BY

M.ARCHANA ASSISTANT PROFESSOR SRI SHAKTHI INSTITUTE OF ENGINEERING &

TECHNOLOGY

Objective
Meaning of management
Concept of management being both art and science. Difference between management and administration. Important management thoughts Major contribution of F.W.Taylor and Henry Fayol. Various functions and their importance. Various types of management.

WHAT IS MANAGEMENT ?
DEFINITION: F.W. Taylor - Art of knowing what you want to do and then seeing that it is done the best and cheepest way.
Henry Fayol To Manage is to forecast, to plan, to organise,

to

command,

to

co-ordinate

and

to

control.

Peter F.Drucker Management is work and as such it has its

own skills, its own tools and its own techniques.

Harold koontz process of designing and maintaining an

environment in which individuals, working together in groups, efficiently accomplish selected aims .
Management is the art of getting things done through and with

people.

 A process of designing and maintaining an environment in which

individuals working together in groups, achieve their objectives effectively and efficiently. A process consisting of all those functions required in getting work done through others without confusion, wastage of resources and overlap. Means to manage resources by planning, organizing, directing and controlling various activities of an enterprise such that all efforts are directed towards specific and objectives. These implies, management is a process and has universal applicability. Management is applicable to all levels in an organization. Management is concerned with productivity (effectiveness and efficiency).

CHARACTERISTICS OF MANAGEMENT
1) Is a Process /a function. 2) Is a Social Process. 3) Involves Group Effort. 4) Aims at achieving predetermined objectives. 5) Required at all levels of management 6) Is a Profession 7) Is comprised of following functions:
Planning Organizing Directing Controlling Co-ordination

8) Is an art and science.

Nature of management and its Purpose.

universal Activity based & continuous Purposeful
Integrative Process

Aims at productivity Nature of Management Both art & science

Involves decision making

Emphasizes people & not things

Is a process

Management & administration are synonymous

Social process

Nature of management and its Purpose.

Universal:

- has universal applicability. - applies to all types of organizations. - applicable to all formally organized group efforts.
Activity based and continuous:

- applicable to organized activities that takes place on a continuous basis. - organized activity can take a variety of forms.
Purposeful:

- Management has a purpose is a goal oriented organized activity. - focus is to achieve predetermined objectives. - the focus is to bring about successful action.

Nature of management and its Purpose.

Integrative process: - Management aims to establish integration between 1. various resources of the organization. 2. objectives of the organization and the requirements of its external environment. E .g., customers, society, government etc. Involves decision-making: - Management involves decision making -means the evaluation and selection of alternatives in a complex environment with a purpose of getting things done through others. - exists at all levels of management. Emphasizes people and not things: -the basic principle is that people are more important than things. - this principle emphasizes that managers are to be leaders whom people will like to follow and not bosses who must be obeyed. -people are to be made to work through motivation, morale etc and not through fear, fine and threats.

Nature of management and its Purpose.

Is a process:

-In management there are specific inputs, processes and outputs.

INPUTS PROCESS

OUTPUTS

Ex: Men Machine Material Money Methods

Ex: Planning Organizing Staffing Directing Controlling

Ex: Objectives

Nature of management and its Purpose.

Aim at Productivity (creating surplus): -Aim of management is to reach the objective using minimum resources and productive operations. -Productivity is defined as the human efforts to produce more and more with less and less input of resources as a result of which the benefits of production is distributed more equally among maximum number of people.

-Production: Concerned only with the volume of o/p totally ignoring the resources used to achieve that level of o/p. -Productivity: takes into account the quantity and quality of resources employed, i.e., the efficiency with which the resources are employed. - efficiency is the achievement of result with fewer amounts of resources.

Management Science or Art?

Management Science: Different people facing same situation-will not think, act or

react in the same way. Hence management science is not accurate as that of physical science. But, is an organized management, hence referred as science. Management Art: As a practice it is an ART. Implies personal creative power + Skills in performance. Is said to be art of arts since it organizes disorganized parts, communicating the vision to achieve the goals and human talents.

