Selecting the Management Team and Form of Business Organization.

Selecting the Selecting the Management Team and Management Team and

Form of Business Form of Business OrganizationOrganization

Corporation

Sole Proprietor

Partnership

Initial organizational costs and requirements

Limited versus unlimited liability for the owners

Continuity of business Transferability of ownership Management control Attractiveness for raising new

equity capital Income taxes

Sole Proprietorship Partnership Corporation

◦ Subchapter S Corporation◦ C-Corporation

Other legal form of Ownership◦ Limited Liability Company

Number Sales Profits

Sole proprietorshipsPartnershipsCorporations

Four Characteristics: Single owner. Bears all responsibility. Represents 70% of all firms in U.S. Generate less than 10 percent of all

business revenue.

Advantages:◦Easy and inexpensive to create◦Least regulated form of ownership◦Business pays no taxes. Owner pays personal income taxes which is a lower rate than the corporate tax rate.

Advantages◦Owner is boss◦Owner receives all profits◦Owner knows employees and customers

◦Owner can act quickly in making decisions

◦Owner is free of much red tape

Disadvantages:◦ Unlimited liability◦ Full responsibility for all debts◦ Owners personal assets are at risk (i.e., home,

car, etc.)◦ Upon death, the business dissolves

Sole Proprietorship

Claims of Sole Proprietor’s CreditorsClaims of Sole Proprietor’s Creditors

Sole Proprietor’s Personal AssetsSole Proprietor’s Personal Assets

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A business with two or more owners Partners do not have to share a business

equally How the partnership interests are divided

are spelled out in the Partnership Agreement.

Advantages of Advantages of PartnershipsPartnerships◦ Ease of formation◦ Availability of capital◦ Diversity of managerial

expertise◦ Flexibility to respond to

changing business conditions

◦ Relative freedom from government control

Disadvantages of Disadvantages of PartnershipsPartnerships◦ Unlimited liability for general

partners◦ Potential for conflict between

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?

Advantages◦Inexpensive and easy to create◦Share ideas, abilities, and financial obligations

◦Owners pay taxes as personal income which is taxed at lower rate.

Advantages◦Skills & abilities pooled◦Sources of income increased◦Credit position improved◦Contribution of goodwill

Advantages ◦Increased concern in business management

◦Less tax burden◦Elimination of competition◦Operating economies

Disadvantages◦Unlimited financial liability◦Disagreement among partners Personality conflicts

◦Each partner bound by contracts of others

◦Partners held liable for each other’s actions

General partners◦ Take an active role in managing a business◦ Have unlimited liability for the partnership’s

debts◦ Every partnership must have at least one

general partner Limited partners

◦ Cannot participate in the day-to-day management of a company

◦ Have limited liability for the partnership’s debts

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

CorporationCorporation::A legal entity with an existence and life separate from its owners, who therefore are not personally liable for its debts; it can own property, enter into contracts, sue and be sued, and operate under terms of its state charter.

C-Corporation Subchapter S Corporation

◦ Limited Liability Corporation

1.1. Select company’s name2. 2. Write and file Articles of

Incorporation paperwork3. 3. Pay fees and taxes4. 4. Hold organizational meeting5. 5. Adopt bylaws, elect

directors, pass operating resolutions

Organizational Structure of Organizational Structure of CorporationsCorporations

Stockholders

Directors

Officers (Top Management)

President Vice Treasurer Secretary President

elect

elect

Registered by the state and operates apart from its owners

A corporation lives-on after the owners die or have sold interest

Ownership is represented by shares of stock, public or private

Elect members of board of directors who are

responsible for establishing general policies of the firm

Elect president and other key officers who runthe business

Earn return on investment in two ways May receive dividends Stock may increase in value

◦ StockholdersStockholders Own the corporation Can sell or transfer shares at any time Entitled to receive profits in the form of dividends

◦ Board of DirectorsBoard of Directors Elected by stockholders Govern the firm

◦ OfficersOfficers Carry out the goals and policies set by the board

◦ C Corporations, S Corporations & Limited C Corporations, S Corporations & Limited Liability CompaniesLiability Companies Major types of corporations

Privately Held◦ Ownership is restricted to small

group of investors.◦ Stock is not traded publicly.

L. L. Bean, Polo, Ralph Lauren, Publix. Publicly Held

◦ Larger corporations.◦ Stock is traded publicly.◦ Act of initially issuing stock: “going public.”

