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Organizing The Venture

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Legal Forms Of Business Organization

Structure

Ownership

Requirements Tax Treatment Liability Advantages Drawbacks

Sole

proprietorship

One owner Income andlosses ³passthrough´ toowner and aretaxed at

personal rate

Unlimitedpersonalliability

Low start-up costs

Freedom from mostregulations

Owner has direct 

control 

All profits go toowner 

Easy to exit 

business

Unlimited personalliability

Personal finances

at risk 

Miss out on manybusiness taxdeductions

Total responsibility 

May be moredifficult to raisefinancing

General

partnership

Two or more

owners

Income and

losses ³passthrough´ to

partners and aretaxed atpersonal rate

flexibility in

profit-loss

allocations to

partners

Unlimited

personalliability

Ease of formation

Pooled talentPooled resources

Somewhat easier 

access to financing

Some tax benefits

Unlimited personal

liabilityDivided authority 

and decisions

Potential for conflict

Continuity of 

transfer of 

ownership

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Legal Forms Of Business Organization

Structure

Ownership

Requirements Tax Treatment Liability Advantages Drawbacks

Limited

liability

partnership

(LLP)

Two or moreowners

Income andlosses ³passthrough´ topartner and are

taxed atpersonal rate;flexibility in

profit-loss

allocations to

partners

Limited,althoughonepartners

mustretainunlimitedliability

Good way to

acquire capital from

limited partners

Cost andcomplexity of forming can be high

Limited partners

cannot participate

in management of 

business without 

losing liability 

protection

C corporation Unlimited number of shareholders;

no limits on typesof stock or votingarrangements

Dividend incomeis taxed at

corporate andpersonalshareholder levels; losses

and deductions

are corporate

Limited Limited liabilityTransferable

ownershipContinuousexistence

Easier access to

resources

Expensive to set up

Closely regulated 

Double taxation

Extensive record 

keeping 

Charter restrictions

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Legal Forms Of Business Organization

Structure

Ownership

Requirements Tax Treatment Liability Advantages Drawbacks

S corporation Up to 75 share-

holders; nolimits on types

of stock or 

voting 

arrangements

Income and

losses ³passthrough´ to

partners and aretaxed at personalrate; flexibility in

profit-loss

allocation to

partners

Limited Easy to set up

Enjoy limitedliability protectionand tax benefits of partnership

Can have a tax-

exempt entity as a

shareholder 

Must meet certain

requirementsMay limit future

financing options

Limited

liability

company

(LLC)

Unlimitednumber of ³members´;flexible

membership

arrangements

for voting rights

and income

Income andlosses ³passthrough´ to

partners and aretaxed at personalrate; flexibility in

profit-loss

allocations to

partners

Limited Greater flexibility 

Not constrained byregulations on Cand S corporations

Taxed as partner-

ship, not as

corporation

Cost of switchingfrom one form tothis can be high

Need legal and 

financial advice in

forming operating 

agreement 

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Other Legal Issues

� Choosing a Business Name, Slogan, or Design

� Trademarks: A Trademark is a form of legal protection for a

distinctive word, name, phrase, logo, symbol, design, slogan, or any 

combination of these elements. � atents:   A legal property that allows its holder to prevent others

from employing this property for their own use for a specified period 

of time. 

a) Utility Patent

b) Design Patent

c) Plant Patent

Invention must satisfy three additional requirements to be

patentable:

1. Novelty 2. Non-obviousness 3. Usefulness

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Other Legal Issues

� Contracts: A contract is an agreement that creates legal obligations and is

enforceable in a court of law. 

Essentials for Contract:

1. Mutual Assent: which means that both parties must agree to the

contract.

2. Consideration: which means that both parties must do or pay something

as stated in contract.

3. Legality of Object: which means that the contract cannot force the parties

to do something illegal.

4. Capacity of the Parties:which means that all parties to the contract mustbe legally able to perform their part of contract.

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Other Legal Issues

� Employment Laws:

Employment law cover hiring and firing,

employment policies, employee compensationand benefits, discrimination, workers

compensation, workplace health and safety,

family and medical leave, and other employer-

employee relationships  

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Other Legal Issues

- Sales Laws

- Trade Secret Laws

- Securities Laws

- Credit Laws

- Consumer ProtectionL

aws,- Pension and Fringe Benefit Laws

- Antitrust Laws

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Organizational Design issues

What is Organizing?

Organizational Structure:

A Organizational Structure is a formalframework within which work is divided,

grouped, and coordinated.

Organizational Chart:The visual representation of an organizations

structure is called Organizational Chart.

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Organizational Design Issues

Organizational Design

A process of developing or changing the organizationalstructure is called organizational design.

Organizational Design Decisions: decisions about six keyelements:

1. Work Specialization

2. Departmentalization

3. Chain of Command

4. Span of Control

5. Centralization-Decentralization

6. Formalization

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Organizational Design Issues

Types of Organizational Structures

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Organizational Design Issues

Appropriate for these

situations

� Cost efficiencies are critical

� Large Organization (2000 or

more employees)

� Standardized products

produced in a routine

Fashion

� Relatively stable and certain

external environment

Appropriate for these

situations

� Innovation is critical

� Smaller organizations

� Customized products

produced in a flexible

setting

� Dynamic , complex, anduncertain external

environment

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Organizational Design Issues

Boundaryless Organization

An flexible and unstructured organizational design

that is intended to break down external barriers

between the organization and its customers andsuppliers.

� Removes internal (horizontal) boundaries:

�Eliminates the chain of command

�Has limitless spans of control�Uses empowered teams rather than departments

� Eliminates external boundaries:

�Uses virtual, network, and modular organizational

structures to get closer to stakeholders.