ENTR 452ENTR 452Chapter 9: The Chapter 9: The

Organizational Plan/Organizational Plan/Legal Forms ofLegal Forms of OrganizationOrganization

DEVELOPING THE DEVELOPING THE MANAGEMENT TEAMMANAGEMENT TEAM

Investors demand that the management team not operate the business as a part-time venture.

It is assumed that the management team is prepared to operate the business full time and at a modest salary. An attempt to draw a large salary out of the new venture may be perceived as a lack of commitment to the business.

Tax considerations

Liability exposure

Startup and future capital requirements

Control

Management ability

Business goals

Management succession plans

Cost of formation

Good Summary in Chapter 9

FACTORS TO CONSIDER WHEN FACTORS TO CONSIDER WHEN CHOOSING A LEGAL FORM CHOOSING A LEGAL FORM

Most common form of business (over 70% of all businesses)

Easy to set up/Easy to discontinue

Total control

Personal tax rate – Taxes reported on personal tax filing

Personally liable for any damage/injury (unlimited)

Limited access to capital

SOLE PROPRIETORSHIPSOLE PROPRIETORSHIP

Similar to a proprietorship except there is more than one owner (easy to set up/ends when one partner leaves)

Should develop a partnership agreement (should file with an attorney, or with the state if possible)

The Uniform Partnership Act (UPA) sets the rules and obligations – not complete, just basic rules

General Partnership does NOT limit liability for all owners (unlimited liability for all general partners)

PARTNERSHIPPARTNERSHIP

Easy to Establish

Complementary Skills

Division of Profits (no restrictions)

Larger Pool of Capital (Shared Risk)

Ability to Attract Limited Partners

Little Government Regulation

Flexibility

Taxation

ADVANTAGES OF ADVANTAGES OF PARTNERSHIPSPARTNERSHIPS

Unlimited liability for at least one partner

Raising capital can be difficult

Difficulty in selling out of the business

Potential for personality and authority conflicts

DISADVANTAGES OF DISADVANTAGES OF PARTNERSHIPSPARTNERSHIPS

Allows a company to take on ‘limited’ partners (reduced or no liability)

Limited partners take a part of the earnings but do not (and cannot) manage the company.

Have at least one general partner whose liability is unlimited. States now recognize LLPs with no general partners

Legal or accounting firms most often. There is a management (general) partner(s) who runs the company and takes on all of the personal risk, and employees/investors (limited partners) who work or put up money.

LIMITED AND LIMITED LIMITED AND LIMITED LIABILITY PARTNERSHIPSLIABILITY PARTNERSHIPS

Separates the business from the individual by creating a new legal entity. (Cannot use corporate money for personal use).

Generate most sales (86% of all business sales) and net income (66% of all profits) of all U.S. businesses.

Technically shareholders (owners) are no longer liable for debts; however, most banks will require personal collateral for small businesses.

Know the difference between domestic, foreign, and alien corporations.

CORPORATIONSCORPORATIONS

Limited liability

Easier for succession planning (death) than proprietorships or partnerships

Easier to raise capital – can issue and sell corporate shares easier than partnership shares

Set up relatively easily (not as difficult as most books indicate)

BENEFITS OF CORPORATIONSBENEFITS OF CORPORATIONS

C corporations are primarily for larger companies with many shareholders.

S corporations cannot have more than 100 shareholders, must be domestic.

Nonresident aliens cannot be shareholders in an S corporation.

C corporations are “double taxed” -- They must pay tax at the corporate level (about 35%) and then again at the individual level (15%-39.6%).

C vs. S CORPORATIONSC vs. S CORPORATIONS

S corporation profits are passed directly to the owners and reported on personal taxes.

C corporations can have various classes of stock (preferred, common, etc.)

S corporations can only have one type of stock and must be domestic (U.S. Corporation)

C vs. S CORPORATIONSC vs. S CORPORATIONS

Similar to “S” Corporation (similar fee and must turnin annual report)

Taxes passed on like “S” Corp

No limit on the number of “members” (no shareholders)

Laws differ on LLC’s from state to state (should considerthe term limits – usually 30 years)

Still a new form of organization

LIMITED LIABILITY COMPANYLIMITED LIABILITY COMPANY

BUILDING THE MANAGEMENT BUILDING THE MANAGEMENT TEAM AND A SUCCESSFUL TEAM AND A SUCCESSFUL ORGANIZATION CULTUREORGANIZATION CULTURE

A management team must be able to accomplish three functions:

– Execute the business plan.– Identify fundamental changes in the business as

they occur.– Make adjustments to the plan based on changes

in the environment and market that will maintain profitability.

Important factors in establishing an effective team:– Desired culture must match business strategy. – Employees must be motivated/rewarded for good work.– Entrepreneur should be adaptable/flexible to change. – Spend extra time in the hiring process. – Core values and appropriate tools must be provided for

employees to effectively complete their jobs.

BUILDING THE MANAGEMENT BUILDING THE MANAGEMENT TEAM AND A SUCCESSFUL TEAM AND A SUCCESSFUL ORGANIZATION CULTUREORGANIZATION CULTURE

THE ROLE OF A BOARD OF THE ROLE OF A BOARD OF DIRECTORSDIRECTORS

Reviewing operating and capital budgets.

Developing longer-term strategic plans for growth.

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 firm.

THE BOARD OF ADVISORSTHE BOARD OF ADVISORS

Selection process like a board of directors, but they serve only in an advisory capacity.

No legal status; not subject to Sarbanes-Oxley Act.

Likely to meet less frequently.

Useful in a family business.

Advisors may be compensated on a per-meeting basis or with stock or stock options.