8-1 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Chapter 8 Selecting the Management Team and Form of Organization In the Spotlight: StrandWare, Inc. In the Spotlight: StrandWare, Inc.

8-4 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Forms of Legal Organization for Small Businesses Sole Proprietorship Common Forms of Legal Organization Partnership Corporation General Partnership Limited Partnership Regular C Corporation Subchapter S Corporation Limited Liability Company Limited Liability Company

8-5 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing The Sole Proprietorship Option A sole proprietorship is a business owned and operated by one person. There is generally no registration or filing fee. Liability is unlimited. The sole proprietorship is dissolved upon the proprietor’s death. Ownership of the company name and assets may be transferred. Management freedom is absolute. Capital is limited to the proprietor’s personal capital. Income from the business is taxed as personal income to the proprietor.

8-6 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing The Partnership Option A partnership is a voluntary association of two or more persons to carry on, as co-owners, a business for profit. There is generally no registration or filing fee. Liability is unlimited. Unless the partnership agreement specifies otherwise, the partnership is dissolved upon withdrawal or death of a partner. Transferring ownership requires the consent of all partners. A majority vote of partners is required for control. Capital is limited by the partners’ ability and desire to contribute. Income from the business is taxed as personal income.

8-7 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing An Opinion Survey About the Pros and Cons of Partnerships Why is a partnership good? Why is a partnership bad? Spreads the workload Spreads the emotional burden Buys executive talent not otherwise affordable Spreads the financial burden Makes company building less lonely Personal conflicts outweigh the benefits Partners never live up to one another’s expectations Companies function better with one clear leader Dilutes equity too much You can’t call your own shots QuestionPerceived Pros and Cons Percentage Responding Source: “The Inc. FaxPoll: Are Partners Bad for Business?” Inc., Vol. 14, No. 2 (February 1992), p. 24.

8-8 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing A corporation is a business organization that exists as a legal entity. It is the form of organization that has the most fees and requirements. A written application must be filed with the secretary of state. The corporation, and not its owners, is liable for debts contracted by the business. Stockholders may sell their interest, represented by stock certificates. Stockholders’ liability is limited to their investment. Withdrawal or death of stockholders does not affect the continuity of a large business. The retirement or death of a majority stockholder in a small firm can have adverse effects on the other stockholders. Usually it is the most attractive form for raising capital. The corporation is taxed on its income, and the stockholder is taxed when dividends are received. The C Corporation Option

8-9 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Issues in Choosing an Organizational Form 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

8-11 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Specialized Forms of Organization The limited partnership The S corporation The limited liability company

S-Corp vs. LLC S-Corp Advantages: limited liability taxed like a partnership does not dissolve with an owner leaving/dying Can be only one member Disadvantages: Need legal assistance to set- up Maximum of 75 Shareholders LLC Advantages: limited liability taxed like a partnership k no limit on number of stockholders Disadvantages: Need legal assistance k Does dissolve if a partner leaves k May require more than one member

8-12 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Strategic Alliance: A Definition A strategic alliance is an organizational relationship that links two or more independent business entities in a common endeavor.