1.

Explain and differentiate in detail the legal forms of

businessownership.
* Types of Legal Structures for Business:

l outlined the four most common business legal structures with considerations for each below, including
tax, liability, and formation of each.

sole proprietor icon

1. Sole Proprietorship

A type of business entity that is owned and run by one individual – there is no legal distinction between
the owner and the business. Sole Proprietorships are the most common form of legal structure for small
businesses.

Taxation: A sole Proprietorship has pass-through taxation. The business itself does not file a tax return.
Instead, the income (or loss) passes through and is reported on the owner’s personal tax return through
a Schedule C (Form 1040).

Liability: The Owner of the sole proprietorship has unlimited personal liability for any liabilities the
business incurs. You can mitigate this risk with insurance and sound contracts.

Formation: The sole proprietorship is the simplest way of doing business. The costs to create a sole
proprietorship are very low and very little formality is required.

Pros of a Sole Proprietorship:

• Easy and fairly cheap to establish.

• Owner has absolute control over the business.

Cons of a Sole Proprietorship:

• Owner has unlimited personal exposure to risk, as the owner is responsible for all liabilities incurred by
the business.

• Investors typically would not invest in a business organized as a sole proprietorship.

general partnership

2. General Partnership

An association between two or more people in business seeking a profit. Partnerships can be created
with little formality, but because more than one person is involved, a partnership agreement should be
created. A partnership agreement stipulates the terms of the partnership by formalizing rules for
profit/loss sharing, ownership percentages, dissolution terms, and management rights among many
other things.

Taxation: A partnership is a tax-reporting entity, not a tax paying entity. A partnership must file an
annual information return (Form 1065) with the IRS to report income and losses from operations, but it
does not pay federal income tax. Profits and Losses are passed through to the owners based on their
profit sharing percentages outlined in the Partnership Agreement. Each partner pays taxes on their
share of the profit/loss.

Liability: Owners typically have unlimited personal liability. Each partner is jointly liable for the
partnerships obligations.

Formation: Usually easy to create, but it is important to have an attorney create the partnership
agreement. Partnership agreements establish the terms of the partnership and typically cover topics
such as:1

• Capital Contributions

• Distributions of profits/losses

• Management Responsibilities

• Bookkeeping

• Banking

• Dissolution

Pros of General Partnerships:

• Fairly easy to create and maintain.

• Profits and losses are passed through to the owner’s personal tax returns.

Cons of General Partnerships:

• Partners are personally liable for business debt and liabilities.

• Can lead to management and oversight issues absent a partnership agreement.

LLC icon

3. Limited Liability Company (LLC)

A hybrid between a corporation, general partnership, and sole proprietorship. Owners of an LLC are
called members. Members may include individuals, corporations, other LLCs and foreign entities. Most
states permit an LLC with only one owner, called a “single member LLC.”
Taxation: An LLC is considered a “pass through entity” for tax purposes. This means, business income
passes through the business to LLC members who report their share of profits or losses on their
individual income tax returns. The LLC entity is only required to file an informational tax return, similar
in character to the general partnership. Single member LLCs are allowed to report business expenses on
Form 1040 Schedule C, E, or F. LLCs with more than one member usually file a partnership return Form
1065.

Liability: LLC members are protected from personal liability for business debts and claims, a feature
known as “limited liability.” If a business with limited liability owes money or faces a lawsuit, only the
assets of the business itself are at risk. Creditors can’t reach personal assets of the LLC members, except
in cases of fraud or illegality. LLC members should exercise caution so that they don’t “pierce the
corporate veil,” which would expose members to personal liability. For example, LLC owners should not
use a personal checking account for business purposes, and should always use the LLC business name
(rather than owner’s individual names) when working with customers.

Formation: To form an LLC, you must pay a filing fee ($100-$800) and must have articles of organization
when at the time the entity is established. Operating agreements are highly recommended, but not
required by all states. Much like a partnership agreement or corporate bylaws, the LLC operating
agreement sets out rules for ownership and operation of business. A standard operating agreement
includes:

• Ownership interest for each member

• Member rights and responsibilities

• Member voting power

• Profit & Loss allocation

• Management Structure

• Buy-Sell provision

Pros of LLC Structure:

• Owners have limited liability, meaning that the entity is responsible for all liabilities the company
incurs.

