techno 9-organizational plan

8/9/2019 Techno 9-Organizational Plan

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The Organizational Plan

McGraw-Hill/IrwinEntrepreneurship, 7/e Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 9


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Developing the Management Team

The management team is expected:

To not operate the business as a sideline or part-

time venture.

To operate the business full time and at a modest

salary.


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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, unlimited

liability who have pooled resources to own a business.

Corporation (C corporation): most common form ofcorporation, regulated by statute (Malaysias Company

Act), and treated as a separate legal entity for liability

and tax purposes.

New forms of business formations:

Limited liability company (LLC).

Limited liability partnership (LLP).


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Ownership (1 of 2)

Proprietorship: Owner is the individual who starts the business.

Has full responsibility for the operations.

Partnership:

General partnership owners and limited partnership

owners.

Limited liability partnerships (LLP):

Partnership is treated as a legal entity.


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Ownership (2 of 2)

Corporation: Ownership is reflected by ownership of shares ofOwnership is reflected by ownership of shares of

stock.stock.

No limit to the number of shareholders.No limit to the number of shareholders.

S corporation:S corporation:

Maximum number of shareholders is 100.Maximum number of shareholders is 100.


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Liability ofOwners

Sole proprietorship: Individual is liable for business liabilities.

Partnership-general:

Liable forall aspects of the business.

Amount of personal liability is shared equally.

Partnership-limited:

Limited partners liable for amount of capital

contribution.

Corporation:

Owners liable only forthe amount of their

investment.


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Costs of Starting a BusinessCosts of Starting a Business

Sole proprietorship: Filing for a business or trade name.Filing for a business or trade name.


Partnership agreement, legal costs, trade namePartnership agreement, legal costs, trade name

filing fees.filing fees.


More complex than a general partnership.More complex than a general partnership.

Corporation:

Created by statute, articles of incorporation, filingCreated by statute, articles of incorporation, filing

fees, taxes, fees for states in which corporationfees, taxes, fees for states in which corporation

registers to do businessregisters to do business


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Continuity of BusinessContinuity of Business

Sole proprietorship

Death of owner results in the termination of thebusiness.


Death orwithdrawal of one of the partners results in

partnership termination, unless stipulated

otherwise.


Death orwithdrawal has no effect on continuity ofbusiness.

Corporation:

Death orwithdrawal has no impact on continuation

of business.


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Transferability of Interest (1 of 2)

Sole proprietorship:

Entrepreneur has the right to sell or transfer anyEntrepreneur has the right to sell or transfer any

assets in the business.assets in the business.

Partnership-general: Cannot sell their interest without first refusal fromCannot sell their interest without first refusal from

the remaining general partners.the remaining general partners.


Can sell their interest at any time without consent ofCan sell their interest at any time without consent of

the general partners.the general partners.


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Transferability of Interest (2 of 2)

Corporation: Shareholders may transfer their shares at any timeShareholders may transfer their shares at any time

without consent from the other shareholders.without consent from the other shareholders.

Disadvantage: It can affect the ownership controlDisadvantage: It can affect the ownership control

S Corporation:S Corporation:

Transfer of interest can occur only as long as theTransfer of interest can occur only as long as the

buyer is an individual.buyer is an individual.


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Capital Requirements

Sole proprietorship: From loans or by additional personal contributionsFrom loans or by additional personal contributions

by the entrepreneur.by the entrepreneur.

Partnership:

Loans can be obtained from banks but may requireLoans can be obtained from banks but may require

change in partnership agreement.change in partnership agreement.

Corporation:

Stock may be sold as either voting or nonvoting.Stock may be sold as either voting or nonvoting.


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Management Control (1 of 2)

Sole proprietorship: Entrepreneur is responsible for and has soleEntrepreneur is responsible for and has sole

authority over all business decisions.authority over all business decisions.


Can present problems if partnership agreement isCan present problems if partnership agreement is

not concise.not concise.

Usually majority rules unless agreement statesUsually majority rules unless agreement statesotherwise.otherwise.


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Management Control (2 of 2)

Partnership-limited Separation of ownership and control.

Limited partners have no control over business

decisions.

Rights of all partners are clearly defined in theagreement.

Corporation: Management has control over day-to-day business

Majority stockholders control major long-term decisionsthrough vote.

Stockholders can indirectly affect operation by electing

someone to the board of directors.


