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Flashcards in 8.1-8.4 Deck (75):

Managers and other key persons who give a company it's general direction.

Management Team


  • Individuals with supervisory responsibilities
  • Nonsupervisory personnel who play key roles in the business.

A management Team Consists of:


The team arrangement does not have to be ______.



Can make the best of a good business idea by securing the resources needed to make it work. Of course, even if this is highly competitent, it cannot rescue a firm that is based on a weak business concept or lacks adequate resources.

Strong management


  • The attitudes of prospective investors, who consider the quality of a new venture's management to be one of the most important factors in decisions to invest or to take a pass.
  • Investors know that enterprises typically perform poory if they are guided by weak or incapable managers.

Importance of Strong Management to Startups is Evident in:


A team can bring a diversity of talent to meet various managerial needs. This can be especially helpful to startups built on new technologies that must manage a broad range of factors. In addition, a team can provide greater assurance of continuity, since the departure of one member of a team is less devastating to a business than the deparature of a single owner.

Management Teams can Bring Greater Strength of a Venture than an Individual Entrepreneur


Depends on the type of venture and the nature of its operations. A small firm needs managers with an appropriate combination of education, experience, and skills. The qualifications of an applicant for a key position should complement those of members already on the team.

The Competence Required on a Management Team


  • Upside- the owner knows these people well and trusts them, they often work for less compensation (despite the elevated risk of joining a new venture) and they are more likely to make personal sacrifices to keep the business alive.
  • The downside is that the team can quickly become very homogeneous, lack complementary strengths, entertain feelings of entitlement, and carry the baggage of family dysfunction into the enterprise.

Management Team with Family and Friends


A management team should comprise both competitent insiders and outside specialists.

  • Commercial bank
  • Law firms
  • Accounting firms
  • Active board of directors (the value of a good board is never overstated)
  • You want some people with expertise in some areas, and some with expertise in other areas.
  • It is helpful to pair the depth of knowledge of highly specialized experts with big-picture thinkers who are better able to "connect the dots."

Achieving Balance


  • Business support services available online for free or for a small monthly fee
  • Hiring help from around the world can require nothing more than a few mouse clicks.
  • Systemize everything you can- see what you can outsource and automate. Every business is a repetitive system and you need to automate it so that you can spend your time doing the things that really add value.
  • Freedom to make own decisions
  • Pursue a dream that you cannot fully share
  • Not dependent on others to get things done

Solo Startup is Still an Option


It is not what you know, but ___ you know that matters.



An interconnected system of relationships with other people.

  • Roommates or other acquaintances from college
  • Former employees and business associates
  • Contacts through community organiations
  • Communicates legitimacy and jump-starts sales (Establishes a solid reputation).
  • Social media tools- LinkedIn, Twitter, Facebook

Social Network


The advantage created by an individual's connections in a social network.

  • Does not happen overnight or by accident
  • Building blocks that support it- being reliable as a friend, being fair in your dealings, being true to your word.

Social Capital


A powerful sense of obligation to repay in kind what another has done for or provided to us.

  • People naturally feel that they should return favors.
  • Be the first to lend a hand
  • Take a genuine interest in the needs of friends and acquaintances.
  • Social capital is sure to increase, binding friends and contracts to you and providing a solid foundation for building a business.



Will determine who the actual owners of the busines are.

  • Sole proprietorship
  • Partnership
  • C corporation

Legal forms of Organization


A business owned by one person, who bears unimited liability for the enterprise.

Sole proprietorship


Liability on the part of an owner that extends beyond the owner's investment in the business.

  • Personal assets can be taken by business creditors if the enterprise fails.

Unlimited Liability


  • Title to all business aspects
  • Subject to claims of creditors
  • Recieves all of the profits
  • Assumes all losses, bears all risks, pays all debts
  • Simplest and cheapest way to start operation
  • Most states do not require a license
  • Free from interference from partners, shareholders and directors
  • Unlimited liability
  • Not employees of the business- cannot benefit from tax-free fringe benefits (insurance and hospitalization plans)

Characteristics of a Sole Proprietorship


The ____ of the owner terminates the legal existence of  sole proprietorship. This possibility clouds relationships between a business and its creditors and employees. It is important to have a will, becuase the assets of the business minus the liabilities will belong to her or his heirs.



