8-1 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Chapter 8 Selecting the Management Team

8-1

Small Business Management, 11th editionLongenecker, Moore, and Petty© 2000South-Western College Publishing

Chapter 8

Selecting the Management Team Selecting the Management Team and Form of Organizationand Form of Organization

In the Spotlight:StrandWare, Inc.www.strandware.com

In the Spotlight:StrandWare, Inc.www.strandware.com

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Learning Objectives: Chapter 8

1. Describe the characteristics and value of a strong management team.

2. Identify the common legal forms of organization used by small

businesses and describe the characteristics of each.

3. Identify factors to consider in choosing among the primary legal forms

of organization.

4. Describe the unique features and restrictions of specialized

organizational forms such as limited partnerships, S corporations, and

limited liability companies.

5. Explain the nature of strategic alliances and their uses in small business.

6. Describe the effective use of boards of directors and advisory councils.

7. Explain how different forms of organization are taxed by the federal

government.

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The Management TeamManagement team:

• Consists of managers and other key persons who give

a company its general direction

Value of a strong management team:• Provides diversity of talent• Assures continuity of business

Building a complementary management team:• Requires balance in areas of competence

Outside professional support:• Supplements a management team• Is not widely used by new firms

Nonmanagerial personnel

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Forms of Legal Organization for Small Businesses

Sole Proprietorship

Common Forms of Legal

OrganizationPartnership

Corporation

General Partnership

Limited Partnership

Regular CCorporation

Subchapter SCorporation

Limited LiabilityCompany

Limited LiabilityCompany

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The Sole Proprietorship Option

• A sole proprietorship is a business owned and operated by one person.

• There is generally no registration or filing fee.

• Liability is unlimited.

• The sole proprietorship is dissolved upon the proprietor’s death.

• Ownership of the company name and assets may be transferred.

• Management freedom is absolute.

• Capital is limited to the proprietor’s personal capital.

• Income from the business is taxed as personal income to the proprietor.

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The Partnership Option

• A partnership is a voluntary association of two or more persons to carry on, as co-owners, a business for profit.

• There is generally no registration or filing fee.

• Liability is unlimited.

• Unless the partnership agreement specifies otherwise, the partnership is dissolved upon withdrawal or death of a partner.

• Transferring ownership requires the consent of all partners.

• A majority vote of partners is required for control.

• Capital is limited by the partners’ ability and desire to contribute.

• Income from the business is taxed as personal income.

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An Opinion Survey About the Pros and Cons of Partnerships

Why is apartnershipgood?

Why is apartnershipbad?

Spreads the workloadSpreads the emotional burdenBuys executive talent not otherwise affordableSpreads the financial burdenMakes company building less lonely

Personal conflicts outweigh the benefitsPartners never live up to one another’s expectationsCompanies function better with one clear leaderDilutes equity too muchYou can’t call your own shots

5541403326

605953 6 6

Question Perceived Pros and Cons Percentage Responding

Source: “The Inc. FaxPoll: Are Partners Bad for Business?” Inc., Vol. 14, No. 2 (February 1992), p. 24.

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• A corporation is a business organization that exists as a legal entity.

• It is the form of organization that has the most fees and requirements.

• A written application must be filed with the secretary of state.

• The corporation, and not its owners, is liable for debts contracted by the business.

• Stockholders may sell their interest, represented by stock certificates.

• Stockholders’ liability is limited to their investment.

• Withdrawal or death of stockholders does not affect the continuity of a large business.

• The retirement or death of a majority stockholder in a small firm can have adverse effects on the other stockholders.

• Usually it is the most attractive form for raising capital.

• The corporation is taxed on its income, and the stockholder is taxed when dividends are received.

The C Corporation Option

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Issues in Choosing an Organizational Form

• Initial organizational costs and requirements

• Limited versus unlimited liability for the owners

• Continuity of business

• Transferability of ownership

• Management control

• Attractiveness for raising new equity capital

• Income taxes

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Comparisons of Legal Forms of Organization

Sole proprietorship

General partnership

Corporation

Form of organizationpreferred

Minimum requirements;generally no registrationor filing fee

Minimum requirements; generally no registration orfiling fee; written partnershipagreement not legally requiredbut strongly suggested

Most expensive and greatestrequirements; filing fees; compliance with state regula-tions for corporations

Proprietorship or generalpartnership

Unlimited liability

Unlimited liability

Liability limited to investmentin company

Corporation

Limited to proprietor’spersonal capital

Limited to partner’sability and desire tocontribute capital

Usually the most attractive form forraising capital

Corporation

Form ofOrganization

Initial OrganizationalRequirements and Costs

Liability ofOwners

Attractiveness forRaising Capital

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Specialized Forms of Organization

• The limited partnership

• The S corporation

• The limited liability company

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Strategic Alliance: A Definition

A strategic alliance is an organizationalrelationship that links two or moreindependent business entities in acommon endeavor.

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The Board of Directors

• Reviews major policy decisions• Advises on external business conditions• Provides informal advice on specific problems• Helps evaluate family talent in a family business• Helps mediate differences among family

members• Increases a small firm’s credibility

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Taxes and the Form of Organization

• Sole Proprietorship: Business income reported on owners’ individual federal income tax returns

• Partnership: Income allocated to partners, who individually report it on their personal tax returns

• C Corporation: Income is reported by the business, which pays any taxes owed on its profits

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BizPlanExpress on the Management Team(pp. 37-38)

The management team provides the leadership for yourbusiness and must include combined strength in bothmanagement and technical areas. The management teamshould be selected in such a manner that talents arecomplementary rather than overlapping or duplicated.You must ensure that all the key areas necessary toaccomplish the goals and objectives of the companyare within the strengths and talents of your managementteam.

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BizPlanExpress on Strategic Alliances (p. 38)

Strategic alliances can strengthen and broaden yourpotential market as well as add talent to your managementteam. Some of the alliances you may seek includeOriginal Equipment Manufacturers (OEMs), jointmarketing, third-party supplier, or joint developer.

Documents

8-1 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Chapter 8 Selecting the Management Team