Entrepreneurship Chap 9


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Entrepreneurship Chap 9

  1. 1. HisrichPetersShepherdChapter 9The Organizational PlanCopyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
  2. 2. 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.
  3. 3. 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.
  4. 4. 9-4 New forms of business formations: Limited liability company (LLC). Limited liability partnership (LLP). S corporation.Legal Forms of Business (cont.)
  5. 5. 9-5Table 9.1 - Three Forms ofBusiness Formation
  6. 6. 9-6Table 9.1 - Three Forms ofBusiness Formation (cont.)
  7. 7. 9-7Table 9.1 - Three Forms ofBusiness Formation (cont.)
  8. 8. 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. 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.)
  10. 10. 9-10Table 9.2 - Tax Attributes ofVarious Legal Forms of Business
  11. 11. 9-11Table 9.2 - Tax Attributes ofVarious Legal Forms of Business (cont.)
  12. 12. 9-12Table 9.2 - Tax Attributes ofVarious Legal Forms of Business (cont.)
  13. 13. 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.
  14. 14. 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.
  15. 15. 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.)
  16. 16. 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.)
  17. 17. 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.
  18. 18. 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.)
  19. 19. 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.)
  20. 20. 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.
  21. 21. 9-21Figure 9.1 - Stages inOrganizational Design
  22. 22. 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.
  23. 23. 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.)
  24. 24. 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.
  25. 25. 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.)
  26. 26. 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.
  27. 27. 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.