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Distribution of Profits and Losses (1 of 2)

Sole proprietorship: eceive all distributions of profits from the business.Receive all distributions of profits from the business.

Personally responsible for all losses.Personally responsible for all losses.


Distribution of profits and losses depends on theDistribution of profits and losses depends on the

agreement.agreement.

Sharing of profits and losses likely to be a functionSharing of profits and losses likely to be a function

of the partners investments.of the partners investments.


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Distribution of Profits and Losses (2 of 2)

Partnership-limited Protect limited partners against personal liability.Protect limited partners against personal liability.

May reduce share in any profits.May reduce share in any profits.

Corporation:

Distribute profits through dividends to stockholders.Distribute profits through dividends to stockholders.

Losses will often result in no dividends.Losses will often result in no dividends.


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Attractiveness for Raising Capital

Sole proprietorship Limited to capability of owner and success of the

business.

Least attractive for raising capital.


Depends on capability of partners and success of

business.

Corporation: Most attractive for raising capital.

Shares of stock, bonds, and/or debt are all

opportunities for raising capital with limited liability.


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Tax Attributes of Forms of Business (1 of 2)Tax Attributes of Forms of Business (1 of 2)

Sole proprietorship: IRS treats business as the individual owner.IRS treats business as the individual owner.

All income appears on owners return as personalAll income appears on owners return as personal

income.income.

Tax advantages:Tax advantages:

No double tax when profits are distributed to owner.No double tax when profits are distributed to owner.

No capital stock tax or penalty for retained earnings.No capital stock tax or penalty for retained earnings.


Tax advantages and disadvantages similar soleTax advantages and disadvantages similar sole

proprietorship.proprietorship.


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Tax Attributes of Forms of Business (2 of 2)


Has the advantage of limited liability.Has the advantage of limited liability.

Treated the same as the LLC for tax purposes.Treated the same as the LLC for tax purposes.

Corporation: Can take many deductions and expenses notCan take many deductions and expenses not

available to proprietorship or partnership.available to proprietorship or partnership.

Distribution of dividends is taxed twice.Distribution of dividends is taxed twice.

Double taxation can be avoided if income isDouble taxation can be avoided if income is

distributed to entrepreneur(s) in the form of salary.distributed to entrepreneur(s) in the form of salary.


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Limited Liability Company Vs S CorporationLimited Liability Company Vs S Corporation

Venture capitalists prefer LL

Cs as a form of

Venture capitalists prefer LL

Cs as a form ofbusiness entity.business entity.

Popularity has resulted from finalization of the newPopularity has resulted from finalization of the new

regulation.regulation.

LLC can be automatically taxed as a partnership,LLC can be automatically taxed as a partnership,unless the entrepreneur actively makes anotherunless the entrepreneur actively makes another

choice.choice.

Growth rate of the formation of S corporationsGrowth rate of the formation of S corporations

has leveled off primarily because of the widehas leveled off primarily because of the wide

acceptance of LLCs.acceptance of LLCs.


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S CorporationS Corporation

Combines the tax advantages of theCombines the tax advantages of thepartnership and the corporation.partnership and the corporation.

Passage of the 1996 law loosened some of thePassage of the 1996 law loosened some of the

restrictions.restrictions.

In 2004, Congress responded to criticisms ofIn 2004, Congress responded to criticisms of

the restrictions on S corporations as comparedthe restrictions on S corporations as compared

to LLCs.to LLCs.

Intent was to make the S corporation asIntent was to make the S corporation as

advantageous as the LLC.advantageous as the LLC.


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S CorporationS Corporation-- AdvantagesAdvantages

Gains/losses = ersonal income/loss.Gains/losses = ersonal income/loss.

Limited Liability Protection.Limited Liability Protection.

No minimum tax.No minimum tax. Stock transferable.Stock transferable.

Stock = Voting or nonStock = Voting or non--voting.voting.

Cash method of accounting.Cash method of accounting. LongLong--term capital gains/losses deductible toterm capital gains/losses deductible to

shareholders.shareholders.


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S CorporationS Corporation-- DisadvantagesDisadvantages

Some restrictions for qualification.Some restrictions for qualification.

Potential tax disadvantages.Potential tax disadvantages.

Most fringe benefits not deductible forMost fringe benefits not deductible for

shareholders.shareholders. Must have calendar tax year.Must have calendar tax year.

