Chapter 2:
Entrepreneurship and
Legal Forms of
Business
Nguyen Hong Tra My (Dr)
Foreign Trade University
Content
• 2.1. Legal Forms of Business
• 2.2. Entrepreneurship and How Small
Businesses Affect the Economy
• 2.3: Analyzing the Potential of a Business
to be Profitable
Chapter objectives
Upon successful completion of this unit, you will be able to:
• discuss the legal forms of businesses (including sole proprietorships,
partnerships, corporations, limited-liability corporations, and subchapter S
corporations…)
• discuss the potential of a business to be profitable, when considering the legal
form of business, tax rates, and break-even analysis;
• evaluate the appropriateness of the different legal forms of business for various
business contexts; and
• analyze the impact of small business on the economy.
What is a Company?
A company, abbreviated as co., is a legal entity representing an
association of people, whether natural, legal or a mixture of both,
with a specific objective. Company members share a common
purpose and unite to achieve specific, declared goals.
An enterprise is an organization with its own name, assets,
and a transaction office, established or registered for
establishment in accordance with the provisions of law for
business purposes (Clause 10, Article 4 of the Law on
Enterprises 2020)
Characteristics of a Company
An Artificial Person Created by Law
•Company is not a citizen
•Separate legal entity
•Transferability of shares
•Separate property
•Capacity to sue and be sued
•Contractual rights
Characteristics of a Company
• 1) An enterprise is an economic organization with its own name, its own assets and a stable
transaction office, established or registered in accordance with the provisions of law for
business purposes (Clause 10, Article 4, Law on Enterprises 2020).
• 2) Recognized as a legal entity. An enterprise is allowed to participate in all relations in civil
exchanges as well as litigation relations.
• 3) The main function and task of an enterprise is to do business. An enterprise is allowed to
carry out business activities such as production, purchase, sale, and supply of goods and
services for the purpose of making a profit or implementing socio-economic policies.
• 4) An enterprise has an organizational structure within the enterprise which is the division
and arrangement of departments, functions and relationships between members in the
enterprise to implement business goals and strategies. There are many different types of
organizational structures, suitable for each type and size of enterprise.
Three Minute Reflection
• Think of a Company you know? Try to think about :
1. How is the company different from a person or a club or a
college?
2. How old is the company?
3. What offices or branches of factories does the company have?
4. Are there any recent news about the company or its employees?
Sole
Proprietorship
Forms of Business Partnerships
Corporations
Sole Proprietorship
• A sole proprietorship is a business
owned by only one person
• Advantages: • Disadvantages:
- Easy and inexpensive to form. - Unlimited liability.
- Profits all go to the owner
- Difficulty raising capital
- Direct control of the business
- Freedom from government regulation. - Limited managerial expertise
- No special taxation - Trouble finding qualified employees
- Ease of dissolution - Personal time commitment
- Unstable business life
- Losses are the owner's responsibility
Partnership (General Partnership)
• A partnership (or general partnership) is a business owned jointly by two
or more people.
• The Partnership Agreement
- Amount of cash and other contributions to be made by each partner
- Division of partnership income (or loss)
- Partner responsibilities - who does what
- Conditions under which a partner can sell an interest in the company
- Conditions for dissolving the partnership
- Conditions for settling disputes
• Limited partnership, which has
two types of partners: a
single general partner who runs the
business and is responsible for its
liabilities, and any number
of limited partners who have limited
involvement in the business and
whose losses are limited to the
amount of their investment.
Pros and Cons of Partnerships
• A partnership has several advantages over a sole proprietorship:
- It's relatively inexpensive to set up and subject to few government regulations.
- Partners pay personal income taxes on their share of profits; the partnership doesn't pay
any special taxes.
- It brings a diverse group of people together to share managerial responsibilities.
- Partners can agree legally to allow the partnership to survive if one or more partners die.
- It makes financing easier because the partnership can draw on resources from a number of
partners.
• A partnership has several disadvantages over a sole proprietorship:
- Shared decision making can result in disagreements.
- Profits must be shared.
