Chapter Four

Micro and Small Business

By: Tekabe S.
(Ass.Professor)
 Topics
SMEs:- Definitions, importance and why SMEs fail?
Entrepreneurial process
Legal form of a business
Funding sources for new ventures
 Though number is a language used to define Small and Medium Enterprises
(SMEs), it is also noted that two institutions, statistical agencies or countries
who speak the same language in terms of Small and Medium Enterprises do not
agree on the definition of Micro and Small Enterprises.
 An acute matter in the literature is the terms used for the category of
businesses that do not fall into the category of large enterprises.
 One part refers to them as Small businesses, others use the concept of Small
and Medium Enterprises, while some still refer to them as Micro, Small and
Medium Enterprises.
 There are differences in SMEs definition comprehends to three wings as
definitions by international institutions, definitions by national laws and
definition by industry.
 European Commission, being one of the wings, supports the criterion of the
number of staff as the main condition . However, the commission has also used
annual turnover and annual balance sheet.
 The World Bank on the other hand uses three quantitative criteria for defining
SMEs: number of employees, total assets in U.S. dollars and annual sales in
U.S. dollar
 Though Micro, Small and Medium Enterprises constitute the major share in
terms of number in Ethiopia, there is no consistently placed definition for the
sub sector by different bodies.
 In 1997, Ethiopia has defined Micro Enterprises as an enterprises with a total
asset of less than 20,000 Birr ($1200) and Small Enterprises as Enterprises with
a total asset of Birr 500,000 ($30,000) or less.
 In this definition, the only base used is the total asset unlike international
organizations’ definition base.
 To align the definition with at least some countries and international
organizations, the country has revised the definition of Micro and Small
Enterprises in 2011.
 In the new definition, some of the attributes used by other countries and
international organizations are addressed.
 In addition, the definition has segregated sectors as service and manufacturing.
However, there is still confusion among different governmental organizations
(e.g. Ministry of Trade, Central Statistics Agency, & Federal Micro and Small
Enterprises Development Agency (FeMSEDA) in defining MSEs.
 According to 2011 definitions….

Type Sector HR Total Assets

Micro Enterprise Industry <5 <100,000.00 birr

Service <5 <50,000.00 birr

Small Enterprise Industry 6-30 <1.5 million birr

Service 6-30 <500,000.00 birr

 FACTORS TO
CONSIDER WHEN YOU
START A BUSINESS
 If you’re starting a new business, you have to decide which legal
form of ownership is best for you and your business.
 Do you want to own the business yourself and operate as a sole
proprietorship? Or, do you want to share ownership, operating as
a partnership or a corporation?
 Before we discuss the pros and cons of these three types of
ownership, let’s address some of the questions that you’d
probably ask yourself in choosing the appropriate legal form for
your business.
 1) In setting up your business, do you want to minimize the
costs of getting started? Do you hope to avoid complex
government regulations and reporting requirements?
 2) How much control would you like? How much responsibility
for running the business are you willing to share? What about
sharing the profits?
 3) Do you want to avoid special taxes?
 4) Do you have all the skills needed to run the business?
 5) Are you likely to get along with your co-owners over an
extended period of time?
 6) Is it important to you that the business survive you?
 7) What are your financing needs and how do you plan to
finance your company?
 8) How much personal exposure to liability are you willing to
accept? Do you feel uneasy about accepting personal liability for
the actions of fellow owners?
 No single form of ownership will give you everything you
desire. You’ll have to make some trade-offs. Because each
option has both advantages and disadvantages, your job is to
decide which one offers the features that are most important to
you.
 In the following sections we’ll compare three ownership options
(sole proprietorship, partnership, corporation) on these eight
dimensions.
Disadvantages
• The disadvantages of a sole proprietorship
include: 
owner has unlimited liability–full and personal responsibility for
all losses and debts of the business 
difficulty in raising financial capital 
size and efficiency–the business may have to carry a large
inventory, or stock of finished goods and parts in reserve 
limited managerial experience 
difficulty of attracting qualified employees 
limited life–firm ceases to exist when owner dies, quits, or sells
the business
• A partnership is a business jointly owned by two or more
persons. 
• Partnerships are the least numerous form of business
organization, accounting for the smallest proportion of sales
and net income.
Types of Partnerships
• The most common form of partnership is a general
partnership, one in which all partners are responsible for
the management and financial obligations of the business.

• In a limited partnership, at least one partner is not active
in the daily running of the business, although he or she
may have contributed funds to finance the operation.
 Disadvantages
• The disadvantages of a partnership include: 

 Each partner is fully responsible for the acts of all other partners 
 Limited partners have limited liability 
 Limited life 
 Potential for conflict between partners 
 Offer increased access to financial capital, but do not always work out 
 A business may have to file for bankruptcy, a court-granted permission to
an individual or business to cease or delay debt payments.
 Corporations
• Corporations account for approximately
one-fifth of the firms in the United States
and about 90 percent of all sales. 

• A corporation is a form of business

organization recognized by law as a
separate legal entity having all the rights of
an individual.
 Forming a Corporation
• Unlike a sole proprietorship or partnership, a corporation is a
very formal and legal arrangement. 

• People who would like to incorporate, or form a corporation,

must file for permission from the national government or the
state where the business will have its headquarters. 
• If approved, a charter–a government document that gives
permission to create a corporation–is granted.
 Forming a Corporation
• These shares are sold to investors,
called stockholders or
shareholders. 
• The charter also specifies
• The money is then used to set up
the number of shares of
stock, or ownership the corporation.
certificates in the firm. 
 Forming a Corporation
• If the corporation is profitable, it may eventually issue a dividend–
a check representing a portion of the corporate earnings–to each
stockholder.
 Corporate Structure
• When an investor purchases stock, he or she becomes an
owner with certain ownership rights.

Ownership, Control, and Organization of a Typical Corporation

 Advantages
• The advantages of a corporation include: 

 Ease of raising financial capital 

 Gain capital by selling additional stock 
 Borrow money by issuing bonds 

• A bond is a written promise to repay the amount borrowed

at a later date. 
• The amount borrowed is known as the principal. 

• While the money is borrowed, the corporation pays

interest, the price paid for the use of another’s money.
 Advantages (cont.)
• The advantages of a corporation also include: 

 Professional managers run the firm 

 Limited liability for owners 

 Unlimited life 

 Ease of transferring ownership

 Disadvantages
• The disadvantages of a corporation include: 

 Difficulty and expense of getting a charter 

 Owners have little say in how the business

is run 
 Double taxation of corporate profits, stockholders’
dividends are taxed twice–
once as corporate profit and again as personal income 

 More government regulation

• End of Chapter Four