One class of stock.One class of stock.

Net loss limited to shareholders stock plusNet loss limited to shareholders stock plusloans to business.loans to business.

No more than 75 shareholders.No more than 75 shareholders.


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Limited Liability CompanyLimited Liability Company

Partnership/corporation hybrid, laws differ fromPartnership/corporation hybrid, laws differ fromstate to state.state to state.

Has members.Has members.

No shares issued, each member ownsNo shares issued, each member ownsaccording to articles of incorporation.according to articles of incorporation.

Liability = Members capital contribution.Liability = Members capital contribution.

Transfer requires unanimous consent.Transfer requires unanimous consent. Taxed as partnership.Taxed as partnership.

Standard term = 30 years, continuity restricted.Standard term = 30 years, continuity restricted.


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Advantages ofLLCAdvantages ofLLC

LLC liabilities added to partnership interest.LLC liabilities added to partnership interest. Most States do not tax LLCs.Most States do not tax LLCs.

Ownership not limited to individuals.Ownership not limited to individuals.

Members share income, profit, expense, etc.,Members share income, profit, expense, etc.,among themselves.among themselves.


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Designing the OrganizationDesigning the Organization

This is the entrepreneurs formal and explicitThis is the entrepreneurs formal and explicitindication to the members of the organizationindication to the members of the organization

as to what is expected of them.as to what is expected of them.

Organization structure.

Planning, measurement, and evaluation

schemes.Rewards.

Selection criteria.

Training.


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Stages in Organizational DesignStages in Organizational Design


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Building the Management Team and aBuilding the Management Team and a

Successful Organization Culture (1 of 2)Successful Organization Culture (1 of 2)

A management team must be able toA management team must be able to

accomplish three functions:accomplish three functions:

Execute the business plan.the business plan.

Identify fundamental changes in the business asIdentify fundamental changes in the business as

they occurthey occur(external and internal environment).

Make adjustments to the plan based on changesto the plan based on changes

in the environment and market that will maintainin the environment and market that will maintain

profitability.profitability.


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Building the Management Team and aBuilding the Management Team and a

Successful Organization Culture (2 of 2)Successful Organization Culture (2 of 2) Factors to establish an effective team, and in turn aFactors to establish an effective team, and in turn a

successful organization culture:successful organization culture:

Desired culture must match business strategymust match business strategy

outlined in the business plan.outlined in the business plan.

The workplace mustThe workplace must encourage communicationfrom the bottom up.

Entrepreneur should beEntrepreneur should be flexible enough to tryto try

different things.different things.

Entrepreneur needs toEntrepreneur needs to spend extra time in thehiring process.

Core values and appropriate tools must bemust be

provided for employees to effectively completeprovided for employees to effectively complete

their jobs.their jobs.


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Board of Directors (1 of 2)Board of Directors (1 of 2)

Functions of the board of directors:

Reviewing operating and capitaloperating and capital budgets.

Developing longer-term strategic plans forfor

growth and expansion.growth and expansion. Supporting dayday--toto--dayday activities.

Resolving conflicts among owners oramong owners or

shareholders.shareholders.

Ensuring the proper use of assets.

Developing a network of information sources forof information sources for

the entrepreneursthe entrepreneurs..


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Board of Directors (2 of 2)Board of Directors (2 of 2)

They must be chosen to meet the requirements ofThey must be chosen to meet the requirements ofthe Sarbanesthe Sarbanes--Oxley Act and the following criteria:Oxley Act and the following criteria:

Individuals who can work with a diverse group

and will commit to the ventures mission. Candidates who understand the market

environment.

Candidates who can contribute important skills

to the new ventures achievement of planninggoals.

Candidates who will show good judgment in

business decision making.


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Board of AdvisorsBoard of Advisors

More loosely tied to the organization.More loosely tied to the organization.

Serve the ventureServe the venture only in an advisorycapacity.

Has no legal status, unlike the board of

directors. Likely to meet less frequently or depending

on the need to discuss important venture

decisions. Useful in a family business.

Selection process for advisors can be

similar to the process for selecting a board


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Organization and Use of AdvisorsOrganization and Use of Advisors

Usually used on anUsually used on an as-needed basis.

Can also become an important part of the

organization.

Need to be managed just like any otherpermanent part of the new venture.

Even after hiring advisors, the entrepreneur

should question their advice.

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