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Ent9 the organizational plan Ent9 the organizational plan Presentation Transcript

  • The Organizational Plan McGraw-Hill/Irwin Entrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9
  • 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.
  • 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, unlimited liability who have pooled resources to own a business.
      • Corporation (C corporation): most common form of corporation, regulated by statute, and treated as a separate legal entity for liability and tax purposes. .
  • Ownership (1 of 2)
    • Proprietorship:
      • Owner is the individual who starts the business.
      • Has full responsibility for the operations.
    • Partnership:
      • General partnership owners and limited partnership owners.
    • Corporation:
      • Ownership is reflected by ownership of shares of stock.
      • No limit to the number of shareholders.
  • Liability of Owners
    • Sole proprietorship:
      • Individual is liable for business liabilities.
    • Partnership-general:
      • General partners share the amount of personal liability equally- regardless of their capital contribution
      • Liable for all aspects of the business.
    • Partnership-limited:
      • Limited partners liable for amount of capital contribution.
    By law must be registered at local court house
  • Costs of Starting a Business
    • Sole proprietorship:
      • Least expensive -Filing for a business or trade name.
    • Partnership-general:
      • Partnership agreement legal costs-convey all the responsibilities, rights & duties of the parties involved
    • Partnership-limited:
      • More complex than a general partnership- Must comply statutory requirements
    • Corporation:
      • Created by statute, articles of incorporation, filing fees, taxes, fees for states in which corporation registers to do business
  • Continuity of Business
    • Sole proprietorship
      • Death of owner results in the termination of the business.
    • Partnership-general:
      • Death or withdrawal of one of the partners results in partnership termination, unless stipulated otherwise.
    • Partnership-limited:
      • Death or withdrawal has no effect on continuity of business- replace partner depending on the agreement
    • Corporation:
      • Death or withdrawal has no impact on continuation of business.
  • 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.
    • Partnership-general:
      • Cannot sell their interest without first refusal from the remaining general partners.
    • Partnership-limited:
      • Can sell their interest at any time without consent of the general partners.
    • Corporation:
      • Shareholders may transfer their shares at any time without consent from the other shareholders.
      • Disadvantage: It can affect the ownership control
  • Capital Requirements
    • Sole proprietorship:
      • From loans or by additional personal contributions by the entrepreneur.
      • Borrow from bank- B may need collateral to support loan
    • Partnership:
      • Loans can be obtained from banks but may require change in partnership agreement.
      • 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.
      • Bonds may be sold by the corp.
  • Management Control (1 of 2)
    • Sole proprietorship:
      • Entrepreneur is responsible for and has sole authority over all business decisions.
    • Partnership-general:
      • Can present problems if partnership agreement is not concise.
      • Usually majority rules unless agreement states otherwise.
    • ‘ 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
  • Management Control (2 of 2)
    • Partnership-limited
      • Separation of ownership and control.
      • Limited partners have no control over business decisions.
      • 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.
      • Stockholders can indirectly affect operation by electing someone to the board of directors.
  • Distribution of Profits and Losses (1 of 2)
    • Sole proprietorship:
      • Receive all distributions of profits from the business.
      • Personally responsible for all losses.
    • Partnership-general:
      • Distribution of profits and losses depends on the agreement.
      • Sharing of profits and losses likely to be a function of the partners’ investments.
  • Distribution of Profits and Losses (2 of 2)
    • Partnership-limited
      • Protect limited partners against personal liability.
      • May reduce share in any profits.
    • Corporation:
      • Distribute profits through dividends to stockholders.
      • Losses will often result in no dividends.
  • Attractiveness for Raising Capital
    • Sole proprietorship
      • Limited to capability of owner and success of the business.
      • Least attractive for raising capital.
    • Partnership-general:
      • Depends on capability of partners and success of business.
    • Corporation:
      • Most attractive for raising capital.
      • Shares of stock, bonds, and/or debt are all opportunities for raising capital with limited liability.
