978-1305405745 Chapter 8

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Chapter 8: The Organizational Plan: Teams, Structures, Alliances, and Directors

CHAPTER 8: THE ORGANIZATIONAL PLAN: TEAMS, STRUCTURES,

ALLIANCES, AND DIRECTORS

CHAPTER OUTLINE

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1) Building a Management Team

LO1: Describe the characteristics and value of a strong management team.

i) Management team – Managers and other key persons who give a company its

general direction

(1) Teams may change, but must be accomplished respectfully

(2) Add team members as needed

(3) Provides diversity of talent making venture stronger

(4) Competence required depends on type of business and nature of operations

(5) Using family allows the owner to know and trust as well as pay less

(sometimes)

(6) How does the team concept fit the individualistic nature of most

entrepreneurs? For example, how does an entrepreneur learn to delegate?

a) Achieving Balance

i) Competence in all areas (finance, marketing, etc.)

ii) Competent insiders and outside specialists

b) The Solo Startup Is Still an Option

i) Emerging technologies makes this option increasingly manageable today.

Business support services are available online and hiring help from around the

world can require nothing more than a few mouse clicks.

c) Expanding Social Networks

i) Social network – an interconnected system comprising relationships with other

people

ii) Used to access information or get advice

iii) Communicates legitimacy and jump-starting sales

iv) Popular choices

(1) LinkedIn.com

(2) Twitter.com

(3) Yelp.com

(4) Facebook.com

v) Social capital – The advantages created by an individual’s connections in a

social network.Reciprocation – a powerful social rule based on an obligation to

repay in kind what another has done for or provided to us

2) Common Legal Forms of Organization

LO2: Explain the common legal forms of organization used by small businesses.

Exhibit 8-1 Forms of Legal Organization for Small Businesses. As each of these legal

forms is discussed, have students suggest local businesses that fit each option.

Chapter 8: The Organizational Plan: Teams, Structures, Alliances, and Directors

a) The Sole Proprietorship Option

i) Business owned by one person, who bears unlimited liability for the enterprise

ii) Most basic business form

iii) Unlimited liability – liability on the part of an owner that extends beyond the

owner’s investment in the business

iv) Exhibit 8-2 Percentage of Small Businesses by Legal Form of Organization

indicates Sole Proprietorship makes up largest percentage

b) The Partnership Option

i) Legal entity formed by two or more co-owners to carry on a business for profit

ii) Qualifications of Partners

(1) Involves consideration of legal issues as well as personal and managerial

factors

(2) Should be honest, healthy, capable, and compatible

(3) Suggestions

(a) Choose your partner carefully

(b) Be open, but cautious, about partnerships with friends

(d) Create a combined vision for the business

(e) Prepare for the worst

iii) Rights and Duties of Partners

(1) Partnership agreement – document that states explicitly the rights and duties

of partners (especially important with family members)

(2) Joint and several liability – liability of each partner resulting from any one

partner’s ability to legally bind the other partners

iv) Termination of a Partnership

(1) Death, incapacity, or withdrawal of a partner ends partnership

(2) Requires liquidation or reorganization of the business

(3) May result in substantial losses to all partners, but may be necessary

c) The C Corporation Option

i) Definitions

(1) Corporation – business organization that exists as a legal entity and provides

limited liability to its owners

(2) Legal entity – business organization that is recognized by the law as having a

separate legal existence

(3) C corporation – ordinary corporation, taxed by the federal government as a

separate legal entity

ii) The Corporate Charter

(1) Document that establishes a corporation’s existence

(2) Sometimes called articles of incorporation or certificate of incorporation

(3) Brief, in accord with state law, and broad in its statement of the firm’s powers

(4) Corporate bylaws outline the basic rules for ongoing formalities and decisions

of corporation such as size of board of directors, duties and responsibilities of

directors and officers, scheduling meetings of directors and shareholders, etc.

iii) Rights and Status of Stockholders

(1) Ownership evidenced by stock certificates (a document specifying the number

of shares owned by a stockholder)

Chapter 8: The Organizational Plan: Teams, Structures, Alliances, and Directors

i) Type of corporation that offers limited liability to its owners but is taxed by the

federal government as a partnership

ii) Must meet specific requirements

(1) No more than 100 stockholders allowed

(2) All stockholders must be individuals or certain qualifying estates and trusts