- Each partner is personally liable not only for his or her own actions but also for those of
all partners - a principle called unlimited liability.
Corporation
• A corporation (sometimes called
a regular or C-corporation): a legal
entity that is entirely separate from
the parties who own it. It can enter
into binding contracts, buy and sell
property, sue and be sued, be held
responsible for its actions, and be
taxed.
Benefits and Disadvantages of Incorporation
• Benefits of Incorporation
- Limited Liability
- Financial Resources
- Specialized Management
- Continuity and Transferability
• Disadvantages of Incorporation:
- The goals of corporate managers, who don't necessarily own stock, and
shareholders, who don't necessarily work for the company, can differ.
- It's costly to set up and subject to burdensome regulations and government
oversight.
- It's subject to "double taxation." Corporations are taxed on their earnings. When
these earnings are distributed as dividends, the shareholders pay taxes on these
dividends.
Practice
• Grand Canyon Helicopter Adventures was started five years ago by Jayden Collins.
The business has grown over the years, but is at a standstill now. Jayden would like to
expand his business, but needs additional funds to do this. Also, he could really use
help running the business. Though he is an excellent pilot with a perfect safety record,
he's not very good at handling the day-to-day details needed to keep the business
running smoothly. A friend of his, Rob Tocci, approached him recently and asked to
join him in the business. Rob is fairly wealthy and has considerable business
experience. Plus, he knows how to fly choppers - though he has had a few (thankfully
nonfatal) mishaps. Jayden is a little apprehensive about sharing responsibility for
running the business, but he doesn't mind sharing profits. On the other hand, he
recognizes that he alone will not be able to grow the business.
• Because Jayden doesn't want to incorporate, he has only two options: continue doing
business as a sole proprietorship or find someone to join him in a partnership. You
should evaluate these two alternatives, discuss the advantages and disadvantages of
each option, and recommend the one you consider most appropriate. If you
recommend forming a partnership, distinguish between a limited and a general
partnership.
Practice
• SolarBike Company was formed as a partnership ten years ago by three sisters-in-law:
Peg McLaughlin, Terry McLaughlin, and Joanie McLaughlin. All three worked
diligently to design and produce the SolarBike: an electric bicycle propelled by the sun's
rays. The good news is that the bike is a big hit with environmentalists and last year's
sales reached $2 million. The bad news is that to keep up with growing demand for the
bike, the company must expand its capacity at a cost of $1 million. Even though the
company is doing well, it's unlikely that the partnership could get the needed $1
million in funds from a bank.
• The company's predicament was discussed at a recent partnership meeting. Not only
were the three partners unwilling to lend the company any more money, but also they
voiced concern about being held responsible for their own actions as well as for all the
partners' actions. Peg asked the group to consider incorporating and raising funds
through the sale of stock. Joanie supported this idea, but Terry was against it.
• The three partners hired you as a consultant to advise them on whether to remain as a
partnership or to form a private corporation. In addition to your recommendation, you
should discuss the advantages and disadvantages of both forms of organization and
explain how they apply to SolarBike Company's situation.
Other Types of Business Owners
S-corporations:
•The company has no more than 100 shareholders
•All shareholders are individuals, estates, or certain nonprofits or trusts
•All shareholders are U.S. citizens and permanent residents of the U.S.
•The business is not a bank or insurance company
•All shareholders concur with the decision to form an S-corporation
Limited-liability companies
Cooperatives
Not-for-profit corporations
Other Types of Business Owners
S-corporations
Limited-liability companies
•Has fewer ownership restrictions. It can have as many members as it wants - it is not
restricted to a maximum of 100 shareholders.
•Its members don't have to be U.S. residents or citizens.
•Profits do not have to be allocated to owners based on percentage ownership.
Members can distribute profits in any way they want.
•Is easier to operate because it doesn't have as many rules and restrictions as does an S-
corporation. It doesn't have to elect a board of directors, hold annual meetings, or
contend with a heavy recordkeeping burden.
