Chapter 6 – Organizational Plan

WHAT IS AN ORGANIZATIONAL PLAN?

The organizational plan is the section of the business plan that identifies the form of ownership the
business venture will take. It provides a background of the management team; describes the organizational
structure, including the management team's roles, responsibilities, and reporting relationships; outlines the
planning, decision-making, monitoring, and evaluation processes; and spells out the role of the board of
advisers, among others. This section of the business plan must provide sufficient information to assure
potential investors and creditors that the money they are asked to pour into the business will be in good
hands.

FORMS OF OWNERSHIP
One of the important decisions an entrepreneur must make is the form of ownership the business will
take. He could choose from any of the three basic legal forms of business ownership sole proprietorship,
partnership, on corporation-each of which has its advantages and disadvantages Table 6.1 compares the three
legal forms with regard to ownership, cost and ease of starting the business, liability of owners, distribution of
profits and losses, management control, ability to raise capital, transferability of ownership, and business
continuity.
Table 6.1. Legal Forms of Business Ownership
Things to Consider Sole Proprietorship Partnership Corporation
Ownership One Person No limit on number of No limit on number of
partners (mostly 2 to 5) stockholders
Cost and ease of starting Low; easy Low; relatively easy High; more difficult
the business
Liability of owners Unlimited; risk Unlimited for general Stockholders typically
shouldered by owner partner; limited for not liable beyond their
alone limited partners investment
Share of profits and Owners receives all Depends on partners Stockholders can share
losses profits and carries all investments and on in profits through
losses agreement of partners dividends
Management Control Owner makes all General partners have Majority stockholders
decisions equal control and have control from a legal
majority rules standpoint
Ability to raise capital Limited Moderate High
Transferability of Fully transferable Typically requires Stockholders can sell or
ownership consent of partners buy stock at will
Continuity of business Owner’s death dissolves Death or retirement of Death or withdrawal of
the business general partner dissolves owner(S) does not affect
the partnership the business’s legal
existence
Ownership
As its name implies, the sole proprietorship is owned by the individual who starts the business, for
which he has full responsibility. In a partnership, there must be at least one general partner, and some (or
many) limited partners. In a corporation, owners are those that hold shares of stock. For both the partnership
and corporation, there is theoretically no limit in the number of partners and stockholders, respectively Cost
and Ease of Starting the Business As the simplest form of business ownership, sole proprietorship is the easiest
to create. Upon paying the required business licenses, the entrepreneur can immediately start the business.
Consequently, the costs involved in setting up a sole proprietorship are also lower compared to the other two.
A partnership is also relatively easy and inexpensive to set up. What makes it different from a sole
proprietorship, though, is the need for a partnership agreement. The preparation of this document would
require some legal advice, and must clearly state the rights, duties, and responsibilities of the parties involved.
Pieces of information that are typically included in a partnership agreement are the following: (a) contribution
of each partner to the business; (b) how profits and losses will be distributed; (c) agreement on partners'
salaries or drawing rights against profits; (d) procedures for expanding or dissolving the business; (e) how
partners can sell their interest in the business; and (f) how assets will be distributed if the partnership is
dissolved.
The corporation is an artificial being created by law. Establishing one is relatively more difficult
compared to forming a partnership or a sole proprietorship. That is because of the various legal requirements
it must satisfy, which makes the registration process complex. Among the information that individuals creating
a corporation must provide include the following: (a) the corporation's name; (b) a statement of purpose; (c)
the length of time it will exist; (d) names and addresses of incorporators; (e) business address (f) capital stock
authorization, i.e., how many shares of stock can be issued; (g) names and addresses of the officers of the
corporation; and (h) the corporation's by-laws.

Liability of Owners
The sole proprietor is liable for all aspects of the business, as is the general partner in a partnership.
This means that in case the business is unable to pay for outstanding debts, the creditor can go after the
assets of the proprietor or general partner even outside of the business. Because of unlimited personal
liability, sole proprietors and general partners can be forced to sell their personal properties, including their
cars and homes, to pay off the debts that cannot be completely covered by the assets of the business.
In a partnership, the general partners usually share the amount of personal liability regardless of their
capital contributions, unless there is a specific agreement to the contrary. The limited partners, on the other
hand are liable only up to the amount that they contribute to the partnership
In a corporation, the owners are liable only up to the amount of their investment, unless there is
negligence or fraud involved. This is because the corporation, given its legal personality, absorbs the liability.
The limited liability of stockholders is one of the major advantages of establishing a corporation, although this
comes with some cost.
Share of Profits and Losses
One of the advantages of being a sole proprietor is that one gets to keep all the profits of the business.
Conversely, the sole proprietor also carries all the losses if the business does not perform well.
In a partnership, the distribution of profits and losses depends on what is provided for in the
partnership agreement. Partners with larger investments are likely to get a bigger share of the profit. For
limited partners, being protected from personal liability may mean getting a reduced share of profits in favor
of general partners, who assume much greater risk. In corporations, profits are distributed to stockholders
through dividends. Some of the profit, though, might not be declared as dividends and will be kept as retained
earnings to finance future capital requirements of the business. If the corporation incurs a loss, then
stockholders might not get dividends at all, until after the business recovers from its slump.

