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Entrepreneurship

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Entrepreneurship ­ MGT602
VU
Lesson 29
THE ORGANIZATIONAL PLAN (Continued....)
TAX ATTRIBUTES OF FORMS OF BUSINESS
A.
Tax Issues for Proprietorship
For the proprietorship the IRS treats the business as the individual owner. All income is personal income
and the business is not taxed as a separate entity. The proprietorship has some tax advantages compared to
the corporation.
a.
There is no double tax on profits.
b. There is no capital stock tax or penalty for retained earnings.
B.
Tax Issues for Partnership.
The partnership's tax advantages and disadvantages are similar to the proprietorship. Limited partnerships
can provide unique tax advantages. Both the partnership and proprietorship have a legal identity distinct
from the partners, but this identity is only for accounting purposes. The income is distributed based on the
partnership agreement, and the owners then report their share as personal income.
C.
Tax Issues for Corporation
The corporation has the advantage of being able to take many deductions not otherwise available. The
disadvantage is that dividends are taxed twice. This double taxation can be avoided if the income is
distributed as salary. The corporation tax may also be lower than the individual rate.
S CORPORATIONS
The S Corporation combines the tax advantages of the partnership and the corporation.
1. It is designed so that the venture income is declared as personal income on a pro rata
basis.
2. Shareholders benefit from all of the income and the deductions of the business.
Prior to passage of the 1996 Small Business Protection Act, rules governing the S corporation were
considered too rigid.
The new law provides more flexibility with regard to:
a.
Number of shareholders.
b. Who can be allowed to own shares?
c.
The role of trusts as stockholders.
d. The ability of S corporations to own more than 90 percent of stock of another
corporation.
e.
Distribution of profits.
f.
Issuance of different classes of stock.
g. Rules affecting the tax basis of incurred loses.
The new law allows existing S corporations to raise capital more easily.
S Corporations represent almost half of all corporate filings.
Limited liability corporations are still more flexible than the S corporation, but conversion entails a
significant cost.
More than half of all S corporations have only one shareholder, which would not be possible as an
LLC.
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Entrepreneurship ­ MGT602
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ADVANTAGES OF AN S CORPORATION
Capital gains or losses are treated as personal income.
Shareholders retain limited liability protection.
It is not subject to a minimum tax, as C corporations are.
Stock may be transferred to low-income-bracket family members.
Stock may be voting or nonvoting.
This form may use the cash method of accounting.
Corporate long-term capital gains and losses are deductible by the shareholders.
DISADVANTAGES OF AN S CORPORATION
Even with the new regulations, there are still some restrictions.
If the corporation earns less than $100,000, then the C Corporation would have a lower tax liability.
The S Corporation may not deduct most fringe benefits for shareholders.
The S Corporation must adopt a calendar year for tax purposes.
Only one class of stock, common stock is permitted.
The net loss of the S Corporation is limited.
THE LIMITED LIABILITY COMPANY
A popular new entity is the limited liability company (LLC), which offers similar advantages as the S
Corporation but with more liberal tax rules under subchapter K. This form is a partnership-corporation
hybrid with the following characteristics:
1. Where the corporation has shareholders, the LLC has members.
2. No shares are issued, and each member owns an interest in the business.
3. Liability does not extend beyond the member's capital contribution.
4. Members may transfer their interest only with the unanimous written consent of the
remaining members.
5. The standard acceptable term of an LLC is 30 years.
6. The laws governing formation of the LLCs differ from state to state.
The LLC is similar to an S corporation, but is more flexible. A major concern with LLCs is in
international business, where the context of unlimited liability is still unclear.
The primary differences between the limited partnership and the LLC are that the limited
partnership must have at least one general partner with unlimited liability for partnership debts.
The acceptability of the LLC should grow as state statutes are clarified and international rules
established.
With the assistance of a tax attorney, owners should compare alternative forms of ownership.
DESIGNING THE ORGANIZATION
The design of the initial organization will be simple. The entrepreneur may perform all of the functions
alone. He or she sometimes is unwilling to give up responsibility to others. The entrepreneur may have
difficulty making the transition from a start-up to a growing well-managed business that maintains its
success over a long period of time. As the workload increases the organizational structure will need to
expand to include additional employees with defined roles. Interviewing and hiring procedures will need to
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Entrepreneurship ­ MGT602
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be implemented. For many new ventures, part-time employees may be hired, raising commitment and
loyalty issues.
The organization must identify the major activities required to operate effectively. The design of the
organization will indicate to employees what is expected of them in five areas: Organizational structure,
which defines members' jobs and the relationship these jobs have to one another. Rewards are in the form
of bonuses, promotion, and praise. A selection criterion is the set of guidelines for selecting individuals for
each position. The organization's design can be simple or complex.
There are two stages of development in an organization
Stage 1: The new venture is operated by one person, the entrepreneur, with no need for sub managers.
Stage 2: As the business expands, the organization may be described as Stage 2.
a. Sub managers are hired to coordinate, organize, and control aspects of the business
b. .Measurement, evaluation, rewards, selection, and training become necessary.
