Ent9 the organizational plan


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Ent9 the organizational plan

  1. 1. The Organizational Plan McGraw-Hill/Irwin Entrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9
  2. 2. Developing the Management Team <ul><li>The management team is expected: </li></ul><ul><ul><li>To not operate the business as a sideline or part-time venture. </li></ul></ul><ul><ul><li>To operate the business full time and at a modest salary. </li></ul></ul>
  3. 3. Legal Forms of Business <ul><li>Three basic legal forms of business: </li></ul><ul><ul><li>Proprietorship: single owner, unlimited liability, controls all decisions, and receives all profits. </li></ul></ul><ul><ul><li>Partnership: two or more individuals, unlimited liability who have pooled resources to own a business. </li></ul></ul><ul><ul><li>Corporation (C corporation): most common form of corporation, regulated by statute, and treated as a separate legal entity for liability and tax purposes. . </li></ul></ul>
  4. 4. Ownership (1 of 2) <ul><li>Proprietorship: </li></ul><ul><ul><li>Owner is the individual who starts the business. </li></ul></ul><ul><ul><li>Has full responsibility for the operations. </li></ul></ul><ul><li>Partnership: </li></ul><ul><ul><li>General partnership owners and limited partnership owners. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Ownership is reflected by ownership of shares of stock. </li></ul></ul><ul><ul><li>No limit to the number of shareholders. </li></ul></ul>
  5. 5. Liability of Owners <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Individual is liable for business liabilities. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>General partners share the amount of personal liability equally- regardless of their capital contribution </li></ul></ul><ul><ul><li>Liable for all aspects of the business. </li></ul></ul><ul><li>Partnership-limited: </li></ul><ul><ul><li>Limited partners liable for amount of capital contribution. </li></ul></ul>By law must be registered at local court house
  6. 6. Costs of Starting a Business <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Least expensive -Filing for a business or trade name. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Partnership agreement legal costs-convey all the responsibilities, rights & duties of the parties involved </li></ul></ul><ul><li>Partnership-limited: </li></ul><ul><ul><li>More complex than a general partnership- Must comply statutory requirements </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Created by statute, articles of incorporation, filing fees, taxes, fees for states in which corporation registers to do business </li></ul></ul>
  7. 7. Continuity of Business <ul><li>Sole proprietorship </li></ul><ul><ul><li>Death of owner results in the termination of the business. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Death or withdrawal of one of the partners results in partnership termination, unless stipulated otherwise. </li></ul></ul><ul><li>Partnership-limited: </li></ul><ul><ul><li>Death or withdrawal has no effect on continuity of business- replace partner depending on the agreement </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Death or withdrawal has no impact on continuation of business. </li></ul></ul>
  8. 8. Transferability of Interest (handing over your interest in the business to someonelse) <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Entrepreneur has the right to sell or transfer any assets in the business. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Cannot sell their interest without first refusal from the remaining general partners. </li></ul></ul><ul><li>Partnership-limited: </li></ul><ul><ul><li>Can sell their interest at any time without consent of the general partners. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Shareholders may transfer their shares at any time without consent from the other shareholders. </li></ul></ul><ul><ul><li>Disadvantage: It can affect the ownership control </li></ul></ul>
  9. 9. Capital Requirements <ul><li>Sole proprietorship: </li></ul><ul><ul><li>From loans or by additional personal contributions by the entrepreneur. </li></ul></ul><ul><ul><li>Borrow from bank- B may need collateral to support loan </li></ul></ul><ul><li>Partnership: </li></ul><ul><ul><li>Loans can be obtained from banks but may require change in partnership agreement. </li></ul></ul><ul><ul><li>Additional funds contributed by each of the partners wil also require a new partnership agreement </li></ul></ul><ul><li>Corporation : (new capital can be raised in number of ways) </li></ul><ul><ul><li>Stock may be sold as either voting or nonvoting. </li></ul></ul><ul><ul><li>Bonds may be sold by the corp. </li></ul></ul>