• Profits and losses of company are passed on to the member and are only taxed at the individual level.

• Allows an unlimited number of members

Cons of LLC Structure:

• Often subject to additional taxes at the state level.

• Each member’s share of profit represents taxable income, even if the profit wasn’t distributed.

S-Corp or C-Corp icon

4. Corporations (C-Corp and S-Corp)

Corporations are the most complex business structure. A corporation is a legal entity that is separate
and independent from the people who own or run the corporation, namely shareholders. A corporation
has the ability to enter into contracts separate from that of the shareholders, but it also has certain
responsibilities such as the payment of taxes. Corporations are generally more appropriate for larger
established companies with multiple employees or when other factors apply (i.e. corporation sells a
product or provides a service that could expose the business to sizable liability). Ownership is designated
by issuing shares of stock.

The two types of corporations are C-Corps and S-Corps. The major difference among the two types of
corporations is the tax treatment of the two entities:

Taxation (C-Corp): For federal income tax purposes, a C-Corp is recognized as a separate taxpaying
entity, thus the entity files its own tax return (Form 1120). A c-corporation is subject to corporate
income tax on any corporate profits (entity pays taxes). Shareholders pay personal income tax on the
corporate profits distributed by the corporation to the owners. As a result, C-corps are subject to
“double taxation.”

Taxation (S-corp): S-Corps elect to pass corporate income, losses, deductions and credit through to their
shareholders for federal tax purposes. However, the entity is required to report income, losses, gains,
deductions, credit, etc. on Form 1120S. Shareholders of S corporations report the corporation’s income
and losses on their personal tax returns pay federal income tax at their individual tax rates. Thus, S-
Corps avoid double taxation.

Liability: A corporation is a legal entity that is “immortal,” meaning it does not terminate upon the
shareholders death. Corporation shareholders have limited liability as they are not personally liable for
debts and obligations incurred by the company. Shareholders cannot lose more money than the amount
they invested in the corporation. Similar to the provisions of an LLC, shareholders should be careful not
to “pierce the corporate veil.” Personal checking accounts should not be used for business purposes,
and the corporate name should always be used when interacting with customers.

Formation: Corporations are more complex entities to create, have more legal and accounting
requirements and are more complex to operate than sole proprietorships, partnerships, or LLCs. One of
the major disadvantages of a corporation is the high level of governance and oversight by the board of
directors. Often times, this prolongs the decision making when multiple shareholders or investors are
involved.

Pros of Corporations:
• Corporate shareholders have limited liability, meaning the entity is responsible for all liabilities the
company incurs.

• Usually a favorable formation for investors.

Cons of Corporations:

• The process to establish the business is more rigorous and costly.

• Earnings are subject to “double taxation”, meaning that earnings are taxed at the entity level and the
individual level upon distribution to shareholders.

2.Provide a detailed description of the steps in setting up small

scale business.
Step 1: Perform market research around your idea

Market research can help you mitigate risk because it lets you know how much of a demand there is for
your product or service and the level of existing competition. It also provides demographic information
on your target customers, such as their income and where they live.

You generally have two options when it comes to research – review existing sources or conduct your
own analysis. Relying on previously gathered data can save you time and money, but it might not be
current or specific enough to your target clientele. If you start your research from scratch, you have the
advantage of engaging with customers directly through focus groups, one-on-one interviews and
surveys.

Step 2: Create a business plan

A business plan explains your goals and how you hope to achieve them. If you need funding for start-up
costs, many investors will want to see your plan so they can assess your potential profitability. Business
plans can also help you attract partners and employees.

* Business Plan

When creating a business plan, you can take a traditional approach or create something lean. Traditional
plans have comprehensive details and are often required to achieve a business loan. Lean plans, on the
other hand, are shorter and may use more charts than written copy. They’re often ideal for simple
business models that plan to start up fast.