MANGEMENT IS AN ART AND SCIENCE

Art

Practical know how Technical skills Concrete results Creativity Personalised nature Science Empirically Derived Critically tested General principles Cause and effect relationship Universal applicability MANAGEMENT AS A SCIENCE PROVIDES PRINCIPLES AND AS AN ART HELPS IN TACKLING SITUATIONS.

Management Science or Art

MANAGEMENT MAN + AGE (EXPERIENCE) FOR AND BY PEOPLE

ART

SCIENCE
Accumulated knowledge such as clear Concepts, Theory etc.,

Organizes and uses human talent using motivation, leadership, human relations etc.,

BY USING OPTIMAL RESOURCES TO PRODUCE OPTIMAL RESULTS

Management Science or Art

Science concentrates on Knowing.

Art concentrates on doing.

Thus management is a blend of art and science, which is used to achieve effectiveness and efficiency. It is an art as it consists of organizing and using human talent to get the job done. It is a science as the management techniques are subjected to measurement and factual determination.

Management and Administration

Management- It is an art of getting things done through & with

the people in formally organized groups.

Administration-

According to Theo Haimann, Administration means overall determination of policies, setting of major objectives, the identification of general purposes and laying down of broad programmes and projects. According to Newman, Administration means guidance, leadership & control of the efforts of the groups towards some common goals.

Management and Administration

Two subdivisions of management
Administrative management. Is basically a thinking function mostly performed by higher

levels of management. Is concerned with determining goals and laying down policies. Operative management. Is basically a doing function mostly performed by lower levels of management. Is concerned with execution of policies for the attainment of goals.

Management and Administration

ADMINISTRATION 1. Is a determinative function MANAGEMENT 1. Is a execution function i.e., executing policies within the limits setup by administration.

2. Determines the organization and defines the goal.

2. Uses administration for the particular objectives set before it and strives to achieve it.

WHAT A MANAGER DOES?

ROLES OF A MANAGER - Achieve Objectives through and with people - Identity and Utilitise Resources Optimum Plan, Analyse, Interpret, Collobrate, educate, Problem solver, Communicator, build team, Change agent, Chief executive.
Interpersonal roles Information roles Monitoring Disseminator Spokesman Decisional roles Entrepreneur

Figurehead
Leader Liason

Disturbance handler
Resource allocator Negotiator

Middle Level Managers

First Level Supervisors

TIME SPENT IN CARRYING OUT MANAGERIAL FUNCTIONS

Controlling

Top Level Managers

Top Level

Technical Skills

Human Skills

Conceptual and Design Skills

Supervisory Level
Solution delivery

THE GOALS OF ALL MANAGERS & ORGANIZATIONS

Goal to make profit. Profit the measure of a surplus of sales dollars over expense dollars. In business firms goal is long-term increase in stock value.

- Managers can achieve as much as possible of a desired goal with the available resources. In non-business firms not responsible for total business profits.

Performance of different managers in an management and administration.

Performed by Higher level managers Middle & lower level managers

Type of function

Determinative or thinking Executive or doing function function Determining goals & laying Execution of policies for attaining down policies goals.

Concerned with

Note

Every manager spends time in both administrative and operative management (but the properties vary depending on the managerial level).

Relation Between Administration, Management and Organization.

Administration Lists out the required policies Attainment of Management Brings the policies to effect/reality

predetermined
organizational

Organization

Establishes coordination between administration and management

goal / objectives

On the Basis of Functions

Basis Meaning Management Administration Management is an art of getting things It is concerned with formulation of broad done through others by directing their objectives, plans & policies. efforts towards achievement of predetermined goals. Management is an executing function. Administration function. is a decision-making

Nature Process Function

Management decides who should do it & Administration decides what is to be done how should he do it. & when it is to be done. Management is a doing function because Administration is a thinking function managers get work done under their because plans & policies are determined supervision. under it. Technical and Human skills Conceptual and Human skills

