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Section Three

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  • 1.  
  • 2. The Organizational Plan McGraw-Hill/Irwin Entrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9
  • 3. 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.
  • 4. 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.
    • New forms of business formations:
      • Limited liability company (LLC).
      • Limited liability partnership (LLP).
      • S corporation.
  • 5. 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.
    • Limited liability partnerships (LLP):
      • Partnership is treated as a legal entity.
  • 6. Ownership (2 of 2)
    • Corporation:
      • Ownership is reflected by ownership of shares of stock.
      • No limit to the number of shareholders.
    • S corporation:
      • Maximum number of shareholders is 100.
  • 7. Liability of Owners
    • Sole proprietorship:
      • Individual is liable for business liabilities.
    • Partnership-general:
      • Liable for all aspects of the business.
      • Amount of personal liability is shared equally.
    • Partnership-limited:
      • Limited partners liable for amount of capital contribution.
    • Corporation:
      • Owners liable only for the amount of their investment.
  • 8. Costs of Starting a Business
    • Sole proprietorship:
      • Filing for a business or trade name.
    • Partnership-general:
      • Partnership agreement, legal costs, trade name filing fees.
    • Partnership-limited:
      • More complex than a general partnership.
    • Corporation:
      • Created by statute, articles of incorporation, filing fees, taxes, fees for states in which corporation registers to do business
  • 9. 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.
    • Corporation:
      • Death or withdrawal has no impact on continuation of business.
  • 10. Transferability of Interest (1 of 2)
    • 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.
  • 11. Transferability of Interest (2 of 2)
    • Corporation:
      • Shareholders may transfer their shares at any time without consent from the other shareholders.
      • Disadvantage: It can affect the ownership control
    • S Corporation:
      • Transfer of interest can occur only as long as the buyer is an individual.
  • 12. Capital Requirements
    • Sole proprietorship:
      • From loans or by additional personal contributions by the entrepreneur.
    • Partnership:
      • Loans can be obtained from banks but may require change in partnership agreement.
    • Corporation:
      • Stock may be sold as either voting or nonvoting.
  • 13. 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.
  • 14. 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.
  • 15. 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.
  • 16. 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.
  • 17. 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.
  • 18. 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.
  • 19. 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.
  • 20. 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.
  • 21. 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.
  • 22. S Corporation- Advantages
    • Gains/losses = Personal 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.
  • 23. 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.
  • 24. 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.
  • 25. 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.
  • 26. 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.
      • Rewards.
      • Selection criteria.
      • Training.
  • 27. Stages in Organizational Design
    • <<Insert Figure 9.1>>
  • 28. Building the Management Team and a Successful Organization Culture (1 of 2)
    • 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.
  • 29. Building the Management Team and a Successful Organization Culture (2 of 2)
    • Factors to establish an effective team, and in turn a successful organization culture:
      • Desired culture must match business strategy outlined in the business plan.
      • The workplace must encourage communication from the bottom up.
      • Entrepreneur should be flexible enough to try different things.
      • Entrepreneur needs to spend extra time in the hiring process.
      • Core values and appropriate tools must be provided for employees to effectively complete their jobs.
  • 30. 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.
  • 31. 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.
  • 32. 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.
  • 33. 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.
  • 34.  
  • 35. Intellectual Property and Other Legal Issues for the Entrepreneur McGraw-Hill/Irwin Entrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6
  • 36. Intellectual Property
    • Includes:
      • Patents.
      • Trademarks.
      • Copyrights.
      • Trade secrets.
    • Represents important assets to the entrepreneur.
    • Should be understood even before engaging the services of an attorney.
  • 37. Selecting a Lawyer
    • Lawyer may work on a:
      • Retainer basis.
      • One-time fee.
    • A good working relationship with a lawyer:
      • Eases some of the risk in starting a new business.
      • Gives the entrepreneur necessary confidence.
    • Entrepreneur can offer lawyer stock in exchange for the services.
