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Entrepreneurship

Chapter 5.4

Organization Plan

McGraw-Hill/Irwin – 10th Edition


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Developing the Management 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.
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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 having
unlimited liability who have pooled resources to
own a business.
• Corporation (C corporation) - Most common form of
corporation; regulated by statute; treated as a
separate legal entity for liability and tax purposes.

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Legal Forms of Business (cont.)

• New forms of business formations:


• Limited liability company (LLC).
• Limited liability partnership (LLP).
• S corporation.

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Table 9.1 - Three Forms of Business
Formation

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Table 9.1 - Three Forms of Business
Formation (cont.)

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Table 9.1 - Three Forms of Business
Formation (cont.)

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Tax Attributes of Forms of Business
• Tax Issues for Proprietorship
• IRS treats business as the individual owner; not
regarded as a separate tax entity.
• 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.
• Tax Issues for Partnership (general)
• Tax advantages and disadvantages similar sole
proprietorship.
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Tax Attributes of Forms of Business
(cont.)

• Tax Issues for Partnership (limited)


• Has the advantage of limited liability.
• Treated the same as the LLC for tax purposes.
• Tax Issues for 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.
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
Table 9.2 - Tax Attributes of
Various Legal Forms of Business

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Table 9.2 - Tax Attributes of
Various Legal Forms of Business (cont.)

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Table 9.2 - Tax Attributes of
Various Legal Forms of Business (cont.)

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The Limited Liability Company
Versus S Corporation
• Venture capitalists prefer LLCs as a form of
business entity.
• A new regulation allows LLCs to be taxed as a
partnership.
• The S corporation was the most popular choice
of organization structure by new ventures and
small businesses.
• Growth rate of S corporations has leveled off
mainly because of the wide acceptance of LLCs.
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
S Corporation
• A special type of corporation where profits are
distributed to stockholders and taxed as personal
income.
• The Small Business Protection Act of 1996 reduced
some 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.
• Status of the S corporation must be monitored and
maintained.
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
S Corporation (cont.)

• Advantages of an S Corporation
• Capital gains or losses are treated as personal income or
losses.
• Limited liability protection.
• Not subject to a minimum tax.
• Transfer of stock to low-income-bracket family
members
• Stock may be voting or nonvoting.
• Cash method of accounting.
• Corporate long-term capital gains and losses are
deductible directly by the shareholders.
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
S Corporation (cont.)

• Disadvantages of an S Corporation
• Some restrictions for qualification.
• Potential tax disadvantages.
• Most fringe benefits not deductible for
shareholders.
• Must have a calendar year for tax purposes.
• Only one class of stock is permitted.
• Net loss is limited to shareholder’s stock plus loans
to business.
• No more than 100 shareholders.
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
The Limited Liability Company
• A partnership/corporation hybrid.
• Laws governing its formation differ from state
to state.
• LLC has members.
• No shares issued; each member owns an
interest as designated by the articles of
organization.
• Liability does not extend beyond member’s
capital contribution.
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The Limited Liability Company (cont.)

• Transfer of interest requires unanimous


consent.
• It is taxed as a partnership.
• Standard acceptable term is 30 years;
continuity restricted.

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The Limited Liability Company (cont.)

• Advantages of LLC
• Partners can add their proportionate shares of the
LLC liabilities to their partnership interests.
• Most states do not tax LLCs.
• One or more (without limit) individuals,
corporations, partnerships, trusts, or other entities
form an LLC.
• Members share income, profit, expense, deduction,
loss and credit, and equity of the LLC among
themselves.
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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; expectations
can be grouped into:
• Organization structure.
• Planning, measurement, and evaluation schemes.
• Rewards.
• Selection criteria.
• Training.
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Figure 9.1 - Stages in Organizational
Design

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Building the Management Team and a
Successful Organization 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.

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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
Building the Management Team and a
Successful Organization Culture (cont.)
• Important factors in establishing an effective
team:
• Desired culture must match business strategy
outlined in the business plan.
• Employees must be motivated and rewarded for good
work.
• Entrepreneur should be flexible to try different things.
• Spend extra time in the hiring process.
• Core values and appropriate tools must be provided
for employees to effectively complete their jobs.
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The Role of a Board of Directors
• 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.

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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
The Role of a Board of Directors
(cont.)

• They meet the requirements of the Sarbanes-


Oxley Act and the following criteria:
• Ability to work with a diverse group and commit to
the venture’s mission.
• Ability to understand the market environment.
• Ability to contribute important skills to the new
venture’s achievement of planning goals.
• Ability to show good judgment in business decision
making.

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The Board of Advisors
• They serve only in an advisory capacity.
• No legal status; not subject to regulations
stipulated in the Sarbanes-Oxley Act.
• Likely to meet less frequently.
• Useful in a family business.
• Selection process is similar to the process for
selecting a board of directors.
• Advisors may be compensated on a per-meeting
basis or with stock or stock options.
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The Organization and Use of
Advisors
• Outside advisors are usually used on an as-
needed basis.
• They can become a part of the organization and
need to be managed.
• The relationship between the entrepreneur and
outside advisors can be enhanced by involving
them thoroughly and at an early stage.
• Even after hiring advisors, the entrepreneur
should question their advice.
© 2014 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.  This document
may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 

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