What is entrepreneurship?
Entrepreneurship is a competency (set of knowledge, skills, and activities) required to start, develop, and assume risk for an enterprise. An entrepreneur is an individual who organizes, operates, and assumes risk for an enterprise with the intention of transforming innovative ideas in products and/or services for a profit.
An enterprise is an undertaking for a prize or cause. It is a group of activities intended to produce income organized for:
- Profit as a business of any size and type: unincorporated or incorporated; one or many entities, of which one is designated as the “holding entity” in a multi-entity structure; and such that one enterprise can incubate another
- A not-for-profit association, such as a public charity or a private foundation
- A government agency
When an enterprise is referred to as an entity, the reference is specifically to the holding entity, unless otherwise specified. The term “not-for-profit” is generic; the term “non-profit” means an entity that has been approved by a taxing authority as being exempt from income tax. “Not-for-profit” does not mean “not-for-revenue.”
As a discipline, a business delivers products and/or services to a customer for a profit. As an entity, a business can be:
- Sole proprietorship (individual)
- Partnership (pass-through to individuals): general, limited, or limited liability
- Limited liability company (pass-through to one or more individuals as a partnership or as an equivalent to a “subchapter S” corporation)
- Corporation: general with directors appointed by shareholder investors, and officers appointed by directors (“subchapter C”), pass-through to one or more shareholder investor individuals who may also be directors and officers (“subchapter S”), professional (pass-through to one or more individuals), or foreign
An upwardly mobile enterprise is a small-to-large enterprise focused on large market dominance (share being either industry-wide or in niches) with local-to-global aspiration in both traditional and non-traditional industries. It has growth potential from highly innovative people, processes, and products and/or services, and/or duplication of a business system. It is financed by founders and/or third-party investors (closely or widely-held) seeking capital appreciation, and potentially cash flow from dividends and/or interest, with medium to high risk. An upwardly mobile enterprise may be founded by one or more entrepreneurs, who either become part of a larger management team as new investors come on board, leave to form another venture as serial entrepreneurs, or retire.
Upwardly mobile enterprises are the heart of Wall Street.
A lifestyle business enterprise owner operates an enterprise in a local community, and may also be the founding entrepreneur:
- Either as an active owner-manager, making a living from its activities for their own lifestyle
- Or as a passive owner-manager, with an active management team in place
Lifestyle business enterprises are the heart of Main Street.
A lifestyle business enterprise owner can be a sole proprietor, partner, member (and usually also a manager) of a limited liability company, or a shareholder investor in a corporation (and usually also a director and an officer).
An employee is an individual who provides services in exchange for compensation under an explicit or implicit contract for hire, whereby the employer (hirer) has the right to control what work is performed and how. An independent contractor is self-employed; the hirer has the right to control only the result of the work, and not how it is performed.
What is individualpreneurship?
Individualpreneurship is a mindset for thinking about oneself as an enterprise, actively developing and managing multiple sources of income, and without being highly dependent upon any if possible.
Sources of an individualpreneur’s income include:
- Entrepreneurship/business ownership
The individualprise represents the aggregation of all sources of an individual’s income. Gross income results from wages from employment, and from both revenues (commissions, dividends, fees, interest, rents, royalties, and sales) and from capital gains from both entrepreneurship/business ownership and investing activities. Net income (profit) results from gross income less the cost of revenue and the expenses required to generate it. The cash flow generated from net income generates wealth, which can be used for investing activities and supporting a personal lifestyle.
The broadest definition of wages includes all remuneration or compensation paid for services rendered by an employee, whether in cash or in other media including bonuses, commissions, and gratuities, based on piece, task, or time.
The need to develop and manage multiple sources of income arises from increasing uncertainty about economic, regulatory, and social trends.
For many individuals, the primary source of income is remuneration from employment, and the largest asset is their home. Employment is an active form of income – in effect employees exchange time for money. However, the best forms of income are those that are residual and passive.
Residual income results from an initial transaction at some time in the past for which an ongoing cash flow is received; passive income results from transactions where the individualpreneur is not actively involved.
Examples of residual income include enrolling members in systems where downstream commissions can be earned; selling items, such as subscriptions that are automatically renewable, or consumables where the ordering is processed by third-parties; and affiliate programs based upon referrals.
The rise and fall of employment opportunities
Prior to the industrial revolution, families were in effect enterprises. Augmenting farm work with other trades and crafts, families flourished in cottage industries working from home, effectively as a group of individualpreneurs. Merchants brought raw materials to homes and would take finished products to markets. Entrepreneurs would “put out” work to families, who were in effect their subcontractors.