  • Tax Attributes of Forms of Business (1 of 2)
    • Sole proprietorship:
      • IRS treats business as the individual owner.
      • 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.
    • Partnership-general:
      • Tax advantages and disadvantages similar sole proprietorship.
  • Tax Attributes of Forms of Business (2 of 2)
    • Partnership-limited:
      • Has the advantage of limited liability.
      • Treated the same as the LLC for tax purposes.
    • 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.
  • Limited Liability Company Vs S Corporation
    • Venture capitalists prefer LLCs as a form of business entity.
      • Popularity has resulted from finalization of the new regulation.
      • LLC can be automatically taxed as a partnership, unless the entrepreneur actively makes another choice.
    • Growth rate of the formation of S corporations has leveled off primarily because of the wide acceptance of LLCs.
  • S Corporation
    • Combines the tax advantages of the partnership and the corporation.
    • Passage of the 1996 law loosened some of the 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.
  • S Corporation- Advantages
    • Gains/losses = ersonal income/loss.
    • Limited Liability Protection.
    • No minimum tax.
    • Stock transferable.
    • Stock = Voting or non-voting.
    • Cash method of accounting.
    • Long-term capital gains/losses deductible to shareholders.
  • S Corporation- Disadvantages
    • Some restrictions for qualification.
    • Potential tax disadvantages.
    • Most fringe benefits not deductible for shareholders.
    • Must have calendar tax year.
    • One class of stock.
    • Net loss limited to shareholder’s stock plus loans to business.
    • No more than 75 shareholders.
  • Limited Liability Company
    • Partnership/corporation hybrid, laws differ from state to state.
    • Has members.
    • No shares issued, each member owns according to articles of incorporation.
    • Liability = Member’s capital contribution.
    • Transfer requires unanimous consent.
    • Taxed as partnership.
    • Standard term = 30 years, continuity restricted.
  • Advantages of LLC
    • LLC liabilities added to partnership interest.
    • Most States do not tax LLCs.
    • Ownership not limited to individuals.
    • Members share income, profit, expense, etc., among themselves.
  • 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.
      • Organization structure.
      • Planning, measurement, and evaluation schemes
          • E must spell out how these goals will be achieved (plans)- how will be measured- how they will be evaluated
      • Rewards.
        • Promotions-bonuses-praise so on (E responsible for these rewards)
      • Selection criteria.
      • Training.
  • Stages in Organizational Design E manages all these functions No sub managers needed Production sub-contracted Sub managers are hired to Coordinate , organize, control Various aspects of B
    • Org evolves- 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, contracts, prices of raw material )
  • 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, training, performance appraisals , compensation programs, JD & JS
    • You know what!!!! Just hire a consultant to assist YOU
    • PAY ME !!!!!!!!!!
  • Board of Directors (1 of 2)
    • 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 .
    • BOD- important expertise & also add prestige(venture)
    • Valuable for obtaining investors-supply relationships- identifying potential customers
    • Criteria to select these BOD ( Read Book)
    • Compensation for BOD- stock options (its important otherwise if members were only volunteers-take the role lightly)
  • 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 understand the market environment.
      • Candidates who can contribute important skills to the new venture’s achievement of planning goals.
      • Candidates who will show good judgment in business decision making.
  • Board of Advisors
    • More loosely tied to the organization.
    • Serve the venture only in an advisory capacity.
    • Has no legal status, unlike the board of directors.
    • Likely to meet less frequently or depending on the need to discuss important venture decisions.
    • Useful in a family business.
    • Selection process for advisors can be similar to the process for selecting a board of directors.
    • Compensated on a per meeting basis or with stock
  • Organization and Use of Advisors
    • Usually used on an as-needed basis.
    • Can also become an important part of the organization.
    • Need to be managed just like any other permanent part of the new venture.
    • Even after hiring advisors, the entrepreneur should question their advice.(why is the advice being given?)
    • Sources -----------
    • Smeda- chambers of commerce-universities-friends & relatives
    • Accountants- bankers- lawyers- advertising agencies- market researchers