9-1

The Organizational Plan

McGraw-Hill/IrwinEntrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 9

9-2

Developing the Management Team

The management team is expected:

To not operate the business as a sideline or part-time venture.

To operate the business full time and at a modest salary.

9-3

Legal Forms of Business

Three basic legal forms of business: Proprietorship: single owner, unlimited liability,

controls all decisions, and receives all profits. Partnership: two or more individuals, unlimited

liability who have pooled resources to own a business.

Corporation (C corporation): most common form of corporation, regulated by statute, and treated as a separate legal entity for liability and tax purposes. .

9-4

Ownership (1 of 2)

Proprietorship: Owner is the individual who starts the business. Has full responsibility for the operations.

Partnership: General partnership owners and limited

partnership owners. Corporation:

Ownership is reflected by ownership of shares of stock.

No limit to the number of shareholders.

9-5

Liability of Owners

Sole proprietorship: Individual is liable for business liabilities.

Partnership-general: General partners share the amount of personal

liability equally- regardless of their capital contribution

Liable for all aspects of the business. Partnership-limited:

Limited partners liable for amount of capital contribution.

By law must be registered at local court house

9-6

Costs of Starting a Business

Sole proprietorship: Least expensive -Filing for a business or trade name.

Partnership-general: Partnership agreement legal costs-convey all the

responsibilities, rights & duties of the parties involved

Partnership-limited: More complex than a general partnership- Must

comply statutory requirements Corporation:

Created by statute, articles of incorporation, filing fees, taxes, fees for states in which corporation registers to do business

9-7

Continuity of Business

Sole proprietorship Death of owner results in the termination of the

business. Partnership-general:

Death or withdrawal of one of the partners results in partnership termination, unless stipulated otherwise.

Partnership-limited: Death or withdrawal has no effect on continuity of

business- replace partner depending on the agreement

Corporation: Death or withdrawal has no impact on continuation of

business.

9-8

Transferability of Interest(handing over your interest in the business to someonelse)

Sole proprietorship: Entrepreneur has the right to sell or transfer any

assets in the business. Partnership-general:

Cannot sell their interest without first refusal from the remaining general partners.

Partnership-limited: Can sell their interest at any time without consent

of the general partners. Corporation:

Shareholders may transfer their shares at any time without consent from the other shareholders.

Disadvantage: It can affect the ownership control

9-9

Capital Requirements

Sole proprietorship: From loans or by additional personal contributions by

the entrepreneur. Borrow from bank- B may need collateral to support

loan Partnership:

Loans can be obtained from banks but may require change in partnership agreement.

Additional funds contributed by each of the partners wil also require a new partnership agreement

Corporation:(new capital can be raised in number of ways)

Stock may be sold as either voting or nonvoting. Bonds may be sold by the corp.

9-10

Management Control (1 of 2)

Sole proprietorship: Entrepreneur is responsible for and has sole

authority over all business decisions. Partnership-general:

Can present problems if partnership agreement is not concise.

Usually majority rules unless agreement states otherwise.

•‘E’ in new venture will want to retain as much as control over the Business• Each of the forms of Business offers different opportunities & problems as to Control |& responsibility for making business decisions

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Management Control (2 of 2)

Partnership-limited Separation of ownership and control. Limited partners have no control over business

decisions. Rights of all partners are clearly defined in the

agreement. Corporation:

Management has control over day-to-day business Majority stockholders control major long-term

decisions through vote. Stockholders can indirectly affect operation by

electing someone to the board of directors.

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Distribution of Profits and Losses (1 of 2)

Sole proprietorship: Receive all distributions of profits from the

business. Personally responsible for all losses.

Partnership-general: Distribution of profits and losses depends on the

agreement. Sharing of profits and losses likely to be a

function of the partners’ investments.

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Distribution of Profits and Losses (2 of 2)

Partnership-limited Protect limited partners against personal liability. May reduce share in any profits.

Corporation: Distribute profits through dividends to

stockholders. Losses will often result in no dividends.

9-14

Attractiveness for Raising Capital

Sole proprietorship Limited to capability of owner and success of the

business. Least attractive for raising capital.

Partnership-general: Depends on capability of partners and success of

business. Corporation:

Most attractive for raising capital. Shares of stock, bonds, and/or debt are all

opportunities for raising capital with limited liability.

9-15

Tax Attributes of Forms of Business (1 of 2)

Sole proprietorship: IRS treats business as the individual owner. All income appears on owner’s return as personal

income. Tax advantages:

No double tax when profits are distributed to owner. No capital stock tax or penalty for retained earnings.

Partnership-general: Tax advantages and disadvantages similar sole

proprietorship.

