Muhammad Hamza Saeed Bhatti

2. Group #07
Muhammad Zulqernan (19014107-008)
Zainab Ashraf (19014107-009)
Syeda Laiqa Mustafa (19014107-012)
Hamza Saeed (19014107-015)
Hasnaat Ahmad (19014107-024)
Maham Mushtaq (19014107-031)
Ayesha Ijaz (19014107-037)

3. MANAGING TEAM
TOPIC

4. Learning objectives
• To understand the importance of the management team
in launching a new venture
• To understand the advantages and disadvantages of the
alternative legal forms for organizing a new venture.
• To explain and compare the S corporation and limited
liability company as alternative forms of incorporation.

5. Muhammad Zulqernan
19014107-008

6. O P E N I N G P R O F I L E

8. SARA BLAKELY
• Not too many entrepreneurs have had the success of Sara Blakely.
She has turned her company Spanx Shapewear into a company with
a net worth of over $1 billion. She did this with little or no
knowledge of business or the design of women’s clothing.
• She failed at many such things such as law entrane failed and many
other things
• Then she started diffent jobs but after such time leaft these jobs and
start selling fax machine of a industry and at the age of 25 she had
become great sale person.

9. • Then she had the idea of designing clothes and other accessories to sell these in market.
• At the age of 27, she moved to Atlanta while still working for the company selling fax
machines. During this time, she continued to develop her idea of making a comfortable and
good fitting undergarment out of hosiery material.
• Then she wanted patent for her work when she got her patent then with patent in hand, she
then started visiting hosiery mills and manufacturers only to be met with rejection every
time.
• Finally, she found a manufacturer who decided to help her because his two daughters
thought that it was a great idea. She spent a lot of time at the factory asking questions and
observing the manufacturing process. She noted that products were typically sized on
plastic forms and that they used the same waistband on all sizes of products.

10. • Sara managed to schedule a meeting with a buyer from Neiman Marcus Group. After
changing into her product in the ladies room, she was able to show the buyer the
benefits of the product. At this point, the buyer offered to sell the product in seven of
their stores.
• This gives he clothes value and she sold them is different stores and after that she
made her brand recognizable in area and spread this in all areas.
• New products, including shoes, jeans, and other undergarments, have been added over
the years such that by 2015 the company reached a net worth of $1.1 billion making
her one of the wealthiest women in the world.

11. • In spite of all her success, Sara claims that one of her most difficult decisions was
stepping back and giving up some of the decision making in the organization.
• As the company grew, she had to let go and find a team that could continue
successfully moving the company to new heights.
• She hired people who did not necessarily have design experience but individuals
who were willing to try new things without the fear of failure. Her belief was that if
people did it 80 percent of how she would do it, then that would be acceptable. So far
her team has surpassed her expectations.

12. Muhammad Hamza
19014107-015
12

13. DEVELOPING THE
MANAGEMENT TEAM

14. Cont…
• We can see from the Sara Blakely and her company Spanx example the importance of employees and
their loyalty and commitment to the organization.
• Also significant to potential investors is the management team and its ability and commitment to the new
venture. Investors will usually demand that the management team not attempt to operate the busi-ness as
a side line or part-time venture while employed full time elsewhere.

15. Cont..
• It is assumed that the management team is prepared to operate the business full time and at
a modest salary.
• It is unacceptable for the entrepreneurs to try to draw a large salary out of the new venture,
and investors may perceive any attempt to do so as a lack of psychological commitment to
the business.
• the entrepreneur should consider the role of the board of directors and/or a board of
advisors in supporting the management of the new venture.
• At this point, however, the entrepreneur needs to consider the alternatives regarding the
legal form of the organization.
• Each of these forms has important implications for taxes, liability, continuity, and financing
the new venture.

16. LEGAL FORMS OF BUSINESS
• There are three basic legal forms of business formation with some variations available
depending on the entrepreneurs’ needs. The three basic legal forms are
1. Sole proprietorship,
2. Partnership
3. Corporation
• These three basic legal forms are compared with regard to ownership, liability, start-up costs,
continuity, transferability of interest, capital requirements, management control, distribution of
profits, and attractive-ness for raising capital.

17. Cont…
• It is very important that the entrepreneur carefully evaluate the pros and cons of
the various legal forms of organizing the new venture. This decision should be
made before the submission of a business plan and request for venture capital.
• The evaluation process requires the entrepreneur to determine the priority of
each of the factors, as well as tax factors. These factors will vary in importance,
depending on the type of new business.
• The variations of organizational structure as well as the advantages and
disadvantages are numerous and can be quite confusing to the entrepreneur.

18. Ownership
• In the Sole Proprietorship, the owner is the individual who starts the business. He or
she has full responsibility for the operations.
• In a Partnership, there may be some general partnership owners and some limited
partnership owners. There are also limited liability partnerships (LLPs) in which the
partnership is treated as a legal entity.
• In the Corporation, ownership is reflected by ownership of shares of stock.
• Unlike the S corporation, where the maximum number of shareholders is 100, there
is no limit as to the number of shareholders who may own stock in a corporation.

