Chapter 8

Report
Part 3
Developing the New Venture Business Plan
CHAPTER 8
The Organizational
Plan: Teams,
Legal Forms, &
Strategic Alliances
Longenecker • Moore • Petty • Palich
© 2008 Cengage Learning.
All rights reserved.
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Looking AHEAD
After you have read this chapter, you should be able to:
1.
Describe the characteristics and value of a strong management
team.
2.
Explain the common legal forms of organization used by small
businesses.
3.
Identify factors to consider in choosing among the primary legal
forms of organization, including tax consequences.
4.
Describe the unique features and restrictions of five specialized
organizational forms.
5.
Explain the nature of strategic alliances and their uses in small
businesses.
6.
Describe the effective use of boards of directors and advisory
councils.
© 2008 Cengage Learning. All rights reserved.
8–2
Building a Management Team
• Management Team
 Managers and other key persons who give a
company its general direction
• Characteristics of a Strong Management Team
 Capable of securing the resources needed to make
business a success
 Reassures investors about the their investment and
the continuity of business
 Diversity of talent makes the team stronger than an
individual entrepreneur
© 2008 Cengage Learning. All rights reserved.
8–3
Building a Management Team (cont’d)
• Team Building and Structure
 The required combination of education and
experience depends on the type of business and the
nature of its operations
 The key: achieving a balance of skills and
competencies in functional areas
 Designing an internal management structure that
defines relationships and responsibilities
 Outside professional support can supplement the
skills of a management team
 An active board of directors can provide counsel
and guidance.
© 2008 Cengage Learning. All rights reserved.
8–4
Building a Management Team (cont’d)
Achieving
Balance
Expanding Social
Networks
Team Building
and Structure
Specifying
Structure
© 2008 Cengage Learning. All rights reserved.
8–5
8-1
Basic Forms of Legal Organization for Small Businesses
© 2008 Cengage Learning. All rights reserved.
8–6
8-2
Percentage of Small Businesses by Legal Form of Organization
Source: http://www.irs.gov/pub/irs-soi/histab22.xls, accessed February 5, 2007.14
© 2008 Cengage Learning. All rights reserved.
8–7
The Sole Proprietorship Option
• Sole Proprietorship
 A business owned by one person.
• Advantages
 Receives all of the firm’s profits.
 Holds title to all of the firm’s assets.
 Can easily sell or transfer ownership of the company
name and assets.
 Requires no registration or filing fee.
 Has absolute freedom from interference by other
stakeholders.
© 2008 Cengage Learning. All rights reserved.
8–8
The Sole Proprietorship Option (cont’d)
• Disadvantages
 Bears all business risk.
 Is subject to all claims of creditors.
 Has unlimited personal liability for business.
 Receives no tax free benefits as an employee.
 Death/incapacity of owner terminates business.
 Is limited to the proprietor’s personal capital.
 Is taxed on business income as personal income.
© 2008 Cengage Learning. All rights reserved.
8–9
The Partnership Option
• Partnership
 A legal entity formed by two or more co-owners to
carry on a business for profit.
• Partner Qualifications
 Required: of legal age to contract
 Desired: Honest, healthy, capable, and compatible
• Questions about Partnership Formation
 What is our business concept?
 How are we going to structure ownership?
 Why do we need each other?
 How do our lifestyles differ?
© 2008 Cengage Learning. All rights reserved.
8–10
Partnership Insights
• Capitalize on the unique advantages of a
partnership.
• Choose your partner carefully.
• Be open, but cautious, about
partnerships with friends.
• Test-drive the relationship,
if possible.
• Create a combined vision for the business.
• Prepare for the worst.
© 2008 Cengage Learning. All rights reserved.
8–11
8-3
The Advantages and Disadvantages of Partnerships
© 2008 Cengage Learning. All rights reserved.
8–12
Rights and Duties of Partners
• Partnership Agreement
 A document that states explicitly the rights and duties
of partners.
• Agency Power
 The ability of any one partner
to legally bind (e.g., borrow
money) the other partners.
© 2008 Cengage Learning. All rights reserved.
8–13
The C Corporation Option
• Corporation
 A business organization that exists as a legal entity
and provides limited liability for its owners.
• Legal Entity
 A business organization that is recognized by the law
as having a separate legal existence (“artificial
being”); can be sued, hold property, and incur debt.
• C Corporation
 An ordinary, or regular, corporation chartered by the
state and taxed by the federal government as a
separate legal entity.
© 2008 Cengage Learning. All rights reserved.
