Business Organization:
Management & Legal Structure
Session 3
Date:
Due:	Section II: Parts A, B and C
Class Opener (10 min.)
Articles of interest, best / worst news, brainteaser, or see Sharing Research Resources.
Instructor Topics (55 min.)
(20 min.)	1.	Choosing the Right Legal Structure
(20 min.)	2.	Government Regulations
(15 min.)	3.	Other Legal Issues and Risk Management
Contracts and Leases
Intellectual Property
Insurance and Business Continuity Planning
Guest Speaker (30 min.)
Small-business attorney or insurance agent
Break (20 min.)
Refreshments
Networking activity
Instructor Topics—continued (25 min.)
(15 min.)	4.	Management and Leadership
(10 min.)	5.	Location and Logistics
Work Period (40 min.)
Homework Review—Session 2
Workbook Preview—Session 3
Assignment for Session 4
WORKBOOK	Complete the worksheets in Workbook Session 3. WRITE	After completing the Session 3 worksheets, follow the instructions on the Writing Your Business Plan page at the end of the worksheets to complete Section III. Business Organization and Operations: A. Business Structure, Management and Personnel and B. Operations Plan. TEXT	Read Chapter 8 (Market Research and Analysis).
Additional Instructor Notes
Session 3
Class Opener—Sharing Research Resources
As students enter, have each of them go to the board to write down one useful research resource they found. Encourage all students to write down shared resource information for their own use.
Ask the question: Did any of you learn anything surprising about your industry? Discuss.
Choosing the Right Legal Structure
NOTE: Make sure students understand that you’re simply introducing these concepts and will not be recommending a specific legal structure. The aim of this session is to serve as a general reference guide, not to provide legal advice! Reassure students that they don’t need to memorize every technical term in this session.
The legal structure you choose for your business affects taxation, accounting, capital and estate issues, so get help from your attorney and accountant before finalizing your decision. Note that if your business situation changes as you grow, you may need to change your legal structure.
Briefly describe each form of business ownership, using OHDs 3-1 through 3-6 to highlight advantages and disadvantages. Where possible, give examples of local businesses whose organization you know, and explain the specific advantages of that legal structure within your state. If you wish to discuss cooperatives, use OHD 3-7. Otherwise, skip this overhead.
Sole Proprietorship
The most common legal structure. You and the business are one and the same.
Run by one person—or a married couple—with no outside owners or investors.
Default form of ownership for one-person businesses. Unless you formally choose a different kind of ownership, the law considers you a sole proprietor.
Some businesses start out as a sole proprietorship and then switch to an LLC or corporation once the business becomes larger and more complex.
General Partnership
Default form of ownership for multi-person businesses. Unless you formally choose a different kind of ownership, the law considers you a general partnership.
Partners share capital, earnings and losses.
Partners are taxed as individuals.
Buy/sell agreements for exiting are encouraged.
If you don’t create a written partnership agreement, the laws of your state will govern your partnership by default. You definitely don’t want this to happen!
Limited Partnership
General partners manage the business. Limited partners are investors who give up most or all of their control over the business in return for limited liability. Limited partners must not get involved in management, or they’ll lose liability protection.
Profit and loss distribution is specified by the partnership agreement.
You must file a certificate of limited partnership (or a similar document) with your secretary of state. You may need legal assistance, and you will also be subject to state filing fees.
In most states, the Uniform Limited Partnership Act governs duties, liabilities and rights.
Corporation
A legal entity separate from the shareholders who own it. As the owner, you are considered an employee of the corporation even though you own all or part of the company.
To form a corporation, you must:
File Articles of Incorporation with the appropriate state agency
Hold an organizational meeting and adopt bylaws
Receive capital from shareholders and issue stock
To maintain a corporation, you must:
File corporate tax returns
File annual reports with the appropriate state agency
Hold annual board meetings
Maintain some equity capital in the company
S corporations
Subtype of corporation. The “S” refers to subchapter S of the IRS tax code, under which tax is passed back to the shareholders like a partnership. This is not a separate legal form of organization—it is a tax election
Limited number of shareholders, and no preferred stock
Limited Liability Company (LLC)
Hybrid form of ownership. Limits liability like a corporation, but taxed like a partnership.
