9. the Organizational Plan

7/30/2019 9. the Organizational Plan

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The management team and its ability andcommitment to the new venture are importantfactors to the potential investors.

The management team is asked to:

Fully engaged in the business operations on full timebasis.

To work on modest salaries.


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Whatare the three main forms of businessorganization, and what factors should acompanys owners consider when selecting aform?

Sole proprietor Partnership Corporation


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Choose a form of organization byevaluating:Ownership

Owners liability for firms debtsCosts of starting a business

Continuity of Business

Transferability of InterestCapital Requirements / The ability to raise

funds

Management Control

Distribution of Profits and Losses


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BZUPAGES.COM

Factors Proprietorship Partnership Corporation

Ownership

Individual No limitation on

number of

partners

No limitation on

numbers of

stockholders

Liability ofowners

Individual liablefor business

liabilities

In generalpartner ship all

individual liable

for liabilities,

limited partner

are liable foramount of

capital.

Amount of capitalcontribution is

limit of

shareholder

liability

Costs ofstarting

business

None, other than

filling fees for

trade name

Partnership

agreement, legal

costs, and minorfilling fees for

trade name.

Created only by

statue. articles of

incorporation,filing fees, taxes

and fees for

states in which

corporation

register to dobusiness.


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Continuity ofbusiness

Death dissolve the

business

Death or

withdrawal of one

partnerterminates

partnership unless

partnership

agreement

stipulatesotherwise, death

or withdrawal of

one of limited

partner has no

effect oncontinuity

Greatest form of

continuty. Death

or withdrawl willnot effect.

Transferabilityof interest

Complete freedom

to sell or transfer

any part of

business

General partner

can transfer his

interest only with

consent of all

other general

Most flexible.

Stockholder can

sell or stock at

will. Some stock

transfers may be


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Capitalrequirement

Capital raised

only by loan or

increasedcontribution by

proprietor

Loan or new

contribution by

partner require achange in

agreement.

New capital

raised by sale of

stocks or bondsor by borrowing

in name of

corporation.

Management

control

Proprietror

makes alldecision and act

immediately

All general

partners haveequal control

Majority

stockholdershave most

controls from

legal point of

view.

Distribution ofprofit andlosses

Responsible and

recice all profits

and losses

Depend on

partnership

agreement and

investment by

partners

Shareholder can

share


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Attractivenessfor RaisingCapital

The ability to

raise funds

depends on thesuccess of the

business and the

personal

capability of the

entrepreneur.

The ability to

raise funds

depends on thesuccess of the

business and the

personal

capability of the

entrepreneur

Is the most

attractive form

of raising capitalbecause of its

advantage

regarding

personal liability.


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ax r u es o orms o us ness:

For ProprietorshipIRS treats the business as anindividual owner and all incomes on

the owners returns as personalincome and has tax advantages incomparison to corporation.


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ax r u es o orms o us ness:

For PartnershipSimilar to proprietorship in terms ofincome distributions, dividends and

capital gains and losses. And in limitedpartnership there is advantage oflimited liability.

Both proprietorship and partnershiphave nontaxable conduits of incomeand deductions.


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Tax Attributes of Forms of Business:

For CorporationIRS recognizes corporation as aseparate tax entity and has the

advantage to take many deductionsand expenses; not available to firsttwo forms of business.

Corporate rate may be lower thanindividual rate.


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Advantages Ease and low cost of

formation

Owners rights to allprofits

Owners control of the

business

Relative freedom fromgovernment regulation

Absence of special taxes

Ease of dissolution

Disadvantages Unlimited liability of the

owner for debts Difficulty in raising capital Limited managerial

expertise Large personal time

commitment Unstable business life Difficulty in attracting

qualified employees Owners personal

absorption of all losses

What are the advantages and disadvantages

of sole proprietorships?


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General Partnerships

Partners co-own

assets and shareprofits

Each partner is

individually liable for

all debts and

contracts of the

partnership

Limited Partnerships Controlled by one or

more general partnerswho have unlimitedliability

Partners liability islimited to theirinvestment

Do not participate inthe firms operations

Why would a new business venture choose to

operate as a partnership, and what downside

would the partners face?


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Advantages ofPartnerships Ease of formation

Availability of capital Diversity of managerial

expertise Flexibility to respond to

changing businessconditions

Relative freedom fromgovernment control

Disadvantages ofPartnerships

Unlimited liability forgeneral partners

Potential for conflictbetween partners

Limited life

Sharing of profits Difficulty in leaving a

partnership

Why would a new business venture choose to

operate as a partnership, and what downside

would the partners face?


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Partnerships

Advantages Easy And Inexpensive

To Form

Diverse Skills And

Expertise

Flexibility

Relative Freedom From

GovernmentRegulations

No Special Taxation

Disadvantages Potential Conflicts

Between Partners

Unlimited Liability &

Potential Loss

Sharing Profits

Hard To Leave Or End

Partnership


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Topics to Cover

in a Partnership Agreement

Purpose & duration of partnership

Roles, responsibilities, compensation

Contributions

Procedures for adding/removing partners Buy-out procedures

Dispute resolution

Financial arrangements

Dissolving the partnership Valuation

Source: American Express Small Business Exchange,

home3.americanexpress.com/smallbusiness


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Advantages of

Corporations Limited liability

Ease of transferring

ownership

Stable business lifeAbility to attract

financing

Disadvantages of

CorporationsDouble taxation of

profits

Cost of complexity of

formationGovernment

restrictions

Why does the corporate structure provide advantages

and disadvantages to a company, and what are the

major types of corporations?


