Please read Chapter 8 – The Organizational Plan and complete the discussion assignment.
Using terms and concepts from Chapter 8 in a way that demonstrates your knowledge of those terms and concepts, please discuss the important considerations in setting the organizational structure of a small business.
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Small Business
Management, 18e
Longenecker/Petty/Palich/Hoy
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The Organizational Plan: Teams, Legal
Structure
s, Alliances, and Directors
Chapter 8
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Learning Goals:
Describe the characteristics and value of a
strong management team.
Explain the common legal forms of
organization used by small businesses.
Identify factors to consider in choosing
among the primary legal forms of
organization.
Discuss the unique features and restrictions
of five specialized organizational forms.
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Learning Goals (cont.):
Understand the nature of strategic alliances
and their uses in small businesses.
Describe the effective use of boards of
directors and advisory boards.
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Building a Management
Team
Management Team
Managers and other key persons who give an
organization its general direction
Characteristics of a Strong
Management
Team
Capable of securing the resources needed to
make business a success
8–5
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Building a Management Team
(cont.)
Characteristics of a Strong Management
Team
Reassures investors about the their
investment and the continuity of business
Diversity of talent makes the team stronger
than an individual entrepreneur
8–6
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Building a Management Team
(cont’d)
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
8–7
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Building a Management Team
(cont’d)
Team Building and Structure
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.
8–8
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The Sole Proprietorship Option
Sole Proprietorship
A business owned by one person, who bears
unlimited liability for the enterprise.
Advantages
Receives all of the firm’s
profits.
Holds title to all of the firm’s assets.
Can easily sell or transfer ownership of the
company name and assets.
8–9
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The Sole Proprietorship Option
(cont.)
Advantages (cont.)
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.
8–10
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part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
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The Sole Proprietorship Option
(cont’d)
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.
8–11
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The Sole Proprietorship Option
(cont’d)
Disadvantages (cont.)
Death/incapacity of owner terminates
business.
Is limited to the proprietor’s personal capital.
Is taxed on business income as personal
income.
8–12
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Forms of Legal Organization for Small Businesses8.1
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Percentage of Small Businesses by Legal Form of Organization8.2
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
8–15
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The Partnership Option (cont.)
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?
8–16
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Partnership Insights
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.
8–17
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Rights and Duties of Partners
Partnership Agreement
A document that states explicitly
the rights and duties of partners.
Joint and Several Liability
The liability of each partner resulting from
any one partner’s ability to legally bind the
other partners.
Termination of a Partnership
Provisions for rapidly responding to death
or departure of a partner.
8–18
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part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
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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 recognized by the law
as having a separate legal existence (“artificial
being”); can be sued, hold property, and incur
debt.
8–19
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The C Corporation Option
(cont.)
The C Corporation
An ordinary, or regular,
corporation
chartered by the state and taxed by the
federal government as a separate legal entity.
8–20
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The Corporate Charter:
Articles of In
corporation
Name of company
Formal statement of
formation
Type of Business
Location
Duration
Classes and preferences of
stock
Number and par value of
authorized shares
Voting privileges for each
class of stock
Names of incorporators
and directors
Capital stock
holders
Statement of limited
liability for stockholders
Statement of directors’
powers
8–21
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part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
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Rights and 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.
8–22
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part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
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Rights and Status of
Stockholders (cont.)
Legal Status
Ownership provides control over the
firm.
Ownership limits liability to investment in the
firm.
Ownership can be transferred without
affecting the firm’s operations.
8–23
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Comparison of Basic Legal Forms of Organization8.3
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Comparison of Basic Legal Forms of Organization (continued)8.3
Criteria for Choosing an Organizational Form
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Initial
Costs
Continuity of
the Business
Transfer of
Ownership
Management
Control
Attraction of
Capital
Income
Taxes
Liability of
Owners
Factors
Affecting the
Choice of a
Firm’s
Structure
Forms of Business—Federal
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.
8–27
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Forms of Business—Federal
Income Taxes (cont.)
Corporation
As a separate legal entity, it reports its
income and pays any taxes related to its
profits; dividends paid to shareholders are
taxed as personal income.
8–28
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Specialized Forms of
Organization
The Limited Partnership
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
8–29
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Specialized Forms… (cont)
S (or Subchapter S) Corporation
Eligibility Requirements
No more than 100 stockholders
All stockholders must be individuals,
estates, or trusts
Only one class of stock can be outstanding
Must operate on a fiscal calendar year basis
No nonresident alien stockholders
8–30
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Specialized Forms… (cont.)
S (or Subchapter S) Corporation (cont.)
Benefits
Liability limited to investment in
corporation
Passes taxable income or losses to share
holders
8–31
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Specialized Forms… (cont.)
The Limited Liability Company
Stockholders have limited liability but pay
personal income taxes on the business profits.
Easier to set up
More flexible
Tax advantages
The Professional Corporation
Protects licensed professionals from liability
of partners but not their personal liability.
8–32
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Specialized Forms… (cont.)
The Nonprofit Corporation
Serves civic, educational, charitable, or
religious purposes but not for generation of
profits.
8–33
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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
8–34
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Most Popular Small Business Alliances by Type8.4
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 partner’s potential financial
benefits from the alliance (clearly a win–win
opportunity).
8–36
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Setting Up and Maintaining
Successful Strategic Alliances
(cont.)
Steps in Building Strategic Alliances
Learn to speak and understand the “language”
of your partner.
Continue to monitor the progress of the
alliance.
8–37
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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 work for the
firm
Outside directors do not work for the
firm
8–38
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Making the Most of a Board of
Directors (cont.)
Duties of Directors
Elect the firm’s officers (top management)
Approve top management’s strategic plans
and policies
Review top management’s performance
Declare dividends
8–39
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The Board of Directors
Contributions of Board of Directors
Bring knowledge and experience
Review policy decisions
Provide general direction
Monitor the firm’s ethical behavior
Mediate and resolve disputes among top
management
8–40
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The Board of Directors (cont.)
Alternative: An Advisory Council
Provides advice but does not have the
fiduciary responsibility for the direction of the
firm.
May be less threatening and more
cooperative than a board of directors
8–41
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Key Terms
advisory board
B corporation
board of directors
C corporation
corporate charter
corporation
general partner
joint and several liability
legal entity
limited liability company
limited partner
limited partnership
management team
nonprofit corporation
organizational test
partnership agreement
partnership
piercing the corporate veil
pre-emptive right
professional corporation
reciprocation
S corporation (Subchapter S
corporation)
social capital
social network
sole proprietorship
stock certificate
strategic alliance
unlimited liability
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