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MGT602 - Entrepreneurship - Lecture Handout 27

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  1. To understand the importance of the management team in launching a new venture.
  2. To understand the advantages and disadvantages of the alternative legal forms of incorporation.
  3. To explain the S Corporation and limited liability company as alternative forms of incorporation.
  4. To learn how to prepare a job analysis, job description, and job specification.
  5. To illustrate how the board of directors or board of advisors can be used to support the management of a new venture.


Potential investors are interested in the management team and its ability and commitment to the new venture. Investors usually demand that the management team not operate the business part- time while employed full time elsewhere. It is also unacceptable for the entrepreneurs to draw a large salary. The entrepreneur should consider the role of the board of directors and/or a board of advisors in supporting the management of the new venture.


There are three basic legal forms and one new form of businesses. The three basic forms are:

  1. Proprietorship.
  2. Partnership.
  3. Corporation

A new form is the limited liability company, which is now possible in most states. The entrepreneur should evaluate the pros and cons of each of the legal forms prior to submitting a business plan. He should determine the priority of several factors discussed below. It is also necessary to consider intangibles such as image to suppliers, existing clients, and prospective customers.


  • In the proprietorship, the owner has full responsibility for operations.
  • In a partnership, there may be owners with general or with limited ownership.
  • In the corporation, ownership is reflected by ownership of shares of stock.

Liability of Owners

  • The proprietor and general partners are liable for all aspects of the business.
  • Since the corporation is a legal entity that is taxable and absorbs liability, the owners are liable only for the amount of their investment.
  • To satisfy any outstanding debts of the business, creditors may seize personal assets of the owners in proprietorships or regular partnerships.
  • In a partnership the general partners share the amount of personal liability equally, regardless of their capital contribution.
  • In a limited partnership, the limited partners are liable only for their capital contributions.

Costs of Starting a Business

  1. The more complex the organization, the more expensive it is to start.
  2. The least expensive is the proprietorship, where the only costs may be for filing for a business name.
  3. In a partnership a partnership agreement is needed, in addition this requires legal advice and should explicitly convey all parties’ responsibilities, rights and duties.
  4. A limited partnership may be more complex to form because it must comply strictly with statutory requirements.
  5. The corporation can be created only by statute.
  6. The owners are required to register the name and articles of incorporation and meet state statutory requirements.
  7. Filing fees and an organization tax may be incurred.
  8. Legal advice is necessary to meet the statutory requirements.

Continuity of Business

  • In a sole proprietorship, the death of the owner results in the termination of the business. In a limited partnership, the death of a limited partner has no effect on the existence of the partnership. A limited partner may be replaced, depending on the partnership agreement. If a general partner in a limited partnership dies or withdraws, the limited
    partnership is terminated unless the partnership agreement specifies otherwise.
  • In a partnership, the death or withdrawal of one of the partners results in termination of the partnership, but this can be overcome by the partnership agreement.
  • Usually the partnership will buy out the withdrawn partner’s share at a predetermined price.
  • Another option is to have a member of the withdrawn partner’s family take over as partner.
  • The corporation has the most continuity, as the owner’s death or withdrawal has no impact on continuity of the business, unless it is a closely held corporation.

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