  10. 10. Management Control (1 of 2) <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Entrepreneur is responsible for and has sole authority over all business decisions. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Can present problems if partnership agreement is not concise. </li></ul></ul><ul><ul><li>Usually majority rules unless agreement states otherwise. </li></ul></ul><ul><li>‘ E’ in new venture will want to retain as much as control over the Business </li></ul><ul><li>Each of the forms of Business offers different opportunities & problems as to </li></ul><ul><li>Control |& responsibility for making business decisions </li></ul>
  11. 11. Management Control (2 of 2) <ul><li>Partnership-limited </li></ul><ul><ul><li>Separation of ownership and control. </li></ul></ul><ul><ul><li>Limited partners have no control over business decisions. </li></ul></ul><ul><ul><li>Rights of all partners are clearly defined in the agreement. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Management has control over day-to-day business </li></ul></ul><ul><ul><li>Majority stockholders control major long-term decisions through vote. </li></ul></ul><ul><ul><li>Stockholders can indirectly affect operation by electing someone to the board of directors. </li></ul></ul>
  12. 12. Distribution of Profits and Losses (1 of 2) <ul><li>Sole proprietorship: </li></ul><ul><ul><li>Receive all distributions of profits from the business. </li></ul></ul><ul><ul><li>Personally responsible for all losses. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Distribution of profits and losses depends on the agreement. </li></ul></ul><ul><ul><li>Sharing of profits and losses likely to be a function of the partners’ investments. </li></ul></ul>
  13. 13. Distribution of Profits and Losses (2 of 2) <ul><li>Partnership-limited </li></ul><ul><ul><li>Protect limited partners against personal liability. </li></ul></ul><ul><ul><li>May reduce share in any profits. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Distribute profits through dividends to stockholders. </li></ul></ul><ul><ul><li>Losses will often result in no dividends. </li></ul></ul>
  14. 14. Attractiveness for Raising Capital <ul><li>Sole proprietorship </li></ul><ul><ul><li>Limited to capability of owner and success of the business. </li></ul></ul><ul><ul><li>Least attractive for raising capital. </li></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Depends on capability of partners and success of business. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Most attractive for raising capital. </li></ul></ul><ul><ul><li>Shares of stock, bonds, and/or debt are all opportunities for raising capital with limited liability. </li></ul></ul>
  15. 15. Tax Attributes of Forms of Business (1 of 2) <ul><li>Sole proprietorship: </li></ul><ul><ul><li>IRS treats business as the individual owner. </li></ul></ul><ul><ul><li>All income appears on owner’s return as personal income. </li></ul></ul><ul><ul><li>Tax advantages: </li></ul></ul><ul><ul><ul><li>No double tax when profits are distributed to owner. </li></ul></ul></ul><ul><ul><ul><li>No capital stock tax or penalty for retained earnings. </li></ul></ul></ul><ul><li>Partnership-general: </li></ul><ul><ul><li>Tax advantages and disadvantages similar sole proprietorship. </li></ul></ul>
  16. 16. Tax Attributes of Forms of Business (2 of 2) <ul><li>Partnership-limited: </li></ul><ul><ul><li>Has the advantage of limited liability. </li></ul></ul><ul><ul><li>Treated the same as the LLC for tax purposes. </li></ul></ul><ul><li>Corporation: </li></ul><ul><ul><li>Can take many deductions and expenses not available to proprietorship or partnership. </li></ul></ul><ul><ul><li>Distribution of dividends is taxed twice. </li></ul></ul><ul><ul><li>Double taxation can be avoided if income is distributed to entrepreneur(s) in the form of salary. </li></ul></ul>
  17. 17. Limited Liability Company Vs S Corporation <ul><li>Venture capitalists prefer LLCs as a form of business entity. </li></ul><ul><ul><li>Popularity has resulted from finalization of the new regulation. </li></ul></ul><ul><ul><li>LLC can be automatically taxed as a partnership, unless the entrepreneur actively makes another choice. </li></ul></ul><ul><li>Growth rate of the formation of S corporations has leveled off primarily because of the wide acceptance of LLCs. </li></ul>
  18. 18. S Corporation <ul><li>Combines the tax advantages of the partnership and the corporation. </li></ul><ul><li>Passage of the 1996 law loosened some of the restrictions. </li></ul><ul><li>In 2004, Congress responded to criticisms of the restrictions on S corporations as compared to LLCs. </li></ul><ul><ul><li>Intent was to make the S corporation as advantageous as the LLC. </li></ul></ul>
  19. 19. S Corporation- Advantages <ul><li>Gains/losses = ersonal income/loss. </li></ul><ul><li>Limited Liability Protection. </li></ul><ul><li>No minimum tax. </li></ul><ul><li>Stock transferable. </li></ul><ul><li>Stock = Voting or non-voting. </li></ul><ul><li>Cash method of accounting. </li></ul><ul><li>Long-term capital gains/losses deductible to shareholders. </li></ul>