Whichever plan you choose for your new business, most include at minimum:

A description of your product, it’s value proposition and how you plan to market it

How much investment you require and the amount of revenue you expect to make
Your target audience and the customer experience

Step 3: Finance your business

Start-up costs are one of the obstacles that sometimes prevent people from ultimately pursuing their
dream. The good news, however, is that even if you don’t have much money at your disposal, there are
several ways to fund your business, including:

* Bootstrapping

Self-funding is advantageous because you maintain complete control of your business. On the downside,
it sometimes comes with the highest personal financial risk.

* Venture capital investments

Venture capitalists or “angel investors” may be willing to fund your business, but they usually expect
membership on your board of directors or some stake in the company. You may need a detailed
business plan to secure a capital investment.

* Small business loans

If you don’t have enough money, but still want to keep full ownership of your business, a loan might be
advantageous. Be prepared to show banks and credit unions a comprehensive business plan, as well as
your estimated expenses and financial projections.

Step 4: Choose your business structure

How you plan to structure your business – sole proprietor, corporation or something in between – will
typically have legal and tax implications for the foreseeable future. That makes this decision a critical
one. Some of the more popular business structures are:

* Sole proprietorship

This is the most common structure for solo entrepreneurs or “solopreneurs.”

* Partnership

If you are starting a business with one or more individuals, then a partnership structure might be right
for you.

* Limited liability company

An LLC blends the limited liability features of a corporation with the tax efficiencies and operational
flexibility of a partnership.

* Cooperative
A cooperative is a business or organization owned and operated for the benefit of those using its
services. Companies in health care, retail, agriculture, art and restaurant industries fall in this category.

* Corporation

Corporations are more complex from a legal and tax standpoint and are therefore more common among
larger companies.

Step 5: File registration documents

Registering your small business with the government may not always be necessary, but it might avail
you to personal liability protection and legal and tax benefits.

Federal registration

Other than a tax ID number, you usually don’t need to register your business with the federal
government unless you’re applying for tax exempt status or trademark protection.

State registration

You may be required to register in the state where your business was formed and any other states that
you operate in, also known as foreign qualification. Registration documents vary by state and business
structure, but most typically ask for:

- Business name

- Location

- Owner or management structure

- Name of registered agent

- Total number and value of shares, if applicable

Local registration

Most local governments don’t mandate that businesses register with them, but certain business
structures may need to apply for licenses or permits.

Step 6: Apply for EIN or Tax ID

As soon as your business is registered, you might want to apply for an employer identification number
(EIN) from the IRS. This number is necessary so you can file your federal taxes, hire employees and in
some cases, open a business bank account. You can apply for an EIN on the IRS website.

In addition, some states have their own tax ID numbers, which you may need to pay state income tax
and unemployment tax. Check with your state for the specific application process.
Step 7: Open a small business bank account

You’re going to need somewhere to deposit all those hard-earned dollars, but what type of account best
fits your current requirements and future goals? Given that you’re just starting out, you may need:

- A simple checking account with no or low monthly fees

- A bank that offers convenient locations and hours of operation

- Online banking and mobile apps to help you manage your money on the go

- Loan products should you need some growth capital now or in the future

How to open a bank account

After you’ve found a bank that suits your needs, gather the necessary paperwork to open a business
account:

- Official business formation documents

- EIN or tax ID numbers

- Business name and location

- Date the business was established

- Business owner’s Social Security number, address and date of birth

How to apply for financing

Particularly at the start, you may need to apply for a business line of credit to keep things moving. These
short-term loans are useful for bridging temporary working capital needs, such as inventory purchases
or operating expenses.

To apply for a line of credit you usually need to provide the bank with proof of revenue. If approved,
they may set a limit, which like a credit card, allows for continuous borrowing and repayment within the
agreed duration of the loan.

Step 8: Obtain any necessary licenses or permits

Before you open for business, take a moment to make sure that you have all the correct licenses,
permits and insurance policies to operate legally. The last thing you want at this stage is to be shut down
by a government agency.

