Lo3 Enter

Lo3:Starting an Enterprise
Lesson Objectives At the end of the training lesson, trainees
will be able to:

 Understand the classification of enterprises
 Distinguish legal forms of a business organization
 Understand the steps to establish an enterprise
 Identify sources of finance
 Explain the importance of marketing and Identify marketing mix.
 Understand the components for preparation of business plan

Enterprise and Enterprising
Definition of Enterprise and Enterprising

• An enterprise is a business-oriented organization formed
specifically so founders can pursue entrepreneurial endeavors
for a profit.
• An enterprise is for the purpose of attracting customers, selling
goods and services and earning profit.
• An enterprise is considered to be any entity engaged in an
economic activity, irrespective of its legal form.
• In the business sense, enterprising refers to the implementation
of a business venture or undertaking.
Concept of Enterprising
Practically all undertakings can be referred to as
enterprising it fulfills the followings;
– Idea identification,
– Planning,
– Implementation,
– Successful completion of an activity and
– Receiving the rewards.
Classification of Enterprise /Types of Business
1. Based on the nature and function of Business of operation
a. Service giving enterprise: Business enterprises that render
service to customers. Example:
– Beauty care services
– Hotel service
– Education services
– Health services
– Legal services
– Computer services
b. Merchandise enterprise: An enterprise that purchases goods
for resale in normal operation of the businesses. Example:
• Food stores, drug, or grocery store
• Wholesale trade (durable goods)
• Automotive dealers and petrol service stations
• Furniture, home furnishing and equipment stores
• General merchandizing stores
Cont.---,
c. Manufacturing enterprise: is purchases raw materials and

different components and convert it into end products.
Example:
• Textile mill products
• Paper and allied products
• Leather and leather products
• Food and kindred products
2. Based on the size/scale of the operation
a. Micro enterprise
b. Small enterprise
c. Medium enterprise
d. Large enterprise
Cont.---,
c. Manufacturing enterprise: is purchases raw materials and

different components and convert it into end products.
Example:
• Textile mill products
• Paper and allied products
• Leather and leather products
• Food and kindred products
2. Based on the size/scale of the operation
a. Micro enterprise
b. Small enterprise
c. Medium enterprise
d. Large enterprise
Cont.---,
3. Based on the nature of ownership
a. Proprietorship
b. Partnership
c. Corporation
Types of business ownership in Ethiopia
Every small business must select a legal form of ownership. The
most common forms are sole proprietorship, partnership, and
corporation.
a. Sole proprietorship/Sole trader
• A sole proprietorship is a business that is owned and
operated by one person.
• The enterprise has no existence apart from its owner .
Cont.….
Advantage Disadvantage
Simplicity: it is very easy to establish and Unlimited liability, Limited skills
dissolve the business., Quick decision
No separation of tax return Potential difficulty in borrowing money
High secrecy, Low costs to start, Lack of continuity/uncertain life: The

Minimum regulations, Low working business is terminated upon the death or
capital requirement incapacity of the owner.
Direct control of business/ personal touch: Difficulty in raising capital/limited

the owner can maintain personal contact financial sources
with his employees & clients.
Tax advantages, Owner receives all profits/ The sole proprietor is responsible for all
direct motivation, Flexibility decisions
Cont.….
b. Partnership
• It is formed through an agreement among two or more persons
to carry on jointly a legalized business as co-owners.
• Like the sole proprietorship, it is not a separate legal entity
from its owners.
• It is recommended that a partnership agreement, called the
Articles of Co-partnership or Memorandum of Association, be
prepared in writing by a competent attorney.
• In case of Ethiopia, as per the commercial code of 1960
Article 211,”A partnership agreement is defined as a contract
where by two or more persons who intended to join together,
make contribution for the purpose of carrying out activities of
an economic nature and of participating in the profit and loses
arising out there of it any”
Cont.….
Characteristics of Partnership
• Association of two or more persons, Contractual
relationship/ mutual agreement
• Existence of lawful business, Sharing of profit and loss
• Mutual agency among partners: Each partner is
responsible and liable for the faults and wrongful acts of
a co-partners with regard to business obligations.
• No separate legal entity of the business, Unlimited
liability
Cont.….
Advantage Disadvantage
Easy to form , Low costs to start, Larger/added Unlimited liability, Lack of continuity, Lack of
capital sources harmony
Business secrecy as compare to corporation

Difficulty in finding suitable partners
business type
Protection of minority interest: each partner has

