- 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
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- Consists of managers and other key persons who give a company
its general direction
- Characteristics of a Strong Management Team
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- Capable of securing the resources needed to make business a
success
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- Reassures investors about the their investment and the
continuity of business
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- Diversity of talent makes the team stronger than an individual
entrepreneur
5. The Management Team (cont)
- Building a Management team:
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- Competencies required depends on type of business
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- Combination of education and experience
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- Requires achieving a balance of skills and competence in
functional areas
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- Designing a management structure that defines relationships and
responsibilities
- Outside professional support:
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- Supplements the skills of a management team
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- 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)
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- A business owned by one person
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- Unlimited personal liability
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- Death/incapacity of owner terminates business
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- Ownership of the company name and assets may be
transferred.
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- There is generally no registration or filing fee.
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- Freedom from interference
8. Sole Proprietorship
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- A business owned by one person
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- Receives all of the firms profits.
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- Holds title to all of the firms assets
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- Can easily sell or transfer ownership of the company name and
assets.
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- Requires no registration or filing fee.
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- Has absolute freedom from interference by other
stakeholders.
9. Sole Proprietorship (contd)
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- Is subject to all claims of creditors.
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- Has unlimited personal liability for business
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- Receives no tax free benefits as an employee
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- Death/incapacity of owner terminates business
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- Is limited to the proprietors personal capital.
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- is taxed on business income as personal income.
10. The Partnership Option
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- A legal entity formed by two or more co-owners to carry on a
business for profit.
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- Required: of legal age to contract
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- Desired: Honest, healthy, capable, and compatible
- Questions about Partnership Formation
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- What is our business concept?
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- How are we going to structure ownership?
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- Why do we need each other?
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- 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
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- A document that states explicitly the rights and duties of
partners.
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- The ability of any one partnerto legally bind (e.g.,
borrowmoney) the other partners.
13. The C Corporation Option
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- A business organization that exists as a legal entity and
provides limited liability for its owners.
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- A business organization that is recognized by the law as having
a separate legal existence (artificial being); can be sued, hold
property, incur debt.
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- 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
- Formal statement of formation
- Classes and preferences of stock
- Number and par value of authorized shares
- Voting privileges for each class of stock
- Names of incorporators and directors
- 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
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- A document specifying the number of shares of stock owned by a
shareholder
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- The right of stockholders to buy new shares of stock before
they are offered to the public.
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- Ownership provides control over the firm.
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- Ownership limits liability to investment in the firm.
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- Ownership can be transferred without affecting the firms
operations
17. Choosing an Organizational Form
- Factors that affect the choice of the firms structure:
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- Initial organizational costs and requirements
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- Limited versus unlimited liability for the owners
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- Transferability of ownership
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- Attractiveness for raising equity capital
18. Specialized Forms of Organization
- Limited Partnership Structure
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- General partner active in the business, personally liable for
the debts of the business
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- Limited partnersnot active in the business, liability limited
to investment in business
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- Income (taxable) or lossesare apportioned to each partner
19. Specialized Forms of Organization (contd)
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- No more than 75 stockholders
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- All stockholders must be individuals
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- Only one class of stock outstanding
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- Must be a domestic corporation
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- Must operate on a calendar year basis
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- No nonresident alien stockholders
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- Liability limited to investment in corporation
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- Dividends avoid double taxation (corporate and personal
income).
20. Specialized Forms of Organization (contd)
- Limited Liability Company
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- A corporation in which stockholders have limited liability but
pay personal income taxes on the business profits.
21. Strategic Alliances
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- An organizational relationship that links two or more
independent business entities in a common endeavor
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- Reduced cycle times through shared resources
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- Increased performance through synergistic combinations of
financial resources and creativity
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- Difficulty in establishing and maintaining alliances
22. The Board of Directors
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- The governing body of a corporation, elected by the
stockholders
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- Board members who work for the firm
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- Board members who do not work for the firm
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- Elect the firms officers (top management)
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- Approve managements plans and policies
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- Review performance and declare dividends
23. The Board of Directors (contd)
- Contributions of Board of Directors
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- Bring knowledge and experience
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- Provide general direction
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- Monitor the firms ethical behavior
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- Mediate and resolve disputes among top management
- Alternative: Advisory Council
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- 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
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- Self-employed persons are taxed on their business incomes at
tax rates set for individuals.
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- The partnership does not pay taxes; allocated shares of income
from partnership are taxed as personal income for each of the
partners.
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- 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
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- 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
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- 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
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- Income earned in the ordinary course of business, including any
salary
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- Gains and losses from sale of property that are not part of the
firms regular business
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- Special of class stock that allows the owner to claim an
ordinary income tax-deductible loss should the stock become
worthless