Selecting the Management Team and Form of Business Organization.
Transcript of Selecting the Management Team and Form of Business Organization.
Selecting the Selecting the Management Team and Management Team and
Form of Business Form of Business OrganizationOrganization
Initial organizational costs and requirements
Limited versus unlimited liability for the owners
Continuity of business Transferability of ownership Management control Attractiveness for raising new
equity capital Income taxes
Sole Proprietorship Partnership Corporation
◦ Subchapter S Corporation◦ C-Corporation
Other legal form of Ownership◦ Limited Liability Company
Four Characteristics: Single owner. Bears all responsibility. Represents 70% of all firms in U.S. Generate less than 10 percent of all
business revenue.
Advantages:◦Easy and inexpensive to create◦Least regulated form of ownership◦Business pays no taxes. Owner pays personal income taxes which is a lower rate than the corporate tax rate.
Advantages◦Owner is boss◦Owner receives all profits◦Owner knows employees and customers
◦Owner can act quickly in making decisions
◦Owner is free of much red tape
Disadvantages:◦ Unlimited liability◦ Full responsibility for all debts◦ Owners personal assets are at risk (i.e., home,
car, etc.)◦ Upon death, the business dissolves
Sole Proprietorship
Claims of Sole Proprietor’s CreditorsClaims of Sole Proprietor’s Creditors
Sole Proprietor’s Personal AssetsSole Proprietor’s Personal Assets
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
A business with two or more owners Partners do not have to share a business
equally How the partnership interests are divided
are spelled out in the Partnership Agreement.
Advantages of Advantages of PartnershipsPartnerships◦ Ease of formation◦ Availability of capital◦ Diversity of managerial
expertise◦ Flexibility to respond to
changing business conditions
◦ Relative freedom from government control
Disadvantages of Disadvantages of PartnershipsPartnerships◦ Unlimited liability for general
partners◦ Potential for conflict between
partners◦ Limited life◦ Sharing of profits◦ Difficulty in leaving a
partnership
• Why would a new business venture choose to operate as a partnership, and what downside would the partners face?
Advantages◦Inexpensive and easy to create◦Share ideas, abilities, and financial obligations
◦Owners pay taxes as personal income which is taxed at lower rate.
Advantages◦Skills & abilities pooled◦Sources of income increased◦Credit position improved◦Contribution of goodwill
Advantages ◦Increased concern in business management
◦Less tax burden◦Elimination of competition◦Operating economies
Disadvantages◦Unlimited financial liability◦Disagreement among partners Personality conflicts
◦Each partner bound by contracts of others
◦Partners held liable for each other’s actions
General partners◦ Take an active role in managing a business◦ Have unlimited liability for the partnership’s
debts◦ Every partnership must have at least one
general partner Limited partners
◦ Cannot participate in the day-to-day management of a company
◦ Have limited liability for the partnership’s debts
Purpose & duration of partnership Roles, responsibilities, compensation Contributions Procedures for adding/removing
partners Buy-out procedures Dispute resolution Financial arrangements Dissolving the partnership Valuation
Source: American Express Small Business Exchange, home3.americanexpress.com/smallbusiness
CorporationCorporation::A legal entity with an existence and life separate from its owners, who therefore are not personally liable for its debts; it can own property, enter into contracts, sue and be sued, and operate under terms of its state charter.
1.1. Select company’s name2. 2. Write and file Articles of
Incorporation paperwork3. 3. Pay fees and taxes4. 4. Hold organizational meeting5. 5. Adopt bylaws, elect
directors, pass operating resolutions
Organizational Structure of Organizational Structure of CorporationsCorporations
Stockholders
Directors
Officers (Top Management)
President Vice Treasurer Secretary President
elect
elect
Registered by the state and operates apart from its owners
A corporation lives-on after the owners die or have sold interest
Ownership is represented by shares of stock, public or private
Elect members of board of directors who are
responsible for establishing general policies of the firm
Elect president and other key officers who runthe business
Earn return on investment in two ways May receive dividends Stock may increase in value
◦ StockholdersStockholders Own the corporation Can sell or transfer shares at any time Entitled to receive profits in the form of dividends
◦ Board of DirectorsBoard of Directors Elected by stockholders Govern the firm
◦ OfficersOfficers Carry out the goals and policies set by the board
◦ C Corporations, S Corporations & Limited C Corporations, S Corporations & Limited Liability CompaniesLiability Companies Major types of corporations
Privately Held◦ Ownership is restricted to small
group of investors.◦ Stock is not traded publicly.
L. L. Bean, Polo, Ralph Lauren, Publix. Publicly Held
◦ Larger corporations.◦ Stock is traded publicly.◦ Act of initially issuing stock: “going public.”
