CHAPTER 8 LECTURE NOTES

PPT 8-1

Chapter 8

Selecting the Management Team and Form of Organization

PPT 8-2

Chapter 8

Learning Objectives

PPT 8-3/TM 8-1

The Management Team

[Acetate 8-1]

A.    The management team

1.    The value of a strong management team

·        In small ventures, the entrepreneur is the only manager; there is no team.

·        Investors value the management team when evaluating a business plan.

                       4 It provides diversity of talent, in management and other key skills.

                       4 It assures continuity in case one person leaves the business.

·       How does the team concept fit the individualistic nature of most entrepreneurs?

·        Cite a current example of management weakness in a new or small firm by                        drawing on an example you know of personally, an example offered by a student,          or an example from a story in a current business periodical.

2.    Building a complementary management team

·        Competence needed in a management team depend on the business.

·        A proper range of abilities is needed, including minimal skills in basic                        operations, marketing, and finance.  Balance is critical.

·       Personal cooperation and compatibility are essential.

·       Issues that should be addressed and specified at the outset by team                        members include organizational structure, ownership share and                        compensation, and the plan for growth.

·        How important is entrepreneurial experience for a management team?

3.    Outside professional support

·        If the management staff is too small or limited, consider outside help.

·        Practical assistance is available from CPAs, attorneys, bankers, or retired                 executives (SCORE).

·        Some firms use the boards of directors.

·        Other outside consultants are available but not used by many new firms.

B.    Legal forms of organization

               (Emphasize that an entrepreneur need not be a lawyer but that he or she must have enough knowledge of the legal aspects of a business to know when legal counsel is required.)

PPT 8-4/TM 8-2

Forms of Legal

Organization for Small

Businesses

·       To give students an idea of where the discussion is going, point out the name         of each legal form and its special variations (see Acetate 8-2).

4       Proprietorship

4       General partnership

4       Limited partnership

4       Regular corporation

4         Subchapter S corporation

PPT 8-5/TM 8-3

The Sole Proprietorship

        1.     The sole proprietorship option

·        A sole proprietorship is a business owned and operated by one person.

·       Its advantages: the single owner has title to all business assets, the owner                 receives all profits, and the owner is free from partner interference.

PPT 8-6/TM 8-4

The Partnership Option

PPT 8-7/TM 8-5

An Opinion Survey

About the Pros and

Cons of Partnerships

        2.     The partnership option

·       A partnership is a voluntary association of two or more persons to carry on, as co-owners, a business for profit. 

·       Its advantages are that it pools managerial talent, spreads the workload (compared to a proprietorship), and is easier to create. 

·       Its disadvantages are unlimited liability (unless you are a limited partner), the fact that the death of a partner can terminate the partnership, the possibility of personal conflicts between partners, and the loss of control (compared with a sole proprietorship).

a.       Qualifications of partners

·        How important is agreement between partners?  Review the questions in Table 8-1 of the chapter with the students.

b.       Rights and duties of partners

·        The importance of written articles of partnership

·        Agency power—a decision by one partner binds all partners.    

PPT 8-8/TM 8-6

The C Corporation

        3.     The C corporation option

·        The Supreme Court has defined a corporation as “an artificial being,                        invisible, intangible, and existing only [in relationship to] the law.”

·        Its advantages are that it is a perpetual entity independent of owners’ lives, that the liability of owners is limited, that ownership is easily transferable, and that there are tax benefits.

·        Its disadvantages are the potential loss of majority ownership, the corporate income tax, and state requirements for creation.

a.       The corporate charter (see elements listed in the chapter)

b.       Rights and status of stockholders

c.        Limited liability of stockholders

PPT 8-9/TM 8-7

Issues in Choosing an
Organizational Form

[Acetate 8-3]

PPT 8-10

Comparison of Legal

        4.     Choosing an organizational form

·        Summarize the three general forms.

·        Discuss initial organizational requirements and costs, liability of owners, continuity of business, transferability of ownership, management control, attractiveness for raising new capital, and income taxes.

PPT 8-11

5.      Specialized forms of organization

        a.     The limited partnership—liability of limited partners is limited to capital invested.

                b.     The S corporation—an arrangement that allows stockholders to be taxed as partners.  It is restricted to corporations with 75 or fewer stockholders.

PPT 8-12

Definition of

Strategic Alliance

C.     Strategic alliances

·        Links     two or more independent businesses in a common endeavor

·        Common ground for large firms that want to share critical resources, but         without the risk and inflexibility of legally merging the organizations

PPT 8-13/TM 8-8

The Board of Directors

[Acetate 8-4]

D.    The board of directors

1.     Growing need for boards of directors

·        Dealing with the increasing complexity of business

·        Bring in outsiders to lend objectivity to decisions in a family business

2.     Use of outside directors by small companies

·        Very few small businesses make extensive use of outside directors.  Explore with students why this is the case.

3.     Contributions of directors

·        Fill in the gaps in the experience of the management team

·        Reviewing major policy decisions

·        Advising on external business conditions

·        Providing informal advice on specific problems

·        Lending credibility to the firm

4.     Selection of directors

          5.     Compensation of directors

PPT 8-14/TM 8-9

Taxes and the Form

E.      Federal income taxes and the form of organization

1.      How businesses are taxed

·        Discuss the role of taxes.

·        Discuss the example in the text.