  • Give the executor  the power to run the business for the heirs until they can take it over or it can be sold.



If she or he were badly hurt in an accident and hospitilized for an extended period, the business could be ruined.

  • Can guard against this by giving a competent person legal power of attorney to carry on such situations.

Possible Incapacity of the Sole Proprietor


A legal entity formed by two or more co-owners to operate a business for profit.

  • Because of voluntary nature, owners can set it up quickly, aboviding many legal requirements involved in creating a corporation.
  • Pools the managerial talents and capital of those joining together as business partners.
  • Owners share unlimited liability.



  • Ability to share the worlkload and emotional and financial burdens
  • Gain management talent that  might otherwise break the budget
  • Adds companionship to life in a small business.

Benefits of Partnership


  • Personal conflicts
  • Falling short of partner's expectations
  • Decision making is more complicated
  • Share equity position in the business (naturally dilutes the control of each partner)
  • Dishonesty of partner
  • Differing priorities

Disadvantages of Partnerships


Should be formed only if it appears to be the best option after considering all features of the enterprise.

A Partnership


Honest, Healthy, Capable and Compatible

Qualifications of Partners


  • Choose your partner carefully
  •  Be open, but cautious, about partnerships with friends
  • Test-drive the relationship, if possible
  • Create a combined vision for the business
  • Prepare for the worst

Suggestions for Choosing Partners


  • Finding someone- trade magazines, client contracts, professional associations, online matching services.
  • Be sure that your- goals, values and work habits are compatible, skills are complementary
  • A person you can trust above all (the actions of your partner legally bind you even if decisions are made without your knowledge or consent).

Choose your Partner Carefully


Valued relationships can take a quick turn fo rthe worse when a business deal gets rocky.

Be open, but cautious, about partnerships with friends


Observe the behavior, style, and work habits, access his or her strengths and weaknesses before committing to a long-term relationship.

Test-Drive the Relationship, if Possible


Partners must be on the same page when it comes to forming the business concept they hope to develop together.

  • Expectations of all partners
  • Planned division of work
  • Anticipated vacation time
  • Sharing of profits and losses

Create a Combined Vision for the Business


More than half of partnerships fail.

  • Have an exit strategy
  • Shifting of conditions
  • Involved in another business venture
  • Personal circumstances

Prepare for the Worst


  • Partnership agreement
  • Joint and several liability

Rights and Duties of Partners


A document that states explicitly the rights and duties of partners.

  • Should be drawn up before the venture is launched

Partnership agreement


The liability of each partner resulting from one partner's ability to legally bind the other partners.

  • One decision can bind all other partners, even if the were not consulted in advance.
  • Assets of the business are at risk
  • Personal assets of the partners are at risk
  • Good faith together with reasonable care in exercise of managerial duties, is required of all partners in the business.

Joint and Several Liability


  • Death
  • Incapacity
  • Withdrawal of partnership

Requires Liquidation or Reorganization of a Partnership Business


Often results in substantial losses to all partners, but may be legally necessary.



Loss due to liquidation may be avoided if the partnership agreement stipulates that surviving partners can continue the business after buying the decedent's interest. This option can be facilitated by having each partner carry life insurance that names the other partners as beneficiaries.

When one Partner Dies


  • Cut the departing partner's access to bank accounts, physical facilities, and company assets to avoid loss or damage.
  • Quickly assess that partner's role in the enterprise and take steps to fill his shoes to get the business back to normal as soon as possible.
  • Sort out any legal issues that remain- abiding by exit agreements signed

Partner Leaving the Business


Represents a close personal relationship of the parties that cannot be maintained against the desire of any one of them.



An ordinary corporation, taxed by federal government as a separate legal entity.