Stage 3 may exist when the firm is large enough that a third level of managers is added
As the organization evolves, the manager's decision roles become more critical The primary concern is to
adapt to changes in the environment and seek new ideas. The manager will also need to respond to
unexpected pressures, referred to as "putting out fires." Another role is that of allocator of resources,
delegating budgets and responsibility. The final role is that of negotiator, as the entrepreneur can be the
only person with the appropriate authority.
BUILDING THE SUCCESSFUL ORGANIZATION
Before writing the organization plan, it is helpful to prepare a job analysis. The job analysis serves as a
guide in determining hiring procedures and job descriptions and specifications. As the size of the venture
changes, the process becomes more complex.
The place to start is with the tasks that need to be performed to make the venture viable. After this list is
made, then determine how many positions and what types of persons will be needed. Other decisions to be
made early in planning process:
a.
Where to advertise for employees.
b. How they will be trained.
c.
How they will be compensated.
Searching for senior talent requires a different strategy. Usually networking provides the best source of
candidates. Some recruiting firms are also specializing in placing senior people in start-ups.
The most important issues in the business plan are the job descriptions and specifications.
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Table of Contents:
  1. THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP:DEFINITION OF ENTREPRENEUR
  2. THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP:Possibility of New Venture Formation
  3. ENTREPRENEURIAL PROCESS/START UPS:GOVERNMENT AS AN INNOVATOR
  4. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND:ENTREPRENEURIAL PROCESS
  5. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…)
  6. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…):CLIMATE FOR ENTREPRENEURSHIP
  7. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…):PROBLEMS AND SUCCESSFUL EFFORTS
  8. THE INDIVIDUAL ENTREPRENEUR:ENTREPRENEURIAL BACKGROUND AND CHARACTERISTICS
  9. THE INDIVIDUAL ENTREPRENEUR (continued…):Personal Values, Work History, MOTIVATION
  10. THE INDIVIDUAL ENTREPRENEUR (continued…):ROLE MODELS AND SUPPORT SYSTEMS
  11. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES:INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES, Minority interests
  12. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):DIRECT FOREIGN INVESTMENT
  13. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):BARRIERS TO INTERNATIONAL TRADE
  14. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):ENTREPRENEURIAL PARTNERING
  15. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):SOURCES OF NEW IDEAS
  16. CREATIVITY AND THE BUSINESS IDEA:METHODS OF GENERATING NEW IDEAS, CREATIVE PROBLEM SOLVING
  17. CREATIVITY AND THE BUSINESS IDEA:PRODUCT PLANNING AND DEVELOPMENT PROCESS
  18. LEGAL ISSUES FOR THE ENTREPRENEUR:NEED FOR A LAWYER, PATENTS
  19. LEGAL ISSUES FOR THE ENTREPRENEUR:TRADEMARKS, LICENSING
  20. LEGAL ISSUES FOR THE ENTREPRENEURS:PRODUCT SAFETY AND LIABILITY, INSURANCE
  21. CREATING AND STARTING THE VENTURE:WHAT IS THE BUSINESS PLAN, PRESENTING THE PLAN
  22. CREATING AND STARTING THE VENTURE (Continued….):WRITING THE BUSINESS PLAN
  23. CREATING AND STARTING THE VENTURE (Continued….):
  24. CREATING AND STARTING THE VENTURE (Continued….):WHY SOME BUSINESS PLANS FAIL, MARKETING PLAN
  25. THE MARKETING PLAN:MARKET RESEARCH FOR THE NEW VENTURE
  26. THE MARKETING MIX:STEPS IN PREPARING THE MARKETING PLAN
  27. THE ORGANIZATIONAL PLAN:DEVELOPING THE MANAGEMENT TEAM, LEGAL FORMS OF BUSINESS
  28. THE ORGANIZATIONAL PLAN (Continued….)
  29. THE ORGANIZATIONAL PLAN (Continued….):THE LIMITED LIABILITY COMPANY
  30. THE FINANCIAL PLAN:OPERATING AND CAPITAL BUDGETS
  31. THE FINANCIAL PLAN (Continued….):PRO FORMA INCOME STATEMENTS, PRO FORMA CASH FLOW
  32. PRO FORMA SOURCES AND USES OF FUNDS:PERSONAL FUNDS, FAMILY AND FRIENDS
  33. PRO FORMA SOURCES AND USES OF FUNDS:COMMERCIAL BANKS
  34. BANK LENDING DECISIONS:SMALL BUSINESS ADMINISTRATION LOANS
  35. SOURCES OF CAPITAL:GOVERNMENT GRANTS
  36. SOURCES OF CAPITAL:PRIVATE PLACEMENT, BOOTSTRAP FINANCING
  37. CAPITAL SOURCES IN PAKISTAN:PROVINCIAL LEVEL INSTITUTIONS, FINANCIAL INSTITUTIONS
  38. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  39. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  40. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  41. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  42. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  43. NEW VENTURE EXPANSION STRATEGIES AND ISSUES:JOINT VENTURES, ACQUISITIONS
  44. NEW VENTURE EXPANSION STRATEGIES AND ISSUES (Continued….):DETERMINING THE PRICE FOR AN ACQUISITION
  45. ENTREPRENEURSHIP & PAKISTAN:GENDER DEVELOPMENT STATUS WOMAN AS AN ENTREPRENEUR IN PAKISTAN