Chapter 9 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. PowerPoint Presentation...

Chapter 9 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.

PowerPoint Presentation by PowerPoint Presentation by

Thomas MThomas MccKaig, Ryerson UniversityKaig, Ryerson University

Selecting the Selecting the Management Management Team and Form of Team and Form of OrganizationOrganization

99

9-2Chapter 9 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.

Looking AheadLooking Ahead

After studying this chapter, you should be able to:

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 effective use of boards of directors and advisory councils.

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


The Management TeamThe Management Team

• Management team:Consists of managers and other key persons who give a

company its general direction

• Characteristics of a Strong Management TeamCapable of securing the resources needed to make

business a successReassures investors about their investment and the

continuity of businessDiversity of talent makes the team stronger than an

individual entrepreneur


Complementary Management TeamComplementary Management Team

• Building a Complementary Management team:Competencies required depends on type of business

• Combination of education and experience• Requires achieving a balance of skills and competence in

functional areasDesigning a management structure that defines

relationships and responsibilities

• Outside professional support:Supplements the skills of a management teamActive board of directors can counsel and guide


Legal Forms of OrganizationLegal Forms of Organization

• In launching a new business, an entrepreneur must choose a form of legal organization. The most common options are: Sole proprietorship Partnership Corporation


Forms of Legal

Organization

Forms of Legal

Organization

Common Formsof LegalOrganization

Federal Corporation

SoleProprietorship

Partnership

Corporation

ProvincialCorporation

LimitedPartnership

GeneralPartnership

Figure 9-1


The Sole Proprietorship OptionThe Sole Proprietorship Option

• Sole ProprietorshipA business owned by one personDisadvantages

• 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


The Partnership OptionThe 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?


The Limited PartnershipThe Limited Partnership

• Limited Partnership This form of ownership consists of at least one general

partner and one or more limited partners

General partner

• a partner in a limited partnership who has unlimited personal liability

Limited partner

• a partner in a limited partnership who is not active in its management and has limited personal liability


Sharing Workload

Sharing FinancialBurden

Sharing EmotionalBurden

Procuring ExecutiveTalent

Companionship

InterpersonalConflicts

Dilution of Equity

Dissatisfactionwith Partner

Absence of OneClear Leader

Frustration of NotCalling Own Shots

Advantages DisadvantagesThe Advantages and Disadvantages

of Partnerships

The Advantages and Disadvantages

of Partnerships


Partnership TermsPartnership Terms

• Articles of PartnershipA document that states explicitly

the rights and duties of partners.

• Agency PowerThe ability of any one partner

to legally bind (e.g., borrow money) the other partners.


Rights and Duties of Partners in a Partnership Agreement

Rights and Duties of Partners in a Partnership Agreement

• Date and formation of partnership

• Names and addresses of partners

• Statement of fact of partnership

• Statement of business

• Name and location of the business

• Amount invested by each partner

• Sharing ratio for profits & losses

• Partner’s right if any re: withdrawal of funds for personal use

• Provision for accounting records and their accessibility to partners

• Specific duties of each partner

• Provision for dissolution and sharing of the net assets

• Restraint on partner's assumption of special obligations, such as endorsing a note of another

• Provision for protection of surviving partners decedent’s estate, and so forth in the even of a partner’s death


The Corporation OptionThe 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


Articles of AssociationArticles of Association

• Restrictions if any on share transfers

• Names and addresses of incorporator and first year’s directors

• Name of company• Restrictions, if any, on

business the corporation may carry on

• Location of principal office

• Classes, voting privileges and, maximum number of shares the corporation is allowed to issue


Rights and Legal Status of ShareholdersRights and Legal Status of Shareholders

• Share CertificateA document specifying the number of shares owned by a

shareholder

• Pre-emptive RightThe right of shareholders to buy new shares before they are

offered to the public.

• Legal StatusOwnership provides control over the firm.Ownership limits liability to investment in the firm.Ownership can be transferred without affecting the firm’s

operations


Limited Liability of ShareholdersLimited Liability of Shareholders

• For most shareholders, their limited liability is a major advantage of the corporate form of organization. Their financial liability is limited to the amount of money they invest in the business.


Death or Withdrawal of ShareholdersDeath or Withdrawal of Shareholders

• Unlike a partnership interest, ownership in a corporation is readily transferable.

• Exchange of shares is sufficient to convey an ownership interest to a different individual.

• Shares of large corporations are exchanged constantly without noticeable effect on the operation of the business.

• For a small firm, a change of owners can involve numerous complications


Issues in Choosing an Organizational Form

Issues in Choosing an Organizational Form

• Factors that affect the choice of the firm’s structure: Initial organizational costs and requirementsLimited versus unlimited liability for the ownersContinuity of businessTransferability of ownershipManagement controlAttractiveness for raising equity capital Income taxes


Comparison of Legal Forms of Organization

Comparison of Legal Forms of Organization

Sole proprietorship

General partnership

Corporation

Form oforganizationpreferred

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 provincial regulations for corporations

Proprietorship orgeneral partnership

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

Table 9-1


The Board of Directors and DutiesThe Board of Directors and Duties

• Board of DirectorsThe governing body of a corporation, elected by the

shareholders Inside directors

• Board members who work for the firmOutside director

• Board members who do not work for the firm

• DutiesElect the firm’s officers (top management)Approve management’s plans and policiesReview performance and declare dividends


The Board of Directors and Advisory Councils

The Board of Directors and Advisory Councils

• Contributions of Board of DirectorsBring knowledge and experience

• Review policy decisions• Provide general direction• Monitor the firm’s ethical behaviour• Mediate and resolve disputes among top management

• Alternative: Advisory CouncilProvides advice but does not have the fiduciary

responsibility for the direction of the firm.


Federal Income TaxesFederal Income Taxes

• 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.


Federal Income Taxes and Sole Proprietorship

Federal Income Taxes and Sole Proprietorship

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

Tax Rate0 to 43,850 15%

43,851 to 105,950 28%105,951 to 161,450 31%161,451 to 288,350 36%

Over to 288,350 40%

Range of Taxable Income

Income Tax Rate TaxesFirst 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


Federal Income Taxes and CorporationsFederal Income Taxes and Corporations

CorporationsExample of taxes due from the profits of a corporation. Any profits of the corporation that are distributed to the shareholders 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= TaxesFirst $50,000 15% $7,500Next $25,000 25% $6,250Next $25,000 34% $8,500Remaining $50,000 39% $19,500Total $150,000 $41,750

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