (plc) are:

Costly and complicated to set up Certain financial information must be made

available for everyone, competitors and customers included

Shareholders in public companies expect a steady stream of income from dividends

Threat of takeover

A franchise is where a business sells a sole proprietor the right to set up a business using their name.

The franchisor is the business whose sells the right to another business to operate a franchise

A franchise is bought by the franchisee – once they have purchased the franchise they have to pay a proportion of their profits to the franchiser on a regular basis.

Organization - Franshises

Advantages of setting up as a franchisee are:

The franchisee is given support by the franchiser. Less investment is required at the start-up stage

since the franchise business idea has already been developed

A franchise allows people to start and run their own business with less risk. The chance of failure among new franchises is lower as their product is a proven success and has a secure place in the market

Disadvantages of setting up as a franchisee are:

Cost to buy franchise – can be very expensive

Have to pay a percentage of your revenue to the business you have bought the franchiser from.

Have to follow the franchise model, so less flexible.

All businesses in Brunei Darussalam must be registered with the Registrar of Companies and Business Names at the Attorney General’s Office.

The proposed names of business or company must be submitted to the Registry of Companies and Business Names for approval and a fee of B$5.00 is imposed for each proposed name.

[Source: http://www.mofat.gov.bn/index.php/investing-in-brunei-darussalam/setting-up-businesses]

Start a business in Brunei

BUSINESS AND INVESTMENT INCENTIVES

His Majesty’s government has announced the reduction of the corporate income tax rate from 30% to 22% for the financial period 1 January 2010 onwards

Corporate tax relief of up to 5 years for companies that invest B$500,000 to B$2.5 million in approved ventures

8-years tax relief for investing more than B$2.5 million

An 11-year tax break if the venture is located in a high-tech industrial park

Exemption from import duties on machinery, equipment, component parts, accessories, building structures and raw materials

Reasons to start a business

1. Do you want to start a business? Why or why not?

2. Which of the business organizations is the best – Discuss.

3. How can a sole trader raise capital for the business?

4. How can a limited company raise capital for a business?

Activity

Read on : Onebiz, online biz licensing system.

To be discussed next week