The New Venture Business Plan part 4 10
The New Venture Business Plan part 4 10 Management Teams, Organizational Forms, and Strategic Alliances Power. Point Presentation by Charlie Cook 12 e Copyright © 2003 South-Western College Publishing. All rights reserved.
Looking Ahead After studying this chapter, you should be able to: 1. Describe the characteristics and value of a strong management team. 2. Explain the common legal forms of organization used by small businesses. 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. Copyright © by South-Western College Publishing. All rights reserved. 2
Looking Ahead (cont’d) 5. Explain the nature of strategic alliances and their uses in small businesses. 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. Copyright © by South-Western College Publishing. All rights reserved. 3
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 their investment and the continuity of business – Diversity of talent makes the team stronger than an individual entrepreneur Copyright © by South-Western College Publishing. All rights reserved. 4
The Management Team (cont’) • Building a Management team: – Competencies required depends on type of business ØCombination of education and experience ØRequires 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 Copyright © by South-Western College Publishing. All rights reserved. 5
Common Forms of Legal Organization Sole Proprietorship General Partnership Limited Partnership Legal Forms of Organization Regular C Corporation Subchapter S Corporation Limited Liability Company Fig 10. 1 Copyright © by South-Western College Publishing. All rights reserved. 6
Legal Forms of Ownership (cont’d) • Sole Proprietorship – A business owned by one person – Disadvantages ØUnlimited personal liability ØNo tax free benefits ØDeath/incapacity of owner terminates business – Advantages ØOwnership of the company name and assets may be transferred. ØThere is generally no registration or filing fee. ØFreedom from interference Copyright © by South-Western College Publishing. All rights reserved. 7
Sole Proprietorship • Sole Proprietorship – A business owned by one person • Advantages – Receives all of the firm’s profits. – Holds title to all of the firm’s 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. Copyright © by South-Western College Publishing. All rights reserved. 8
Sole Proprietorship (cont’d) • 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 proprietor’s personal capital. – is taxed on business income as personal income. Copyright © by South-Western College Publishing. All rights reserved. 9
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? Copyright © by South-Western College Publishing. All rights reserved. 10
The Advantages and Disadvantages of Partnerships Advantages Disadvantages Sharing Workload Interpersonal Conflicts Sharing Emotional Burden Dissatisfaction with Partner Procuring Executive Talent Absence of One Clear Leader Sharing Financial Burden Dilution of Equity Companionship Copyright © by South-Western College Publishing. All rights reserved. Frustration of Not Calling Own Shots Fig 10. 2 11
Partnership Terms • Articles of Partnership – A document that states explicitly the rights and duties of partners. • Agency Power – The ability of any one partner to legally bind (e. g. , borrow money) the other partners. Copyright © by South-Western College Publishing. All rights reserved. 12
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. Copyright © by South-Western College Publishing. All rights reserved. 13
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 Copyright © by South-Western College Publishing. All rights reserved. • Voting privileges for each class of stock • Names of incorporators and directors • Capital stockholders • Statement of limited liability for stockholders • Statement of directors’ powers 14
Comparison of Legal Forms of Organization Form of Organization Initial Organizational Requirements and Costs Liability of Owners Attractiveness for Raising Capital Sole proprietorship Minimum requirements; generally no registration or filing fee Unlimited liability Limited to proprietor’s personal capital General partnership Minimum requirements; generally no registration or filing fee; written partnership agreement not legally required but strongly suggested Unlimited liability Limited to partner’s ability and desire to contribute capital Corporation Most expensive and greatest requirements; filing fees; compliance with state regulations for corporations Liability limited to investment in company Usually the most attractive form for raising capital Form of organization preferred Proprietorship or general partnership Corporation Copyright © by South-Western College Publishing. All rights reserved. 15
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 firm’s operations Copyright © by South-Western College Publishing. All rights reserved. 16
Choosing an Organizational Form • Factors that affect the choice of the firm’s 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 Copyright © by South-Western College Publishing. All rights reserved. 17
Specialized Forms of Organization • Limited Partnership Structure – General partner—active in the business, personally liable for the debts of the business – Limited partners—not active in the business, liability limited to investment in business – Income (taxable) or losses—are apportioned to each partner Copyright © by South-Western College Publishing. All rights reserved. 18
Specialized Forms of Organization (cont’d) • S Corporation – Eligibility Requirements ØNo more than 75 stockholders ØAll stockholders must be individuals ØOnly one class of stock outstanding ØMust be a domestic corporation ØMust operate on a calendar year basis ØNo nonresident alien stockholders – Benefits ØLiability limited to investment in corporation ØDividends avoid double taxation (corporate and personal income). Copyright © by South-Western College Publishing. All rights reserved. 19
Specialized Forms of Organization (cont’d) • Limited Liability Company – A corporation in which stockholders have limited liability but pay personal income taxes on the business profits. Copyright © by South-Western College Publishing. All rights reserved. 20
Strategic Alliances • Strategic Alliances – An organizational relationship that links two or more independent business entities in a common endeavor – Benefits ØReduced cycle times through shared resources ØIncreased performance through synergistic combinations of financial resources and creativity – Risk ØDifficulty in establishing and maintaining alliances Copyright © by South-Western College Publishing. All rights reserved. 21
The Board of Directors • Board of Directors – The governing body of a corporation, elected by the stockholders – Inside directors ØBoard members who work for the firm – Outside director ØBoard members who do not work for the firm • Duties – Elect the firm’s officers (top management) – Approve management’s plans and policies – Review performance and declare dividends Copyright © by South-Western College Publishing. All rights reserved. 22
The Board of Directors (cont’d) • Contributions of Board of Directors – Bring knowledge and experience ØReview policy decisions ØProvide general direction ØMonitor the firm’s ethical behavior ØMediate and resolve disputes among top management • Alternative: Advisory Council – Provides advice but does not have the fiduciary responsibility for the direction of the firm. Copyright © by South-Western College Publishing. All rights reserved. 23
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 income and pays any taxes related to these profits. Copyright © by South-Western College Publishing. All rights reserved. 24
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 selfemployed persons, Range of Taxable Income Tax Rate 0 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% 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 Copyright © by South-Western College Publishing. All rights reserved. 25
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 $0 to $50, 000 $50, 001 to $75, 000 $75, 001 to $100, 000 $100, 001 to $335, 000 Tax Rate 15% 25% 34% 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 Copyright © by South-Western College Publishing. All rights reserved. 26
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 firm’s 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 Copyright © by South-Western College Publishing. All rights reserved. 27
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