  • 38. Types of Patents
    • Patent: grants holder protection from others making, using, or selling similar idea; issued by the PTO.
      • Utility patent: grants owner protection from anyone else making, using, and/or selling the identified invention.
      • Design patent: provide inventor with a negative right excluding others from making, using, or selling an article having the ornamental appearance given in the drawings included in the patent.
      • Plant patent: given for new varieties of plants, represent a limited area of interest.
  • 39. International Patents
    • The Patent Cooperation Treaty (PCT) was established to provide firms protection in global markets.
      • Has over 100 participants.
      • Facilitates patent filings in multiple countries in one office.
      • Administered by the World Intellectual Property Organization (WIPO) in Geneva, Switzerland.
      • Provides a preliminary search that assesses whether filing firm will face infringements in any country.
    • Significant differences may exists in patent laws in each of these countries.
  • 40. The Disclosure Document
    • Statement to U.S. Patent and Trademark Office by inventor disclosing intent to patent idea.
      • Establish a date of conception of the invention.
      • Important when two entrepreneurs file patents on similar inventions.
      • Relevant when foreign companies are involved.
    • To file a disclosure document:
      • Prepare a clear and concise description of the invention.
      • Include photographs.
      • Include a cover letter and a duplicate with the description.
  • 41. The Patent Application (1 of 2)
    • Introduction
      • Background.
      • Advantages of the invention and the nature of problems that it overcomes.
      • States how the invention differs from existing offerings.
    • Description of invention
      • Description of the drawings that accompany it.
      • Detailed description of the invention.
  • 42. The Patent Application (2 of 2)
    • Claims
      • Serve to specify what the entrepreneur is trying to patent.
      • Essential parts of the invention should be described in broad terms
        • Claims must not be too general either.
    • Application should contain a declaration or oath signed by the inventor or inventors.
  • 43. Patent Infringement
    • Many businesses, inventions, or innovations are results of improvements on, or modifications of, existing products.
    • Copying and improving on a product:
      • May be perfectly legal
      • A good business strategy.
    • Products can be licensed from the patent holder.
    • Advisable to hire a patent attorney to ensure no possibility of patent infringement.
  • 44. Business Method Patents
    • Growth of Internet use and software development has given rise to use of business method patents.
      • E.g. Amazon.com.
    • Firms that hold these patents use them to assault competitors.
      • Subsequently provide a steady stream of income from royalties or licensing fees.
  • 45. Trademarks
    • A distinguishing word, name, or symbol used to identify a product.
      • Can last indefinitely.
      • Can be filed solely on intent to use the trademark in interstate or foreign commerce.
      • Can also be filed with intent to use in the future.
    • Categories:
      • Coined marks.
      • Arbitrary marks.
      • Suggestive marks.
      • Descriptive marks.
  • 46. Registering the Trademark (1 of 2)
    • Federal registration of trademarks – PTO.
    • Filing must meet four requirements:
      • Completion of the written form.
      • A drawing of the mark.
      • Five specimens showing actual use of the mark.
      • The fee.
    • Initial determination of suitability takes 3 months.
      • Objections must be raise within six months, or application is considered abandoned.
      • Right to appeal in case of refusal.
  • 47. Registering the Trademark (2 of 2)
    • Once accepted, trademark is published in the Trademark Official Gazette to allow any party:
      • 30 days to oppose.
      • Request an extension to oppose.
      • Registration issued if no opposition is filed.
      • Procedure takes about 13 months from initial filing.
  • 48. Copyrights
    • Right given to prevent others from printing, copying, or publishing any original works of authorship
      • Issues surrounding access to material on the Internet have led to major legal battles for the entertainment industry.
      • Example: Napster.
    • Copyrights are registered with the Library of Congress
      • Usually do not require an attorney.
      • Term of the copyright is the life of the author plus 70 years.
  • 49. Trade Secrets
    • Protection against others revealing or disclosing information that could be damaging to business.
      • Have a life as long as the idea or process remains a secret.
      • Not covered by any federal law but is recognized under a governing body of common laws in each state.
