Chapter

The Organizational Plan

9

McGraw-Hill/Irwin Entrepreneurship, 7/e

Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

9-1

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.

9-2

and receives all profits.  Corporation (C corporation): most common form of corporation. unlimited liability who have pooled resources to own a business. and treated as a separate legal entity for liability and tax purposes.Legal Forms of Business  Three basic legal forms of business:  Proprietorship: single owner. regulated by statute. unlimited liability. . controls all decisions.  Partnership: two or more individuals. 9-3 .

 Has full responsibility for the operations. 9-4 .Ownership (1 of 2)  Proprietorship:  Owner is the individual who starts the business.  No limit to the number of shareholders.  Corporation:  Ownership is reflected by ownership of shares of stock.  Partnership:  General partnership owners and limited partnership owners.

regardless of their capital contribution  Liable for all aspects of the business. By law must be registered at local court house 9-5 .  Partnership-general:  General partners share the amount of personal liability equally.  Partnership-limited:  Limited partners liable for amount of capital contribution.Liability of Owners  Sole proprietorship:  Individual is liable for business liabilities.

fees for states in which corporation registers to do business 9-6 . taxes. rights & duties of the parties involved The more complex the Org. articles of incorporation.  Partnership-limited:  More complex than a general partnership.Must comply statutory requirements  Corporation:  Created by statute. the more expensive to start  Least expensive -Filing for a business or trade name.Costs of Starting a Business  Sole proprietorship:  Partnership-general:  Partnership agreement legal costs-convey all the responsibilities. filing fees.

 Partnership-general:  Death or withdrawal of one of the partners results in partnership termination.replace partner depending on the agreement  Corporation:  Death or withdrawal has no impact on continuation of business. unless stipulated otherwise.  Partnership-limited:  Death or withdrawal has no effect on continuity of business. 9-7 .Continuity of Business  Sole proprietorship  Death of owner results in the termination of the business.

 Partnership-limited:  Can sell their interest at any time without consent of the general partners.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.  Corporation:  Shareholders may transfer their shares at any time without consent from the other shareholders.  Disadvantage: It can affect the ownership control 9-8 .  Partnership-general:  Cannot sell their interest without first refusal from the remaining general partners.

 Bonds may be sold by the corp.  Borrow from bank.  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.Capital Requirements  Sole proprietorship:  From loans or by additional personal contributions by the entrepreneur. 9-9 .B may need collateral to support loan  Partnership:  Loans can be obtained from banks but may require change in partnership agreement.

9-10 .  Usually majority rules unless agreement states otherwise.  Partnership-general:  Can present problems if partnership agreement is not concise.Management Control (1 of 2) •‘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  Sole proprietorship:  Entrepreneur is responsible for and has sole authority over all business decisions.

 Stockholders can indirectly affect operation by electing someone to the board of directors. 9-11 .  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.  Limited partners have no control over business decisions.Management Control (2 of 2)  Partnership-limited  Separation of ownership and control.

 Personally responsible for all losses.  Sharing of profits and losses likely to be a function of the partners’ investments. 9-12 .  Partnership-general:  Distribution of profits and losses depends on the agreement.Distribution of Profits and Losses (1 of 2)  Sole proprietorship:  Receive all distributions of profits from the business.

Distribution of Profits and Losses (2 of 2)  Partnership-limited  Protect limited partners against personal liability.  Losses will often result in no dividends.  May reduce share in any profits. 9-13 .  Corporation:  Distribute profits through dividends to stockholders.

bonds. and/or debt are all opportunities for raising capital with limited liability.Attractiveness for Raising Capital  Sole proprietorship  Limited to capability of owner and success of the business. 9-14 .  Corporation:  Most attractive for raising capital.  Partnership-general:  Depends on capability of partners and success of business.  Shares of stock.  Least attractive for raising capital.

 All income appears on owner’s return as personal income.  Partnership-general:  Tax advantages and disadvantages similar sole proprietorship.  No capital stock tax or penalty for retained earnings.Tax Attributes of Forms of Business (1 of 2)  Sole proprietorship:  IRS treats business as the individual owner.  Tax advantages:  No double tax when profits are distributed to owner. 9-15 .