Cooperatives
Not-for-profit corporations
Other Types of Business Owners
• S-corporations
• Limited-liability companies
• Cooperatives: A cooperative (also known as a co-op) is a business
owned and controlled by those who use its services. Individuals and
firms who belong to the cooperative join together to market products,
purchase supplies, and provide services for its members. If run correctly,
cooperatives increase profits for its producer-members and lower costs
for its consumer-members.
• Not-for-profit corporations
• S-corporations
• Limited-liability companies
• Cooperatives
• Not-for-profit corporations: is an
Other Types of organization formed to serve some
public purpose rather than for
Business Owners financial gain. As long as the
organization's activity is for charitable,
religious, educational, scientific, or
literary purposes, it should be exempt
from paying income taxes.
Key takeaway
• The S-corporation gives small business owners limited liability protection, but taxes
company profits only once, when they are paid out as dividends. It can't have more
than one hundred stockholders.
• A limited-liability company (LLC) is similar to an S-corporation: its members are
not personally liable for company debts and its earnings are taxed only once, when
they're paid out as dividends. But it has fewer rules and restrictions than does an S-
corporation. For example, an LLC can have any number of members.
• A cooperative is a business owned and controlled by those who use its services.
Individuals and firms who belong to the cooperative join together to market
products, purchase supplies, and provide services for its members.
• A not-for-profit corporation is an organization formed to serve some public
purpose rather than for financial gain. It enjoys favorable tax treatment.
Create a table comparing a regular corporation,
an S-corporation, and a limited-liability
company on these dimensions: limited-liability
protection, double taxation, restrictions on
Exercise number of stockholders or members, rules, and
restrictions. If you and several of your friends
owned an ice skating rink, which form of
ownership would you select? Why? Which form
of ownership would you select for Google?
1. Single member limited liability company
2. Limited liability company with two or more
05 types of legal members
businesses in 3. Joint Stock Company (Công ty cổ phần)
Vietnam
4. Partnership (Công ty hợp danh)
5. Private enterprise
Has legal status from the date of issuance of
the Business Registration Certificate.
1. Single member Not allowed to transfer all or part of the
limited liability charter capital to others, except in cases
company otherwise provided by special laws.
A single-member LLC has the
Not allowed to issue shares (except for the
following characteristics:
case of conversion into a joint stock
company).
Allowed to issue bonds according to
regulations.
Has legal status from the date of issuance of the
business registration certificate.
Can transfer charter capital to others according to
the provisions of law and the company's charter.
2. Limited liability
company Capital contributions can only be transferred
according to the provisions of Articles 51, 52, 53 of
A limited liability company the Enterprise Law 2020.
with two or more members
has the following
characteristics: Cannot issue shares, except for the case of
conversion into a joint stock company
The company is allowed to issue bonds according to
regulations.
Shares: Charter capital divided into equal parts.
Shareholders: Can be individuals or organizations, of
which there are at least 3 shareholders, with no limit on
the maximum number of shareholders.
3. A Joint Stock
Shareholders are only responsible for debts and other
Company financial obligations within the scope of the
contributed capital.
A joint stock company
includes Shareholders are free to transfer their shares to others
according to regulations.
A joint stock company has legal status from the date of
being granted the Certificate of Business Registration.
The company has the right to issue shares, bonds
and other types of securities of the company.
There must be at least 02 members who are joint owners of the
company, jointly doing business under a common name
(hereinafter referred to as general partners). In addition to general
partners, the company may have additional capital contributors
General partners must be individuals, responsible for
all of their assets for the obligations of the company;
4. Partnership
Capital contributors are organizations or individuals
A partnership company has and are only responsible for the debts of the company
the following characteristics: within the scope of the capital committed to
contribute to the company.
A partnership has legal entity status from the date of
being granted a Certificate of Business Registration.
A partnership may not issue any type of securities.
A private enterprise is not allowed to issue any type of
securities
5. Private
Enterprise
Each individual is only allowed to establish one private
A private enterprise is an enterprise. The owner of a private enterprise cannot be at
the same time the owner of a business household or a
enterprise owned by an general partner of a general partnership
individual who is personally
responsible for all activities of
the enterprise with all of A private enterprise is not allowed to contribute capital to
his/her assets establish or purchase shares or capital contributions in a
general partnership, limited liability company or joint
stock company.