You should have an operating agreement that spells out rights and responsibilities, and you must file articles of organization (or a similar document) with the state.
Relatively new form of organization, therefore not much case law.
No liability protections for: tax debt; failing to keep business and personal assets separate; fraud and negligence; and loans requiring owner’s personal guarantee.
Government Regulations (see OHD 3-8)
NOTE: You will not have time to discuss each of these topics in depth, so you must tailor your discussion to your students’ interests and needs. We also recommend that you research applicable state and local laws before teaching this session. That way, you can focus on information that directly affects your students. Not only will this be more helpful for them, but it will also hold their attention during one of the drier sessions. Where possible, get information sheets and forms directly from the relevant agencies and use them as handouts.
It’s impossible to describe all the legal requirements that affect different types of businesses. Our goal is to give you general knowledge so you can seek expert help. We recommend using SBA’s online search page for permits and licenses (www.sba.gov/content/business-licenses-and-permits). (This is a great resource for instructors as well as students.)
Again, the goal of this session is not to produce legal experts, but to make students aware of regulatory issues and direct them toward sources of information. Stress that this isn’t just about running your business by the book. Compliance costs can be a significant business expense. Researching these costs is a necessary part of budgeting. Also, it gives you an opportunity to research lower-cost alternatives (e.g., switching from a regulated to a nonregulated material).
Business Registry
Check with your state to determine the requirements for registering your business. These requirements vary by state and form of ownership. Many cities and towns also require local businesses to pay business license fees.
Business name registration
Unless you plan to do business under your own name, you must register a fictitious business name. In addition to being a legal requirement, this is normally a requirement for getting a business bank account.
Usually, registration is a simple matter of filing a form with your county and paying a fee. Again, research and explain the specific rules in your area.
Zoning
Zoning laws regulate land use to protect public health, safety and welfare. If you plan to run your business from home, check the zoning laws in your neighborhood. Common zoning restrictions include no onsite sales, deliveries, signage or customer parking.
Business Taxation
Introduce the basics of business taxation. Again, make it clear that this is just an overview.
Personal and business income tax. Federal, state and local governments all have the power to collect taxes. Each state has its own tax laws for business, which can vary depending on business structure, the type of business and the stage of business development. Discuss your state and local taxation structure.
Sales tax. Some businesses must register with state or local tax collection agencies. Discuss the specific requirements within your state.
Property taxes. Depending on location, your business may have unique tax benefits or burdens. Many states have “enterprise zones” where businesses get tax breaks if they locate in economically disadvantaged areas. Urban renewal districts can also result in favorable tax assessments. Again, localize this discussion where possible.
Laws That Apply to Businesses With Employees
Run through these employment laws briefly—again using OHD 3-8—even if your class is full of sole proprietors. It’s never too early to think about these issues! Always focus on the laws in your state and the type of workers your students might need to hire.
The Department of Labor’s FirstStep Employment Law Advisor tool can help you understand which employment laws apply to a given business: www.dol.gov/elaws/FirstStep.
The Fair Labor Standards Act establishes a national minimum wage, along with laws regulating overtime, breaks, recordkeeping and related issues. Some states have stricter regulations. Check with your state department of labor for current information.
The Equal Pay Act requires virtually all U.S. employers to pay men and women the same amount for equal work. “Equal work” means work requiring “equal skill, effort and responsibility...performed under similar working conditions.” It’s legal to pay different amounts based on seniority, merit and other work-related factors.
Family and Medical Leave Act. The FMLA applies to employers of 50 or more. It entitles workers to a maximum of 12 weeks of unpaid leave for pregnancy, adoption, illness or elder care. State or local laws may provide greater rights. Also, FMLA applies to legally married same-sex couples even if their state of residence does not recognize such marriages.
Affordable Care Act. The main issues for businesses with 50 FTE employees or fewer: All employers covered by FLSA are required to notify all employees of the ACA’s health marketplace. Also, businesses that offer health plans must provide employees with a “Summary of Benefits and Coverage” that states what the plan covers and how much it costs. Research current ACA law before teaching this segment of the class. Also, keep the discussion focused. Although there may be strong feelings for or against the act, our sole concern is explaining legal requirements for U.S. businesses.