As the industrial revolution progressed, work was transferred form homes to factories when the required machinery became too large or expensive. Initially, the “put in” system was used whereby workers in a factory were treated as subcontractors, and eventually became employees. Labor movements were founded to fight for workers’ rights, from which today’s employment and labor laws have evolved.
As the economy shifted from family to commercial and industrial enterprises, employment opportunities grew. Workers could expect long-term employment opportunities as manufacturing demand increased. Through improvements in manufacturing techniques, such as production lines and automation, the scale of units produced increased dramatically. Through improvements in energy, transportation, and telecommunications technologies, reach extended into new geographic markets for acquisition of materials and supplies, and delivery of end-products.
However, recent globalization trends have changed the cost structure of certain activities through outsourcing to providers who offer economy of scale, or to lower cost production markets. As a consequence of information and process control technologies, work has shifted from manufacturing to knowledge-based services. Technology can play a major role by creating jobs in new areas and eliminating them in others.
Enterprises have been impacted dramatically by these trends. For example, “big box” and online stores have had an impact on retailers on “Main Street” – but the savvy ones offer specialty products coupled with exceptional service. Even the local coffee shop is impacted by the price of green beans in global markets. Many manufacturers have downsized through strategic sourcing of components to scale providers, and in the construction industry, general contractors take advantage of prefabricated assemblies. As industries shift from manufacturing to knowledge-based, a major differentiator is marketing capability. Marketing capability requires understanding customer needs and wants, and responding with products and/or services designed for niche or mass markets, regardless of where the components are made.
The consequence is that job markets are dramatically changing, and that old assumptions for employment have become invalid. The notion of working for one employer for forty plus years is no longer possible because technology is changing the structure of industries and the nature of employment. Downsizing has become common, and it is a challenge for the education system to keep up with changing trends in the knowledge, skills, and technical requirements for jobs in emerging enterprises and industries.
The increase in consumer debt coupled with unstable employment opportunities has created stress for many individuals and their families, especially for those who are unemployed, face foreclosure on their homes, or even bankruptcy.
What is “Plan B?”
The term “Plan B” is used to describe an alternative course of action in case the preferred or primary “Plan A” fails. For many individuals, Plan A is a combination of a good education leading to a well-paying job. This form of Plan A stresses individual achievement through successes in education and employment – failures are usually downplayed. However, changing trends in employment put pressure on most individuals’ Plan A, who may face downsizing or even their employer going out of business.
For others, Plan A is a combination of entrepreneurship and business ownership. This form of Plan A can result in failure. However, ultimate success in entrepreneurship and business ownership is often achieved by learning from mistakes and failures over time, and by building teams. Plan A for entrepreneurs and business owners may change from time to time as their ventures change. Eventually, many entrepreneurs and business owners finally get it right as lessons from past failures lead to successes. Many entrepreneurs and business owners become investors in other enterprises with a sense of “wanting to put back,” and often with a higher tolerance for risk than those who have, in effect, earned income in exchange for time.
The uncertainty of the economy, regulation, and social trends as evidenced by downsizing, high consumer debt, government debt and unbalanced budgets, and high unemployment has created the need for all individuals to have a strong “Plan B.”
An effective Plan B begins with the notion of an individual behaving as an enterprise in their own right – the individualprise. Whereas Plan A may provide a primary source of income, developing a Plan B means understanding opportunities for earning multiple sources of income and allocating time efficiently by prioritizing on the best. Executing a Plan B may allow an individual to keep their primary form of employment, but work on other income producing activities, such as part-time employment, home-based businesses, or investing in real estate and/or securities.
The income statement of the individualprise is the tax return – after all, if the an individual has multiple strong streams of income, taxes are likely to be an important consideration.
The basis structure of the Individual Tax Return (IRS Form 1040) applicable to both Plan A and B activities includes:
- Interest (Schedule B)
- Dividends (Schedule B)
- Business income from sole proprietorships (Schedule C)
- Capital gains (Schedule D)
- Supplemental income from rental real estate, royalties, partnerships, and subchapter S corporations (Schedule E)
The tax return offers clues as to opportunities for alternative sources of income; however, it is useful to separate the type of income from the forms of business, such as sole proprietorships, partnerships, limited liability companies, and corporations.