8–14
Corporate Charter: Articles of Incorporation
• Name of company
• Formal statement of
formation
• Voting privileges for each
class of stock
• Type of Business
• Names of incorporators
and directors
• Location
• Capital stockholders
• Duration
• Statement of limited
liability for stockholders
• Classes and preferences
of stock
• Number and par value of
authorized shares
© 2008 Cengage Learning. All rights reserved.
• Statement of directors’
powers
8–15
Rights and Legal Status of Stockholders
• Stock Certificate
 A document specifying the number of shares of stock
owned by a shareholder.
• Pre-emptive Right
 The right of current stockholders to buy new shares of
stock before they are offered to the public.
• Legal Status
 Ownership provides control over the firm.
 Ownership limits liability to investment in the firm.
 Ownership can be transferred without affecting the
firm’s operations.
© 2008 Cengage Learning. All rights reserved.
8–16
Choosing an Organizational Form
Initial
Costs
Continuity of
the Business
Extent of
Liability
Factors
Affecting the
Choice of a
Firm’s
Structure
Income
Taxes
Attraction of
Capital
© 2008 Cengage Learning. All rights reserved.
Transfer of
Ownership
Management
Control
8–17
8-4
Comparison of Basic Legal Forms of Organization
Form of
Organization
Initial Organizational
Requirements and Costs
Liability of
Owners
Continuity
of Business
Sole
proprietorship
Minimum requirements;
generally no registration
or filing fee
Unlimited
liability
Dissolved upon
proprietor’s death
General
partnership
Minimum requirements;
generally no registration
or filing fee; written
partnership agreement
not legally required but
strongly suggested
Unlimited
liability
Unless partnership
agreement specifies
differently, dissolved
upon withdrawal or
death of partner
C corporation
Most expensive and
greatest requirements;
filing fees; compliance
with state regulations for
corporations
Liability limited
to investment
in company
Continuity of business
unaffected by
shareholder withdrawal
or death
Form of
organization
preferred
Proprietorship or
partnership
C corporation
C corporation
© 2008 Cengage Learning. All rights reserved.
8–18
8-4
Comparison of Basic Legal Forms of Organization (cont’d)
Form of
Organization
Transferability
of Ownership
Management
Control
Attractiveness for
Raising Capital
Income Taxes
Sole
proprietorship
May transfer
ownership in
company name
and assets
Absolute
management
freedom
Limited to
proprietor’s
personal capital
Income is taxed as
personal income to
the proprietor
General
partnership
Requires the
consent of
all partners
Majority vote of
partners required
for control
Limited to
partners’ ability
and desire to
contribute capital
Income is taxed as
personal income to
the partners
C
corporation
Easily
transferred by
transferring
shares of stock
Shareholders have
final control, but
usually board
of directors
controls company
policies
Usually the most
attractive form for
raising capital
Corporation’s
income tax and the
stockholder is
taxed if and when
dividends are
received
Form of
organization
preferred
Depends on the
circumstances
Depends on the
circumstances
C corporation
Depends on the
circumstances
© 2008 Cengage Learning. All rights reserved.
8–19
Forms of Business—Federal Income Taxes
• Sole Proprietorship
 Self-employed persons are taxed on their business
incomes at tax rates set for individuals.
• Partnership
 The partnership does not pay taxes; allocated shares
of income from partnership are taxed as personal
income for each of the partners.
• Corporation
 As a separate legal entity, it reports its income and
pays any taxes related to these profits.
© 2008 Cengage Learning. All rights reserved.
8–20
Forms of Business—Federal Income Tax
Sole Proprietorship
Example of taxes due
from a married couple
with $150,000 in income
from the business that
they operate as selfemployed persons.
Range of Taxable Income
$0–$15,650
10%
$15,651–$63,700
15%
$63,701–$128,500
25%
$128,501–$195,850
28%
$195,851–$349,700
33%
Over $349,700
35%
Income
x
Tax Rate
=
Taxes
First $ 15,650
10%
$1,565.00
Next $ 48,050
15%
$7,207.50
Next $ 64,800
25%
$16,200.00
Next $ 21,500
28%
$6,020.00
Total $150,000
© 2008 Cengage Learning. All rights reserved.
Tax Rate
$30,992.50
8–21
Forms of Business—Federal Income Tax
Corporation
Example of taxes due
from profits of $150,000
of a corporation. Any
profits of the corporation
that are distributed to the
stockholders are taxed
again as personal
income.
Range of Taxable Income
$0–$50,000
15%
$50,001–$75,000
25%
$75,001–$100,000
34%
$100,001–$335,000
39%
$335,001–$10,000,000
34%
$10,000,001–$15,000,000
35%
$15,000,001–$18,333,333
38%
Over $18,333,333
35%
Income
×
Tax Rate
=
Taxes
First $ 50,000
15%
$7,500
Next $ 25,000
25%
$6,250
Next $ 25,000
34%
$8,500
Next $ 50,000
39%
$19,500
Total $150,000
© 2008 Cengage Learning. All rights reserved.