The Immigration Reform and Control Act prohibits private employers with four or more employees from discriminating against job seekers or employees based on citizenship or national origin. It also makes it illegal for employers to knowingly hire or retain employees who are not authorized to work in the United States.
The Occupational Safety and Health Administration (OSHA) sets guidelines for worker safety and the reporting of illnesses and accidents. OSHA offers a free consultation program that helps small businesses maintain a safe workplace. Consultants have no enforcement power. Briefly discuss OSHA regulations that pertain to the businesses in your class.
Civil rights laws. Various federal laws prohibit businesses from discriminating against anyone on the basis of race, color, sex, national origin, disability or age. Although federal nondiscrimination laws usually apply only to businesses with 15 or more employees, city and state laws may apply to smaller businesses. They may also forbid other types of discrimination, such as firing people based on sexual orientation. Check with your state to find out which nondiscrimination laws businesses must follow.
Child labor. In many states, children aged 14 through 17 must have a work permit and there are limits on how many hours they can work per day. What are the rules in your state? Do authorities distinguish between employees and family members?
Payroll taxes
Discuss FICA, FUTA and other state and local payroll taxes, including methods of payment. The bottom line: Do not skip or be late in making payroll tax deposits! This is a common mistake among startup businesses. Federal and state taxes must be paid on time!
Discuss the issue of determining who is an independent contractor versus an employee. Use OHD 3-9 and your own state’s laws regarding independent contractors to explain the difference. Trying to avoid payroll taxes by calling a worker an independent contractor is very dangerous.
Other Regulations
Consumer protection laws
Federal and state consumer protection laws affect everything from consumer credit to warranties. Again, tailor this discussion to the businesses in your class by citing state and local laws and telling students which agencies to contact for more information.
Consumer privacy. If you collect personal data about your customers, you have a legal duty to keep it secure and to dispose of it properly. Because e-commerce often happens across state lines, data collection laws in a customer’s state can affect your business.
Telemarketing and spam. Strict federal regulations govern telemarketing, mobile text marketing (SMS/MMS), and commercial emails. Most states also restrict these forms of direct marketing. Legal advice is recommended before engaging in telemarketing, mobile marketing or email marketing. The TEXT describes these issues at length. The bottom line: Do not market by phone or email unless the recipient has opted in (e.g., subscribed to a newsletter).
Advertising and labeling laws. The FTC states that express claims and implied claims must be truthful, fair, nondeceptive and (where necessary) evidence-based. Example: If a company advertises a “100%-natural” product, the express claim is that the product is natural, and the implied claim is that being “natural” confers some health benefit. Certain types of products may also be subject to labeling laws (e.g., packaged foods).
Internet, telephone and mail orders. The Federal Trade Commission (FTC) has strict rules for businesses that take orders online, over the phone or by mail. Most of these rules won’t affect a well-run business. Example: Businesses must ship merchandise within 30 days of receiving an order, unless they clearly state that order fulfillment will take longer.
Refunds and returns. All businesses are required to give refunds for defective goods or services. Businesses that post an official return policy are legally required to follow that policy, and most states also require businesses to post their return policy clearly. If your business doesn’t have an official return policy, your state’s default refund law will apply.
Public health and food safety. If you plan to run a food-service business—such as a restaurant, food truck, or packaged food business—consult federal, city, county and state health regulations. Students who work with food should look into use of a shared-use commercial kitchen. Health department violations can have very serious penalties.
Uniform Commercial Code (UCC). Almost every business encounters the UCC every day, but most don’t realize it. Discuss what the UCC regulates (bills of lading, warehouse receipts, bank interactions, etc.). Suggest that your students review applicable regulations.
Shipping and transportation laws
U.S. and international laws regulate what you can ship, how you can ship it, and where it can go. Some of these laws reflect national security concerns. Others protect U.S. agriculture or ensure safe shipping of hazardous materials. The U.S. Postal Service has strict rules, as do commercial carriers such as UPS and FedEx. If you ship internationally, you may face additional regulations.
Environmental laws
NOTE: The TEXT contains an overview of these laws that was accurate at the time of writing. However, federal laws are subject to change, and local and state laws can vary greatly from the federal standard. Research the most current information before teaching this class.