Management Control
Choosing a particular form of ownership has implications on managerial decision-making and control.
In a sole proprietorship, the entrepreneur has great control and flexibility in making decisions.
This is especially true in a small-scale business, where the owner-manager decides on purchasing,
marketing, finance, human resource management, and other business functions. When the business grows,
however, the entrepreneur might choose to delegate the management of certain business functions to a
professional manager, who could make decisions that fall within the scope of his responsibilities. Ultimately,
though, the entrepreneur exercises authority over all business decisions, and can even overturn decisions of
managers reporting to her.
In a partnership, the element that ideally binds the parties is trust. Partners are, therefore, assumed to
make decisions meant to benefit the business and to protect the interests of the parties involved. In some
partnerships, in fact, several partners are willing to entrust their investment to one of the partners, who might
be the one managing the business on their behalf. Ever heard about a business deal "sealed by a handshake
Business, after all, is a human activity more than a legal affair.
For those who prefer the legalistic approach, however, it might be a good idea to be explicit about the
control over business decisions so as to sustain goodwill between the parties involved. This can be spelled out
in the partnership agreement.
For corporations, control over the business depends on the type of business decisions and on the scale
of the enterprise. For day-to-day business activities, control is typically in the hands of the management team,
the members of which may or may not be major stockholders. For start-up enterprises, major stockholders
will likely be managing the business too. For management will need the vote of the major stockholders. As the
corporation becomes bigger, it is likely that owners will be more concerned about major investment decisions
and long-term prospects of the business. Acting as members of the board of directors, the stockholders
appoint trusted individuals to constitute the management team, to whom they can delegate the operational
concerns of the business.

Ability to Raise Capital

Sole proprietors typically depend on their own resources to finance business operations. Generally, it is
difficult for them to secure loans from commercial banks, who might be reluctant to provide financing because
of the risks involved. Many small business owners also get turned off by the numerous documentary
requirements involved in securing a loan, preferring to secure money from informal sources (e.g, family
members, friends, and the enterprising neighborhood 'bombay’) Partnerships are relatively better off than
sole proprietorships, in the sense that they are able to pool the financial resources of the partners.
Corporations, however, have the most options in terms of raising capital. They can sell shares of stock to
investors, who do not have to worry about unlimited personal liability. Corporations also typically have the
means to secure bigger loans from commercial banks.

Transferability of Ownership
Just like in any human activity, people can change their minds about things, including their desire to be
a business owner.
In a sole proprietorship, the entrepreneur has the right to sell the assets of the business or to transfer
its ownership to another individual. For limited partners that belong to a general partnership, they can
typically sell their interest at any time even without the consent of the general partners, unless otherwise
stipulated in the partnership agreement. For general partners who want to sell their interest, they usually
have to offer this to the remaining general partners, who have the right to first refusal.
Shareholders of corporations have the most freedom in terms of transferring their interest in the
business. They may sell their shares of stock to other parties, whether these are individuals or organizations,
even without the consent of other shareholders. If the shareholder owns a significant portion of the business,
though, a transfer of interest could mean a change in the composition in the board of directors, if the new
shareholders exercise their right to elect individuals that they believe will protect their investments.
Shareholder agreements, however, can give existing shareholders the option of purchasing stock at a specific
price or at an agreed-upon price, an arrangement similar to the right to first refusal, as previously mentioned.

Continuity of Business
For sole proprietorships, the death of the owner means the termination of the business as well. In a
partnership, the death or withdrawal of a general partner signals the end of the partnership too. However, the
partnership may continue if the partnership agreement provides for the buyout of the share of the partner
who died or withdrew, based on a predetermined value. A family member of the deceased partner can also
take over as partner, if provided for in the partnership agreement. If there are limited partners in a general
partnership, their death or withdrawal does not affect the continuity of the business. Corporations on the
other hand, can continue indefinitely, Death or withdrawal of a shareholder does not affect the existence of
the business since shares of stock are transferrable or can be sold to other individuals or companies.