Organizing an Entrepreneurial Venture PDF

Organizing an Entrepreneurial Venture Reasons for Forming a Specific Legal Form of Business There are many different legal forms of business available which differ on a country-by-country basis. The factors affecting the choice of one legal form over another include: taxation policy; number...

Organizing an Entrepreneurial Venture Reasons for Forming a Specific Legal Form of Business There are many different legal forms of business available which differ on a country-by-country basis. The factors affecting the choice of one legal form over another include: taxation policy; number of employees now and in the next 10 years; level of legal liability; and the type of firm and product area. 1. Taxation: The level and type of taxes varies with the type and company formed and the country’s laws. This is probably the or one of the most important factors in the choice of the legal form chosen; while taxation and tax policy can often keep an entrepreneur or even an existing firm from locating there, sometimes the other factors are more important than tax rate and a different legal form is chosen. 2. Number of employees: The number and type of employees the company will have in the future as it builds its market position is another sector. This includes whether citizens outside the country will need to be hired. The size of the company has a significant impact on the types and costs of the fringe benefits. Besides the usual benefits of retirement, health and dental insurance, other benefits include: training, education, and upgrading knowledge. The fringe benefit package that can be offered vary by the types of legal form used. The fringe benefits of the top management team and owners must also be taken into account. 3. Legal liability: In some countries such as the United States, the extent of legal liability has significantly increased. Sometimes, even an extensive amount of insurance cannot provide coverage and protection. Thus legal liability is involved in the offering (the products or services offered) by the firm, the management team and when present the company’s board of directors. 4. Type of firm and its industry: Some industries by their very nature require a certain type of legal form. There are similar organizational forms for accounting, legal, financial institutions, mining, production (service) companies, and hightech companies. Unless there is a strong case for not using the typical legal form of the industry, it is often better to follow the same legal form already established. Types of Legal Forms Available in the U.S. 1. Limited liability company: This is the most frequently used organization form as it provides legal protection for the individual as the company is the entity not the individual and there is no double taxation as any income earned by the corporation flows directly to the individual without any taxes or profits. There is a limitation on the number of owner. 2. S-corporation: Another frequently used form of organization form with the same advantages of a limited liability company but limits the number of owners to 100. 3. C-corporation: The organizational form required for C Company to be listed on any stock exchange. The company has double taxation as there is a tax on company income and taxes on the dividends at the individual tax rate 4. Non-profit organization: This is usually the most different form of organization to establish as the company does not pay taxes on any revenue or donations. The non-profit organization must gift at least 80% of its earned income (revenue) of the year in the United States to retain its Non-Profit status. 5. Hybrid corporation: This is the newest form of corporation where a percentage of income is specified to be given to a non-profit organization or the company’s own non-profit organization established. This percentage is carefully monitored for use in an appropriate way. 6. Professional corporation: This organizational structure is set aside for use by professional organizations such as accounting firms and law firms. It can only be used in the case specified by the tax authority.  These general organizational structure can as well be grouped into 3 legal groups: Proprietorship, Partnerships, and Corporation. The attributes of each of three general legal groups needs to be carefully evaluated in order to select the best organizational structure for the organization in the specific country.  1. Costs of starting a business: The more complex the organizational form, usually the more expensive it is to file and start. Of the three general forms, the least expensive is the proprietorship as in addition to the filing the only other cost is filing the trade name and any other copyright materials. In addition to filing fee and the costs of filing the trade name and any other copyright material, the partnership form of the company requires a formal document covering all the responsibilities, rights, and duties of each of the partner (the partners) involved. There are two forms of partnership agreements—a limited partnership and a general agreement. The final and most comprehensive general organization form is the corporation. Besides the usual filing costs of the trade name and copyright material, the corporation requires registering the name and articles of incorporation and meeting the statutory requirements of the domicile of the company. These costs vary by country and even by state within the United States. 