Organizational Plan

Entrepreneurship

1. Organizational Plan Entrepreneurship Module 6

2. Developing the Management Team Investors demand that the management team not operate the business as a part-time venture. It is assumed that the management team is prepared to operate the business full time and at a modest salary. An attempt to draw a large salary out of the new venture may be perceived as a lack of commitment to the business.

3. Legal Forms of Business Three basic legal forms of business: Proprietorship - Single owner, unlimited liability, controls all decisions, and receives all profits. Partnership - Two or more individuals having unlimited liability who have pooled resources to own a business. Corporation (C corporation ) LLC - Most common form of corporation; regulated by statute; treated as a separate legal entity for liability and tax purposes.

4. Table 9.1 - Three Forms of Business Formation

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7. Tax Attributes of Forms of Business Tax is a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions. Tax Issues for Proprietorship: For the proprietorship Internal Revenue Service (IRS) treats business as the individual owner; not regarded as a separate tax entity. All income appears on owner’s return as personal income. Tax advantages: No double tax when profits are distributed to owner. No capital stock tax or penalty for retained earnings.

8. Cont. Tax Issues for Partnership (general ): The partnership’s tax advantages and disadvantages are similar to those of the proprietorship, especially regarding income, distributions, dividends, & capital gains & losses. Tax Issues for Partnership (limited): Has the advantage of limited liability that they are liable only for the amount of their investment. The income is distributed based on the partnership agreement. The owners then report their share as personal income & pay taxes based on this amount.

9. Cont. Tax Issues for Corporation: Since the IRS recognizes the corporation as a separate tax entity, it has the advantage of being able to take many deductions and expenses not available to proprietorship or partnership. The disadvantage is that the distribution of dividends is taxed twice, as income of the corporation & as income of the stockholder. Double taxation can be avoided if income is distributed to entrepreneur(s) in the form of salary.

10. Table 9.2 - Tax Attributes of Various Legal Forms of Business

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13. The Limited Liability Company Versus S Corporation Venture capitalists prefer LLCs as a form of business entity. A new regulation allows LLCs to be taxed as a partnership. The S corporation was the most popular choice of organization structure by new ventures and small businesses. Growth rate of S corporations has leveled off mainly because of the wide acceptance of LLCs.

14. S Corporation A special type of corporation where profits are distributed to stockholders and taxed as personal income. The Small Business Protection Act of 1996 reduced some restrictions like ownership, of stock of another corporation, number of shareholders. In 2004, Congress responded to criticisms of the restrictions on S corporations as compared to LLCs. Intent was to make the S corporation as advantageous as the LLC. Status of the S corporation must be monitored and maintained.

15. Cont. Advantages of an S Corporation: Capital gains or losses are treated as personal income or losses by the shareholders on a pro rata basis (determined by number of shares of stock held). Share holders retain the same limited liability protection as the c corporation. Not subject to a minimum tax. Transfer of stock to low-income-bracket family members (children must be 14 years or older). Stock may be voting or nonvoting. Corporate long-term capital gains and losses are deductible directly by the shareholders.

16. Cont. Disadvantages of an S Corporation: Some restrictions for qualification. Potential tax disadvantages. Most fringe benefits not deductible for shareholders. Must have a calendar year for tax purposes. Only one class of stock is permitted. Net loss is limited to shareholder’s stock plus loans to business. No more than 100 shareholders.

17. The Limited Liability Company This business form is considered a partnership-corporation hybrid with the following characteristics. Laws governing its formation differ from state to state. LLC has members. No shares issued; each member owns an interest as designated by the articles of organization. Liability does not extend beyond member’s capital contribution.

18. Cont. Transfer of interest requires unanimous consent. It is taxed as a partnership. Standard acceptable term is 30 years; continuity restricted.

19. Cont. Advantages of LLC: Partners can add their proportionate shares of the LLC liabilities to their partnership interests. Most states do not tax LLCs. One or more (without limit) individuals, corporations, partnerships, trusts, or other entities form an LLC. Members share income, profit, expense, deduction, loss and credit, and equity of the LLC among themselves.

20. Designing the Organization This is the entrepreneur’s formal and explicit indication to the members of the organization as to what is expected of them; expectations can be grouped into: Organization structure : this defines members jobs & the communication & relationship these jobs have with each other. Planning , measurement, and evaluation schemes: A ll organization activities should reflect the goals & objectives that underline the ventures existence. Rewards : M embers of an organization will require rewards in the form of promotions, bonuses, praise & so on.

21. Cont. Selection criteria: The entrepreneur will need to determine a set of guidelines for selecting individuals for each position. Training: Training, on or off the job, must be specified. This training may be in the form of formal education or learning skills.

22. Figure 9.1 - Stages in Organizational Design

23. Building the Management Team and a Successful Organization Culture In conjunction with design of the organization the entrepreneur will need to assemble the right mix of people to assume the responsibilities outlined in the organization structure. A management team must be able to accomplish three functions: Execute the business plan. Identify fundamental changes in the business as they occur. Make adjustments to the plan based on changes in the environment and market that will maintain profitability. Although these function may seem simple & easy to achieve, the people engaged & the culture promoted by the entrepreneur are critical in in accomplishing these functions.

24. Cont. The organization culture will be a blend of attitudes, behaviors, dress & communication styles that make one business different from another. Important factors in establishing an effective team are: Desired culture must match business strategy outlined in the business plan. Employees must be motivated and rewarded for good work. Entrepreneur should be flexible to try different things. Spend extra time in the hiring process. Core values and appropriate tools must be provided for employees to effectively complete their jobs.

25. The Role of a Board of Directors An entrepreneur may find it necessary in his or her organization plan to establish a board of directors or board of advisors. The board of directors may serve a number of functions : Reviewing operating and capital budgets. Developing longer-term strategic plans for growth and expansion. Supporting day-to-day activities. Resolving conflicts among owners or shareholders. Ensuring the proper use of assets. Developing a network of information sources for the entrepreneurs . Most important in establishing these responsibilities is the consideration of the impact of the Sarbanes-Oxley Act passed in 2002. passage of this act resulted because of accounting irregularities, fraud, bankruptcy & other related issues.

26. Cont. Purpose of the board of directors is to provide important leadership & direction for the new venture, & it should be carefully chosen to meet the requirements of the following criteria: Ability to work with a diverse group and commit to the venture’s mission. Ability to understand the market environment. Ability to contribute important skills to the new venture’s achievement of planning goals. Ability to show good judgment in business decision making.

27. The Board of Advisors They serve only in an advisory capacity. No legal status; not subject to regulations stipulated in the Sarbanes-Oxley Act. Likely to meet less frequently. Useful in a family business. Selection process is similar to the process for selecting a board of directors. Advisors may be compensated on a per-meeting basis or with stock or stock options.

28. The Organization and Use of Advisors Outside advisors are usually used on an as-needed basis. They can become a part of the organization and need to be managed. The relationship between the entrepreneur and outside advisors can be enhanced by involving them thoroughly and at an early stage. Even after hiring advisors, the entrepreneur should question their advice.