19. AYESHA IJAZ
19014107-037
19

20. Liability of Owners
• Liability is one of the most critical reasons for establishing a corporation rather than
any other form of business. The proprietor and general partners are liable for all
aspects of the business.
• Since the corporation is an entity or legal “person,” which is taxable and absorbs
liability, the owners are liable only for the amount of their investment unless there is
negligence or fraud involved.

22. • In a general partnership, there also may be limited partners. These limited partners are
liable for only what they contribute to the partnership.
• It is actually a form of limited liability company (LLC).
• Thus, the advantages of the LLP are the same as the LLC, allowing the partners to
protect their personal assets from liability risk.

23. 23

26. Costs of Starting a Business
• The more complex the organization, the more expensive it is to start.
The least expensive is the proprietorship, where the only costs
incurred may be for filing for a business or trade name. In a
partnership, in addition to filing a trade name, a partnership
agreement is needed.
• This generally means that before the corporation may be legally
formed, the owners are required to
1) Register the name and articles of incorporation a
2) Meet the state requirements (some states are more lenient than
others).

27. 27

28. ZAINAB ASHRAF
19014107-009
28

29. Transferability of Interest
• There can be mixed feelings as to whether the transfer of interest in a business is desirable. In some cases, the
entrepreneur(s) may prefer to evaluate and assess any new owners before giving them a share of the business.
• On the other hand, it is also desirable to be able to sell one’s interest whenever one wishes. This may be of particular
significance when there is the need to consider a succession plan or strategy.
• In the sole proprietorship, the entrepreneur has the right to sell or transfer any assets in the business. Limited partners,
if existing in a general partnership organization, have more flexibility and may typically sell their interest at any time
without consent of the general partners.
• In an LLP, the transfer of interest of one limited partner is typically not allowable. As stated previously, the LLP has
become popular among law and CPA firms. Limited partners also may vary in distinction (e.g., there may be
associate partners or junior partners), in which case they also may not share the same profit percentages as full
partners. Full partners in law or CPA firms may elect to sell the business, but such a decision usually re-quires the
approval of all or a majority.

30. Cont…
• The corporation has the most freedom in terms of selling one’s interest in the business. Shareholders
may transfer their shares at any time without consent from the other share-holders. The disadvantage of
the right is that it can affect the ownership control of a corporation through election of a board of
directors.
• Shareholders’ agreements may provide some limitations on the ease of transferring interest, usually by
giving the existing share-holders or corporation the option of purchasing the stock at a specific price or at
the agreed-on price. Thus, they sometimes can have the right of first refusal.
• In the S corporation, the transfer of interest can occur only as long as the buyer is an individual.

31. Capital Requirements
• The need for capital during the early months of the new venture can become one of the
most critical factors in keeping a new venture alive. The opportunities and ability of the
new venture to raise capital will vary, depending on the form of business venture to raise
capital will vary, depending on the form of business.
• For a proprietorship, any new capital can come only from loans by any number of
sources or by additional personal contributions by the entrepreneur. In borrowing money
from a bank, the entrepreneur in this form of business may need collateral to support the
loan.
• In the partnership, loans may be obtained from banks but will likely require a change in
the partnership agreement. Additional funds contributed by each of the partners will also
require a new partnership agreement. As in the proprietorship, the entrepreneurs are liable
for payment of any new bank loans.

32. 32

33. Cont…
• In the corporation, new capital can be raised in a number of ways. The alternatives
are greater than in any of the other legal forms of business. Stock may be sold as
either voting or nonvoting.
• Nonvoting stock will of course protect the power of the existing major stock-
holders. Bonds also may be sold by the corporation. This alternative would be more
difficult for the new venture since a high bond rating will likely occur only after the
business has been successful over time.
• Money also may be borrowed in the name of the corporation. As stated earlier, this
protects the personal liability of the entrepreneur(s).

34. Management Control
In any new venture, the entrepreneur(s) will want to retain as much control as possible over the
business. Each of the forms of business offers different opportunities and problems as to control and
responsibility for making business decisions.
In the proprietorship, the entrepreneur has the most control and flexibility in making business
decisions.
The partnership can present problems over control of business decisions if the partnership
agreement is not concise regarding this issue.
The existence of limited partners in a general partnership offers a compromise between the
partnership and the corporation.

35. Cont…
• Control of day-to-day business in a corporation is in the hands of
management, who may or may not be major stockholders.
• Control over major long-term decisions, however, may require a
vote of the Stockholders in the corporation can indirectly affect the
operation of the business by electing someone to the board of
directors who reflects their personal business philosophies.
• These board members, through appointment of top management,
then affect the operation and control of the day-to-day management
of the business. e major stockholders

36. Maham Mushtaq
19014107-031
36

37. Distribution of Profits and Losses
• Proprietors receive all distributions of profits from the business. they are also
personally responsible for all losses.
• Some of the profits may be used to pay back the entrepreneur for any personal
capital contributions that are made to keep the business operating.
• In the partnership, the distribution of profits and losses depends on the partnership
agreement.
• in the proprietorship, the partners may assume liability. Limited partners in a
general partnership, or the formation of an LLP, are alternatives that protect those
limited partners against personal liability but that may also reduce their share in any
profits.

