1. part 4 PowerPoint Presentation by Charlie Cook Copyright © 2003 South-Western College Publishing. All rights reserved. All rights reserved. Management Teams, Organizational Forms, and Strategic Alliances 10 The New Venture Business Plan 12e

2. Copyright © by South-Western College Publishing. All rights reserved. 10–2 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.

3. Copyright © by South-Western College Publishing. All rights reserved. 10–3 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.

4. Copyright © by South-Western College Publishing. All rights reserved. 10–4 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 the their investment and the continuity of business –Diversity of talent makes the team stronger than an individual entrepreneur

5. Copyright © by South-Western College Publishing. All rights reserved. 10–5 The Management Team (cont’) Building a Management team: –Competencies required depends on type of business  Combination of education and experience  Requires 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

6. Copyright © by South-Western College Publishing. All rights reserved. 10–6 Fig 10.1 Legal Forms of Organization

7. Copyright © by South-Western College Publishing. All rights reserved. 10–7 Legal Forms of Ownership (cont’d) Sole Proprietorship –A business owned by one person –Disadvantages  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

8. Copyright © by South-Western College Publishing. All rights reserved. 10–8 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.

9. Copyright © by South-Western College Publishing. All rights reserved. 10–9 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.

10. Copyright © by South-Western College Publishing. All rights reserved. 10–10 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?

11. Copyright © by South-Western College Publishing. All rights reserved. 10–11 Fig 10.2 Sharing Workload Sharing Financial Burden Sharing Emotional Burden Procuring Executive Talent Companionship Interpersonal Conflicts Dilution of Equity Dissatisfaction with Partner Absence of One Clear Leader Frustration of Not Calling Own Shots AdvantagesDisadvantages The Advantages and Disadvantages of Partnerships

12. Copyright © by South-Western College Publishing. All rights reserved. 10–12 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.

13. Copyright © by South-Western College Publishing. All rights reserved. 10–13 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.

14. Copyright © by South-Western College Publishing. All rights reserved. 10–14 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 Voting privileges for each class of stock Names of incorporators and directors Capital stockholders Statement of limited liability for stockholders Statement of directors’ powers

15. Copyright © by South-Western College Publishing. All rights reserved. 10–15 Comparison of Legal Forms of Organization Sole proprietorship General partnership Corporation Form of organization preferred Minimum requirements; generally no registration or filing fee Minimum requirements; generally no registration or filing fee; written partnership agreement not legally required but strongly suggested Most expensive and greatest requirements; filing fees; compliance with state regulations for corporations Proprietorship or general partnership Unlimited liability Liability limited to investment in company Corporation Limited to proprietor’s personal capital Limited to partner’s ability and desire to contribute capital Usually the most attractive form for raising capital Corporation Form of Organization Initial Organizational Requirements and Costs Liability of Owners Attractiveness for Raising Capital

16. Copyright © by South-Western College Publishing. All rights reserved. 10–16 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

17. Copyright © by South-Western College Publishing. All rights reserved. 10–17 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

18. Copyright © by South-Western College Publishing. All rights reserved. 10–18 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

19. Copyright © by South-Western College Publishing. All rights reserved. 10–19 Specialized Forms of Organization (cont’d) S Corporation –Eligibility Requirements  No more than 75 stockholders  All stockholders must be individuals  Only one class of stock outstanding  Must be a domestic corporation  Must operate on a calendar year basis  No nonresident alien stockholders –Benefits  Liability limited to investment in corporation  Dividends avoid double taxation (corporate and personal income).

20. Copyright © by South-Western College Publishing. All rights reserved. 10–20 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.

21. Copyright © by South-Western College Publishing. All rights reserved. 10–21 Strategic Alliances –An organizational relationship that links two or more independent business entities in a common endeavor –Benefits  Reduced cycle times through shared resources  Increased performance through synergistic combinations of financial resources and creativity –Risk  Difficulty in establishing and maintaining alliances

22. Copyright © by South-Western College Publishing. All rights reserved. 10–22 The Board of Directors Board of Directors –The governing body of a corporation, elected by the stockholders –Inside directors  Board members who work for the firm –Outside director  Board 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

23. Copyright © by South-Western College Publishing. All rights reserved. 10–23 The Board of Directors (cont’d) Contributions of Board of Directors –Bring knowledge and experience  Review policy decisions  Provide general direction  Monitor the firm’s ethical behavior  Mediate and resolve disputes among top management Alternative: Advisory Council –Provides advice but does not have the fiduciary responsibility for the direction of the firm.

24. Copyright © by South-Western College Publishing. All rights reserved. 10–24 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 its income and pays any taxes related to these profits.

25. Copyright © by South-Western College Publishing. All rights reserved. 10–25 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 self- employed persons, Tax Rate 0to43,850 15% 43,851 to105,950 28% 105,951 to161,450 31% 161,451 to288,350 36% Overto288,350 40% Range of Taxable Income IncomeTax RateTaxes First43,850 15%6,577.50 Next62,100 28%17,388.00 Next44,050 31%13,655.50 Total150,000 37,621.00

26. Copyright © by South-Western College Publishing. All rights reserved. 10–26 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 IncomeTax Rate $0to$50,00015% $50,001to$75,00025% $75,001to$100,00034% $100,001to$335,00039% Income x Tax Rate=Taxes First$50,00015%$7,500 Next$25,00025%$6,250 Next$25,00034%$8,500 Remaining$50,00039%$19,500 Total$150,000$41,750

27. Copyright © by South-Western College Publishing. All rights reserved. 10–27 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