Skills

Level

Middle & lower level function

Top level function

On the Basis of Usage

Basis Management Administration Applicabil It is applicable to business It is applicable to non-business ity concerns i.e. profit-making concerns i.e. clubs, schools, organization. hospitals etc. Influence The management decisions are influenced by the values, opinions, beliefs & decisions of the managers. Management constitutes the employees of the organization who are paid remuneration (in the form of salaries & wages). The administration is influenced by public opinion, govt. policies, religious organizations, customs etc. Administration represents owners of the enterprise who earn return on their capital invested & profits in the form of dividend.

Status

Administrative Management Function and Operative Management Function

Principles of Management
Management principles are the statements of fundamental truth based on logic which provides

guidelines for managerial decision making and actions. These principles are derived: -On the basis of observation and analysis i.e. practical experience of managers. -By conducting experimental studies.

Contribution of Fayol
Fayol's definition of management roles and actions distinguishes between Five Elements:
1.

2.

3. 4.

5.

Prevoyance: (Forecast & Plan). Examining the future and drawing up a plan of action. The elements of strategy. To organize: Build up the structure, both material and human, of the undertaking. To command: Maintain the activity among the personnel. To coordinate: Binding together, unifying and harmonizing all activity and effort. To control: Seeing that everything occurs in conformity with established rule and expressed command.

Origin of the 14 Principles of Management

Henri Fayol (1841-1925)-French Management Theorist-20th

century. Fayol -The father of modern operational management theory. Fayol -one of the most influential contributors to modern concepts of management. Proposed five primary functions of management-planning, organizing, commanding, coordinating, and controlling. Daft (2005) have reduced the five functions to four: planning, organizing, leading, and controlling. Fayol suggested that it is important to have unity of commandone supervisor for one person.

Fayols 14 Principles of Management

1. Division of Work: Specialization allows the individual to build up

2. 3.

4. 5.

experience, and to continuously improve his skills. Thereby he can be more productive. Authority: The right to issue commands, along with which must go the balanced responsibility for its function. Discipline: Employees must obey, but this is two-sided: employees will only obey orders if management plays their part by providing good leadership. Unity of Command: Each worker should have only one boss with no other conflicting lines of command. Unity of Direction. People engaged in the same kind of activities must have the same objectives in a single plan. This is essential to ensure unity and coordination in the enterprise. Unity of command does not exist without unity of direction but does not necessarily flows from it.

Fayols 14 Principles of Management

6. Subordination of individual interest (to the general interest): Management must see that the goals of the firms are always paramount. 7. Remuneration: Payment is an important motivator although by analyzing a number of possibilities, Fayol points out that there is no such thing as a perfect system. 8. Centralization (or Decentralization): This is a matter of degree depending on the condition of the business and the quality of its personnel. 9. Scalar chain (Line of Authority): A hierarchy is necessary for unity of direction. But lateral communication is also fundamental, as long as superiors know that such communication is taking place. Scalar chain refers to the number of levels in the hierarchy from the ultimate authority to the lowest level in the organization. It should not be over-stretched and consist of too-many levels.

Fayols 14 Principles of Management

10. Order: Both material order and social order are necessary.

The former minimizes lost time and useless handling of materials. The latter is achieved through organization and selection. 11. Equity: In running a business a combination of kindliness and justice is needed. Treating employees well is important to achieve equity. 12. Stability of Tenure of Personnel: Employees work better if job security and career progress are assured to them. An insecure tenure and a high rate of employee turnover will affect the organization adversely.

Fayols 14 Principles of Management

13. Initiative: Allowing all personnel to show their initiative in

some way is a source of strength for the organization. Even though it may well involve a sacrifice of personal vanity on the part of many managers. 14. Esprit de Corps: Management must foster the morale of its employees. He further suggests that: real talent is needed to coordinate effort, encourage keenness, use each persons abilities, and reward each ones merit without arousing possible jealousies and disturbing harmonious relations.

