The management team and its ability and

commitment to the new venture are important factors to the potential investors.
The management team is asked to:
Fully engaged in the business operations on full time

basis. To work on modest salaries.

 What are the three main forms of business

organization, and what factors should a companys owners consider when selecting a form?

Sole proprietor Partnership Corporation

 Choose a form of organization by

evaluating:
Ownership Owners liability for firms debts Costs of starting a business Continuity of Business Transferability of Interest Capital Requirements / The ability to raise

funds Management Control Distribution of Profits and Losses

Factors Ownership

Proprietorship Individual

Partnership

Corporation No limitation on numbers of stockholders Amount of capital contribution is limit of shareholder liability

Liability of owners

Costs of starting business

No limitation on number of partners Individual liable In general for business partner ship all liabilities individual liable for liabilities, limited partner are liable for amount of capital. None, other than Partnership filling fees for agreement, legal trade name costs, and minor filling fees for trade name.

BZUPAGES.COM

Created only by statue. articles of incorporation, filing fees, taxes and fees for states in which corporation register to do business.

Factors Continuity of business

Proprietorship

Partnership

Corporation Greatest form of continuty. Death or withdrawl will not effect.

Transferability of interest

Death dissolve the Death or business withdrawal of one partner terminates partnership unless partnership agreement stipulates otherwise, death or withdrawal of one of limited partner has no effect on continuity Complete freedom General partner to sell or transfer can transfer his any part of interest only with business consent of all BZUPAGES.COM other general

Most flexible. Stockholder can sell or stock at will. Some stock transfers may be

Factors Capital requirement

Proprietorship Capital raised only by loan or increased contribution by proprietor Proprietror makes all decision and act immediately

Partnership

Corporation

Loan or new New capital contribution by raised by sale of partner require a stocks or bonds change in or by borrowing agreement. in name of corporation. All general partners have equal control Majority stockholders have most controls from legal point of view. Shareholder can share

Management control

Distribution of profit and losses

Responsible and recice all profits and losses

Depend on partnership agreement and investment by partners BZUPAGES.COM

Factors Attractiveness for Raising Capital

Proprietorship The ability to raise funds depends on the success of the business and the personal capability of the entrepreneur.

Partnership The ability to raise funds depends on the success of the business and the personal capability of the entrepreneur

Corporation Is the most attractive form of raising capital because of its advantage regarding personal liability.

 Tax Attributes of Forms of Business:

For Proprietorship IRS treats the business as an

individual owner and all incomes on the owners returns as personal income and has tax advantages in comparison to corporation.

 Tax Attributes of Forms of Business:

For Partnership Similar to proprietorship in terms of

income distributions, dividends and capital gains and losses. And in limited partnership there is advantage of limited liability. Both proprietorship and partnership have nontaxable conduits of income and deductions.

 Tax Attributes of Forms of Business:

For Corporation IRS recognizes corporation as a

separate tax entity and has the advantage to take many deductions

and expenses; not available to first two forms of business. Corporate rate may be lower than individual rate.

 What are the advantages and disadvantages of sole proprietorships?

Advantages
Ease and low cost of

Disadvantages
Unlimited liability of the

formation Owners rights to all profits Owners control of the business Relative freedom from government regulation Absence of special taxes Ease of dissolution

owner for debts Difficulty in raising capital Limited managerial expertise Large personal time commitment Unstable business life Difficulty in attracting qualified employees Owners personal absorption of all losses

 Why would a new business venture choose to operate as a partnership, and what downside would the partners face?
General Partnerships
Partners co-own
Limited Partnerships Controlled by one or

assets and share profits Each partner is individually liable for all debts and contracts of the partnership

more general partners who have unlimited liability Partners liability is limited to their investment Do not participate in the firms operations

 Why would a new business venture choose to operate as a partnership, and what downside would the partners face?
Advantages of Disadvantages of

Partnerships Ease of formation Availability of capital Diversity of managerial expertise Flexibility to respond to changing business conditions Relative freedom from government control

Partnerships Unlimited liability for general partners Potential for conflict between partners Limited life Sharing of profits Difficulty in leaving a partnership

Partnerships
Advantages
Easy And Inexpensive

Disadvantages
Potential Conflicts

To Form Diverse Skills And Expertise Flexibility Relative Freedom From Government Regulations No Special Taxation

Between Partners Unlimited Liability & Potential Loss Sharing Profits Hard To Leave Or End Partnership

Topics to Cover in a Partnership Agreement

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

 Why does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?