• Limited liability means • Unlimited liability
According to that the owner or means that the
members who owner/member of the
the liability contribute capital to the company must take
regime company are only responsibility with all of
responsible to the his/her assets for the
company for the debts performance of the
and receive benefits company's obligations
corresponding to their when the company does
contribution to the not have enough assets
company without having to perform its financial
to use personal assets to obligations.
take responsibility.
Micro, Small and Medium Enterprises
1. Micro enterprises in the fields of agriculture, forestry, fisheries; industry and construction using an
average of no more than 10 employees participating in social insurance per year and total revenue of
the year not exceeding 3 billion VND or total capital of the year not exceeding 3 billion VND.
• Micro enterprises in the fields of trade and services using an average of no more than 10 employees
participating in social insurance per year and total revenue of the year not exceeding 10 billion
VND or total capital of the year not exceeding 3 billion VND.
2. Small enterprises in the fields of agriculture, forestry, fisheries;
• Industrial and construction sectors, the average number of employees participating in social
insurance is not more than 100 people per year and the total revenue of the year is not more than
VND 50 billion or the total capital of the year is not more than VND 20 billion, but it is not a
micro-enterprise as prescribed in Clause 1 of this Article.
• Small enterprises in the trade and service sectors, the average number of employees participating in
social insurance is not more than 50 people per year and the total revenue of the year is not more
than VND 100 billion or the total capital of the year is not more than VND 50 billion, but it is not
a micro-enterprise as prescribed in Clause 1 of this Article.
3. Medium enterprises in the agricultural, forestry
and fishery sectors; Industrial and construction
sectors employ an average of no more than 200
employees participating in social insurance and
have a total annual revenue of no more than VND
200 billion or a total annual capital of no more
Micro, Small than VND 100 billion, but are not micro-
enterprises or small enterprises as prescribed in
and Medium Clause 1 and Clause 2 of this Article. Medium-
sized enterprises in the trade and service sectors
Enterprises employ an average of no more than 100 employees
participating in social insurance and have a total
annual revenue of no more than VND 300 billion
or a total annual capital of no more than VND
100 billion, but are not micro-enterprises or small
enterprises as prescribed in Clause 1 and Clause 2
of this Article.
(According to Article 5 of Decree 80/2021/ND-CP)
Other
Classifications
Which are known globally?
Which are famous in Vietnam?
Three Minute Which you like to work for?
Reflection
Think of 1-2 Companies: Which are in the news recently?
Whose at least 1 employee you know?
Which has presence in your
neighborhood?
Most
Valuable
Brands in
2024
Top 8 Biggest Companies In Vietnam By Number Of Employees
Top Companies in Vietnam in Revenue
8 unicorn startups in Vietnam
Three Minute Reflection
Think of a Company • What Product or Service does it provide?
you work for or would • Where is it based ?
like to work for? • How big or small is it?
2. Entrepreneurship
• An entrepreneur is someone who identifies a business opportunity and assumes
the risk of creating and running a business to take advantage of it.
• There are three characteristics of entrepreneurial activity:
• Innovating. An entrepreneur offers a new product, applies a new technique
or technology, opens a new market, or develops a new form of organization
for the purpose of producing or enhancing a product.
• Running a business. Entrepreneurship means setting up a business to make a
profit from an innovative product or process.
• Risk taking. Risk means that an outcome is unknown. Entrepreneurs,
therefore, are always working under a certain degree of uncertainty, and they
can't know the outcomes of many of the decisions that they have to make.
Advantages to starting a business
1 2 3 4 5
Be your own Accommoda Achieve Enjoy Use your
boss. te a desired financial creative skills and
lifestyle. independenc freedom. knowledge.
e.
To find out, start by reviewing the following list of
characteristics commonly attributed to
entrepreneurs:
• They are creative people who sometimes
accomplish extraordinary things because they're
Do you have passionate about what they're doing.
what it takes • They are risk-taking optimists who commit
themselves to working long hours to reach desired
to be an goals.
entrepreneur? • They take pride in what they're doing and get
satisfaction from doing something they enjoy.
