Download - 9. the Organizational Plan
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The management team and its ability andcommitment to the new venture are importantfactors to the potential investors.
The management team is asked to:
Fully engaged in the business operations on full timebasis.
To work on modest salaries.
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Whatare the three main forms of businessorganization, and what factors should acompanys owners consider when selecting aform?
Sole proprietor Partnership Corporation
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Choose a form of organization byevaluating:Ownership
Owners liability for firms debtsCosts of starting a business
Continuity of Business
Transferability of InterestCapital Requirements / The ability to raise
funds
Management Control
Distribution of Profits and Losses
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BZUPAGES.COM
Factors Proprietorship Partnership Corporation
Ownership
Individual No limitation on
number of
partners
No limitation on
numbers of
stockholders
Liability ofowners
Individual liablefor business
liabilities
In generalpartner ship all
individual liable
for liabilities,
limited partner
are liable foramount of
capital.
Amount of capitalcontribution is
limit of
shareholder
liability
Costs ofstarting
business
None, other than
filling fees for
trade name
Partnership
agreement, legal
costs, and minorfilling fees for
trade name.
Created only by
statue. articles of
incorporation,filing fees, taxes
and fees for
states in which
corporation
register to dobusiness.
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Factors Proprietorship Partnership Corporation
Continuity ofbusiness
Death dissolve the
business
Death or
withdrawal of one
partnerterminates
partnership unless
partnership
agreement
stipulatesotherwise, death
or withdrawal of
one of limited
partner has no
effect oncontinuity
Greatest form of
continuty. Death
or withdrawl willnot effect.
Transferabilityof interest
Complete freedom
to sell or transfer
any part of
business
General partner
can transfer his
interest only with
consent of all
other general
Most flexible.
Stockholder can
sell or stock at
will. Some stock
transfers may be
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Factors Proprietorship Partnership Corporation
Capitalrequirement
Capital raised
only by loan or
increasedcontribution by
proprietor
Loan or new
contribution by
partner require achange in
agreement.
New capital
raised by sale of
stocks or bondsor by borrowing
in name of
corporation.
Management
control
Proprietror
makes alldecision and act
immediately
All general
partners haveequal control
Majority
stockholdershave most
controls from
legal point of
view.
Distribution ofprofit andlosses
Responsible and
recice all profits
and losses
Depend on
partnership
agreement and
investment by
partners
Shareholder can
share
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Factors Proprietorship Partnership Corporation
Attractivenessfor RaisingCapital
The ability to
raise funds
depends on thesuccess of the
business and the
personal
capability of the
entrepreneur.
The ability to
raise funds
depends on thesuccess of the
business and the
personal
capability of the
entrepreneur
Is the most
attractive form
of raising capitalbecause of its
advantage
regarding
personal liability.
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ax r u es o orms o us ness:
For ProprietorshipIRS treats the business as anindividual owner and all incomes on
the owners returns as personalincome and has tax advantages incomparison to corporation.
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ax r u es o orms o us ness:
For PartnershipSimilar to proprietorship in terms ofincome distributions, dividends and
capital gains and losses. And in limitedpartnership there is advantage oflimited liability.
Both proprietorship and partnershiphave nontaxable conduits of incomeand deductions.
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Tax Attributes of Forms of Business:
For CorporationIRS recognizes corporation as aseparate tax entity and has the
advantage to take many deductionsand expenses; not available to firsttwo forms of business.
Corporate rate may be lower thanindividual rate.
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Advantages Ease and low cost of
formation
Owners rights to allprofits
Owners control of the
business
Relative freedom fromgovernment regulation
Absence of special taxes
Ease of dissolution
Disadvantages Unlimited liability of the
owner for debts Difficulty in raising capital Limited managerial
expertise Large personal time
commitment Unstable business life Difficulty in attracting
qualified employees Owners personal
absorption of all losses
What are the advantages and disadvantages
of sole proprietorships?
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General Partnerships
Partners co-own
assets and shareprofits
Each partner is
individually liable for
all debts and
contracts of the
partnership
Limited Partnerships Controlled by one or
more general partnerswho have unlimitedliability
Partners liability islimited to theirinvestment
Do not participate inthe firms operations
Why would a new business venture choose to
operate as a partnership, and what downside
would the partners face?
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Advantages ofPartnerships Ease of formation
Availability of capital Diversity of managerial
expertise Flexibility to respond to
changing businessconditions
Relative freedom fromgovernment control
Disadvantages ofPartnerships
Unlimited liability forgeneral partners
Potential for conflictbetween partners
Limited life
Sharing of profits Difficulty in leaving a
partnership
Why would a new business venture choose to
operate as a partnership, and what downside
would the partners face?
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Partnerships
Advantages Easy And Inexpensive
To Form
Diverse Skills And
Expertise
Flexibility
Relative Freedom From
GovernmentRegulations
No Special Taxation
Disadvantages Potential Conflicts
Between Partners
Unlimited Liability &
Potential Loss
Sharing Profits
Hard To Leave Or End
Partnership
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Topics to Cover
in a Partnership Agreement
Purpose & duration of partnership
Roles, responsibilities, compensation
Contributions
Procedures for adding/removing partners Buy-out procedures
Dispute resolution
Financial arrangements
Dissolving the partnership Valuation
Source: American Express Small Business Exchange,
home3.americanexpress.com/smallbusiness
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Advantages of
Corporations Limited liability
Ease of transferring
ownership
Stable business lifeAbility to attract
financing
Disadvantages of
CorporationsDouble taxation of
profits
Cost of complexity of
formationGovernment
restrictions
Why does the corporate structure provide advantages
and disadvantages to a company, and what are the
major types of corporations?