Environmental laws regulate how your business and its employees use, store and dispose of hazardous materials. If you work with hazardous materials, check with your state’s environmental protection agency or department of environmental quality to make sure you’re following the current regulations for air, soil and water pollution. You don’t have to work with high explosives to be regulated under environmental laws. Things like batteries, oil and certain cleaning supplies and solvents count as hazardous materials, too.
Violating environmental laws can cost you a lot of money. It may be harder to do things the right way—e.g., to dispose of hazardous waste legally instead of dumping it in the nearest creek—but you can offset this expense by making environmental ethics and pollution prevention part of your brand identity, which can lead to more sales, better public relations and less government oversight. Also, consider what happens if you won’t do these things, but your competitors will. They may end up with a strong competitive edge!
Bankruptcy regulations
Understanding bankruptcy is important both from the ownership side of the business, and for dealing with suppliers and customers who are involved in bankruptcy proceedings. At a minimum, students should understand that bankruptcy usually won’t wipe the slate clean; many debts can’t be discharged through bankruptcy, including tax debts.
Other Legal Issues and Risk Management
NOTE: A very short time has been allotted to the remaining topics in this session. You can pick topics on which to focus in depth—based on your students’ business type and experience level—or simply review key points. The material on contracts and insurance is probably the most important, as all businesses in your class will use contracts and insure against risk. The section on respecting copyrights is also important, as many businesses ignore these laws (especially online).
What Is a Contract?
Use OHD 3-10 to introduce the four basic elements of a legally enforceable contract:
Mutual assent (offer and acceptance). Suppose a car salesman points to a brand-new Ferrari and says, “Wouldn’t you like to have one of these?” The fact that you answer “yes” doesn’t mean you’ve made a deal. There must be a valid offer for goods or services, and an acceptance of this offer at an agreed-upon price. Also, the offer must set forth the basic terms of the contract: the price, and the date and place of performance or delivery.
Consideration (an exchange of value). Suppose you promise to paint the offices of a graphic design firm, and they promise to design a logo and a business card for you in return. Both your services have value, so both count as consideration.
Capacity (understanding). You can’t enter into a contract with someone who lacks the mental capacity to understand it (e.g., someone with Alzheimer’s disease). Being drunk or under the influence of legal or illegal drugs also counts as lack of capacity.
Legality. You can’t enforce a contract based on an illegal transaction.
Types of contracts
A contract can be express or implied. An express contract is stated in words (preferably in writing), while an implied contract is demonstrated by conduct (e.g., placing an order).
Some contracts must be in writing by law (e.g., real estate contracts). But our position is that all contracts should be in writing. This reduces the chance of time-consuming legal disputes.
Contract terms
Every word in a contract has a legal meaning. Don’t sign a contract unless you understand how each term affects you. Small print can have huge consequences! Legal help is essential. The TEXT explains many contract terms. Emphasize that this makes it a valuable resource. Define and discuss a few terms that you feel are especially important for businesses in your class.
Email and contracts
Email exchanges can constitute a contract, so save all emails to and from your customers. By law, it’s the final email offer that, when accepted, creates a contract. Therefore, your final communication should set forth all the terms of the agreement.
You may also want to discuss rules on electronic, digital and mobile signatures. Check the laws in your state before teaching this topic.
Leases
Leases are one of the most common business contracts, and they often represent one of a business’s largest fixed costs. A lease differs from a sale in that a lease transfers possession of property, while a sale transfers both possession and ownership.
Leases must contain beginning and ending dates, monthly lease amount due, and total rent due. If these elements are not present, it may legally convert to a month-to-month rental agreement.
Use OHD 3-11 to discuss common lease types. Note that almost everything in a lease is subject to negotiation! Have your attorney and tax accountant review all leases before you sign.
Consignment
The TEXT offers advice on consignment contracts. Discuss this only if it’s relevant to your class.
Intellectual Property
Intellectual property law prevents other people from stealing your ideas, business name, company logo, product designs and business methods. Unlike machinery or money, these assets can’t be picked up and handled. But they may be your most valuable business asset!
Use OHD 3-12 to introduce intellectual property.
Business names and trademark law
A trademark is a word, phrase, symbol, color or design that identifies the source of a product.
Business names are protected by state and federal trademark law.