  20. 20. S Corporation- Disadvantages <ul><li>Some restrictions for qualification. </li></ul><ul><li>Potential tax disadvantages. </li></ul><ul><li>Most fringe benefits not deductible for shareholders. </li></ul><ul><li>Must have calendar tax year. </li></ul><ul><li>One class of stock. </li></ul><ul><li>Net loss limited to shareholder’s stock plus loans to business. </li></ul><ul><li>No more than 75 shareholders. </li></ul>
  21. 21. Limited Liability Company <ul><li>Partnership/corporation hybrid, laws differ from state to state. </li></ul><ul><li>Has members. </li></ul><ul><li>No shares issued, each member owns according to articles of incorporation. </li></ul><ul><li>Liability = Member’s capital contribution. </li></ul><ul><li>Transfer requires unanimous consent. </li></ul><ul><li>Taxed as partnership. </li></ul><ul><li>Standard term = 30 years, continuity restricted. </li></ul>
  22. 22. Advantages of LLC <ul><li>LLC liabilities added to partnership interest. </li></ul><ul><li>Most States do not tax LLCs. </li></ul><ul><li>Ownership not limited to individuals. </li></ul><ul><li>Members share income, profit, expense, etc., among themselves. </li></ul>
  23. 23. Designing the Organization <ul><li>This is the entrepreneur’s formal and explicit indication to the members of the organization as to what is expected of them. </li></ul><ul><ul><li>Organization structure. </li></ul></ul><ul><ul><li>Planning, measurement, and evaluation schemes </li></ul></ul><ul><ul><ul><ul><li>E must spell out how these goals will be achieved (plans)- how will be measured- how they will be evaluated </li></ul></ul></ul></ul><ul><ul><li>Rewards. </li></ul></ul><ul><ul><ul><li>Promotions-bonuses-praise so on (E responsible for these rewards) </li></ul></ul></ul><ul><ul><li>Selection criteria. </li></ul></ul><ul><ul><li>Training. </li></ul></ul>
  24. 24. 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 <ul><li>Org evolves- E decision roles becomes critical </li></ul><ul><li>Adapt to changes in the environment –role of adaptor </li></ul><ul><li>Pressure of unsatisfied customers-supplier-key employee threatening to quit </li></ul><ul><li>Allocate resources-Negotiator (salaries, contracts, prices of raw material ) </li></ul>
  25. 25. Building the Successful Organization <ul><li>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 </li></ul><ul><li>Job Analysis- guide for hiring procedures, training, performance appraisals , compensation programs, JD & JS </li></ul><ul><li>You know what!!!! Just hire a consultant to assist YOU </li></ul><ul><li>PAY ME !!!!!!!!!! </li></ul>
  26. 26. Board of Directors (1 of 2) <ul><li>Functions of the board of directors: </li></ul><ul><ul><li>Reviewing operating and capital budgets. </li></ul></ul><ul><ul><li>Developing longer-term strategic plans for growth and expansion. </li></ul></ul><ul><ul><li>Supporting day-to-day activities. </li></ul></ul><ul><ul><li>Resolving conflicts among owners or shareholders. </li></ul></ul><ul><ul><li>Ensuring the proper use of assets. </li></ul></ul><ul><ul><li>Developing a network of information sources for the entrepreneurs . </li></ul></ul><ul><li>BOD- important expertise & also add prestige(venture) </li></ul><ul><li>Valuable for obtaining investors-supply relationships- identifying potential customers </li></ul><ul><li>Criteria to select these BOD ( Read Book) </li></ul><ul><li>Compensation for BOD- stock options (its important otherwise if members were only volunteers-take the role lightly) </li></ul>
  27. 27. Board of Directors (2 of 2) <ul><li>They must be chosen to meet the requirements of the Sarbanes-Oxley Act and the following criteria: </li></ul><ul><ul><li>Individuals who can work with a diverse group and will commit to the venture’s mission. </li></ul></ul><ul><ul><li>Candidates who understand the market environment. </li></ul></ul><ul><ul><li>Candidates who can contribute important skills to the new venture’s achievement of planning goals. </li></ul></ul><ul><ul><li>Candidates who will show good judgment in business decision making. </li></ul></ul>
  28. 28. Board of Advisors <ul><li>More loosely tied to the organization. </li></ul><ul><li>Serve the venture only in an advisory capacity. </li></ul><ul><li>Has no legal status, unlike the board of directors. </li></ul><ul><li>Likely to meet less frequently or depending on the need to discuss important venture decisions. </li></ul><ul><li>Useful in a family business. </li></ul><ul><li>Selection process for advisors can be similar to the process for selecting a board of directors. </li></ul><ul><li>Compensated on a per meeting basis or with stock </li></ul>
  29. 29. Organization and Use of Advisors <ul><li>Usually used on an as-needed basis. </li></ul><ul><li>Can also become an important part of the organization. </li></ul><ul><li>Need to be managed just like any other permanent part of the new venture. </li></ul><ul><li>Even after hiring advisors, the entrepreneur should question their advice.(why is the advice being given?) </li></ul><ul><li>Sources ----------- </li></ul><ul><li>Smeda- chambers of commerce-universities-friends & relatives </li></ul><ul><li>Accountants- bankers- lawyers- advertising agencies- market researchers </li></ul>