Applications of 14 Principles
Change and Organization.
Decision-making. Skills -Can be used to improve the basic effectiveness of a manager.

Understand that management can be seen as a variety of activities, which can be listed and grouped.

Contribution of Taylor
Fredrick Winslow Taylor ( March 20, 1856 - March 21, 1915) -

Father of Scientific Management.

Conducted various experiments during this process which forms the

basis of scientific management.

Implies application of scientific principles for studying & identifying

management problems.
Scientific Management is an art of knowing exactly what you want

your men to do and seeing that they do it in the best and cheapest way.

Principles of Scientific Management

1. Development of Science for each part of mens job
1) This principle suggests that work assigned to any

employee should be observed, analyzed with respect to each and every element and part and time involved in it. 2) This is done by the use of method of enquiry, investigation, data collection, analysis and framing of rules. 3) Under scientific management, decisions are made on the basis of facts and by the application of scientific decisions.

Principles of Scientific Management

2. Scientific Selection, Training & Development of Workers
1) There should be scientifically designed procedure for the 2) 3) 4) 5)

selection of workers. Physical, mental & other requirement should be specified for each and every job. Workers should be selected & trained to make them fit for the job. The management has to provide opportunities for development of workers having better capabilities. According to Taylor, efforts should be made to develop each employee to his greatest level, efficiency & prosperity.

Principles of Scientific Management

3. Co-operation between Management & workers
1) Taylor believed in co-operation and not individualism. 2) It is only through co-operation that the goals of the

enterprise can be achieved efficiently. 3) There should be no conflict between managers & workers. 4) Taylor believed that interest of employer & employees should be fully harmonized so as to secure mutually understanding relations between them.

Principles of Scientific Management

4. Division of Responsibility
1) This principle determines the concrete nature of roles to

be played by different level of managers & workers. 2) The management should assume the responsibility of planning the work whereas workers should be concerned with execution of task. 3) Thus planning is to be separated from execution.

Principles of Scientific Management

5. Mental Revolution
1)

2)
3)

4) 5) 6) 7)

The workers and managers should have a complete change of outlook towards their mutual relation and work effort. It requires that management should create suitable working condition and solve all problems scientifically. Similarly workers should attend their jobs with utmost attention, devotion and carefulness. They should not waste the resources of enterprise. Handsome remuneration should be provided to workers to boost up their moral. It will create a sense of belongingness among worker. They will be disciplined, loyal and sincere in fulfilling the task assigned to them. There will be more production and economical growth at a faster rate.

Principles of Scientific Management

6. Maximum Prosperity for Employer & Employees
1) The aim of scientific management is to see maximum 2) 3)

4) 5)

prosperity for employer and employees. It is important only when there is opportunity for each worker to attain his highest efficiency. Maximum output & optimum utilization of resources will bring higher profits for the employer & better wages for the workers. There should be maximum output in place of restricted output. Both managers & workers should be paid handsomely.

Techniques of Scientific Management

1. Time Study
It is a technique which enables the manager to ascertain standard

time taken for performing a specified job. Every job or every part of it is studied in detail. This technique is based on the study of an average worker having reasonable skill and ability. Average worker is selected and assigned the job and then with the help of a stop watch, time is ascertained for performing that particular job. Taylor maintained that Fair days work should be determined through observations, experiment and analysis by keeping in view an average worker.

Standard Time Working Hours = Fair Days Work

Techniques of Scientific Management

2. Motion Study
In this study, movement of body and limbs required to

perform a job are closely observed. In other words, it refers to the study of movement of an operator on machine involved in a particular task. The purpose of motion study is to eliminate useless motions and determine the best way of doing the job. By undertaking motion study an attempt is made to know whether some elements of a job can be eliminated combined or their sequence can be changed to achieve necessary rhythm. Motion study increases the efficiency and productivity of workers by cutting down all wasteful motions.

Techniques of Scientific Management

3. 1. 2.