 Distribution of dividends is taxed twice.  Treated the same as the LLC for tax purposes.  Double taxation can be avoided if income is distributed to entrepreneur(s) in the form of salary.Tax Attributes of Forms of Business (2 of 2)  Partnership-limited:  Has the advantage of limited liability. 9-16 .  Corporation:  Can take many deductions and expenses not available to proprietorship or partnership.

9-17 . unless the entrepreneur actively makes another choice.Limited Liability Company Vs S Corporation  Venture capitalists prefer LLCs as a form of business entity.  Growth rate of the formation of S corporations has leveled off primarily because of the wide acceptance of LLCs.  LLC can be automatically taxed as a partnership.  Popularity has resulted from finalization of the new regulation.

 Passage of the 1996 law loosened some of the restrictions.S Corporation  Combines the tax advantages of the partnership and the corporation.  In 2004.  Intent was to make the S corporation as advantageous as the LLC. 9-18 . Congress responded to criticisms of the restrictions on S corporations as compared to LLCs.

Long-term capital gains/losses deductible to shareholders. Cash method of accounting.S Corporation. Stock transferable. Stock = Voting or non-voting. Limited Liability Protection.Advantages        Gains/losses = ersonal income/loss. 9-19 . No minimum tax.

Disadvantages Some restrictions for qualification.S Corporation. Potential tax disadvantages. One class of stock. Must have calendar tax year.  No more than 75 shareholders.       9-20 . Most fringe benefits not deductible for shareholders. Net loss limited to shareholder’s stock plus loans to business.

Limited Liability Company  Partnership/corporation hybrid.  No shares issued. laws differ from state to state. continuity restricted.  Standard term = 30 years.  Taxed as partnership.  Has members. each member owns according to articles of incorporation.  Liability = Member’s capital contribution. 9-21 .  Transfer requires unanimous consent.

etc. Most States do not tax LLCs. profit. among themselves.. 9-22 . Ownership not limited to individuals. expense. Members share income.Advantages of LLC     LLC liabilities added to partnership interest.

 Planning. and evaluation schemes  E must spell out how these goals will be achieved (plans)how will be measured.how they will be evaluated  Rewards.  Organization structure.  Promotions-bonuses-praise so on (E responsible for these rewards)  Selection criteria.  Training.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. measurement. 9-23 .

contracts.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. organize.Stages in Organizational Design E manages all these functions No sub managers needed Production sub-contracted Sub managers are hired to Coordinate . control Various aspects of B •Org evolves. prices of raw material) 9-24 .

training. JD & JS  You know what!!!! Just hire a consultant to assist YOU PAY ME !!!!!!!!!! 9-25 . performance appraisals .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. compensation programs.

Resolving conflicts among owners or shareholders.important expertise & also add prestige(venture) Valuable for obtaining investors-supply relationships. Supporting day-to-day activities.identifying potential customers Criteria to select these BOD ( Read Book) Compensation for BOD.  Developing a network of information sources for the entrepreneurs.stock options (its important otherwise if members were only volunteers-take the role lightly) 9-26 . • • • • BOD.Board of Directors (1 of 2)  Functions of the board of directors:      Reviewing operating and capital budgets. Ensuring the proper use of assets. Developing longer-term strategic plans for growth and expansion.

 Candidates who will show good judgment in business decision making.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 can contribute important skills to the new venture’s achievement of planning goals. 9-27 .  Candidates who understand the market environment.

Has no legal status.  Compensated on a per meeting basis or with stock     9-28 . unlike the board of directors.  Useful in a family business.Board of Advisors More loosely tied to the organization. Likely to meet less frequently or depending on the need to discuss important venture decisions.  Selection process for advisors can be similar to the process for selecting a board of directors. Serve the venture only in an advisory capacity.

 Can also become an important part of the organization.  Even after hiring advisors. the entrepreneur should question their advice.lawyers.bankers.Organization and Use of Advisors  Usually used on an as-needed basis.chambers of commerce-universities-friends & relatives  Accountants.(why is the advice being given?) Sources ---------- Smeda.  Need to be managed just like any other permanent part of the new venture.advertising agenciesmarket researchers 9-29 .