Advantages of

Disadvantages of

Corporations Limited liability Ease of transferring ownership Stable business life Ability to attract financing

Corporations Double taxation of profits Cost of complexity of formation Government restrictions

How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?
Stockholders Own the corporation Can sell or transfer shares at any time Entitled to receive profits in the form of

dividends Board of Directors Elected by stockholders Govern the firm Officers Carry out the goals and policies set by the board C Corporations, S Corporations & Limited Liability Companies Major types of corporations

Corporations
Advantages
limited liability

Disadvantages
double taxation of profits

easy to get financing

easy to transfer

costly & complex to form

government restrictions

ownership unlimited life-span tax deductions

Steps of Forming a Corporation

1. Select companys name 2. Write and file Articles of Incorporation paperwork 3. Pay fees and taxes 4. Hold organizational meeting 5. Adopt bylaws, elect directors, pass operating resolutions

Organizational Structure of Corporations

Stockholders elect

Directors elect

Officers (Top Management) President Vice Treasurer Secretary President

1. S corporations
organized like a corporation, but avoids double taxation of profits by routing income and losses through stockholders

2. Limited liability companies (LLC)

offers same limited liability as a corporation, but may be taxed as either a partnership or corporation

Some Pros and Cons of S Corp.

Pros Capital gains or losses are treated as personal income or losses. Shareholders retain limited liability. Not subjected to a minimum tax. Transferred to low-incomebracket family members. Stock may be voting or nonvoting. Use cash method of accounting. Corporate long-term capital gains and losses are deductible directly by shareholders to offset other personal capital gains or losses. Cons Restrictions regarding qualification for this form of business. Tax advantage to C corporation depending on amount of net income. Dont deduct fringe benefits for shareholders. Must adopt a calendar year for tax purposes. Cannot have more than 100 shareholders.

Some Pros and Cons of LLCs

Pros Protection of personal assets Avoid doubletaxation of profits Flexible management & organization Good for foreign investors

Cons Often required to have a limited life (< 30 years) Not corporations, so can not issue stock
Source: The Company Corporation, www.incorporate.com

Does a company have any business organization options besides sole proprietorship, partnership, and corporation?
Limited Liability Company Provides limited liability for its owners Taxes like a partnership Cooperatives Collectively owned by individuals or businesses with

similar interests Combine to achieve more economic power Joint venture An alliance of two or more companies Formed to undertake a special project Franchises Business arrangement between a franchisor and franchisee Franchisee uses business name and logo of

Specialized Forms of Business Organization

1. Cooperatives
2. Joint ventures 3. Franchises

Cooperatives
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:
2 or more companies form an alliance to pursue a

specific project, usually for a specific time period.

Franchising:
Business organization in which a franchisor

supplies the product concept to the franchisee, who sells the goods or services.

Why is franchising growing in importance?

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

Franchises
Advantages
increased opportunity to

Disadvantages
loss of control

expand (franchisor) recognized name, product, and operating concept (franchisee) management training and assistance (franchisee) financial assistance (franchisee)

(franchisor) costs of franchising restricted operating freedom (franchisee)

 Organization structure

Planning, Measurement and evolution Scheme

Rewards Selection criteria

Training

President

Production

Marketing/Sales

Administration

President Production Manager Quality Control Assembly Marketing Manager Sales Administratio n Manager Finance Accounting Purchasing Shipping/ Receiving

Promotion Advertising

Primary concern of entrepreneur is to change the environment and seek new ideas. Another role for entrepreneur is that of allocation of resources .

There are some issues to address before assembling and building the management team. A team must be able to accomplish three functions Execute the business plans Identify functional changes in the business as the occurs Make adjustments to the plans based on changes in the environment in the market that will maintain profitability.

 Enterpnuere will also need to consider the

personality and character of each individuales to creat a successful orangization culture . Organiztion will be a blend of attitudes, behaviours, dress, comuunications style that make one business different from others.

 Desired culture must match the business

strategies outline in the business plans Leader must create a workplace where employees are rewarded for good works. Entrepreneur should be flexible enough to try different things It is necessary to spend extra time to hiring process The entrepreneur needs to understand significance of the leadership in the organization. Provide the appropriate tools to the employees

The purpose of Boards of Directors is to provide important leadership and direction for the new venture. The function of the Boards of Directors Functions : Reviewing operating and capital budgets Developing long term strategies plans for growth and expansion Supporting day-to-day activities Ensure the proper use of assets

 Select individuals who can work with a diverse

group and will commit to the ventures mission Select candidates who understand the market environment or can contribute important skills to achieve planning goals Select candidates who will show good judgments in business decision making

 A board of advisor would be more loosely tied to the

organization and would serve the venture only an advisory capacity for some of the function. It has no legal status. Effect in family business.

Entrepreneur will use outside advisors such as accountant, bankers, lawyers, advertising agencies.