1. PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Part 3 Developing the New Venture Business Plan The Human Resource Plan: Managers, Owners, Allies, and Directors

2. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 8–2 Looking Ahead After studying 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 three specialized organizational forms: limited partnerships, S corporations, and limited liability companies. 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.

3. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 8–3 The Management Team A strong management team nurtures a good business idea and helps provide the necessary resources to make it succeed. The skills of management team members should complement each other, forming an optimal combination of education and experience. A small firm can enhance its management by drawing on the expertise of outside professional groups. An entrepreneur should create a management structure that defines relationships among all members of the organization.

4. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 8–4 Legal Forms of Organization The most basic legal forms of organization used by small businesses are the sole proprietorship, partnership, and C corporation. –In a sole proprietorship, the owner receives all profits and bears all losses. The principal disadvantage of this form is the owner’s unlimited liability. –In a partnership, which should be established on the basis of a written partnership agreement, success depends on the partners’ ability to build an effective working relationship. –Corporations are particularly attractive because of their limited- liability feature. The fact that ownership is easily transferable makes them well suited for combining the capital of numerous owners.

5. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 8–5 Choosing a Legal Form of Business Nearly three-fourths of all new businesses are organized as sole proprietorships, 8 percent are set up as partnerships, and 21 percent are formed as corporations. The key factors in the choice among different legal forms of organization are organizational requirements and costs, liability of the owners, continuity of the business, transferability of ownership, management control, attractiveness for raising capital, and income taxes.

6. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 8–6 Legal Forms of Business and Taxes Self-employed individuals who operate businesses as sole proprietorships report income from the businesses on their individual tax returns. A partnership reports the income it earns to the Internal Revenue Service, but the partnership itself does not pay income taxes. The income is allocated to the owners according to their partnership agreement. A C corporation reports its income and pays any taxes due on this corporate income. Individual stockholders must also pay personal income taxes on dividends paid to them by a corporation.

7. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 8–7 Legal Forms of Business and Taxes (cont’d.) Holding Section 1244 stock helps to protect the stockholder in case of corporate failure. If such stock becomes worthless, the loss (up to $100,000) may be treated as an ordinary tax-deductible loss.

8. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 8–8 Liability and Legal Forms of Business In a limited partnership, general partners have unlimited liability, while limited partners have only limited liability as long as they are not active in the firm’s management. S corporations, also called Subchapter S corporations, enjoy a special tax status that permits them to avoid the corporate tax but requires individual stockholders to pay personal taxes on their proportionate shares of the business profits. In limited liability companies, individual owners have the advantage of limited liability but pay only personal income taxes on the firm’s earnings.

9. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 8–9 Strategic Alliances Strategic alliances allow business firms to combine their resources without compromising their independent legal status. –Strategic alliances may be formed by two or more independent businesses to achieve some common purpose. For example, a large corporation and a small business or two or more small businesses may collaborate on a joint project. Strategic alliance matchmakers can help small businesses find suitable alliance partners. –Entrepreneurs can improve their chances of creating and maintaining a successful alliance by establishing productive connections, identifying the best person to contact, confirming the long-term benefits of the alliance, and learning to speak the partner’s “language.”

10. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 8–10 Boards of Directors and Advisory Councils Boards of directors can assist small corporations by offering counsel and assistance to their chief executives. To be most effective, members of the board should include properly qualified, independent outsiders. One alternative to an active board of directors is an advisory council, whose members are not personally liable for the company’s actions.

11. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 8–11 Key Terms management team 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 strategic alliance board of directors advisory council