1. Management Teams, Organizational Forms, and Strategic Alliances part 4 PowerPoint Presentation by Charlie Cook Copyright2003 South-Western College Publishing. All rights reserved. 10 The New Venture Business Plan 12e

2. Looking Ahead

After studying this chapter, you should be able to:

Describe the characteristics and value of a strong management team.

Explain the common legal forms of organization used by small businesses.

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

Describe the unique features and restrictions of specialized organizational forms such as limited partnerships, S corporations, and limited liability companies.

3. Looking Ahead (contd)

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

Describe the effective use of boards of directors andadvisory councils.

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

4. The Management Team

Management team:

• Consists of 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

5. The Management Team (cont)

Building a Management team:

• Competencies required depends on type of business

• • Combination of education and experience

• • Requires achieving a balance of skills and competence in functional areas

• Designing a management structure that defines relationships and responsibilities

Outside professional support:

• Supplements the skills of a management team

• Active board of directors can counsel and guide

6. Legal Forms of Organization Fig 10.1 Common Forms of Legal Organization Subchapter S Corporation Sole Proprietorship Partnership Corporation Regular C Corporation Limited Liability Company Limited Partnership General Partnership 7. Legal Forms of Ownership (contd)

Sole Proprietorship

• A business owned by one person

• Disadvantages

• • Unlimited personal liability

• • No tax free benefits

• • Death/incapacity of owner terminates business

• Advantages

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

• • There is generally no registration or filing fee.

• • Freedom from interference

8. Sole Proprietorship

Sole Proprietorship

• A business owned by one person

Advantages

• Receives all of the firms profits.

• Holds title to all of the firms 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.

9. Sole Proprietorship (contd)

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 proprietors personal capital.

• is taxed on business income as personal income.

10. 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?

11. The Advantages and Disadvantages ofPartnerships Fig 10.2 Sharing Workload Sharing Financial Burden Sharing Emotional Burden Procuring Executive Talent Companionship Interpersonal Conflicts Dilution of Equity Dissatisfaction with Partner Absence of One Clear Leader Frustration of Not Calling Own Shots Advantages Disadvantages 12. Partnership Terms

Articles of Partnership

• A document that states explicitly the rights and duties of partners.

Agency Power

• The ability of any one partnerto legally bind (e.g., borrowmoney) the other partners.

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, incur debt.

C Corporation

• An ordinary, or regular, corporation chartered by the state and taxed by the federal government as a separate legal entity.

14. Corporate Charter: Articles of Incorporation

Name of company

Formal statement of formation

Type of Business

Location

Duration

Classes and preferences of stock

Number and par value of authorized shares

Voting privileges for each class of stock

Names of incorporators and directors

Capital stockholders

Statement of limited liability for stockholders

Statement of directors powers

15. Comparison of Legal Forms of Organization Sole proprietorship General partnership Corporation Form of organization preferred Minimum requirements; generally no registration or filing fee Minimum requirements;generally no registration or filing fee; written partnership agreement not legally required but strongly suggested Most expensive and greatest requirements; filing fees;compliance with state regulations for corporations Proprietorship or general partnershipUnlimited liability Unlimited liability Liability limited to investment in company Corporation Limited to proprietors personal capital Limited to partners ability and desire to contribute capital Usually the mostattractive form for raising capital Corporation Form of Organization Initial Organizational Requirements and Costs Liability of Owners Attractiveness for Raising Capital 16. 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 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 firms operations

17. Choosing an Organizational Form

Factors that affect the choice of the firms structure:

• Initial organizational costs and requirements

• Limited versus unlimited liability for the owners

• Continuity of business

• Transferability of ownership

• Management control

• Attractiveness for raising equity capital

• Income taxes

18. Specialized Forms of Organization

Limited Partnership Structure

• General partner active in the business, personally liable for the debts of the business

• Limited partnersnot active in the business, liability limited to investment in business

• Income (taxable) or lossesare apportioned to each partner

19. Specialized Forms of Organization (contd)

S Corporation

• Eligibility Requirements

• • No more than 75 stockholders

• • All stockholders must be individuals

• • Only one class of stock outstanding

• • Must be a domestic corporation

• • Must operate on a calendar year basis

• • No nonresident alien stockholders

• Benefits

• • Liability limited to investment in corporation

• • Dividends avoid double taxation (corporate and personal income).

20. Specialized Forms of Organization (contd)

Limited Liability Company

• A corporation in which stockholders have limited liability but pay personal income taxes on the business profits.

21. 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

22. The 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 firms officers (top management)

• Approve managements plans and policies

• Review performance and declare dividends

23. The Board of Directors (contd)

Contributions of Board of Directors

• Bring knowledge and experience

• • Review policy decisions

• • Provide general direction

• • Monitor the firms 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.

24. Federal Income Taxes and Organizational Form: How Businesses Are Taxed

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.

25. Federal Income Taxes and Organizational Form: How Businesses Are Taxed

Sole Proprietorship

• Example of taxes due from a married couple with $150,000 in income from the business that they operate as self-employed persons,

Tax Rate 0 to43,850 15% 43,851 to105,950 28% 105,951 to161,450 31% 161,451 to288,350 36% Over to288,350 40% Range of Taxable Income Income Tax Rate Taxes First 43,850 15% 6,577.50 Next 62,100 28% 17,388.00 Next 44,050 31% 13,655.50 Total 150,000 37,621.00 26. Federal Income Taxes and Organizational Form: How Businesses Are Taxed

Corporation

• Example of taxes due from the profits of a corporation. Any profits of the corporation that are distributed to the stockholders are taxed again as personal income.

Range of Taxable Income Tax Rate $0 to $50,000 15% $50,001 to $75,000 25% $75,001 to $100,000 34% $100,001 to $335,000 39% Income x Tax Rate= Taxes First $50,000 15% $7,500 Next $25,000 25% $6,250 Next $25,000 34% $8,500 Remaining $50,000 39% $19,500 Total $150,000 $41,750 27. Section 1244 Stock

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 firms 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