• They have the flexibility to adjust to changing
situations to achieve their goals.
2.3. Analyzing the Potential of a Business
to be Profitable
Purpose of a Business Plan
• The business plan is a plan or blueprint for the company,
and it's an indispensable tool in attracting investors,
obtaining loans, or both.
• In developing and writing your business plan, you must
make strategic decisions in the areas of management,
operations, marketing, accounting, and finance.
• The most common use of a business plan is persuading
investors, lenders, or both, to provide financing.
1. Executive summary
2. Description of proposed business
Sections of 3. Industry analysis
4. Mission statement and core values
the 5. Management plan
Business 6. Goods or services and (if applicable)
production processes
Plan 7. Marketing
8. Global issues
9. Financial plan.
Executive summary Description of proposed
business
• The executive summary is a one- to • A brief description of the company
three-page overview of the business and tell the reader why you're starting
plan. your business, what benefits it
• It's written after the other sections of provides, and why it will be successful
the plan are completed.
Industry Analysis Mission Statement and
Core Values
• A brief introduction to the industry • The mission statement describes the
in which you propose to operate. It purpose or mission of your
describes both the current situation organization - its reason for existence.
and the future possibilities It tells the reader what the
organization is committed to doing.
• Core values are fundamental beliefs
about what's important and what is
(and isn't) appropriate in conducting
company activities.
Management Plan
A. Legal Form of Organization
• This section identifies the chosen legal form of business ownership: sole proprietorship
(personal ownership), partnership (ownership shared with one or more partners), or
corporation (ownership through shares of stock).
B. Qualifications of Management Team and Compensation Package
• This part of the management plan section provides information about the qualifications of
each member of the management team. It describes each individual's education,
experience, and expertise, as well as each person's responsibilities. It also indicates the
estimated annual salary to be paid to each member of the management team.
C. Organizational Structure
• This section of the management plan describes the relationships among individuals within
the company, listing the major responsibilities of each member of the management team.
• Describe all the goods and services that
you will provide the marketplace. This
Goods, section explains why your proposed
offerings are better than those of
Services, and competitors and indicates what market
the needs will be met by your goods or
services. In other words, it addresses a
Production key question: What competitive
advantage will the company's goods and
Process services have over similar products on
the market?
Marketing
• This critical section focuses on four marketing-related areas -
target market, pricing, distribution, and promotion:
[Link] market. Describe future customers and profile them
according to age, gender, income, interests, and so forth. If
your company will sell to other companies, describe your
typical business customer.
[Link]. State the proposed price for each product. Compare
your pricing strategy to that of competitors.
[Link]. Explain how your goods or services will be
distributed to customers. Indicate whether they'll be sold
directly to customers or through retail outlets.
[Link]. Explain your promotion strategy, indicating what
types of advertising you'll be using.
Financial Plan Appendices
• Specify the company's cash needs • Supplemental information that
and explain how you'll be able to may be of interest to the reader.
repay debt. It presents financial In addition to a set of financial
projections, including expected statements, for example, you
sales, costs, and profits (or losses). might attach the résumés of your
It refers to a set of financial management team.
statements included in an
appendix to the business plan.
Exercise
Let's start with three givens: (1) college students love
chocolate chip cookies, (2) you have a special talent for
baking cookies, and (3) you're always broke. Given
these three conditions, you've come up with the idea
of starting an on-campus business - selling chocolate
chip cookies to fellow students. As a business major,
you want to do things right by preparing a business
plan. First, you identified a number of specifics about
your proposed business. Now, you need to put these
various pieces of information into the relevant section
of your business plan.
Using the business plan format described in this chapter, indicate the section of the business plan into which
you'd put each of the following:
1. You'll bake the cookies in the kitchen of a friend's apartment.
2. You'll charge $1 each or $10 a dozen.
3. Your purpose is to make the best cookies on campus and deliver them fresh. You value integrity, consideration of
others, and quality.