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StockholdersOwn the corporationCan sell or transfer shares at any timeEntitled to receive profits in the form of

dividendsBoard of DirectorsElected by stockholdersGovern the firm

OfficersCarry out the goals and policies set by the

boardC Corporations, S Corporations & Limited

Liability CompaniesMajor types of corporations

How does the corporate structure provideadvantages and disadvantages to a company,and what are the major types of corporations?


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Corporations

Advantages limited liability

easy to get financing

easy to transfer

ownership

unlimited life-span

tax deductions

Disadvantages double taxation of profits

costly & complex to form

government restrictions


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Steps of Forming a Corporation

1.Select companys name

2. Write and fileArticles of

Incorporation paperwork3. Pay fees and taxes

4. Hold organizational meeting

5.Adopt bylaws, elect directors, passoperating resolutions


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Organizational Structure of

Corporations

Stockholders

Directors

Officers (Top

Management)

President Vice Treasurer SecretaryPresident

elect

elect


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1.S corporations

organized like a corporation, but avoids double

taxation of profits by routing income and losses

through stockholders

2.Limited liability companies (LLC)

offers same limited liability as a corporation, but may

be taxed as either a partnership or corporation


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Some Pros and Cons of S Corp.

Pros

Capital gains or losses are treatedas personal income or losses.

Shareholders retain limitedliability.

Not subjected to a minimum tax.

Transferred to low-income-bracket family members.

Stock may be voting ornonvoting.

Use cash method of accounting.

Corporate long-term capital gainsand losses are deductible directlyby shareholders to offset otherpersonal capital gains or losses.

Cons

Restrictions regardingqualification for this form ofbusiness.

Tax advantage to Ccorporation depending onamount of net income.

Dont deduct fringe benefitsfor shareholders.

Must adopt a calendar year fortax purposes.

Cannot have more than 100shareholders.


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Some Pros and Cons of LLCs

Pros Protection of

personal assets

Avoid double-taxation of profits Flexible

management &

organization Good for foreign

investors

Cons

Often required tohave a limited life

(< 30 years)

Not corporations,so can not issue

stockSource: The Company Corporation,www.incorporate.com


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Limited Liability Company Provides limited liability for its owners

Taxes like a partnership

Cooperatives

Collectively owned by individuals or businesses withsimilar interests

Combine to achieve more economic power

Joint venture

An alliance of two or more companies

Formed to undertake a special project

Franchises

Business arrangement between a franchisor andfranchisee

Franchisee uses business name and logo of

Does a company have any business organizationoptions besides sole proprietorship, partnership, andcorporation?


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Specialized Forms

of Business Organization

1. Cooperatives

2. Joint ventures

3. Franchises


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Cooperatives

Formed by people with similar interests, such ascustomers and suppliers lower costs

increased economic power

share in profits

Members/owners pay annual fees

Common in:

agriculture hardware/lumber

grocery


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Joint Venture:

2 or more companies form an alliance to pursue aspecific project, usually for a specific time period.


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Franchising:

Business organization in which a franchisorsupplies the product concept to the franchisee,who sells the goods or services.


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Why is franchising growing in

importance?

Business owner does not have to start

from scratchBuys a business concept with a proven

product and operating methods

Franchisor provides:Management training and assistanceUse of a recognized brand name, product,

and operating concept

Financial assistance


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Franchises

Advantages increased opportunity to

expand (franchisor)

recognized name, product,

and operating concept(franchisee)

management training and

assistance (franchisee)

financial assistance(franchisee)

Disadvantages

loss of control

(franchisor)

costs of franchising

restricted operatingfreedom (franchisee)


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Organization structure

Planning, Measurement and evolution Scheme

Rewards

Selection criteria Training


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President

Production Marketing/Sales Administration


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President

ProductionManager

QualityControl

Assembly

MarketingManager

Sales

PromotionAdvertising

Administration Manager

FinanceAccounting

Purchasing

Shipping/Receiving


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Primary concern of entrepreneur is to change the

environment and seek new ideas.

Another role for entrepreneur is that of allocation of

resources .


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There are some issues to address before assemblingand building the management team. A team must beable to accomplish three functions

Execute the business plans Identify functional changes in the business as the

occurs

Make adjustments to the plans based on changes in

the environment in the market that will maintainprofitability.


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Enterpnuere will also need to consider thepersonality and character of each individuales tocreat a successful orangization culture .

Organiztion will be a blend of attitudes, behaviours,dress, comuunications style that make one businessdifferent from others.


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Desired culture must match the businessstrategies outline in the business plans

Leader must create a workplace where employeesare rewarded for good works.

Entrepreneur should be flexible enough to trydifferent things

It is necessary to spend extra time to hiringprocess

The entrepreneur needs to understandsignificance of the leadership in the organization.Provide the appropriate tools to the employees


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The purpose of Boards of Directors is to provideimportant leadership and direction for the newventure. The function of the Boards of Directors

Functions : Reviewing operating and capital budgets

Developing long term strategies plans for growthand expansion

Supporting day-to-day activities Ensure the proper use of assets


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Select individuals who can work with a diversegroup and will commit to the ventures mission

Select candidates who understand the market

environment or can contribute important skills toachieve planning goals

Select candidates who will show good judgments inbusiness decision making


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A board of advisor would be more loosely tied to theorganization and would serve the venture only anadvisory capacity for some of the function.

It has no legal status. Effect in family business.


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Entrepreneur will use outside advisors such asaccountant, bankers, lawyers, advertising agencies.

9. the Organizational Plan

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