(3) Only one class of stock can be outstanding

(4) Fiscally, the corporation must operate on a calendar-year basis

(5) Shareholders may not include nonresident aliens

c) The Limited Liability Company

i) Form of organization in which owners have limited liability buy pay personal

income taxes on business profits

ii) Major advantage is the liability protection

iii) Usually the best choice for new businesses

(1) Ability to pass taxable income on to shareholders

(2) Easier to set up

(3) More flexible

(4) Significant tax advantages

iv) Better to use a C corporation if you want to:

(1) Provide extensive fringe benefits to owners or employees

(2) Offer stock options to employees

(3) Go public or sell out at some time in the future

(4) Eventually convert to a C corporation

d) The Professional Corporation

i) Form of corporation that shields owners from liability and is set up for individuals

in certain professional practices

ii) Does not protect a practitioner from his/her own negligence or malpractice

iii) Applies to narrow range of enterprises

iv) Many states require this form of organization before a practice can operate

e) The Nonprofit Corporation

i) Form of corporation for enterprises established to serve civic, educational,

charitable, or religious purposes but not for generation of profits

ii) Most become 501[c](3) organizations

iii) IRS will not allow this option for an individual or partnership

iv) Organizational test – verification of whether a nonprofit organization is staying

true to its stated purpose

f) The B Corporation

i) B corporation—A form of corporation that creates a positive social or

environmental impact while maintaining high standards of transparency and

accountability.

ii) Strategic alliance—An organizational relationship that links two or more

independent business entities in a common endeavor.

5) Forming Strategic Alliances

LO5: Understand the uses of strategic alliances and their uses in small businesses.

i) An organizational relationship that links two or more independent business

entities in a common endeavor

a) Strategic Alliances with Large Companies

Chapter 8: The Organizational Plan: Teams, Structures, Alliances, and Directors

i) Alliances created with both other large corporations and small businesses

b) Strategic Alliances with Small Companies

i) Provides mutual competitive strength

ii) Allows them to reach goals that would otherwise be too costly or too difficult for

small businesses to accomplish on their own

c) Setting Up and Maintaining Successful Strategic Alliances

i) Challenging to find a suitable partner

ii) Spreads the risk of entering new markets

iii) Helps small players with unattractive balance sheets appear stable to the end

buyer

iv) Steps to help succeed

(1) Establish a healthy network of contacts

(2) Identify and contact individuals within a firm who are accessible

(3) Do your homework, and you will win points just for being prepared

(4) Learn to speak and understand the “language” of your partner

(5) Make sure any alliance offer is clearly a win-win opportunity

(6) Continue to monitor the progress of the alliance to ensure that goals and

expectations are being met, and make changes as they become necessary

6) Making the Most of a Board of Directors

LO6: Describe the effective use of boards of directors and advisory boards.

i) The governing body of a corporation, elected by the stockholders

a) Selection of Directors

i) Firm’s attorney, banker, accountant, local management consultants, and other

business executives available, but lack independence needed to look at firm

critically

ii) Outside directors more objective in decisions and advice

iii) Nature and needs of business help determine qualifications required for directors

b) Contributions of Directors

i) May help with long term strategic decisions

ii) Reviews major policy decisions

iii) Advises on external business conditions and proper reaction to the business cycle

iv) Provide informal advice on specific problems

v) Offers access to important personal contacts

c) Compensation of Directors

i) Compensation varies greatly

ii) Some pay no fees at all

iii) May be annual retainer, board meeting fees, pay for committee work

iv) Money may not be their primary motivation for serving on the board

d) An Alternative: An Advisory Board

i) A group that serves as an alternative to a board of directors, acting only in an

advisory capacity

ii) Qualified outsiders serve

ADDITIONAL DISCUSSION QUESTIONS

1. Why would investors tend to favor a new business led by a management team

over one headed by a lone entrepreneur? Is this preference justified?

Chapter 8: The Organizational Plan: Teams, Structures, Alliances, and Directors

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Investors are concerned that management has a blend of important management

skills and that the founder has the ability to perform in a professional way. They

realize that the typical “idea person” who starts a business is deficient in some

area of management. This preference appears justified for most ventures of

substantial size.