2. Ownership: The ownership varies over the three general organizational forms. In the proprietorship, the owner is almost always the individual who starts the company, since this individual is responsible for operating the company. Sometimes, all or some of the ownership is given to the spouse, children, or someone who has done a lot for the company formation to occur. A partnership can involve general partnership owners and limited partnership owners until the ownership reflected in the number of shares of share of stock in the organization or individual has in the company. Sometimes there is a maximum number of owners in an S Corporation where the maximum number of owners is 100. 3. Transferability of ownership: Transferring all or part of the ownership is very easy for sole proprietorship as the entrepreneur (founder) has the right to sell any part or all of business desired. In a partnership, limited partners have flexibility and can sell their part of ownership in the business without consent of the general partner. General partner usually cannot sell (transfer) their interests to a new party without first offering their interest (ownership) to the other general partner. General partners usually cannot sell (transfer) their interests to a new party without first offering their interest (ownership) to the other general partners. In LLP’s, popular among accounting and law firms, the transfer of interest is often not allowed. The form of organization providing the easiest way to transfer ownership is the corporation particularly when the stock is listed and traded on one of the many stock exchanges. This transfer can of course be done without the consent of any other shareholders. When the stock of the corporation is not listed on an exchange, then the valuation and transfer of ownership is more difficult; the present owner needs to determine the valuation and then find some interested party and then determine the price and transferability. 4. Capital requirements: The capital needed to start a company varies by country and the raising of capital varies by the form of organization. New capital for a proprietorship can come from loans from any source or additional capital (or even loans) from the proprietors. In a partnership, acquiring additional capital frequently requires a change in the partnership agreement even if the new capital is provided by the existing partners. The partners are liable for the payment of any loan. There are numerous ways a corporation can raise capital, more than any other legal organizational forms. Preferred or common stock as well as bonds can be offered. Loans may be obtained by the corporation, not the individual, with the corporation having the responsibility for its repayment. 5. Management control: Each of three general forms of organization offer different possibilities for making business decisions and having control. In a proprietorship, since there is only one owner, he/she has the most control and ease in making business decisions. In partnership, there is some difficulty in making decisions unless there are clearly defined methods in the partnership agreement. Often in a partnership, minor decisions are made by the managing partner with all major decisions requiring a majority vote of all the partners. In a corporation, management decisions and control are usually done by the management. Major long term decisions, however, often require the vote of the stockholders. Usually stockholders elect a board of director which the president (CEO) and all top management report to. 6. Attractiveness for raising capital: Of the three forms of organization, the attractiveness of raising capital is most for the corporation due to the structure and advantages regarding personal liability. Stock, bonds, and any other form of debt can be used when raising capital with limited liability. 7. Distribution of profits and losses: The distribution of profits (losses) also vary greatly by the organizational form. In proprietorship, the owner (proprietor) receives personally all the profits and is responsible for any losses. The partnership agreement in the partnership form of organization specifies how the profits will be distributed and the losses handled. Limited partners can be protected from liability and being responsible for losses in a limited partnership agreement or an LLP. Profits are distributed by a corporation through dividends. Losses need to be adsorbed by the company and are not the responsibility of the stockholders. 8. Liability of owners: Owners liability is one of the most critical issues in choosing one of the three general organizational forms. Owners in a corporation have no liability whereas the owner in a proprietorship or partnership do have liability. Given the amount of litigation occurring in today’s world this feature alone may be the most important one for using the corporation organizational form. In a partnership, the general partners have the liability which can be protected by insurances. One form is DTO Insurance—directors’ and officers’ insurance. The same is true for proprietorship.  