Types of income include:
- Wages – all forms of compensation for full or part-time employment
- Interest on investments
- Dividends on investments
- Capital gains on investments
- Net income from active revenue generation such as commissions, fees, rents, royalties, and sales less expenses
- Net income from passive revenue generation activities – primarily real estate rents and royalties less expenses
Types of business forms include:
- Sole proprietorship and single member limited liability company – an individual that sells products and/or renders services, including as an independent contractor to hirers
- Partnership or limited liability company – where an individual is a partner or member in an enterprise that shares profits, losses, and capital with others – the individual may be a general partner or member-manager, or a limited partner or member; a single member limited liability company is considered to be a disregarded entity
- Subchapter S corporation – where an individual is a shareholder investor in a corporation that passes its profits and losses through to its shareholders – the individual also may be a director and/or an officer, and as such earns wages as an employee in addition to receiving dividends
- Subchapter C corporation – where an individual is a shareholder investor in a corporation that is taxed separately from its shareholders, but may pay tax on the dividends received (thus is subject to double taxation) – the individual may also be an employee, and as such earns wages in addition to receiving dividends
Only individuals and corporations are legal entities, and as such, corporations have separate rights and privileges from their shareholder investors. Individuals are natural persons. However, a juristic person is a group of natural persons behaving as if they are a single group, such as in a partnership, a limited liability company, or an association. A company is a group of individuals that make up an enterprise regardless of business or legal form.
Entrepreneurs may start enterprises in any business form, but lenders and investors may require a specific form, and may place personal guarantees in individuals for contingent liabilities. Venture capital and investment firms may place specific requirements on business forms and management structure, such as being a Delaware subchapter C corporation. Thus a founding entrepreneur could become a shareholder investor in an enterprise that they are no longer in control of if an investor group brings in its own management team. Delaware is the preferred choice for incorporation for many investors because of its well established corporate laws.
Although self-employed individuals are treated as business owners through sole proprietorships, single member limited liability companies, and single shareholder corporations, they are unable to leverage their time unless they can delegate to trustworthy employees, or earn residual and/or passive income.
Individuals who are sole proprietors, partners, and members in limited liability companies are subject to self-employment taxes, and shareholder investors who are officers in subchapter S corporations are subject to employment taxes.
Achieving “Plan B”
There are many ways to develop and achieve a Plan B that has multiple income streams, and it is possible that one component may become the new Plan A eventually. Some opportunities result from converting a hobby into an income producing activity, whereas others result from leveraging professional qualifications and experience.
Examples of income producing activities include:
- Part-time employment
- Establishing a home-based business on a part-time basis, that has the potential to become full-time
- Earning fees and commissions from referrals through affiliate marketing relationships
- Earning royalties and fees through writing and speaking engagements
- Investing in real estate for rental income and capital gains
- Investing in securities for interest and dividend income and capital gains
Businesses that require separate physical premises, inventories, and employees should be avoided as a Plan B because of the high overhead of carrying costs, insurance, payroll, risk of theft, and governance. Whereas the notion of owning a restaurant can be a dream to many, all too often such an enterprise becomes nothing but a nightmare.
Home-based businesses can take many forms such as buying and selling products on the internet or providing professional services on a part-time basis. It is important to note that home-based businesses are subject to licensing and zoning laws and regulations, and may be subject to property, sales, and use taxes, in addition to income tax.
Any form of revenue generating activity requires business development and marketing capability to create awareness and build relationships. The degree of selling experience necessary is a function of the type of business. These activities can be routinized through duplicable, predictable, and measurable processes that can be learned over time.
Some investing activities may require active trading to ensure that capital gains can be properly realized in up markets, and to prevent losses in down markets.
The best form of income is both residual and passive, whereby ongoing cash flow results from activity that occurred in the past, and for which little or no management activities are required in the present.
An effective way to achieve a blend of residual and passive income is through a combination of sources from membership systems and investing activities as follows by:
- Enrolling customers in membership systems where commissions are earned from ongoing sales of consumables, for which the ordering and distribution is handled by third-parties – this activity generates residual gross income
- Investing the residual income in an investment portfolio that diversifies risk, and generates cash flow from interest and dividends – this activity generates residual gross income; the income is passive if the portfolio does not require active management through trading
- Note: investing in real estate may generate residual income from rents; however active management may be required for finding tenants, negotiating leases, collecting rents, paying expenses such as utilities, and performing maintenance and repairs; investing in securities may require some trading to hedge from risk, and to take advantage of capital gains.
A shorter-term objective of Plan B is provide a hedge against Plan A as an alternative. A longer-term objective of Plan B is to gain financial independence – the state of having sufficient wealth to cover expenses required by a certain lifestyle. Wealth is achieved by having sufficient assets and income producing activities to generate a gross income that exceeds all professional, physical, and personal expenses required by that lifestyle. Wealth is a source of capital for future investment. It is usually advisable to eliminate debt in the quest to achieve financial independence.
A key success factor in developing a Plan B is understanding those enterpriship (entrepreneurship, leadership, and management) competencies that are essential to income generation.