3. 4. 5.

Functional Foremanship Taylor advocated functional foremanship for achieving ultimate specification. This technique was developed to improve the quality of work as single supervisor may not be an expert in all the aspects of the work. Therefore workers are to be supervised by specialist foreman. The scheme of functional foremanship is an extension of principle of specialization at the supervisory level. Taylor advocated appointment of 8 foramen, 4 at the planning level & other 4 at implementation level.

Techniques of Scientific Management

3. Functional Foremanship

Techniques of Scientific Management

6.

The names & function of these specialist foremen are: 1)

2)

3)

4)

5)

6)

7)

8)

Instruction card clerk concerned with tagging down of instructions according to which workers are required to perform their job Time & cost clerk is concerned with setting a time table for doing a job & specifying the material and labor cost involved in it. Route clerk determines the route through which raw materials has to be passed. Shop Disciplinarians are concerned with making rules and regulations to ensure discipline in the organization. Gang boss makes the arrangement of workers, machines, tools, workers etc. Speed boss concerned with maintaining the speed and to remove delays in the production process. Repair boss concerned with maintenance of machine, tools and equipments. Inspector is concerned with maintaining the quality of product.

Techniques of Scientific Management

4.

Standardization 1) It implies that the physical attitude of products should be such that it meets the requirements & needs of customers. 2) Taylor advocated that tools & equipments as well as working conditions should be standardized to achieve standard output from workers. 3) Standardization is a means of achieving economics of production. 4) It seems to ensure a. The line of product is restricted to predetermined type, form, design, size, weight, quality. Etc b. There is manufacture of identical parts and components. c. Quality & standards have been maintained. d. Standard of performance are established for workers at all levels.

Techniques of Scientific Management

5. Differential Piece Wage Plan
1) 2) 3)

4) 5) 6)

This tech of wage payment is based on efficiency of worker. The efficient workers are paid more wages than inefficient one. On the other hand, those workers who produce less than standard no. of pieces are paid wages at lower rate than prevailing rate i.e. worker is penalized for his inefficiency. This system is a source of incentive to workers who improving their efficiency in order to get more wages. It also encourages inefficient workers to improve their performance and achieve their standards. It leads to mass production which minimizes cost and maximizes profits.

Techniques of Scientific Management

6. Other Techniques
1) Various other techniques have been developed to create

ordeal relationship between management and workers and also to create better understanding on part of works. 2) Those includes use of instruction cards, strict rules & regulations, graphs, slides, charts etc, so as to increase efficiency of workers.

Study of Fayol and Taylor

Both the persons have contributed to development of science of

management. The work of Taylor & Fayol was, of course, especially complementary. They both realized that problem of personnel & its management at all levels is the key to individual success. Both applied scientific method to this problem that Taylor worked primarily from operative level, from bottom to upward, while Fayol concentrated on managing director and work downwards, was merely a reflection of their very different careers.

Study of Fayol and Taylor

They both differ from each other in following aspects: Taylor looked at management from supervisory viewpoint & tried to

improve efficiency at operating level. He moved upwards while formulating theory. On the other hand, Fayol analyzed management from level of top management downward. Thus, Fayol could afford a broader vision than Taylor. Taylor called his philosophy Scientific Management while Fayol described his approach as A general theory of administration. Main aim of Taylor to improve labor productivity & to eliminate all type of waste through standardization of work & tools. Fayol attempted to develop a universal theory of management and stressed upon need for teaching the theory of management. Taylor focused his attention on fact by management and his principles are applicable on shop floor. But Fayol concentrated on function of managers and on general principles of management wheel that could be equally applied in all.

Study of Fayol and Taylor

Similarity - Both emphasized mutual co-operation between employment

and employees. Spheres of Human Activity Fayols theory is more widely applicable than that of Taylor, although Taylors philosophy has undergone a big change under influence of modern development, but Fayols principles of management have stood the test of time and are still being accepted as the core of management theory. Psychologists View Point According to Psychologists, Taylor's study had following drawbacks: Ignores human factors - Considers them as machines. Ignores human requirements, want and aspirations. Separation of Planning and Doing. Dissatisfaction - Comparing performance with others. No best way - Scientific management does not give one best way for solving problems.