Tax Rate
$41,750
8–22
Taxes on Gains and Losses
• Ordinary Income
 Income earned in the ordinary course of business,
including any salary
• Capital Gains and Losses
 Gains and losses from sale of property that are not
part of the firm’s regular business
• Section 1244 Stock
 Special of class stock that allows the owner to claim
an ordinary income tax-deductible loss should the
stock become worthless
© 2008 Cengage Learning. All rights reserved.
8–23
Specialized Forms of Organization
• Limited Partnership Structure
 General partner
 Active
in the business, personally liable
for the debts of the business
 Limited partners
 Not
active in the business, liability limited
to investment in business
 Income (taxable) or losses
 Apportioned
© 2008 Cengage Learning. All rights reserved.
to each partner
8–24
Specialized Forms of Organization (cont’d)
• S Corporation
 Eligibility Requirements
 No
more than 100 stockholders
 All stockholders must be individuals or trusts
 Only one class of stock can be outstanding
 Must be a domestic corporation
 Must operate on a fiscal calendar year basis
 No nonresident alien stockholders
 Benefits
 Liability limited to investment in corporation
 Dividends avoid double taxation
© 2008 Cengage Learning. All rights reserved.
8–25
Specialized Forms of Organization (cont’d)
• Limited Liability Company
 Stockholders have limited liability but pay personal
income taxes on the business profits.
 Easier to set up
 More flexible
 Tax advantages
• Professional Corporation
 Protects licensed professionals from liability of
partners but not their personal liability.
• Nonprofit Corporation
 Serves civic, educational, charitable, or religious
purposes but not for generation of profits.
© 2008 Cengage Learning. All rights reserved.
8–26
Forming Strategic Alliances
• Strategic Alliances
 An organizational relationship that links two or more
independent business entities in a common endeavor
 Benefits
 Reduced
cycle times through shared resources
 Increased
performance through synergistic
combinations of financial resources and creativity
 Risk
 Difficulty
in establishing and maintaining alliances
© 2008 Cengage Learning. All rights reserved.
8–27
Setting Up and Maintaining
Successful Strategic Alliances
• Steps in Building Strategic Alliances
 Establish a healthy network of contacts.
 Identify and contact individuals within a firm who are
likely to return your call.
 Outline the partner’s potential financial benefits from
the alliance.
 Learn to speak and understand the “language” of your
partner.
 Continue to monitor the progress of the alliance.
© 2008 Cengage Learning. All rights reserved.
8–28
8-5
Most Popular Small Business Alliances by Type
These alliances include only relationships that are long-term in nature.
2 These alliances include agreements relating to programs, such as just-in-time
supply or total quality management, that are relatively long-term in nature.
1
Source: “Strategic Alliances,” National Small Business Poll, William J. Dennis, Jr. (ed.),
Vol. 4, No. 4 (Washington, DC: NFIB Research Foundation, 2004), pp. 1–8.
© 2008 Cengage Learning. All rights reserved.
8–29
Making the Most of a Board of Directors
• Board of Directors
 The governing body of a corporation, elected by the
stockholders
 Inside directors
 Board members who work for the firm
 Outside director
 Board members who do not work for the firm
• Duties
 Elect the firm’s officers (top management)
 Approve management’s plans and policies
 Review performance and declare dividends
© 2008 Cengage Learning. All rights reserved.
8–30
The Board of Directors (cont’d)
• Contributions of Board of Directors
 Bring knowledge and experience
 Review
policy decisions
 Provide
general direction
 Monitor
the firm’s ethical behavior
 Mediate
and resolve disputes among top
management
• Alternative: Advisory Council
 Provides advice but does not have the fiduciary
responsibility for the direction of the firm.
© 2008 Cengage Learning. All rights reserved.
8–31
Key TERMS
•
•
•
•
•
•
•
•
•
•
•
•
•
•
management team
social network
social capital
reciprocation
sole proprietorship
unlimited liability
partnership
partnership agreement
agency power
corporation
legal entity
C corporation
corporate charter
stock certificate
© 2008 Cengage Learning. All rights reserved.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
pre-emptive right
ordinary income
capital gains and losses
Section 1244 stock
limited partnership
general partner
limited partner
S corporation (Subchapter S corporation)
limited liability company
professional corporation
nonprofit corporation
organizational test
strategic alliance
board of directors
advisory council
8–32

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