9-16

Tax Attributes of Forms of Business (2 of 2)

Partnership-limited: Has the advantage of limited liability. Treated the same as the LLC for tax purposes.

Corporation: Can take many deductions and expenses not

available to proprietorship or partnership. Distribution of dividends is taxed twice. Double taxation can be avoided if income is

distributed to entrepreneur(s) in the form of salary.

9-17

Limited Liability Company Vs S Corporation

Venture capitalists prefer LLCs as a form of business entity. Popularity has resulted from finalization of the

new regulation. LLC can be automatically taxed as a partnership,

unless the entrepreneur actively makes another choice.

Growth rate of the formation of S corporations has leveled off primarily because of the wide acceptance of LLCs.

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S Corporation

Combines the tax advantages of the partnership and the corporation.

Passage of the 1996 law loosened some of the restrictions.

In 2004, Congress responded to criticisms of the restrictions on S corporations as compared to LLCs. Intent was to make the S corporation as

advantageous as the LLC.

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S Corporation- Advantages

Gains/losses = ersonal income/loss. Limited Liability Protection. No minimum tax. Stock transferable. Stock = Voting or non-voting. Cash method of accounting. Long-term capital gains/losses deductible to

shareholders.

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S Corporation- Disadvantages

Some restrictions for qualification. Potential tax disadvantages. Most fringe benefits not deductible for

shareholders. Must have calendar tax year. One class of stock. Net loss limited to shareholder’s stock plus loans

to business. No more than 75 shareholders.

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Limited Liability Company

Partnership/corporation hybrid, laws differ from state to state.

Has members. No shares issued, each member owns according

to articles of incorporation. Liability = Member’s capital contribution. Transfer requires unanimous consent. Taxed as partnership. Standard term = 30 years, continuity restricted.

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Advantages of LLC

LLC liabilities added to partnership interest. Most States do not tax LLCs. Ownership not limited to individuals. Members share income, profit, expense, etc.,

among themselves.

9-23

Designing the Organization

This is the entrepreneur’s formal and explicit indication to the members of the organization as to what is expected of them.

Organization structure. Planning, measurement, and evaluation schemes

E must spell out how these goals will be achieved (plans)- how will be measured- how they will be evaluated

Rewards. Promotions-bonuses-praise so on (E responsible for these rewards)

Selection criteria. Training.

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Stages in Organizational Design

E manages all these functionsNo sub managers neededProduction sub-contracted

Sub managers are hired to Coordinate , organize, controlVarious aspects of B

•Org evolves- E decision roles becomes critical•Adapt to changes in the environment –role of adaptor•Pressure of unsatisfied customers-supplier-key employee threatening to quit•Allocate resources-Negotiator (salaries, contracts, prices of raw material)

9-25

Building the Successful Organization

Once the legal form of Org is determined & the roles necessary to perform all the important functions of the Org are identified – E needs to prepare JD & JA

Job Analysis- guide for hiring procedures, training, performance appraisals , compensation programs, JD & JS

You know what!!!! Just hire a consultant to assist YOU

PAY ME !!!!!!!!!!

9-26

Board of Directors (1 of 2)

Functions of the board of directors: Reviewing operating and capital budgets. Developing longer-term strategic plans for growth and expansion. Supporting day-to-day activities. Resolving conflicts among owners or shareholders. Ensuring the proper use of assets. Developing a network of information sources for the

entrepreneurs.

• BOD- important expertise & also add prestige(venture)• Valuable for obtaining investors-supply relationships- identifying potential

customers• Criteria to select these BOD ( Read Book)• Compensation for BOD- stock options (its important otherwise if

members were only volunteers-take the role lightly)

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Board of Directors (2 of 2)

They must be chosen to meet the requirements of the Sarbanes-Oxley Act and the following criteria:

Individuals who can work with a diverse group and will commit to the venture’s mission.

Candidates who understand the market environment.

Candidates who can contribute important skills to the new venture’s achievement of planning goals.

Candidates who will show good judgment in business decision making.

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Board of Advisors

More loosely tied to the organization. Serve the venture only in an advisory capacity. Has no legal status, unlike the board of

directors. Likely to meet less frequently or depending on

the need to discuss important venture decisions. Useful in a family business. Selection process for advisors can be similar to

the process for selecting a board of directors. Compensated on a per meeting basis or with

stock

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Organization and Use of Advisors

Usually used on an as-needed basis. Can also become an important part of the

organization. Need to be managed just like any other permanent

part of the new venture. Even after hiring advisors, the entrepreneur should

question their advice.(why is the advice being given?)

Sources ----------- Smeda- chambers of commerce-universities-friends &

relatives Accountants- bankers- lawyers- advertising agencies-

market researchers