C- Corporation


A business organization that is recognized b the l aw as having a separate legal existence.

  • Can file a suit and be sued
  • Hold and sell property
  • Engage in business operations that are stipulated in the corporate charter.

Legal Entity


A business organization that exists as a legal entity and provides limited liability to its owners.



A document that establishes a corporation's existence.

  • Must apply to the secretary of state for permission- the written application becomes this.
  • Should be brief, in accordance with state law, and broad in its statement of the firm's powers.
  • Details should be left to corporate bylaws

Corporate Charter (Articles of incorporation, Certificate of corporation)


Outline the basic rules for ongoing formalities and decisions of corporate life.

  • Size of the board of directors
  • Duties and responsibilities of directors and officers
  • Scheduling of regular meetings of the directors and shareholders
  • Means of calling for special meeting of these groups
  • Procedures for exercising voting rights
  • Restrictions on the transfer of corporate stock

Corporate Bylaws


  • Stock certificates
  • Preemptive right

Rights and Status of Stockholders


A document specifying the number of shares owned by a stockholder.

  • Does not confer a legal right to act for the firm or to share in its management
  • Provides the stockholder with the right to recieve dividends in proportion to stockholdings, but only when the dividends are properly declared by the firm.

Stock Certificates


The right of stockholders to buy new shares of stock before they are offered to the public.

Preemptive Right


  • Major advantage of the corporate form of organization
  • Restricted to the amount of money they invested in the business
  • Creditors cannot require them to sell personal assets to pay the corporation's debts
  • A bank that makes a loan to a small firm may insist that the owners assume personal liability for the firm's debts. If the corporation cannot repay the loan, the banker than then look to the owner's personal assets to recover the amount of the loan. In this case the advantage of limited liability is lost.

Limited Liability of Stockholders


  • Ownership is readily transferable
  • Stock shares of large corporations are exchanged continually without noticable effect on the operation of the business.
  • Finding a buyer may prove difficult for small firms.
  • Minority stockholder in a small firm is vulnerable- if 2 of 3 equal shareholders in a small business sold their stock to an outsider, the remaining sharesholder is at the mercy of that outsider.

withdrawl of Stockholders


An heir, the executor, or purchaser of stock might well insist on direct control, with possible adverse effects for oter stockholders.

  • Legal arrangements should be made at the outset to provide for management continuity by surviving stockholders and fair treatment of stockholder's heirs.
  • Taking out life insurance ahead of time can ensure the ability to buy out a deceased's stockholder's interest.

The Death of a Majority Stockholder


  • Must hold annual meetings of both the shareholders and the board of directors.
  • Keep minutes to document the major decisions of shareholders and directors
  • Maintain bank accounts that are separate from the owner's bank accounts
  • File a separate income tax return for the business.

Maintaining Corporate Status


  • Internal organizational requirements and costs
  • Liability of owners
  • Continuity of business
  • Transferability of ownership
  • Management control
  • Attractiveness for raising capital
  • Income taxes

Considerations in Choosing an Organizational Form


  • Sole Proprietorship- Minimum requirements, generally  no registration or filing fee.
  • General partnership- Minimum requirements; generally no registration or filing fee; written partnership agreement not legally required but strongly suggested.
  • C-Corporation- Most expensive and greatest requirements; filing fees; compliance with state regulations for corporations
  • Form or organization preferred: Proprietorship or partnership

Initial Organizational Requirements and Costs


  • Sole Proprietorship- unlimited liability
  • General partnership- Unlimited liability
  • C-Corporation- Liability limited to investment in company.
  • Form of organization preferred: C-Corporation

Liability of Owners


  • Sole Proprietorship- Dissolved upon proprietor's death.
  • General Partnership- Unless partnership agreement specifies differently, dissolved upon withdrawal or death fo partner.
  • C-Corporation- Continuity of business unaffected by shareholder withdrawal or death.
  • Form of Organization Preferred- C-Corporation

Continuity of Business


  • Sole Proprietorship- May transfer ownership of company name and assets.
  • General Partnership- Requires the consent of all partners.
  • C-Corporation- Is easily transferred by transferring shares of stock.
  • Form of Organization Preferred- Depends on the cirumstances.