    • Entrepreneur needs to take proper precautions.
    • Legal action can be taken only after the secret has been revealed.
  • 50. Licensing (1 of 2)
    • Contractual agreement giving rights to others to use intellectual property in return for a royalty or fee. Type of licensing:
      • Patent license agreement: specifies how the licensee would have access to the patent.
      • Trademark: involves a franchising agreement.
      • Copyrights.
    • Licensing has become a revenue boom for many Fortune 500 companies.
  • 51. Licensing (2 of 2)
    • Question to be considered by an entrepreneur:
      • Will customers recognize licensed property?
      • How well does the licensed property complement my products or services?
      • How much experience do I have with the licensed property?
      • What is the long-term outlook for the licensed property?
      • What kind of protection does the licensing agreement provide?
      • What commitment do I have in terms of payment of royalties, sales quotas, and so on?
      • Are renewal options possible and under what terms?
  • 52. Product Safety and Liability (1 of 2)
    • Responsibility of a company to meet any legal specifications regarding a new product covered by the Consumer Product Safety Act.
      • First passed in 1972.
      • Created a five-member commission with:
        • Power to prescribe safety standards.
        • Responsibility and power to identify substantial hazards and bar products it considers unsafe.
    • Act was amended and signed into law in 1990.
      • Establishes stricter guidelines for reporting product defects and any injury or death resulting from such defects.
  • 53. Product Safety and Liability (2 of 2)
    • Claims regarding product liability usually fall under one of the following categories:
      • Negligence.
      • Warranty.
      • Strict liability.
      • Misrepresentation.
    • Best protection against product liability is to:
      • Produce safe products.
      • Warn consumers of any potential hazards.
  • 54. Insurance
    • Provides a means of managing risk in the new business.
    • Entrepreneurs usually have limited resources in the beginning.
      • Some insurances are required by law and cannot be avoided.
      • Other insurances are not required but may be necessary to protect the financial net worth of the venture.
  • 55. Types of Insurance and Possible Coverage
    • <<Insert Table 6.4>>
  • 56. Sarbanes-Oxley Act (1 of 3)
    • Congress passed the Act in 2002.
      • Has provided a mechanism for greater control over the financial activities of public companies.
      • Has created some difficulties for start-ups and smaller companies.
    • Under this law:
      • CEOs need to vouch for financial statements through a series of internal control mechanisms and reports.
      • Directors must meet background, length of service, and responsibilities requirements regarding internal auditing and control.
  • 57. Sarbanes-Oxley Act (2 of 3)
    • Attempt to influence the auditor or impede the internal auditing process is considered a criminal act.
      • Law covers bank fraud.
    • Passage of this law has been of some concern due to:
      • Interpretation of this law.
      • Subsequent directors’ liability.
    • Foreign companies that trade on U.S. stock exchanges often delist.
  • 58. Sarbanes-Oxley Act (3 of 3)
    • Though private companies are not included, they are subject to control if:
      • They consult with a public company.
      • Influence that public company in any wrongdoing established by the Sarbanes-Oxley Act.
    • Entrepreneurs can set up a board of advisors instead of an extended board of directors.
  • 59. Contracts (1 of 2)
    • A legally binding agreement between two parties.
    • Business deals are concluded with a handshake, but in case of disagreements, entrepreneurs:
      • May find that there is no deal.
      • May be liable for something never intended.
    • Rule is to not to rely on a handshake if deal cannot be completed within one year.
    • Courts insist on a written contract for all transactions over $500.
  • 60. Contracts (2 of 2)
    • Four essential items in an agreement to provide the best legal protection:
      • All parties involved should be named and specific roles in the transaction specified.
      • Transaction should be described in detail.
      • Exact value of the transaction should be specified.
      • Signature(s) of the person(s) involved in the deal should be obtained.
  • 61.  
  • 62. The Financial Plan McGraw-Hill/Irwin Entrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 10
  • 63. Operating and Capital Budgets (1 of 2)
    • Developed before the pro forma income statement.