The most common corporate form for large businesses (i.e., Federal Express, Microsoft)
Can create status that may assist in getting loans
Shareholders are owners of the corporation – 75 or more
Required to have an elected Board of Directors to make decisions for the company
Structured to accommodate employee benefits; i.e., pensions, retirement plans, and profit sharing
AdvantagesAdvantages limited liability easy to get
financing easy to transfer
ownership perpetual life-
span tax deductions available source
of income
DisadvantagesDisadvantages taxes are higher double taxation of
profits costly & complex to
form (hire attorney) government
restrictions & regulations
record keeping for stockholders complex
1.1. S corporationsS corporationsorganized like a corporation, but avoids double taxation of profits by routing income and losses through stockholders
2.2. Limited liability companies (LLC)Limited liability companies (LLC)offers same limited liability as a corporation, but may be taxed as either a partnership or corporation
The S corporation – 75 or fewer employees◦Taxed as a partnership◦Provides lower taxes◦Limited liability◦Profits are part of individual tax return
◦Transfer of ownership
Designed for owners of smaller companies who want the liability protection of a corporation, but want to avoid double taxation◦ Pass-through Taxation: Profits are
taxed once at shareholder’s personal tax rate
◦ Shareholders liable to amount invested In smaller private corporations, the
founders generally hold all–or a majority–of the stock.
Disadvantages Regulations may vary from state to state
which impact taxation and liability Costly to set up and follow corporate rules All shareholders must be U.S. citizens Personal finances separate from
corporation finances Increased banking, accounting, legal costs
The limited liability company Acts as a corporation
◦ Pay personal income taxes on business profits Avoids double taxation
◦ Provides limited liability◦ Less formal requirements than corporation
ProsPros Protection of
personal assets Avoid double-
taxation of profits Flexible
management & organization
Good for foreign investors
ConsCons• Often required to have a
limited life (< 30 years)• Not corporations, so can
not issue stock
Source: The Company Corporation, www.incorporate.com
Formed by people with similar interests, such as customers and suppliers lower costs increased economic power share in profits
Members/owners pay annual fees Common in:
◦ agriculture◦ hardware/lumber◦ grocery
Joint Venture:Joint Venture:2 or more companies form an alliance to pursue a specific project, usually for a specific time period
◦ Business owner does not have to start from scratch
◦ Buys a business concept with a proven product and operating methods
◦ Franchisor provides: Management training and assistance Use of a recognized brand name, product, and
operating concept Financial assistance
Franchising:Franchising:business organization in which a franchisor supplies the product concept to the franchisee, who sells the goods or services
AdvantagesAdvantages increased opportunity to
expand (franchisor) recognized name, product,
and operating concept (franchisee)
management training and assistance (franchisee)
financial assistance (franchisee)
DisadvantagesDisadvantages loss of control (franchisor) costs of franchising restricted operating
freedom (franchisee)
◦ Companies use mergers and acquisitions for strategic reasons such as Growth or diversification of product lines Increased market share Economies of scale Financial restructuring to increase company value to
stockholders
Merger:Merger:The combination of 2 or more firms to form a new company, which often takes a new corporate identity
Acquisition:Acquisition:The purchase of a corporation by another corporation or investment group
Reduced:Reduced: costs overlap in
operations competition
Increased:Increased: purchasing power market share
1. Horizontal mergersHorizontal mergers◦ same industry, same stage of production
2. Vertical mergersVertical mergers◦ same industry, different stages of production
3. Conglomerate mergersConglomerate mergers◦ different industries
4. Leveraged buyoutsLeveraged buyouts◦ corporate takeovers with borrowed money
Increases in:Increases in: Niche markets Variety in franchises
Expect more franchised goods & services that ease consumers’ busy lives (Source: Entrepreneur, Jan. 2000, p. 157)
Consolidation through mergers & acquisitions
Mergers across national borders
Types of Businesses Types of Businesses One way to classify businesses is to group them by the kind of products they provide:
• Producing raw goods• Processing raw goods
Types of Businesses Types of Businesses
• Manufacturing goods from raw or processed goods
• Distributing goods• Providing services
Producers Producers A producer is a business that gathers raw products in their natural state.
Raw goods are materials gathered in their original state from natural resources such as land and water.
Processors Processors Processors change raw materials into more finished products.
Processed goods are made from raw goods and may require further processing.
Manufacturers Manufacturers Manufacturers are businesses that make finished products out of processed goods.
The finished products need no further processing and are ready for market.
Intermediaries Intermediaries Wholesalers buy goods from manufacturers in huge quantities and resell them in smaller quantities to their customers, usually other companies.
Intermediaries Intermediaries A retailer purchases goods from a wholesaler and resells them to the consumer, or the final buyer of the goods.
Service Businesses Service Businesses Service businesses provide services rather than goods.
Services are the products of a skill or an activity, such as hairstyling and car repair.