lecture 9

2. 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.

3. 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.
 New forms of business formations:
a. Limited liability company (LLC).
b. Limited liability partnership (LLP).
c. S corporation.

4. 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.

5. 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.
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.

6. S Corporation
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.

7. 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.
 Transfer of interest requires unanimous consent.
 It is taxed as a partnership.
 Standard acceptable term is 30 years; continuity restricted.

8. 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.

9. 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.

10. 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.

11. END