Which licenses and permits do you need?

If your business operates in certain industries, such as agriculture and broadcasting, you might need a
federal license. Other industries, like health care, typically require professional licenses. Even if you
don’t fall into one of these categories, you may need some form of permission to conduct business.
Freelancers and consultants, for example, sometimes have to have a home occupation permit.

Step 9: Choose your accounting and payroll system

Before you make an initial sale or hire your first employee, you most likely need a method of managing
your finances and paying the people who work for you. You can tackle these important tasks yourself
using spreadsheets, hire an accountant or work with a payroll provider.

If you’re a solo operation or only have a few employees, a manual approach to payroll may save you
money. It is, however, time consuming and comes with the most risk because you could be fined for
mistakes. Hiring an accountant might give you more peace of mind, but they’re usually expensive and
you may lose some control of the process. A payroll provider, on the other hand, is often the best of
both worlds, giving you control and risk reduction, while also saving you time.

Payroll providers like ADP offer products that in most cases, can automatically pay your employees, file
taxes on your behalf and help you comply with applicable government regulations. Our payroll also
seamlessly integrates with many types of accounting software so you can manage your finances from
one place. A provider like ADP serves business of all sizes so whether you need payroll for a small
business or something larger, we can help.

Step 10: Create a web presence

Since most customers use the internet to search for goods and services, a helpful and attractive website
can be an integral piece of your marketing strategy. The ideal web presence should:

- Engage your target audience

- Include key terms for search engine optimization (SEO)

- Display your business logo

- Have creative content

- Integrate social media channels

Although there are some platforms that allow you to build a site with little or no development
knowledge, it may be worth hiring a professional if you want to present a truly polished image of your
business. Look for digital agencies who specialize in helping small businesses because they’re usually
more likely to understand your needs and meet your budget requirements.

Starting an online business

A website is even more critical if your business will be conducted entirely online. You have several
options in this regard:

* Ecommerce store
Sell your own inventory of products directly to customers.

* Drop shipping

Work with a third party distributor to fulfill your sales orders.

* Affiliate marketing

Drive traffic to ecommerce sites and make commission on sales.

* Blogging

Create engaging content that generates revenue from advertisements.

Step 11: Choose retirement and health insurance plans

You might want to review your health insurance and retirement plan options as soon as possible
because they can help you attract employees. Even if you don’t or won’t have employees, you may still
want to consider benefits for yourself as the business owner.

3.Discuss the concept of organizational structure and

entrepreneurial team formation.
* Organizational structure

The method by which work flows through an organization. It allows groups to work together within their
individual functions to manage tasks. Traditional organizational structures tend to be more formalized—
with employees grouped by function (such as finance or operations), region or product line. Less
traditional structures are more loosely woven and flexible, with the ability to respond quickly to
changing business environments.

Organizational structures have evolved since the 1800s. In the Industrial Revolution, individuals were
organized to add parts to the manufacture of the product moving down the assembly line. Frederick
Taylor's scientific management theory optimized the way tasks were performed, so workers performed
only one task in the most efficient way. In the 20th century, General Motors pioneered a revolutionary
organizational design in which each major division made its own cars.

Today, organizational structures are changing swiftly—from virtual organizations to other flexible
structures. As companies continue to evolve and increase their global presence, future organizations
may embody a fluid, free-forming organization, member ownership and an entrepreneurial approach
among all members.

* Entrepreneurial team formation

The process through which founders establish a team to start a new venture—has important
implications for team performance and entrepreneurial success. Although research on entrepreneurial
team formation is gradually growing, it is at a critical juncture and marked by considerable
fragmentation. In part, this is because scholars have examined entrepreneurial team formation through
different disciplinary lenses and within very different contexts. Our structured content analysis situates
the literature based on questions addressed for new venture team formation, such as why, how, when,
and where entrepreneurial teams are formed. The resulting integrative framework delineates the
dynamic nature of the formation process, the origins of new venture teams, primary formation
strategies used to initiate cofounding relations, and their effects on team characteristics, processes, and
performance. Two key insights emerge to guide future research. One, the need for integration,
especially across disciplines and contexts, acknowledging the role of the latter in shaping the formation
process. Two, the need to embrace (self-) selection and endogeneity of founding characteristics,
processes, and performance outcomes to the antecedent formation stage. We conclude that
entrepreneurial team formation research is a fertile ground that has met merely a fraction of its
potential to advance important knowledge in the field.

