The organizational plan

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Learning Goal 1

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:

Owners liability for firms debts

The ease and cost of forming the business
The ability to raise funds
The taxes
The degree of operating control the operator can retain
The ability to attract employees

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Learning Goal 2
What are the advantages and disadvantages
ofAdvantages
sole proprietorships?

Ease and low cost of

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

Disadvantages

Unlimited liability of the

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

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Comparisons of Forms of Business

Organization

Sole proprietorships
Partnerships
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Corporations

Learning Goal 3
Why would a new business venture choose to
operate as a partnership, and what downside
would the partners face?

General Partnerships
Partners co-own assets
and share profits
Each partner is
individually liable for all
debts and contracts of
the partnership

Limited Partnerships
Controlled by one or more
general partners who have
unlimited liability
Partners liability is is
limited to their investment
Do not participate in the
firms operations

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Learning Goal 3 (contd.)

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

Advantages of
Partnerships

Disadvantages of
Partnerships

Ease of formation
Unlimited liability for general
Availability of capital
partners
Diversity of managerial
Potential for conflict between
expertise
partners
Flexibility to respond to
Limited life
changing business
Sharing of profits
conditions
Difficulty in leaving a
Relative freedom from
government control
partnership
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Partnerships
Disadvantages

Advantages

easy and
inexpensive to form
diverse skills and
expertise
flexibility
relative freedom
from government
regulations
no special taxation

potential conflicts
between partners
unlimited liability &
potential loss
sharing profits
hard to leave or end
partnership

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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,

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home3.americanexpress.com/smallbusiness

Learning Goal 4
Why does the corporate structure provide advantages
and disadvantages to a company, and what are the
major types of corporations?

Advantages of
Corporations

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

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

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Learning Goal 4 (contd.)

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

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Corporations
Advantages

Disadvantages

limited liability
easy to get financing

easy to transfer
ownership

unlimited life-span
tax deductions

double taxation of
profits
costly & complex to
form
government
restrictions

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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
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Organizational Structure of
Corporations
Stockholders

elect

Directors

elect

Officers (Top
Management)
President

Vice Treasurer Secretary

President

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Types of Hybrid Corporations

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

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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

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Learning Goal 5

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 franchisor

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Specialized Forms
of Business Organization

1. Cooperatives
2. Joint ventures
3. Franchises

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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
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Joint Venture:
2 or more companies form an
alliance to pursue a specific
project, usually for a specific
time period

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Learning Goal 6

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
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Franchising:
business organization in which
a franchisor supplies the
product concept to the
franchisee, who sells the goods
or services
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Franchises
Disadvantages

Advantages

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

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

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Factors

Proprietorship

Partnership

Corporation

Ownership

Individual

Liability of owners

Individual liable for

buisness liabilities

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

Costs of starting
buisness

None, other than filling

fees for trade name

No limitation on number
of partners
In general partner ship
all individual liable for
liabilities, limited partner
are liable for amount of
capital.
Partnership agreement,
legal costs, and minor
filling fees for trade
name.

Continuity of buisness

Death dissolve the

buisness

Death or withdrawl of one

partner terminates
partnership unless
partnership agreement
stipulates otherwise,
death or withdrawl of
one of limited partner has
no effect on continiuty

Transferability of
interest

Complete freedom to sell

or transfer any part of
buisness

General partner can

transfer his interest only
with consent of all other
general partners.

Capital requirment

Capital raised only by

loan or increased
contribution by
proprietror
Proprietror makes all
decision and act
immediately
Responsible and recice all
profits and losses

Loan or new contribution

by partner require a
change in agreement.

Management control

Distribution of profit
and losses

All general partners have

equal control
Depend on partnership
agreement and
investment by partners

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Created only by
statue.articles of
incorporation,filing fees,
taxes and fees for
statesin which corporation
register to do buisness.
Greatest form of
continuty. Death or
withdrawl will not effect.

Most flexible. Stockholder

can sell or stock at will.
Some stock tranfers may
be restricted by
agreement. In s cop may
be transferred.
New capital raised by sale
of stocks or bonds or by
borrowing in name of
corporation.
Majority stockholders
have most controls from
legal point of view.
Shareholder can share

Presentation on
Designing the Organization

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Expected Functions of Formal

Organization

organization structure
Planning, Measurement and
evolution Scheme
Rewards
Selection criteria
Training

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Stages in Organization Design

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Primary concern of entrepreneur is to

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

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Buliding the management Team and

Successful Organization Culture
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.
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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.
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Successful Organization culture

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
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Roles of Boards of Directors

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
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Criteria to chose the Boards of

directors

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
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Boards of Advisor
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

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Organization and use of Advisor

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

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