organizing and financing a new business

1. Organizing and Financing
a New Business
By: Itmamul Akwan (825839)
Small Business Finance (BWFF5083)
Lectured by
PROF DR. MOHD AMY AZHAR DATO’ MOHD HARIF
Universiti Utara Malaysia

2. Presentation outline
1. Forms of business organization
2. Choosing the form of organization: Tax & other
considerations
3. Intellectual property
4. Seed and start-up financing sources
5. Business assets, liabilities and owner’s equity

3. 1. Forms of Business Organization
BusinessOrganization
A. Proprietorships
B. Partnerships
General
Limited
C. Corporations
D. Limited Liability
Companies (LLCs)

4. 1. Forms of Business Organization ( A. Proprietorships)
Proprietorships Owned by an individual who makes all the business decisions, receives the
profits that business earns, and bears the financial responsibility for losses
Advantage
Business is simple to set-up
Decision making is clear-out
Earnings are taxed only once as personal income
Disadvantages
The owner has unlimited liability
The owner makes the decision
Business dies with the owner

5. 1. Forms of Business Organization ( B. Partnerships)
Partnerships
It is much like an proprietorship but with more than one owner. It is can be described then as a
business enterprise that is owned by two or more people (partner) who make all the business
decisions, share the profits, and bear the financial responsibility for any losses.
Type
General do not require a formal agreement
Limited Require a formal agreement
Advantages
The business is relatively easy to set-up
More management skills are available
Earnings are taxed only once as the personal income of the partners
Disadvantages
There is unlimited liability for the partners
Decision making can be complicated
Limited ability to raise capital
Partner can be unstable

6. 1. Forms of Business Organization ( C. Corporations)Corporations
A form of business enterprise that is owned by a large number of shareholders, it has the legal status of
a fictional individual and is authorized by law to act as a single person, it has a board of directors who
appoints the management of the corporation which whom elected by the shareholders.
Advantage
There is limited lability for the owner
It has a separate legal status, and it is able to raise
large sums of capital
It has perpetual existence, and it is able to recruit
professional management
Disadvantages
Corporate income is taxed twice: once as corporate profit, then as
personal income (dividend)
Greater possibility for management disagreement
Conflict interest between the principles and managements

7. 1. Forms of Business Organization ( D. Limited Liability Companies)LimitedLiabilityCompanies
a business enterprise owned by "members” (shareholders) with limited Liability. Instead of shares, each
member owns a designated percentage of the company “membership interest”. A LLCs operating
agreement will typically specify whether and how membership interests can be transferred
Advantage
There is limited lability for the owner
It has a separate legal status, and it is able to raise large sums of capital
Profits are distributed to the members, who are taxed on profits at their
personal tax level.This avoids double taxation
Disadvantages
In a business operating as an LLCs, all income may be subject to payroll or self-
employment taxes
Some states charge extra fee for operating LLCs
if not defined in operating agreement, when a member leaves the LLCs it must be
dissolved

8. 2. Choosing the form of organization: Tax & other considerations
Form of organization Taxation
Proprietorships PersonalTax Rate
Partnerships PersonalTax Rate
Corporations corporate taxation; dividends subject to personal tax rates
Limited Liability Companies income flows to owners; taxed at personal tax rates
Form of organization Equity Capital Sources
Proprietorships owner, family, & friends
Partnerships partners, families, & friends / general and limited partners
Corporations venture investors & common shareholders
Limited Liability Companies venture investors & equity offerings to owners
Form of organization Firm Life & Liquidity of Ownership
Proprietorships life determined by owner; often difficult to transfer ownership
Partnerships life determined by partners; often difficult to transfer ownership
Corporations unlimited life; usually easy to transfer ownership
Limited Liability Companies life set by owners; often difficult to transfer ownership

9. 3. Intellectual property
What is Intellectual Property?
It is a venture’s intangible assets and
human capital and includes inventions
and innovations that can be protected
from being freely used or copied by
others.

10. 3. Intellectual property
ProtectingValuable Intangible Assets
4 Forms of Protection
Patents
Trade Secret
Trademarks
Copy Rights
granted for inventions that are
useful, novel, and non-obvious
in the form of inventions and information
not generally known to others that convey
economic advantages to the holders
Allow firms to differentiate their
products & services through the use
of unique marks
intellectual property rights to
writings in written and
electronically stored forms

11. 3. Intellectual property Other Methods for Protecting Intellectual Property Rights
Other Methods for
Protecting
Intellectual Property
Rights
Confidential
Disclosure
Agreements
Employment
Contracts
documents used to
protect an idea or other
forms of intellectual
property when disclosure
must be made to another
individual or organization
agreements between an
employer and employee
whereby the employer employs
the employee in exchange for
the employee agreeing to keep
confidential information secret
and to assign ideas and
inventions to the employer

12. 4. Seed and start-up financing sources
Personal Investment
• Your own cash or collateral
Love Money
• Friends, Parents and
Family
Venture Capital
• Institutional Investors
Angels
• Wealthy Individual, or retired company
executives who invest directly in small
firms owned by others
Business Incubator
• Support from institution
which concern to the
business development
Grant or subsidies
• Government agencies
provide financing such as
grants and subsidies that
may be available to the
business
Bank Loans
• Bank loans are the most
commonly used source of
funding for small and
medium-sized businesses

13. 5. Business assets, liabilities and owner’s equity
Assets, liability, and equity are the three components
of a balance sheet. These three categories
allow business owners and investors to evaluate the
overall health of the business, as well as its liquidity, or
how easily its assets can be turned into cash.

14. 5. Business assets, liabilities and owner’s equity
What are assets?
Assets are anything valuable that your company owns,
whether it’s equipment, land, buildings, or intellectual
property.
Assets are generally divided into two categories:
• Current assets: cash and anything that can be converted
into cash within a year (like inventory, for example).
• Fixed assets:Things like land, trademarks, and the value of
your “brand.”
Some common asset types include:
• Account Receivable: any payments that your clients and
customers owe you.
• Cash: the money you have in your business bank account.
• Inventory: any goods you have in stock that you intend to
sell.
• Property and equipment: any buildings or tools that you
need to operate your business.

15. 5. Business assets, liabilities and owner’s equity
What are liabilities?
The liabilities are any debts your business has, whether it’s
bank loans, mortgages, unpaid bills, IOUs, or any other sum of
money that you owe someone else.
If you’ve promised to pay someone in the future, and haven’t
paid them yet, that’s a liability.
Two main kinds of liabilities.
• Current liabilities: debts you owe within the next 12
months.
• Non-current liabilities: long-term debt that ranges beyond
12 months.
Combine them, and you get your total liabilities.
Some popular examples include:
• Accounts payable: payments you owe your suppliers.
• Bank loans: the principle you owe investors
• Salaries and wages payable: what you’ve agreed to pay
your employees in the future, but haven’t paid out yet.

16. 5. Business assets, liabilities and owner’s equity
What is equity?
"How much is left over?"
That’s what looking at your equity tells you: how much value is
left over once you’ve totaled up everything valuable that you
have, and subtracted everything you owe to your creditors. For
a small business owner, equity is the net worth of your
business.
Put another way: when you take all of your assets and subtract
all of your liabilities, you get equity.
For a sole proprietorship or partnership, equity is usually called
“owners equity” on the balance sheet. In a corporation, equity
is “shareholders’ equity”.

17. Itmamul Akwan