9. Taxes: There are a lot of differences in the tax structure of any country and the three forms of organizations. Tax policy and rates are one of the most important things to consider in choosing one form over another. Generally, for proprietorships taxes for the business as are treated like the individual owner. There are however some advantages: no double tax where profits are distributed to the owner; no capital stock tax or penalty for retained earnings of the company. A partnership has the same advantages as a proprietorship; the limited partners usually have tax advantages over a general partner. Since the corporation is viewed as an individual entity instead of the individual, the corporation can take many deductions and expenses not available to proprietorships and partnership. The biggest disadvantage for corporations (except for LLC and S-corporations) is that the distribution of dividends is taxed as income to the corporations and as income to the individual at his/her tax rate. Since tax laws vary widely by country and state within the United States often a tax advisor should be consulted. 10. Organizational structure: At start up, the initial organizational structure will be simple. If there are employees, it could be in the form of Figure, Where there are no employees, the owner/founder will perform all the functions of the organization outsourcing those functions that he/she does not feel capable of performing in the time needed. These functions outsourced are often accounting and production/assembling Board of Directors/Board of Advisor It’s important for the successful launch, growth, and exit from the business to establish a Board of Advisors or a Board of Directors. The main difference between the two boards is that the Board of Directors has fiduciary responsibility (legal liability) in the way the organization is run and the Board of Advisors do not. Since a company usually starts with a Board of Advisors due to the difficulty in recruitment and the cost which will be discussed first Board of Directors The Board of Directors is a much more formal group compared to the Board of Advisors and have legal liability for the decisions and operations of the organization. The Board of Directors usually: resolve conflicts between owners/ shareholders, review and approve the operations and budgets of the organization, develop long term strategic plans for stability and growth of the organization, monitor the use of assets, and provide information and advice within their area of expertise. Board of Advisors The Board of Advisors serves only in an advisory capacity. Each venture should have 2–3 members on the advisory board at the start of the venture and can expand this to 5 members as the venture grows and has different needs. The selection of the Board of Advisors is important as each member should have a skill or knowledge that is needed at that time. Each board member should be offered a part of equity each year for a 3 years’ period. The distribution ¾ of a part will be done at the end of the third year to help ensure that a board member is committed and will be there over a period of time. Each advisor should be interviewed and carefully assessed as if they were being hired for a position in the venture. The quality of their contribution to the venture and compatibility with other advisors and the management team should be determined. While advisors are definitely needed for small companies they can provide expertise and direction in critical areas for organizations of all sizes. Board Meeting Meetings of the board of advisors can take place as frequently as needed and anytime after the formal board meeting, each advisor can be contacted individually as needed. Some advisory groups or individuals can be used as an advisory individual without ever being a member of the board. This includes: banks, other small business, chamber of commerce, accountants, lawyers, and even friends and relatives although the latter two need to carefully selected as frequently friends and relatives can be optimistic and give the advice they think is desired by the management team. DEPARTMENT OF TRADE AND INDUSTRY (DTI). This government agency grants loan under the Covid-19 Assistance to Restart Enterprises (CARES) program to micro and small enterprises. The CARES program provides interest-free loans to micro-businesses with assets not exceeding PHP3 million, and small businesses with assets not exceeding PHP15 million. LANDBANK OF THE PHILIPPINES. The primary objective is to support government efforts to alleviate poverty by empowering the marginalized sector towards economic growth. GSIS FAMILY BANK MICROFINANCE LENDING PROGRAM. This program introduces an alternative credit system for the urban and rural poor in order to ensure them of access to credit and encourage the poor to use their time, effort and talents productively. DEPARTMENT OF SCIENCE AND TECHNOLOGY (DOST). This agency introduced a program named Small Enterprises Technology – Upgrading Program (Set-Up) which aims to improve viability of small and medium enterprises by providing financial assistance, in the form of cash advances from DOST, to facilitate technology adoption and improve the productivity and competitiveness of SMEs all over the country. CREDIT LINE FOR MICRO, SMALL AND MEDIUM ENTERPRISES (CLMSME). This program is under the Development Bank of the Philippines (DBP) which provides assistance to sectors considered to be the backbone of our economy – the Micro, Small and Medium Enterprises. SME UNITED LENDING OPPORTUNITIES FOR NATIONAL GROWTH (SULONG). his program is a financing strategy collaborated by Philippine Export- Import Credit Agency (PhilEXIM) and other government financial institutions (GFIs) to provide SMEs access to financing under a uniform lending structure. Assignment Who are the eligible borrower for each institutions?