Part 3

Developing the New Venture Business Plan

CHAPTER 8

The Organizational
Plan: Teams,
Legal Forms, &
Strategic Alliances

Longenecker Moore Petty Palich

2008 Cengage Learning.

All rights reserved.

PowerPoint Presentation by Charlie Cook

The University of West Alabama

Looking AHEAD
After you have read 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, including tax consequences.

4.

Describe the unique features and restrictions of five specialized

organizational forms.

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.

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Building a Management Team

Management Team
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

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Building a Management Team (contd)

Team Building and Structure
The required combination of education and

experience depends on the type of business and the

nature of its operations
The key: achieving a balance of skills and
competencies in functional areas
Designing an internal management structure that
defines relationships and responsibilities
Outside professional support can supplement the
skills of a management team
An active board of directors can provide counsel
and guidance.
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Building a Management Team (contd)

Achieving
Achieving
Balance
Balance

Expanding
ExpandingSocial
Social
Networks
Networks

Team
Team Building
Building
and
and Structure
Structure

Specifying
Specifying
Structure
Structure

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8-1

Basic Forms of Legal Organization for Small Businesses

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8-2

Percentage of Small Businesses by Legal Form of Organization

Source: http://www.irs.gov/pub/irs-soi/histab22.xls, accessed February 5, 2007.14

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The Sole Proprietorship Option

Sole Proprietorship
A business owned by one person.

Advantages
Receives all of the firms profits.
Holds title to all of the firms 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.
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The Sole Proprietorship Option

(contd)
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 proprietors personal capital.
Is taxed on business income as personal income.

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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?

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Partnership Insights
Capitalize on the unique advantages of a
partnership.
Choose your partner carefully.
Be open, but cautious, about
partnerships with friends.
Test-drive the relationship,
if possible.
Create a combined vision for the business.
Prepare for the worst.
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8-3

The Advantages and Disadvantages of Partnerships

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Rights and Duties of Partners

Partnership Agreement
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.

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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, and incur debt.

C Corporation
An ordinary, or regular, corporation chartered by the

state and taxed by the federal government as a

separate legal entity.
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Corporate Charter: Articles of

Incorporation
Voting privileges for each
Name of company
Formal statement of
formation

class of stock

Type of Business

Names of incorporators
and directors

Location

Capital stockholders

Duration

Statement of limited
liability for stockholders

Classes and preferences

of stock
Number and par value of
authorized shares

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Statement of directors
powers

815

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 current 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

firms operations.
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Choosing an Organizational Form

Initial
Initial
Costs
Costs
Extent
Extentof
of
Liability
Liability

Income
Income
Taxes
Taxes

Continuity
Continuityof
of
the
theBusiness
Business
Factors
Factors
Affecting
Affectingthe
the
Choice
Choiceof
ofaa
Firms
Firms
Structure
Structure

Attraction
Attractionof
of
Capital
Capital

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Transfer
Transferof
of
Ownership
Ownership

Management
Management
Control
Control

817

8-4

Comparison of Basic Legal Forms of Organization

Form of
Organization

Initial Organizational
Requirements and Costs

Liability of
Owners

Continuity
of Business

Sole
proprietorship

Minimum requirements;
generally no registration
or filing fee

Unlimited
liability

Dissolved upon
proprietors death

General
partnership

Minimum requirements;
generally no registration
or filing fee; written
partnership agreement
not legally required but
strongly suggested

Unlimited
liability

Unless partnership
agreement specifies
differently, dissolved
upon withdrawal or
death of partner

C corporation

Most expensive and

greatest requirements;
filing fees; compliance
with state regulations for
corporations

Liability limited
to investment
in company

Continuity of business
unaffected by
shareholder withdrawal
or death

Form of
organization
preferred

Proprietorship or
partnership

C corporation

C corporation

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8-4

Comparison of Basic Legal Forms of Organization (contd)

Form of
Organization

Transferability
of Ownership

Management
Control

Attractiveness for
Raising Capital

Income Taxes

Sole
proprietorship

May transfer
ownership in
company name
and assets

Absolute
management
freedom

Limited to
proprietors
personal capital

Income is taxed as
personal income to
the proprietor

General
partnership

Requires the
consent of
all partners

Majority vote of
partners required
for control

Limited to
partners ability
and desire to
contribute capital

Income is taxed as
personal income to
the partners

C
corporation

Easily
transferred by
transferring
shares of stock

Shareholders have
final control, but
usually board
of directors
controls company
policies

Usually the most

attractive form for
raising capital

Corporations
income tax and the
stockholder is
taxed if and when
dividends are
received

Form of
organization
preferred

Depends on the
circumstances

Depends on the
circumstances

C corporation

Depends on the
circumstances

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Forms of BusinessFederal Income

Taxes

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.