38. Cont..
• Corporations distribute profits through dividends to stockholders.
• These distributions are not likely to absorb all the profits that may be retained by the
corporation for future investment or capital needs of the business.
• Losses by the corporation will often result in no dividends. These losses will then be
covered by retained earnings or through other financial means discussed earlier.

39. Attractiveness for Raising Capital
• In both the proprietorship and the partnership, the ability of the entrepreneurs to raise
capital depends on the success of the business and the personal capability of the
entrepreneur.
• These two forms are the least attractive for raising capital, primarily because of the
problem of personal liability. Any large amounts of capital needed in these forms of
business should be given serious consideration.
• The corporation, because of its advantages regarding personal liability, is the most
attractive form of business for raising capital. Shares of stock, bonds, and/or debt are all
opportunities for raising capital with limited liability.
• The more attractive the corporation, the easier it will be to raise capital.

40. TAX ATTRIBUTES OF FORMS OF BUSINESS
• The tax advantages and disadvantages of each of the forms of business differ
significantly.
• If the entrepreneur has any doubt about these advantages, he or she should
get outside advice.
• We will discuss now
1. Tax Issues for Proprietorship
2. Tax Issues for Partnership
3. Tax Issues for Corporation

41. 1. Tax Issues for Proprietorship
• For the proprietorship, the IRS treats the business as the individual owner. All income
appears on the owner’s return as personal income.
• The proprietorship has some tax advantages when compared with the corporation. First,
there is no double tax when profits are distributed to the owner.
• Another advantage is that there is no capital stock tax or penalty for retained earnings in
the business.

42. Laiqa Mustafa
19014107-012

43. 2. Tax Issues for Partnership
• The partnership’s tax advantages and disadvantages are similar to those of the
proprietor-ship, especially regarding income distributions, dividends, and capital
gains and losses
• Limited partners in a traditional general partnership have the advantage of limited
liability but they can share in the profits at a percentage stipulated in the partnership
agreement.
• Both the partnership and proprietorship are organizational forms that serve as non
tax-able conduits of income and deduction.
• It is especially important for partnerships to report income since this serves as the
basis for determining the share of each partner.
• The income is distributed based on the partnership agreement. The owners then
report their share as personal income and pay taxes based on this amount.

44. 3. Tax Issues for Corporation
• Since the IRS recognizes the corporation as a separate tax entity, it has the
advantage of being able to take many deductions and expenses that are not
available to the proprietor-ship or partnership.
• The disadvantage is that the distribution of dividends is taxed twice, as income
of the corporation and as income of the stockholder.
• Bonuses, incentives, profit sharing, and so on are thus allowable ways to
distribute income of the corporation as long as the compensation is reasonable
in amount and payment was for services rendered.
• The corporate tax may be lower than the individual rate.

47. Hasnaat Ahmad
19014107-024

48. THE LIMITED LIABILITY COMPANY
VERSUS THE S CORPORATION

49. S CORPORATION
• S corporation Special type of corporation where profits are distributed to stockholders and taxed as
personal income
• The S corporation combines the tax advantages of the partnership and the corporation.
• It is designed so that venture income is declared as personal income on a pro rata basis by the
shareholders.
• One of the issues with the S corporation is that its status must be carefully monitored and maintained.
• For example, its tax status as a pass-through entity (with its income taxed as personal income of
shareholders) still requires an affirmative election of shareholders. If the S corporation status is ever
lost, it usually cannot be re elected for five years and with some costs.

50. Advantages of an S Corporation
• Capital gains or losses from the corporation are treated as personal income or losses
by the shareholders on a pro rata basis (determined by number of shares of stock
held). The corporation is thus not taxed.
• Shareholders retain the same limited liability protection as the C corporation.
• The S corporation is not subject to a minimum tax, as is the C corporation.
• Stock may be voting or nonvoting.
• This form of business may use the cash method of accounting.
• Corporate long-term capital gains and losses are deductible directly by the
shareholders to offset other personal capital gains or losses.

51. Disadvantages of an S Corporation
• Even with the regulations passed in 1996 and 2004, there are still some restrictions
regarding qualification for this form of business. More recent Small Business Job Acts
passed in each of the past two years have also had some impact on the S corporation
and should be consulted when considering this form of organization.
• The S corporation may not deduct most fringe benefits for shareholders.
• The S corporation must adopt a calendar year for tax purposes.
• Only one class of stock (common stock) is permitted for this form of business.
• The net loss of the S corporation is limited to the shareholder’s stock plus loans to the
business.
• S corporations cannot have more than 100 shareholders.

53. THANK YOU

54. ANY QUESTION?