Business Economics

The most common corporate form for large businesses (i.e., Federal Express, Microsoft)

Can create status that may assist in getting loans

Shareholders are owners of the corporation – 75 or more

Required to have an elected Board of Directors to make decisions for the company

Structured to accommodate employee benefits; i.e., pensions, retirement plans, and profit sharing

AdvantagesAdvantages limited liability easy to get

financing easy to transfer

ownership perpetual life-

span tax deductions available source

of income

DisadvantagesDisadvantages taxes are higher double taxation of

profits costly & complex to

form (hire attorney) government

restrictions & regulations

record keeping for stockholders complex

1.1. S corporationsS corporationsorganized like a corporation, but avoids double taxation of profits by routing income and losses through stockholders

2.2. Limited liability companies (LLC)Limited liability companies (LLC)offers same limited liability as a corporation, but may be taxed as either a partnership or corporation

The S corporation – 75 or fewer employees◦Taxed as a partnership◦Provides lower taxes◦Limited liability◦Profits are part of individual tax return

◦Transfer of ownership

Designed for owners of smaller companies who want the liability protection of a corporation, but want to avoid double taxation◦ Pass-through Taxation: Profits are

taxed once at shareholder’s personal tax rate

◦ Shareholders liable to amount invested In smaller private corporations, the

founders generally hold all–or a majority–of the stock.

Disadvantages Regulations may vary from state to state

which impact taxation and liability Costly to set up and follow corporate rules All shareholders must be U.S. citizens Personal finances separate from

corporation finances Increased banking, accounting, legal costs

The limited liability company Acts as a corporation

◦ Pay personal income taxes on business profits Avoids double taxation

◦ Provides limited liability◦ Less formal requirements than corporation

ProsPros Protection of

personal assets Avoid double-

taxation of profits Flexible

management & organization

Good for foreign investors

ConsCons• Often required to have a

limited life (< 30 years)• Not corporations, so can

not issue stock

Source: The Company Corporation, www.incorporate.com

1. 1. Cooperatives

2. 2. Joint ventures

3. 3. Franchises

Formed by people with similar interests, such as customers and suppliers lower costs increased economic power share in profits

Members/owners pay annual fees Common in:

◦ agriculture◦ hardware/lumber◦ grocery

Joint Venture:Joint Venture:2 or more companies form an alliance to pursue a specific project, usually for a specific time period

◦ Business owner does not have to start from scratch

◦ Buys a business concept with a proven product and operating methods

◦ Franchisor provides: Management training and assistance Use of a recognized brand name, product, and

operating concept Financial assistance

Franchising:Franchising:business organization in which a franchisor supplies the product concept to the franchisee, who sells the goods or services

AdvantagesAdvantages increased opportunity to

expand (franchisor) recognized name, product,

and operating concept (franchisee)

management training and assistance (franchisee)

financial assistance (franchisee)

DisadvantagesDisadvantages loss of control (franchisor) costs of franchising restricted operating

freedom (franchisee)

◦ Companies use mergers and acquisitions for strategic reasons such as Growth or diversification of product lines Increased market share Economies of scale Financial restructuring to increase company value to

stockholders

Merger:Merger:The combination of 2 or more firms to form a new company, which often takes a new corporate identity

Acquisition:Acquisition:The purchase of a corporation by another corporation or investment group

Reduced:Reduced: costs overlap in

operations competition

Increased:Increased: purchasing power market share

1. Horizontal mergersHorizontal mergers◦ same industry, same stage of production

2. Vertical mergersVertical mergers◦ same industry, different stages of production

3. Conglomerate mergersConglomerate mergers◦ different industries

4. Leveraged buyoutsLeveraged buyouts◦ corporate takeovers with borrowed money

Increases in:Increases in: Niche markets Variety in franchises

Expect more franchised goods & services that ease consumers’ busy lives (Source: Entrepreneur, Jan. 2000, p. 157)

Consolidation through mergers & acquisitions

Mergers across national borders

Types of Businesses Types of Businesses One way to classify businesses is to group them by the kind of products they provide:

• Producing raw goods• Processing raw goods

Types of Businesses Types of Businesses

• Manufacturing goods from raw or processed goods

• Distributing goods• Providing services

Producers Producers A producer is a business that gathers raw products in their natural state.

Raw goods are materials gathered in their original state from natural resources such as land and water.

Processors Processors Processors change raw materials into more finished products.

Processed goods are made from raw goods and may require further processing.

Manufacturers Manufacturers Manufacturers are businesses that make finished products out of processed goods.

The finished products need no further processing and are ready for market.

Intermediaries Intermediaries A wholesaler, also known as a distributor, distributes goods.

Intermediaries Intermediaries Wholesalers buy goods from manufacturers in huge quantities and resell them in smaller quantities to their customers, usually other companies.

Intermediaries Intermediaries A retailer purchases goods from a wholesaler and resells them to the consumer, or the final buyer of the goods.

Service Businesses Service Businesses Service businesses provide services rather than goods.

Services are the products of a skill or an activity, such as hairstyling and car repair.

Service Businesses Service Businesses Some service businesses meet needs, such as medical clinics and law firms.

Some provide conveniences, such as taxi companies and copy shops.