Study of Fayol and Taylor

Basis Human aspect Taylor disregards human elements and there is more stress on improving men, materials and methods Fayol Fayol pays due regards on human element. E.g. Principle of initiative, Espirit De Corps and Equity recognizes a need for human relations

Status Efficiency administration

Father of scientific Father of management management principles & Stressed on efficiency Stressed on general administration

Study of Fayol and Taylor

Basis Approach Taylor Fayol It has micro-approach It has macrobecause it is restricted approach and discuses general to factory only principles of management which are applicable in every field of management. These principles are These are applicable restricted to in all kinds of organization production activities regarding their management affairs Scientific management Administrative management

Scope of principles

Achievement

FUNCTIONS OF MANAGEMENT
Planning
Look ahead and chart out future course of operation Formulation of Objectives, Policies, Procedure, Rules,

Programmes and Budgets

Organising
Bringing people together and tying them together in the

pursuit of common objectives.

Enumeration of activities, classification of activities, fitting

individuals into functions, assignment of authority for action.

FUNCTIONS OF MANAGEMENT
Directing
Act of guiding, overseeing and leading people. Motivation, leadership, decision making.

Controlling
Laying

standards, comparing actuals and correcting deviation-achieve objectives according to plans.

Co-ordination
Synchronizing and unifying the actions of a group of

people.

FUNCTIONS OF MANAGEMENT
Managers task to design an internal as well as

external environment for performance with in an organization.

Understanding of & are responsive to the many elements of external environment economic, technological, social, political and ethical factors.

MANAGEMENT AS AN ESSENTIAL FOR ANY ORGANIZATION

Responsibility of managers to make individuals

contribute the best to achieve the group objective.

Applies to small & large organizations, to profit

and not-for-profit enterprises.

Enterprise Businesses, Government agencies,

hospitals, universities etc,.

APPROACHES TO MANAGEMENT
Empirical or case approach Managerial roles approach Contingency or situational approach Mathematical or management Science approach Decision theory approach Reengineering approach Systems approach Sociotechnical systems approach Cooperative social systems approach Group behaviour approach Interpersonal behaviour approach McKinseys 7-S framework TQM approach Management Process or operational approach

EMPIRICAL OR CASE APPROACH

Characteristics/Contributions: Studies experience through cases. Identifies successes and failures. Limitations: Situations are all different. No attempt to identify principles. Limited value for developing management theory.

Empirical or case approach

Case situation

Failure

Success

Why?

MANAGERIAL ROLES APPROACH

Characteristics/Contributions: Original study consisted of observations of 5 chief executives. On the basis of this study, 10 managerial roles were identified3 interpersonal, 3 informational, 4 decision roles. Limitations: Original sample - small. Some activities - not managerial. Some managerial activities are left out. (appraising)

MANAGERIAL ROLES APPROACH

Contingency or situational approach

Characteristics/Contributions: Depends on circumstances. Recognizes the influence of given solutions on organizational behaviour patterns. Limitations: Managers realized - no one best way to do things. Difficult to determine all relevant contingency factors. Complex.

Contingency or situational approach

Cause Effect

Depends on

Situation

Contingency

Mathematical or Management Science Approach

Characteristics/Contributions: Sees managing as mathematical processes, concepts, symbols & models. Looks at management- purely logical process, expressed in mathematical symbols & relationships Limitations: Preoccupation with mathematical models. Many aspects in managing can not be modeled. Is a useful tool but hardly an approach to management.

Mathematical or Management Science Approach

E = F(Xi1 Yi1)
YES

NO

Decision Theory Approach

Characteristics/Contributions: Focuses on the making of decisions, persons or groups making decisions and decision making process. Some theorist use decision making to study all enterprise activities. Limitations: There is more to managing than making decisions. The focus is at the same time, too narrow and too wide.