Transferability of Ownership


  • Sole Proprietorship- Absolute management freedom.
  • General Partnership- Majority vote of partners required for control.
  • C-Corporation- Shareholders have final control, but usually board of directors controls company policies.
  • Form of Organization Preferred- Depends on the circumstances.

Management Control


  • Sole Proprietorship- Limited to proprietor's personal capital.
  • General Partnership- Limited to partner's ability and desire to contribute capital.
  • C-Corporation- Usually the most attractive form for raising capital.
  • Form of Organization Preferred- C-Corporation

Attractiveness for Raising Capital


  • Sole Proprietorship- Income from the business is taxed as personal income to the proprietor.
  • General Partnership- Income from the business is taxed as personal income to the partners.
  • C-Corporation- Taxed on it's income and the stockholder is taxed if and when dividends are recieved.
  • Form of Organization Preferred- Depends on the circumstances.

Income Taxes


  1. Incorporation will not protect a firm's owners from liability if it is used to perpetuate a fraud, skirt a law, or commit some wrongful act.
  2. No form of organization can protect entrepreneurs from all forms of liability.

Two Cautions in Order Regarding Liability and Organizational Forms


A situation in which the courts conclude that incorporation has been used to perpetuate a fraud, skirt a law, or common some wrongful act and remove liability protection from the corporate entity.

Piercing the Corporate Veil


  • The company is bankrupt, but its owners knowingly take on debt.
  • The board of directors does not meet as required by law or observe other corporate formalities.
  • Business and personal accounts are not kept separate and company funds are used to pay an owner's personal expenses.

Jeopardized Financial Liability


A partnership with at least one general partner and one or more limited partners.

Limited Partnership


A partner in a limited partnership who has unlimited personal liability.

General Partner


A partner in a limited partnership who is not active in its management and has limited personal liability.

  • Risk only the capital they invest in the business.
  • Must not be active in management
  • Must file a certificate of limited partnership wtiht he proper state office, as state law governs this form of organization.

Limited Partner


A type of organization that offers limited liability to its owners and passes taxable income or losses on stockholders.



A form of organization in which owners have limited liabiliy but pay personal income taxes on business profits.

  • can have unlimited number of owners (or even a single owner and may include non US citizens)
  • Avoids double taxation (unlike C-Corporation)
  • Not taxed but simply pass their income on to their owners, who pay taxes as part of their personal income.
  • Usually the best choice for new businesses- easier to set up, more flexible, offers significant tax advantages.

Limited Liability Company


  • You want to provide extensive fringe benefits to owners or employees.
  • You want to offer stock options to employees
  • You hope to go public or sell the business at some time in the future.
  • You plan to convert to a C corporation eventually.

Conditions to Choose C-Corporation over The Limited Liability Company


A form or corporation that shields owners from liability and is set up for individuals in certain professional practices.

Professional Corporation


Applies to those individuals whose professions require that they obtain a license before they can practice.



  • Does not protect a practicioner from her or his own negligence or malpractice.
  • Applies to a fairly narrow range of businesses
  • Many states require this form of organization before a professional practice can operate.

Characteristics of Professional Corporations


A form of corporation for enterprises established to serve civic, educational, chairtable, or religious purposes; not for generation of profits.

  • IRS will not grant this for sole proprietorship or partners
  • Must pass the organizational test
  • Bust establish a board of directors or trustees to oversee its operations, should it dissolve, required to transfer its assets to another nonprofit corporation.

Nonprofit Corporation


Verification of whether a nonprofit organization is staying true to its stated purpose.

Organiational Test


  • Nonprofit- Tax-deductable donations from individuals, foundations, and corporations
  • For profit- ability to raise money from private investors, for which it then grants equity in the venture or promises dividents.

Most Fundamental Difference Between Two General Forms