Chapter 9

Chapter 9
The Organizational Plan
Hisrich
Peters
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Shepherd
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.
9-2
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) - Most common
form of corporation; regulated by statute;
treated as a separate legal entity for liability and
tax purposes.
9-3
Table 9.1 - Three Forms of
Business Formation
9-4
Business Formation (cont.)
9-5
Business Formation (cont.)
9-6
Tax Attributes of Forms of Business
 Tax Issues for Proprietorship

 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.
 Tax Issues for Partnership (general)
 Tax advantages and disadvantages similar sole
proprietorship.
9-7
Tax Attributes of Forms of Business
(cont.)
 Tax Issues for Partnership (limited)

 Has the advantage of limited liability.
 Tax Issues for Corporation:
 Can take many deductions and expenses not
available to proprietorship or partnership.
 Distribution of dividends is taxed twice.
 Double taxation can be avoided if income is
distributed to entrepreneur(s) in the form of
salary.
9-8
Designing the Organization
 Organization structure.
 Planning, measurement, and evaluation
schemes.
 Rewards.
 Selection criteria.
 Training.
9-9
Building the Management Team and a
Successful Organization Culture
 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.
9-10
Building the Management Team and a
Successful Organization Culture (cont.)
 Important factors in establishing an effective
team:
 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.
9-11
The Role of a Board of Directors
 Functions of the board of directors:

 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.
9-12
The Board of Advisors
 They serve only in an advisory capacity.

 No legal status
 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.
9-13
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.
9-14

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The Organizational Plan

 Investors demand that the management

 Three basic legal forms of business:

 Tax Issues for Proprietorship

 Tax Issues for Partnership (limited)

 Functions of the board of directors:

 They serve only in an advisory capacity.

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