1. 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. www.strandware.com In the Spotlight: StrandWare, Inc. www.strandware.com

2. 8-2 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Learning Objectives: Chapter 8 1. Describe the characteristics and value of a strong management team. 2. Identify the common legal forms of organization used by small businesses and describe the characteristics of each. 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. 5. Explain the nature of strategic alliances and their uses in small business. 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.

3. 8-3 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing The Management Team Management team: Consists of managers and other key persons who give a company its general direction Value of a strong management team: Provides diversity of talent Assures continuity of business Building a complementary management team: Requires balance in areas of competence Outside professional support: Supplements a management team Is not widely used by new firms Nonmanagerial personnel

4. 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

5. 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.

6. 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.

7. 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 55 41 40 33 26 60 59 53 6 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. 8-8 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

9. 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

10. 8-10 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Comparisons 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 regula- tions 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

11. 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

12. 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.

13. 8-13 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing The Board of Directors Reviews major policy decisions Advises on external business conditions Provides informal advice on specific problems Helps evaluate family talent in a family business Helps mediate differences among family members Increases a small firm’s credibility

14. 8-14 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Taxes and the Form of Organization Sole Proprietorship: Business income reported on owners’ individual federal income tax returns Partnership: Income allocated to partners, who individually report it on their personal tax returns C Corporation: Income is reported by the business, which pays any taxes owed on its profits

15. 8-15 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing BizPlanExpress on the Management Team (pp. 37-38) The management team provides the leadership for your business and must include combined strength in both management and technical areas. The management team should be selected in such a manner that talents are complementary rather than overlapping or duplicated. You must ensure that all the key areas necessary to accomplish the goals and objectives of the company are within the strengths and talents of your management team.

16. 8-16 Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing BizPlanExpress on Strategic Alliances (p. 38) Strategic alliances can strengthen and broaden your potential market as well as add talent to your management team. Some of the alliances you may seek include Original Equipment Manufacturers (OEMs), joint marketing, third-party supplier, or joint developer.