You don’t need to register your trademark to own exclusive rights to it in your area, but federal registration protects you in all 50 states. It also allows you to use the ® symbol.
Registering your business name as a trademark
Your business name should be easy to spell, say and remember. It should also be unique. The more distinctive your trademark is, the more legal protection it has.
Courts usually rule that the first business to register a business name has the right to continue using it, so register your business name as soon as possible. Here are the basic steps:
Come up with a list of possible names and type each one into a search engine.
Check the list of fictitious business names at your county clerk’s office, the corporation and LLC names in your secretary of state’s business registry database, and business names registered with the U.S. Patent and Trademark Office.
If you find a business name that’s similar or identical to yours, find out where the business is located and what products it offers. If it’s in your county or state and offers similar products, choose a different name. If it’s a large business with a strong online presence, you should probably avoid the name even if you sell different products.
Note that trademarks are much easier to violate than they used to be. You may plan to sell only to customers in your home town. But if an online business with a similar name is also targeting those customers, they may be able to claim that you’re violating their trademark!
Copyright
Copyright protection applies to original works of authorship in tangible form. Tangible means that it can’t simply be in your head; it must be physically available to other people, like a book. Original doesn’t necessarily mean the idea behind that work is original. Ideas aren’t protected by copyright law. What’s protected is a specific, original expression of the idea.
Works made for hire
Ask the question: If you ask someone to draw a logo for you, who owns it? If a copyrighted work is legally defined as a work made for hire, the hiring party owns the copyright. Otherwise, the contractor may own it. Such contracts should always specify whether a work is made for hire.
Registering copyrights
Legally, a copyright exists from the moment an original work of authorship is put in tangible form (e.g., written down). However, registering your copyright with the Register of Copyrights in Washington, DC will give you stronger protections.
Respecting copyrights
Far too many businesses—large and small—casually use copyrighted text, photos, music and artwork for commercial purposes without asking permission or (in many cases) giving the creator of the work credit. This is unethical as well as illegal! Always ask permission before using other people’s work for any purpose, whether it’s a drawing on a product label, a song on a YouTube video, or a photo on a website.
Use restrictions may apply even if you pay for copyrighted material (e.g., stock photos). Never assume that permission for one use of copyrighted material implies permission for all!
Patents
A patent grants its owner the right to exclude other businesses from making, using, offering for sale, importing or selling a patented invention in the United States. Anyone can obtain a U.S. patent, regardless of age or citizenship. Patent protection lasts for 15 to 20 years.
Patents aren’t cheap. They can cost thousands of dollars each and require plenty of legal help. Note that using the phrase “Patent Pending” on an item for which no patent application has been made is illegal and can result in a fine.
Trade secrets
Trade secrets include private business information, methods and processes. Even if an invention or process isn’t eligible for patent registration, it may be a trade secret under state law. Unlike patents and trademarks, trade secret protection never expires.
Briefly mention basic methods of protecting trade secrets: Securing computer networks, setting strict email policies, shredding documents, and not telling employees more than they need to know to do their job.
Nondisclosure agreements
A nondisclosure agreement prevents people who receive nonpublic information about your business from revealing it or using it for their own purposes. They are useful when you must give a person or business access to sensitive information. For example, you should include a nondisclosure agreement with each copy of your business plan.
Risk Management
You have four basic ways of managing business risk: Buying insurance, getting help from qualified advisors, creating standard operating procedures, and planning for disruptive events.
Insurance
No other form of risk management is as inexpensive or effective as insurance, but most small businesses are not properly insured. The basic rule: If you can’t afford to pay 100 percent of a business loss, you need insurance.
EXERCISE: Business owners must plan for the worst-case scenarios as well as the best. Ask the question: What are some of the worst things that could happen to your business? Log responses on the board, then discuss the type of insurance needed in each scenario:
The business is destroyed by fire, earthquake, tornado, or flood, and it takes six months to rebuild. (business property insurance; business interruption insurance)
The owner is killer or disabled. (key-person insurance)
A partner in a partnership dies suddenly, and the heirs request immediate payment of his portion of the business. (life insurance tied to a buy/sell agreement)
One of your truck drivers falls asleep at the wheel and totals the truck, destroying all your cargo. (commercial auto insurance)
An employee is injured on the job and becomes permanently disabled. (workers’ compensation; Social Security)
Ask the questions: What insurance do you need? How do you know? Use OHD 3-13 to discuss types of insurance.