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Forms of BusinessFederal Income

Tax
Sole Proprietorship
Example of taxes due
from a married couple
with $150,000 in income
from the business that
they operate as selfemployed persons.

Range of Taxable Income

Tax Rate

$0$15,650

10%

$15,651$63,700

15%

$63,701$128,500

25%

$128,501$195,850

28%

$195,851$349,700

33%

Over $349,700

35%

Income

x Tax Rate

Taxes

First $ 15,650

10%

$1,565.00

Next $ 48,050

15%

$7,207.50

Next $ 64,800

25%

$16,200.00

Next $ 21,500

28%

$6,020.00

Total $150,000

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$30,992.50

821

Forms of BusinessFederal Income

Tax
Corporation
Example of taxes due
from profits of $150,000
of a corporation. Any
profits of the corporation
that are distributed to the
stockholders are taxed
again as personal
income.

Range of Taxable Income

Tax Rate

$0$50,000

15%

$50,001$75,000

25%

$75,001$100,000

34%

$100,001$335,000

39%

$335,001$10,000,000

34%

$10,000,001$15,000,000

35%

$15,000,001$18,333,333

38%

Over $18,333,333

35%

Income

Tax Rate

Taxes

First $ 50,000

15%

$7,500

Next $ 25,000

25%

$6,250

Next $ 25,000

34%

$8,500

Next $ 50,000

39%

$19,500

Total $150,000

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$41,750

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Taxes on Gains and Losses

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 firms 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

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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

Apportioned

to each partner

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Specialized Forms of Organization

(contd)
S Corporation
Eligibility Requirements
No

more than 100 stockholders

All stockholders must be individuals or trusts
Only one class of stock can be outstanding
Must be a domestic corporation
Must operate on a fiscal calendar year basis
No nonresident alien stockholders
Benefits
Liability limited to investment in corporation
Dividends avoid double taxation
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Specialized Forms of Organization

(contd)
Limited Liability Company
Stockholders have limited liability but pay personal

income taxes on the business profits.

Easier to set up
More flexible
Tax advantages

Professional Corporation
Protects licensed professionals from liability of

partners but not their personal liability.

Nonprofit Corporation
Serves civic, educational, charitable, or religious

purposes but not for generation of profits.

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Forming Strategic Alliances

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

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Setting Up and Maintaining

Successful Strategic Alliances
Steps in Building Strategic Alliances
Establish a healthy network of contacts.
Identify and contact individuals within a firm who are

likely to return your call.

Outline the partners potential financial benefits from

the alliance.
Learn to speak and understand the language of your

partner.
Continue to monitor the progress of the alliance.

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8-5

Most Popular Small Business Alliances by Type

These alliances include only relationships that are long-term in nature.

2
These alliances include agreements relating to programs, such as just-in-time
supply or total quality management, that are relatively long-term in nature.
1

Source: Strategic Alliances, National Small Business Poll, William J. Dennis, Jr. (ed.),
Vol. 4, No. 4 (Washington, DC: NFIB Research Foundation, 2004), pp. 18.

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Making the Most of a 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 firms officers (top management)
Approve managements plans and policies
Review performance and declare dividends

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The Board of Directors (contd)

Contributions of Board of Directors
Bring knowledge and experience
Review

policy decisions

Provide

general direction

Monitor

the firms 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.

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Key TERMS

management team
social network
social capital
reciprocation
sole proprietorship
unlimited liability
partnership
partnership agreement
agency power
corporation
legal entity
C corporation
corporate charter
stock certificate

pre-emptive right
ordinary income
capital gains and losses
Section 1244 stock
limited partnership
general partner
limited partner
S corporation (Subchapter S corporation)
limited liability company
professional corporation
nonprofit corporation
organizational test
strategic alliance
board of directors
advisory council

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