2. What are the merits of the three most basic legal forms of organization?

Sole proprietorship is the most widely used form of organization. However, the

3. Does the concept of limited liability apply to a sole proprietorship? Why or why

not?

4. Suppose a partnership is set up and operated without a formal partnership

agreement. What problems might arise? Explain.

If articles of partnership are not put in writing, disagreements and

5. How do the three most basic forms of organization differ in terms of

management control by the owner and sharing of the firm’s profits.

In a proprietorship, the owner has complete and absolute control. In a general

partnership, an owner must share control with the other partner or partners, and

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10. How do advisory boards differ from boards of directors? Which of the two

would you recommend to a small company owner? Why?

SUGGESTED ANSWERS TO YOU MAKE THE CALL EXERCISES

Situation 1

1. How relevant are the individual personalities to the success of this

entrepreneurial team? Do you think Starner and Eckols have a chance to

survive a potential partnership? Why or why not?

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2. Do you consider it an advantage or a disadvantage that the members of this

team are about the same age?

3. On balance, is it good or bad that the company will be started by two men who

are very close friends? What are the potential benefits and drawbacks of mixing

business and friendship in this case?

As long as the friends create a partnership agreement that carefully outlines the

Situation 2

1. What are the advantages and disadvantages of running the business as a

partnership?

2. What other legal forms of organization could have been used for this business?

Which type would you recommend? Why?

Freeman may choose either a “C corporation” or an “S corporation”. Each of

these offers the advantage of limited liability and the legitimacy needed for

Chapter 8: The Organizational Plan: Teams, Structures, Alliances, and Directors

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taxed as a partnership. Taxable income and losses are passed to the stockholders

rather than the corporation paying corporate income taxes. Thus, dividends are

not subject to double taxation. An “S corporation” is limited in many other

respects (e.g., no more than 75 shareholders, only one class of stock, corporation

must be domestic), but none of these are relevant for Freeman’s decision. Thus, it

appears that the “S corporation” provides the necessary benefits with the least tax

burden.

Situation 3

1. Would you accept the investment and the conditions that go along with it, or

refuse it and go a different direction?

2. Can one outside member on a board of three make any real difference in the

way the board operates?

3. If you were the owners, whom would you include on the board?

4. If Patton and Marks decide to form a board of directors, what will determine its

usefulness or effectiveness? Do you predict that it will be helpful? Why or why

not?

The corporate bylaws would determine whether the board would be useful or

Chapter 8: The Organizational Plan: Teams, Structures, Alliances, and Directors

SUGGESTED SOLUTION TO CASE 8: COUCHSURFING INTERNATIONAL

1. How would you describe the founding team of Fenton, Hoffer, and Le Tuan? Is

it a balanced team? What does each member bring to the business? Can you see

gaps in their skills and capabilities that should be adjusted for in some way?

The members of the founding team each bring years of experience in website

2. What is the form of organization that Fenton, Hoffer, and Le Tuan first choose

for CouchSurfing International? Assess the advantages and disadvantages of

the major organizational forms mentioned in Chapter 8. Which of these would

have been best for the company when it was founded? Why?

Originally, the team chose to launch the business as a 501(c)(3) non-profit in the

state of New Hampshire. In Chapter 8 of the textbook, the three most common

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3. Identify and describe the organizational form to which the team transitioned the

firm more recently? Was it a good decision to make this change? How well was

the transition handled? In what ways might the conversion have been managed

better?

Most recently, the group decided to change the organization to a B Corporation.

4. Assess the fit of the board of directors with CouchSurfing based on the profiles

of those members who are mentioned in the case (since the company actually

has others). What are the strengths and weaknesses of these board members

and potential gaps in their knowledge? Do you see any ways in which their

advice to the entrepreneurial team may not have been the best for the company?

Like the original founders of CouchSurfing, the board of directors also embodied

an extensive wealth of knowledge and experience as developers, entrepreneurs,

Chapter 8: The Organizational Plan: Teams, Structures, Alliances, and Directors

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organizational restructuring. Many members of CouchSurfing viewed this move

as a departure from the original core values of “promoting exploration and

freedom.” The repercussions from their advisors’ advice to become a for-profit

business greatly impacted the group’s operations and created a strain on relations

with the CouchSurfing community.