THE ORGANIZATIONAL PLAN (Continued….):THE LIMITED LIABILITY COMPANY

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Entrepreneurship MGT602

Lesson 29

THE ORGANIZATIONAL PLAN (Continued....)

TAX ATTRIBUTES OF FORMS OF BUSINESS

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.

There is no double tax on profits.

b. There is no capital stock tax or penalty for retained earnings.

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.

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:

Number of shareholders.

b. Who can be allowed to own shares?

The role of trusts as stockholders.

d. The ability of S corporations to own more than 90 percent of stock of another

corporation.

Distribution of profits.

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.

Entrepreneurship MGT602

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

Entrepreneurship MGT602

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:

Where to advertise for employees.

b. How they will be trained.

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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