Decision Theory Approach

Process of decision making Individual decision making

Entire area of business activity

Values of decision making DECISION THEORY Group decision making

Nature of organization structure

Information for decision

Reengineering Approach
Characteristics/Contributions: Concerned with fundamental rethinking, process analysis, redesign and dramatic results. Limitations: Neglects external environment. Possibly it knows customers needs. Neglects human needs. Ignores total management systems.

Systems Approach
Characteristics/Contributions: Systems concept have broad applicability. Systems have boundaries, but they also interact with the external environment i.e, organizations are open systems. Limitation: Can hardly be considered a new approach to management.

Socio-technical Systems Approach

Characteristics/Contributions: Technical system has a great effect on social system (personal attitudes, group behaviour) Focuses on production, office operation & other areas with close relationship between the technical systems & people. Limitations: Emphasizes only blue color and lower level officer. Ignores much of other managerial knowledge.

Cooperative Social Systems Approach

Characteristics/Contributions: Concerned with both interpersonal and group behavioral aspects leading to a system of cooperation. Expanded concept includes any cooperative group with the clear purpose. Limitations: Too broad a field for the study of management It overlooks many managerial concepts, principles & techniques.

Types of Business Organizations

1. Sole Proprietorships The vast majority of small business starts out as sole proprietorships- very dangerous. These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume "complete personal" responsibility for all of its liabilities or debts.

Advantages of Sole Proprietorship

Easiest and least expensive form of ownership to organize. Sole proprietors are in complete control, within the law, to

make all decisions. Sole proprietors receive all income generated by the business to keep or reinvest. Profits from the business flow-through directly to the owner's personal tax return. The business is easy to dissolve, if desired.

Disadvantages of Sole Proprietorship

Unlimited liability and are legally responsible for all debts

against the business. Their business and personal assets are 100% at risk. Has almost been ability to raise investment funds. Are limited to using funds from personal savings or consumer loans. Have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business. Employee benefits such as owner's medical insurance premiums are not directly deductible from business income (partially deductible as an adjustment to income).

Types of Business Organizations...

2. Partnerships

In a Partnership, two or more people share ownership of a single business. The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed. They also must decide up front how much time and capital each will contribute, etc.

Advantages of a Partnership
Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
With more than one owner, the ability to raise funds may be increased. The profits from the business flow directly through to the partners' personal taxes. Prospective employees may be attracted to the business if given the incentive to become a partner.

Disadvantages of a Partnership
Partners are jointly and individually liable for the actions

of the other partners. Profits must be shared with others. Since decisions are shared, disagreements can occur. Some employee benefits are not deductible from business income on tax returns. The partnerships have a limited life; it may end upon a partner withdrawal or death.

Types of Business Organizations

A. Types of Partnerships that should be considered:

General Partnership Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently. Limited Partnership and Partnership with limited liability "Limited" means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership.

Types of Business Organizations

Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such, and distribute accumulated partnership assets upon dissolution of the entity.

Types of Business Organizations

3. Corporations

A corporation, chartered by the state in which it is headquartered, is considered by law to be a unique "entity", separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.

Advantages of a Corporation
Shareholders have limited liability for the corporation's debts or

judgments against the corporations. Generally, shareholders can only be held accountable for their investment in stock of the company. Corporations can raise additional funds through the sale of stock. A corporation may deduct the cost of benefits it provides to officers and employees. Can elect S corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.

Disadvantages of a Corporation
The process of incorporation requires more time and money

than other forms of organization. Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations. Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income, thus this income can be taxed twice.

Types of Business Organizations

A. Subchapter S Corporations

A tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and have them pass thru directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay herself wages, and it must meet standards of "reasonable compensation". This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit.

Types of Business Organizations

Limited Liability Company (LLC) The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC's must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; free transferability of ownership interests.