Seeking advice and competitive quotes from qualified professionals is critical. Also, reviewing insurance coverage yearly is necessary as your business changes or grows.
Lowering costs
Improving safety and security reduces the risk of loss, which in turn reduces the cost of insurance. Use OHD 3-14 to go over steps that can lower insurance premiums. Then, point out that insurance agents can help you identify unsafe conditions at your site. Although these problems may cost some money to fix, addressing them will save money on insurance. It may even save your business!
If you’re facing high premiums because of a specific risk, you might consider outsourcing it to another company. That way, you get the work done and the outside firm takes on the risks. Note that this can also reduce regulatory burdens discussed in the previous section.
Finding professional advisors
Every entrepreneur needs professional advisors to help with the legal aspects of running and protecting a business. Lawyers and accountants are the most obvious examples. Although their services can be costly, they probably won’t be as costly as a serious legal or financial error!
Often, entrepreneurs assess professional services by cost. But in some cases, lower cost indicates less experience, which may mean longer billable hours and a higher risk of errors.
Don’t overlook the importance of liking and trusting your advisors. You will need to work closely with them, so look for someone whose personality and outlook suits your own. We’ll discuss professional advisors further in our section on creating a management team.
Creating an operations manual
Developing standard operating procedures for important business functions can greatly reduce the risk of problems. Example: Washing the floor of your business after it closes, instead of before it opens, reduces the risk that customers will slip and fall.
An operations manual should describe all such standard procedures, including safety measures and security policies. This is especially helpful as a guide for temporary help. When you can’t be at your business, the manual tells your stand-in how to keep things running smoothly and safely.
Business continuity planning
Continuity planning means preparing your business for disasters and disruptions in order to minimize downtime and restore critical business functions as soon as possible.
No business is too small to benefit from a continuity plan. Statistics show that many small businesses fail to survive common disasters like fires and flooding. Businesses with a plan have a better chance of getting back on their feet.
If time allows, use OHD 3-15 to go through the steps involved in continuity planning. Alternatively, direct students to the continuity planning templates at www.ready.gov/business.
Guest Speaker
Small-Business Attorney or Insurance Agent
Prepare some questions you want your guest speaker to address in 20 minutes of talking, plus 10 minutes of questions. Give them to your guest well in advance. Be sure to let your class ask questions specific to their businesses!
Suggestions—Small-business attorney
What are some of the most common legal problems entrepreneurs face?
How would you help a growing business choose the right legal structure?
How would you suggest finding the right small-business attorney?
What materials can entrepreneurs prepare ahead of office visits to reduce costs?
What are the main things an entrepreneur should do before hiring employees?
What are the benefits and risks of employee policy manuals?
Suggestions—Insurance agent
What is the most frequent question asked about insurance by the new entrepreneur?
Is there a standard package of insurance that every business owner needs?
What is the biggest risk to be managed in small business?
What are the best ways to reduce the cost of insurance?
Management and Leadership
A business’s organizational structure is defined by the roles and responsibilities of employers and employees, the allocation of business tasks, and the flow of information between team members. Although businesses will naturally develop an organizational structure, it’s best to plan ahead! Choose a structure that makes sense now and will facilitate growth in the future.
Use OHDs 3-16 and 3-17 to show simple forms of organizational charts. Then, use OHD 3-18 to show the basic factors involved in developing an organizational structure.
Last, use OHD 3-19 to discuss key management goals. Be prepared to give examples of each item on the overhead, so that the concepts become clear.
Your Management Team
NOTE: Before teaching this section, be sure you understand how the Management Team Worksheets work together to develop an internal and external management team.
The Internal Management Team Worksheet identifies owners and managers by name and title. It also lists their skills and qualifications.
The Management Skills Worksheet analyzes the knowledge and skills of the internal management team to determine which functions they can perform in-house and which functions require outside help.
The Outside Services Worksheet helps students identify external team members and contractors who can provide the skills the internal management team lacks.
The Advisory Board Worksheet helps students create an advisory board as a low-cost way to enhance the internal management team’s expertise.