Risk of implied agency, Shared authority,
an equal role in management of firm’s affair. ,
Non-transferability of interest
Shared management/specialization
Tax advantages as compare to corporation Difficulty in raising additional capital/limited

business type financial sources
Cont.….
c. Cooperative
• It is a group of ten or more people operating a business through a
jointly owned and democratically run organization.
• A written cooperative agreement is required and must be filed
with the appropriate government authorities. The management of
a cooperative is elected by the members of the cooperative.
Characteristics of Cooperative
• Registered and have limited liability for its members
• Members have an equal vote in decisions
• Membership is open to everyone who fulfils specified conditions
• Assets controlled and usually owned jointly by members
• Profit shared equally b/n members with limited interest payable
on loans made by members
• Share capital remains at its original value
Cont.….
Advantage and Disadvantage of Cooperative
Advantages Disadvantages
Means to empower poor women, Hard to keep qualified members,

disabled persons and other groups Members contributing to cooperative
who often lack a voice unequally
Joint self-help, Organizational Shared authority, Gender issues,

structure helps all members Governance challenges
Shared risk-taking, Easier to raise

capital, Combines individual skills
Micro and Small Enterprises in Ethiopia
• Small and medium enterprises (SMEs) cover a wider range of
industries and play an important role in both developed and
developing economies.
• The sector is also an important force to stimulate economic
development by:
 Generate employment , Equitable income distribution , Activate
competition
 Enhance productivity and technical change
Classifications of Enterprises
a. Micro enterprises
• Means an enterprise having a total capital of exceeding Birr
50,000 in the service sector or not exceeding Birr 100,000 in the
industrial sector.
• Engages 5 workers, including the owner, his family member and
other employees.
Cont.….
b. Small enterprises
• Means an enterprise having a total capital, excluding building,
from birr 50,001 to birr 500,000 in the case of service sector or
birr 100,001 to birr 1,500.000 in the industrial sector.
• Engages from 6 to 30 workers including the owner, his family
members and other employees.
c. Medium enterprises
• Means an enterprise with total capital, excluding building
from Br. 1,500,001 to Br. 20,000,000
• Engaging from 31 to 100 workers
Why are Micro and Small Enterprises Important to
the Economy?
 They can spark off socio-economic revival, as they need little small
capital to operate, but can contribute much
 They use minimum, simple, and inexpensive equipment and inputs
 They often available locally, use limited space, operate with basic
technical and management skills., adapt swiftly, (quickly , rapidly ,
fast ), repair or replace infrastructure and equipment
 They fabricate basic goods and services needed by societies
 They create quickly self-employment and jobs
 Greater flexibility, Less bureaucracy

Small Business Failure Factors
Some Specific causes of failure are;
1. Incompetence - The owners simply do not know how to run
the enterprise
2. Unbalanced experience - This means owners do not have
well-rounded experience in the major activities of the
business, such as finance, purchasing, selling, and production
3. Lack of managerial experience - The owners simply do not
know how to manage people.
4. Lack of experience in the business line (field) - The owner
has entered a business field in which he/she has very little
knowledge
5. Others such as neglect, fraud, and disasters
Establishing an Enterprise
Buying an Existing Business Vs. Starting a New Business
a. Buying an existing business
If someone has never owned a business, buying and operating an existing
business offers many advantages such as:
 Established customers and business procedures,
 Trained employees,
 Inventory and premises which are in place and
 A business which already has a name in the market.
There are many questions which the potential entrepreneur needs to ask
about any business which is for sale:
 Why do I want to buy this business?
 Why does the owner want to sell?
 Does the business have a future where it is and the way it is operating?
 Will I be happy operating this business?
 Do I have the skills?
Cont.….
b. Starting a new business

• Most people who want to be entrepreneurs think that the best
approach is to start their own new business and not to buy one that
already exists.
• This approach gives the potential owner a great deal of satisfaction.
c. Becoming a franchisee
• Franchising is a system where a franchiser has developed
and implemented a business that he offers for replication
to a franchisee.
• The franchisee opens a business by using the business
idea of the franchiser against a fee.
• In return, the franchisee gets training, the marketing
concept, the brand name and the product or service.

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Lo3:Starting an Enterprise

Lesson Objectives At the end of the training lesson, trainees

will be able to:

 Distinguish legal forms of a business organization

 Understand the steps to establish an enterprise

 Identify sources of finance

 Explain the importance of marketing and Identify marketing mix.

 Understand the components for preparation of business plan

Definition of Enterprise and Enterprising

c. Manufacturing enterprise: is purchases raw materials and

c. Manufacturing enterprise: is purchases raw materials and

No separation of tax return Potential difficulty in borrowing money

High secrecy, Low costs to start, Lack of continuity/uncertain life: The

Direct control of business/ personal touch: Difficulty in raising capital/limited

Business secrecy as compare to corporation

Protection of minority interest: each partner has

Tax advantages as compare to corporation Difficulty in raising additional capital/limited

Advantage and Disadvantage of Cooperative

Means to empower poor women, Hard to keep qualified members,

Joint self-help, Organizational Shared authority, Gender issues,

Shared risk-taking, Easier to raise

 They create quickly self-employment and jobs

 Greater flexibility, Less bureaucracy

b. Starting a new business

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