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StockholdersOwn the corporationCan sell or transfer shares at any timeEntitled to receive profits in the form of
dividendsBoard of DirectorsElected by stockholdersGovern the firm
OfficersCarry out the goals and policies set by the
boardC Corporations, S Corporations & Limited
Liability CompaniesMajor types of corporations
How does the corporate structure provideadvantages and disadvantages to a company,and what are the major types of corporations?
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Corporations
Advantages limited liability
easy to get financing
easy to transfer
ownership
unlimited life-span
tax deductions
Disadvantages double taxation of profits
costly & complex to form
government restrictions
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Steps of Forming a Corporation
1.Select companys name
2. Write and fileArticles of
Incorporation paperwork3. Pay fees and taxes
4. Hold organizational meeting
5.Adopt bylaws, elect directors, passoperating resolutions
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Organizational Structure of
Corporations
Stockholders
Directors
Officers (Top
Management)
President Vice Treasurer SecretaryPresident
elect
elect
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1.S corporations
organized like a corporation, but avoids double
taxation of profits by routing income and losses
through stockholders
2.Limited liability companies (LLC)
offers same limited liability as a corporation, but may
be taxed as either a partnership or corporation
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Some Pros and Cons of S Corp.
Pros
Capital gains or losses are treatedas personal income or losses.
Shareholders retain limitedliability.
Not subjected to a minimum tax.
Transferred to low-income-bracket family members.
Stock may be voting ornonvoting.
Use cash method of accounting.
Corporate long-term capital gainsand losses are deductible directlyby shareholders to offset otherpersonal capital gains or losses.
Cons
Restrictions regardingqualification for this form ofbusiness.
Tax advantage to Ccorporation depending onamount of net income.
Dont deduct fringe benefitsfor shareholders.
Must adopt a calendar year fortax purposes.
Cannot have more than 100shareholders.
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Some Pros and Cons of LLCs
Pros Protection of
personal assets
Avoid double-taxation of profits Flexible
management &
organization Good for foreign
investors
Cons
Often required tohave a limited life
(< 30 years)
Not corporations,so can not issue
stockSource: The Company Corporation,www.incorporate.com
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Limited Liability Company Provides limited liability for its owners
Taxes like a partnership
Cooperatives
Collectively owned by individuals or businesses withsimilar interests
Combine to achieve more economic power
Joint venture
An alliance of two or more companies
Formed to undertake a special project
Franchises
Business arrangement between a franchisor andfranchisee
Franchisee uses business name and logo of
Does a company have any business organizationoptions besides sole proprietorship, partnership, andcorporation?
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Specialized Forms
of Business Organization
1. Cooperatives
2. Joint ventures
3. Franchises
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Cooperatives
Formed by people with similar interests, such ascustomers and suppliers lower costs
increased economic power
share in profits
Members/owners pay annual fees
Common in:
agriculture hardware/lumber
grocery
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Joint Venture:
2 or more companies form an alliance to pursue aspecific project, usually for a specific time period.
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Franchising:
Business organization in which a franchisorsupplies the product concept to the franchisee,who sells the goods or services.
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Why is franchising growing in
importance?
Business owner does not have to start
from scratchBuys a business concept with a proven
product and operating methods
Franchisor provides:Management training and assistanceUse of a recognized brand name, product,
and operating concept
Financial assistance
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Franchises
Advantages increased opportunity to
expand (franchisor)
recognized name, product,
and operating concept(franchisee)
management training and
assistance (franchisee)
financial assistance(franchisee)
Disadvantages
loss of control
(franchisor)
costs of franchising
restricted operatingfreedom (franchisee)
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Organization structure
Planning, Measurement and evolution Scheme
Rewards
Selection criteria Training
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President
Production Marketing/Sales Administration
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President
ProductionManager
QualityControl
Assembly
MarketingManager
Sales
PromotionAdvertising
Administration Manager
FinanceAccounting
Purchasing
Shipping/Receiving
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Primary concern of entrepreneur is to change the
environment and seek new ideas.
Another role for entrepreneur is that of allocation of
resources .
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There are some issues to address before assemblingand building the management team. A team must beable to accomplish three functions
Execute the business plans Identify functional changes in the business as the
occurs
Make adjustments to the plans based on changes in
the environment in the market that will maintainprofitability.
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Enterpnuere will also need to consider thepersonality and character of each individuales tocreat a successful orangization culture .
Organiztion will be a blend of attitudes, behaviours,dress, comuunications style that make one businessdifferent from others.
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Desired culture must match the businessstrategies outline in the business plans
Leader must create a workplace where employeesare rewarded for good works.
Entrepreneur should be flexible enough to trydifferent things
It is necessary to spend extra time to hiringprocess
The entrepreneur needs to understandsignificance of the leadership in the organization.Provide the appropriate tools to the employees
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The purpose of Boards of Directors is to provideimportant leadership and direction for the newventure. The function of the Boards of Directors
Functions : Reviewing operating and capital budgets
Developing long term strategies plans for growthand expansion
Supporting day-to-day activities Ensure the proper use of assets
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Select individuals who can work with a diversegroup and will commit to the ventures mission
Select candidates who understand the market
environment or can contribute important skills toachieve planning goals
Select candidates who will show good judgments inbusiness decision making
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A board of advisor would be more loosely tied to theorganization and would serve the venture only anadvisory capacity for some of the function.
It has no legal status. Effect in family business.
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Entrepreneur will use outside advisors such asaccountant, bankers, lawyers, advertising agencies.