Part 3 – Comparison of Forms of Business Ownership
Part 3 – The Importance of Entrepreneurs to the Creation of Wealth
There are two ways to succeed in business, either to rise through the ranks of a large company or to become an entrepreneur. Working for others offers the advantages that somebody else assumes the company’s entrepreneural risk and provides you with benefits, like paid vacation time and health insurance.
Becoming an entrepreneur is risker but more exciting. Owning your own business allows you to reap its profits or to fail. As an entrepreneur you don’t receive benefits, such as paid vacation, day care, a company car or health insurance. You have to provide them for yourself. But you gain the freedom to make your own decisions, opportunity and possible wealth, so the trade off can be worth the effort. Part of your due diligence before taking on the challenge of starting your own business should be to study successful entrepreneurs to learn the process.
Economists have identified five factors of production that seem to contribute to wealth:
- Land/natural resources. Land and other natural resources are used to make homes, cars and other products.
- Labor/workers. People have always been an important resource in producing goods and services, but many people are now being replaced by technology.
- Capital. This includes machines, tools, buildings, and whatever else is used in the production of goods. It might not include money; money is used to buy factors of production but is not always considered a factor in and of itself.
- Entrepreneurship. All the resources in the world have little value unless entrepreneurs are willing to take the risk of starting businesses to use those resources.
- Knowledge. Information technology has revolutioned businesses, making it possible to quickly determine wants and needs and to respond with the desired goods and services.
Traditionally business and economics textbooks emphasized only the first four factors, but the late management expert and business consultant Peter Drucker said the most important factor of production in our economy is and will always be knowledge.
When we compare the factors of production in rich and poor countries, we find that land is not the critical element for wealth creation; numerous poor countries have plenty of land and natural resources. Nor is labor. Most poor countries have plenty of laborers who need to find work to make a contribution, thus they need entrepreneurs to create jobs for them. In addition capital, such as machinery and tools, is now fairly easy for companies to find in world markets, so capital is not the missing ingredient either. In fact, capital is not productive without entrepreneurs to put it to use.
What makes countries rich is a combination of entrepreneurship with the effective use of knowledge. Entrepreneurs use the knowledge they have learned in order to grow their businesses and increase wealth. The business environment either encourages or discourages entrepreneurship, which helps explain why some states and cities in this country grow rich while others remain relatively poor.
Whether you’re operating a for profit or a nonprofit enterprise, you need a great team of advisors helping you out. Surrounding yourself with people who are not only there to answer the questions you ask, but to ask questions you haven’t thought of yet is key to your success. And one of the most important team members (next to your BauerGriffith attorney, of course!) is your accountant.
Now when I say accountant, I mean more than a bookkeeper, or someone to fill out your tax returns. Both of these skills are very important, but there are so many opportunities to save money and structure your business for success that many business owners miss without the savvy advice of an accountant.
Here are just a few key issues to think about:
- Are you paying and collecting sales tax when you need to, and only when you need to.
- Have you classified your workers properly as employees or independent contractors, and how can making a few tweaks to the way you work with your staff potentially save you a ton of money.
- Are you capturing all the possible business deductions you can for expenses.
- Are you classifying your expenses properly to capture all possible depreciation for your building or capital purchases (think desks and chairs, not just buildings and large equipment).
- Are you monitoring cash flow on a monthly basis, even when some expenses are paid annually.
- Are you budgeting for hidden expenses like credit card processing fees and employee related taxes.
Of course, the list goes on. Practically every business of every size needs to examine these issues in advance of closing the year-end books to make sure every advantage is captured. If all your accountant is doing for you is telling you how much to pay the IRS, then they’re not doing enough. So add this important team member to your list of advisors now to make 2020 your best year yet.