9-2Developing the Management Team Investors demand that the managementteam not operate the business as a part-time venture. It is assumed that the management team isprepared to operate the business full timeand at a modest salary. An attempt to draw a large salary out of thenew venture may be perceived as a lack ofcommitment to the business.
9-3Legal 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 havingunlimited liability who have pooled resources toown a business. Corporation (C corporation) - Most commonform of corporation; regulated by statute;treated as a separate legal entity for liability andtax purposes.
9-4 New forms of business formations: Limited liability company (LLC). Limited liability partnership (LLP). S corporation.Legal Forms of Business (cont.)
9-5Table 9.1 - Three Forms ofBusiness Formation
9-6Table 9.1 - Three Forms ofBusiness Formation (cont.)
9-7Table 9.1 - Three Forms ofBusiness Formation (cont.)
9-8Tax Attributes of Forms of Business Tax Issues for Proprietorship IRS treats business as the individual owner; notregarded as a separate tax entity. All income appears on owner’s return aspersonal income. Tax advantages: No double tax when profits are distributed to owner. No capital stock tax or penalty for retained earnings. Tax Issues for Partnership (general) Tax advantages and disadvantages similar soleproprietorship.
9-9 Tax Issues for Partnership (limited) Has the advantage of limited liability. Treated the same as the LLC for tax purposes. Tax Issues for Corporation: Can take many deductions and expenses notavailable to proprietorship or partnership. Distribution of dividends is taxed twice. Double taxation can be avoided if income isdistributed to entrepreneur(s) in the form ofsalary.Tax Attributes of Forms of Business(cont.)
9-10Table 9.2 - Tax Attributes ofVarious Legal Forms of Business
9-11Table 9.2 - Tax Attributes ofVarious Legal Forms of Business (cont.)
9-12Table 9.2 - Tax Attributes ofVarious Legal Forms of Business (cont.)
9-13The Limited Liability CompanyVersus S Corporation Venture capitalists prefer LLCs as a form ofbusiness entity. A new regulation allows LLCs to be taxed asa partnership. The S corporation was the most popularchoice of organization structure by newventures and small businesses. Growth rate of S corporations has leveledoff mainly because of the wide acceptanceof LLCs.
9-14S Corporation A special type of corporation where profitsare distributed to stockholders and taxed aspersonal income. The Small Business Protection Act of 1996reduced some restrictions. In 2004, Congress responded to criticismsof the restrictions on S corporations ascompared to LLCs. Intent was to make the S corporation asadvantageous as the LLC. Status of the S corporation must bemonitored and maintained.
9-15 Advantages of an S Corporation Capital gains or losses are treated as personalincome or losses. Limited liability protection. Not subject to a minimum tax. Transfer of stock to low-income-bracket familymembers Stock may be voting or nonvoting. Cash method of accounting. Corporate long-term capital gains and losses aredeductible directly by the shareholders.S Corporation (cont.)
9-16 Disadvantages of an S Corporation Some restrictions for qualification. Potential tax disadvantages. Most fringe benefits not deductible forshareholders. Must have a calendar year for tax purposes. Only one class of stock is permitted. Net loss is limited to shareholder’s stock plusloans to business. No more than 100 shareholders.S Corporation (cont.)
9-17The Limited Liability Company A partnership/corporation hybrid. Laws governing its formation differ fromstate to state. LLC has members. No shares issued; each member owns aninterest as designated by the articles oforganization. Liability does not extend beyond member’scapital contribution.
9-18 Transfer of interest requires unanimousconsent. It is taxed as a partnership. Standard acceptable term is 30 years;continuity restricted.The Limited Liability Company (cont.)
9-19 Advantages of LLC Partners can add their proportionate shares ofthe LLC liabilities to their partnership interests. Most states do not tax LLCs. One or more (without limit) individuals,corporations, partnerships, trusts, or otherentities form an LLC. Members share income, profit, expense,deduction, loss and credit, and equity of the LLCamong themselves.The Limited Liability Company (cont.)
9-20Designing the Organization This is the entrepreneur’s formal andexplicit indication to the members of theorganization as to what is expected ofthem; expectations can be grouped into: Organization structure. Planning, measurement, and evaluationschemes. Rewards. Selection criteria. Training.
9-22Building the Management Team and aSuccessful Organization Culture A management team must be able toaccomplish three functions: Execute the business plan. Identify fundamental changes in the business asthey occur. Make adjustments to the plan based on changesin the environment and market that willmaintain profitability.
9-23 Important factors in establishing aneffective team: Desired culture must match business strategyoutlined in the business plan. Employees must be motivated and rewarded forgood work. Entrepreneur should be flexible to try differentthings. Spend extra time in the hiring process. Core values and appropriate tools must beprovided for employees to effectively completetheir jobs.Building the Management Team and aSuccessful Organization Culture (cont.)
9-24The Role of a Board of Directors Functions of the board of directors: Reviewing operating and capital budgets. Developing longer-term strategic plans forgrowth and expansion. Supporting day-to-day activities. Resolving conflicts among owners orshareholders. Ensuring the proper use of assets. Developing a network of information sources forthe entrepreneurs.
9-25 They meet the requirements of theSarbanes-Oxley Act and the followingcriteria: Ability to work with a diverse group and committo the venture’s mission. Ability to understand the market environment. Ability to contribute important skills to the newventure’s achievement of planning goals. Ability to show good judgment in businessdecision making.The Role of a Board of Directors(cont.)
9-26The Board of Advisors They serve only in an advisory capacity. No legal status; not subject to regulationsstipulated in the Sarbanes-Oxley Act. Likely to meet less frequently. Useful in a family business. Selection process is similar to the processfor selecting a board of directors. Advisors may be compensated on a per-meeting basis or with stock or stockoptions.
9-27The Organization and Use ofAdvisors Outside advisors are usually used on an as-needed basis. They can become a part of the organizationand need to be managed. The relationship between the entrepreneurand outside advisors can be enhanced byinvolving them thoroughly and at an earlystage. Even after hiring advisors, the entrepreneurshould question their advice.