4.Provide a detailed explanation on the different sources of

finance to start a business venture.
Financing is needed to start a business and ramp it up to profitability. There are several sources to
consider when looking for start-up financing. But first you need to consider how much money you need
and when you will need it.

The financial needs of a business will vary according to the type and size of the business. For example,
processing businesses are usually capital intensive, requiring large amounts of capital. Retail businesses
usually require less capital.

Debt and equity are the two major sources of financing. Government grants to finance certain aspects of
a business may be an option. Also, incentives may be available to locate in certain communities or
encourage activities in particular industries.

Equity Financing

Equity financing means exchanging a portion of the ownership of the business for a financial investment
in the business. The ownership stake resulting from an equity investment allows the investor to share in
the company’s profits. Equity involves a permanent investment in a company and is not repaid by the
company at a later date.
The investment should be properly defined in a formally created business entity. An equity stake in a
company can be in the form of membership units, as in the case of a limited liability company or in the
form of common or preferred stock as in a corporation.

Companies may establish different classes of stock to control voting rights among shareholders.
Similarly, companies may use different types of preferred stock. For example, common stockholders can
vote while preferred stockholders generally cannot. But common stockholders are last in line for the
company’s assets in case of default or bankruptcy. Preferred stockholders receive a predetermined
dividend before common stockholders receive a dividend.

Debt Financing

Debt financing involves borrowing funds from creditors with the stipulation of repaying the borrowed
funds plus interest at a specified future time. For the creditors (those lending the funds to the business),
the reward for providing the debt financing is the interest on the amount lent to the borrower.

Debt financing may be secured or unsecured. Secured debt has collateral (a valuable asset which the
lender can attach to satisfy the loan in case of default by the borrower). Conversely, unsecured debt
does not have collateral and places the lender in a less secure position relative to repayment in case of
default.

Debt financing (loans) may be short-term or long-term in their repayment schedules. Generally, short-
term debt is used to finance current activities such as operations while long-term debt is used to finance
assets such as buildings and equipment.

Crowdfunding is a way of raising money to finance projects and businesses. It enables fundraisers to
collect money from a large number of people via online platforms.

5. Provide a detailed explanation on the following;

A.crowdfunding

Crowdfunding is most often used by startup companies or growing businesses as a way of accessing
alternative funds. It is an innovative way of sourcing funding for new projects, businesses or ideas.

It can also be a way of cultivating a community around your offering. By using the power of the online
community, you can also gain useful market insights and access to new customers.
This guide is aimed at entrepreneurs, businesspeople and companies, especially small and medium
enterprises. If you are thinking about ways of financing a new business or idea, or have heard about
crowdfunding and want to learn more, you may find this guide useful.

B.Micro-finance in Ethiopia

Microfinance is a way to provide capital to low-income business owners who may be excluded from
traditional credit and lending options. Microfinance offerings include small loans – called microloans,
savings accounts (microsavings) and insurance policies (microinsurance

Microfinance is a banking service provided to unemployed or low-income individuals or groups who

otherwise would have no other access to financial services. Microfinance allows people to take on
reasonable small business loans safely, and in a manner that is consistent with ethical lending practices

Normally, almost most of Ethiopia's microfinance institutions have common goals: poverty reduction by
providing loans and saving services by using the group

Microfinance is a banking service provided to unemployed or low-income individuals or groups who

otherwise would have no other access to financial services. Microfinance allows people to take on
reasonable small business loans safely, and in a manner that is consistent with ethical lending practices

There are currently 35 MFIs operating in the country, which disbursed ETB27 billion in credit in the
2016/17fiscal year, according to the National Bank of Ethiopia.