    • Sales budget: estimate of the expected volume of sales by month.
      • Cost of sales can be determined from the sales forecasts.
      • In manufacturing ventures: costs of internal production or subcontracting are compared.
      • Includes estimated ending inventory required as a buffer.
  • 64. Example of a Manufacturing Budget
    • <<Insert Table 10.1>>
  • 65. Operating and Capital Budgets (2 of 2)
    • Operating costs:
      • List of fixed expenses incurred regardless of sales volume.
      • Variable expenses must be linked to strategy in the business plan.
    • Capital budgets provide a basis for evaluating expenditures that will impact the business for more than one year.
  • 66. Example of an Operating Budget
    • <<Insert Table 10.2>>
  • 67. Pro Forma Income Statements (1 of 2)
    • Pro forma income: projected net profit calculated from projected revenue minus projected costs and expenses.
    • Sales by month is calculated first.
      • Basis of the figures: marketing research, industry sales, and some trial experience.
      • Forecasting techniques may be used.
    • New ventures take time to build up sales.
    • Projections of all operating expenses for each of the months during the first year should be made.
  • 68. Pro Forma Income Statements (2 of 2)
    • Increasing selling expenses as sales increase should be taken into account.
    • Changes in expenses during the first year can necessitate month-by-month illustration.
    • Increase in individual expenses need to be reflected in the first year’s pro forma income statement.
    • Projections should be made for years 2 and 3 as well.
  • 69. Example of a Pro Forma Income Statement
    • <<Insert Table 10.3>>
  • 70. Pro Forma Cash Flow (1 of 2)
    • Projected cash available calculated from projected cash accumulations minus projected cash disbursements.
      • Not the same as profit.
      • Sales may not be regarded as cash.
      • Cash flow is a major problem faced by new ventures.
      • Use of profit as a measure of success for a new venture may be deceiving.
    • Two standard methods used to project cash flow:
      • Indirect method.
      • Direct method.
  • 71. Statement of Cash Flows: The Indirect Method
    • <<Insert Table 10.5>>
  • 72. Pro Forma Cash Flow (2 of 2)
    • Entrepreneurs must make monthly projections of cash.
    • Difficulty with projecting cash flows is determining the exact monthly receipts and disbursements.
    • Cash flow statement is based on best estimates.
  • 73. Example of a Pro Forma Cash Flow
    • <<Insert Table 10.6>>
  • 74. Pro Forma Balance Sheet
    • Pro forma balance sheet: summarizes the projected assets, liabilities, and net worth of the new venture.
      • A picture of the business at a certain moment in time.
      • Does not cover a period of time.
    • Consists of:
      • Assets: items that are owned or available to be used in the venture operations.
      • Liabilities: money that is owed to creditors.
      • Owner’s equity: amount owners have invested and/or retained from the venture operations.
  • 75. Example of a Balance Sheet
    • <<Insert table 10.7>>
  • 76. Break-Even Analysis
    • Break-even: volume of sales where the venture neither makes a profit nor incurs a loss.
    • Break-even sales point indicates the volume of sales needed to cover total variable and fixed expenses.
    • Major weakness in calculating the breakeven lies in determining if a cost is a fixed or variable.
  • 77. Graphic Illustration of Breakeven
    • <<Insert Figure 10.1>>
  • 78. Pro Forma Sources and Applications of Funds
    • Sources
      • Operations.
      • New investments.
      • Long-term borrowing.
      • Sale of assets.
    • Uses/ Applications:
      • Increase assets.
      • Retire long-term liabilities.
      • Reduce owner or stockholders’ equity.
      • Pay dividends.
  • 79. Example for Sources and Applications of Funds
    • <<Insert Table 10.9>>
  • 80. Software Packages
    • A spreadsheet program (Microsoft Excel) is most suitable for completing pro forma statements.
      • Helps present different scenarios and assess their impact on the pro forma statements.
      • A simple and easy to use software is useful in the start-up stage.
    • Software packages vary in price and complexity.

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