4. Each cookie will have ten chocolate chips and will be superior to those sold in nearby bakeries and other stores.
5. You expect sales of $6,000 for the first year.
6. Chocolate chip cookies are irresistible to college students. There's a lot of competition from local bakeries, but your
cookies will be superior and popular with college students. You'll make them close to campus using only fresh
ingredients and sell them for $1 each. Your management team is excellent. You expect first-year sales of $6,000 and
net income of $1,500. You estimate start-up costs at $600.
7. You'll place ads for your product in the college newspaper.
8. You'll hire a vice president at a salary of $100 a week.
9. You can ship cookies anywhere in the United States and in Canada.
[Link] need $600 in cash to start the business.
[Link] are six bakeries within walking distance of the college.
[Link]'ll bake nothing but cookies and sell them to college students. You'll make them in an apartment near campus
and deliver them fresh.
Write a Business Plan
2.3. Break-even Analysis
• Breakeven analysis is a method of determining the level of sales at which the
company will break even (have no profit or loss).
• The following information is used in calculating the breakeven point: fixed
costs, variable costs, and contribution margin per unit.
• Fixed costs are costs that don't change when the amount of goods sold changes.
For example, rent is a fixed cost.
• Variable costs are costs that vary, in total, as the quantity of goods sold changes
but stay constant on a per-unit basis. For example, sales commissions paid based
on unit sales are a variable cost.
• Contribution margin per unit is the excess revenue per unit over the variable
cost per unit.
• The breakeven point in units is calculated with this formula: fixed costs divided
by contribution margin per unit (selling price per unit less variable cost per
unit).
[Link] your total fixed costs, which are so called because the total cost doesn't change
as the quantity of goods sold changes:
Fixed costs = $210,000 salaries + $60,000 rent + $10,000 advertising + $8,000 insurance +
12,000 other fixed costs = $300,000
[Link] your variable costs. These are costs that vary, in total, as the quantity of goods sold
changes but that stay constant on a per-unit basis. State variable costs on a per-unit basis:
Variable cost per unit = $40 (cost of each pair of shoes) + $5 sales commission = $45
[Link] your contribution margin per unit: selling price per unit less variable cost per
unit:
Contribution margin per unit = $80 selling price minus $45 variable cost per unit = $35
[Link] your breakeven point in units: fixed costs ÷ contribution margin per unit:
Breakeven in units = $300,000 fixed costs ÷ $35 contribution margin per unit = 8,571
units
• Your calculation means that if you sell 8,571 pairs of shoes, you will end up with zero
profit (or loss) and will exactly break even.
Exercise
• For the past ten years, you've worked at a PETCO Salon as a dog groomer. You're
thinking of starting your own dog grooming business. You found a place you could
rent that's right next to a popular shopping center, and two of your friends (who are
also dog groomers) have agreed to work for you. The problem is that you need to
borrow money to start the business and your banker has asked for a breakeven
analysis. You have prepared the following cost estimates for your first year of
operations:
Fixed Costs Variable Cost per Dog
Salaries $105,000 Shampoo $2.00
Rent and utilities $36,000 Coat conditioner $1.50
Advertising $2,000 Pet cologne $0.75
Equipment $3,000 Dog treats $1.25
Hair ribbons $0.50
• You went online and researched grooming prices in your area. Based on your review, you
have decided to charge $32 for each grooming.
• Part 1:
• What's the breakeven point in units - how many dogs will you need to groom in the first
year to break even?
• If you and your two employees groomed dogs five days a week, seven hours a day, fifty
weeks a year, how many dogs would each of you need to groom each day? Is this realistic
given that it takes one hour to groom a dog?
• Part 2:
• If you raised your grooming fee to $38, how many dogs would you need to groom to
break even?
• At this new price, how many dogs will each of you have to groom each day (assuming,
again, that the three of you groom dogs fifty weeks a year, five days a week, seven hours a
day)?
• Part 3:
• Would you start this business?
• What price would you charge to groom a dog?
• How could you lower the breakeven point and make the business more profitable?