As your business grows, neither high energy nor innovative products are enough to sustain your success. You must make a deliberate effort to create structures and processes that will ensure consistent performance through changing business conditions.
Even entrepreneurs with no employees will need the support and assistance of outside team members who can provide specialized help. We will discuss outsourcing in more depth later.
Your management team will probably include internal members (employees, family and trusted friends that help you with your business) and an external network (outside advisors, business professionals, mentors, customers and independent contractors).
Have students turn to the Internal Management Team Worksheet on page 3-45 of the WORKBOOK. Give them a couple of minutes to fill in the chart and to answer the questions. Make sure they list their skills, experience and qualifications in Question 3. Ask the questions: How many of you listed accounting as one of your skills? How about inventory control? Or graphic design? Identify at least one skill that at least one student doesn’t currently have. This will lead directly to the next discussion.
Identifying key management activities
Have students turn to the Management Skills Worksheet on page 3-45. Discuss what can be done to fill skill gaps, including:
Getting additional education to develop the skill
Adding a business partner or management team member who has those skills
Outsourcing the task to someone outside the business
Discuss the cost of acquiring education—and the cost efficiency of taking the time to get that education—versus hiring outside services. Also, discuss the concept of core competency—concentrating on what you do best and outsourcing the rest. This will lead to the discussion of outside services, outsourcing and advisory boards.
Getting outside help
Getting outside help and advice is one of the most important things you can do for your business. Good advice means better management decisions and fewer risks.
Advisors and mentors can evaluate the way you plan to structure and run your business.
Bookkeeper or accountant. A bookkeeper keeps records of your daily, weekly, monthly and annual sales and expenses. If you’re going to keep your own books, an accountant can evaluate your work, prepare important reports and file your tax returns.
Banker. It’s easier to obtain financing if you already have a good relationship with a banker.
Attorney. You may not need a lawyer now, but you should have a name of a good one on file in case the need arises.
Qualified advisors
Discuss the following areas briefly. See the TEXT for additional information.
Using qualified advisors and agents to help mitigate risk (accountants, lawyers, insurance agents, bankers, technical assistance providers).
How to find the right insurance agent, accountant, lawyer (personal referral, reputation, services offered, personality, cost).
Outsourcing
Outsourcing means hiring outside people or businesses to perform tasks as an alternative to the expense of hiring an employee. In the era of globalization, this provider may live almost anywhere, including in a foreign country. Use OHD 3-20 to discuss the pros and cons.
Using OHD 3-21, stress that the value of outsourcing must be assessed in terms of long-term viability. Don’t assume that decreasing labor costs will always provide big savings! You must weigh efficiency against effectiveness. Cutting costs is a bad idea if it lowers your ability to meet customer expectations and quality standards, and to attract and retain motivated employees. Again, remind students of the legal issues surrounding independent contractors.
Have students turn to the Outside Services Worksheet on page 3-47 and walk them through it. Note that it will take some research to determine the approximate cost of outsourcing.
Next, have students turn to the Advisory Board Worksheet on page 3-48. Explain the purpose and benefits of advisory boards. Example: A clothing store decided to open a teen department. It contacted each of the local high schools and chose four teenagers from each to sit on its advisory board. The students were taken to a big buying show in a major city, where they helped adult buyers choose teen styles. The result was a teen clothing department that carried clothing picked by teens, which meant that adults didn’t have to guess what teens would wear.
Managing Employees
NOTE: Several worksheets relate to employee issues and costs. Depending on your class configuration, adjust the amount of time you spend on this topic. Familiarize yourself with these worksheets ahead of time, and choose the best way to present this topic to your class.
If you want your business to run smoothly and grow consistently—even in your absence—you must hire exceptional people and empower them to innovate, improvise and excel. This means creating rewards, policies, and guidelines for all your employees; writing job descriptions and performance evaluations; and offering fair and competitive compensation.
Start this discussion by using OHD 3-22 to summarize basic employee management tasks. Note that the Employee Management Worksheets encourage students to think about how they will find, screen, hire, motivate and manage employees.
Business culture and employee relations
A business’s culture is a function of its values, which govern the spoken and unspoken rules of behavior. They range from how employees dress, to the language they use, to how they deal with each other and their customers.
Values vary from company to company. For example, the corporate culture of a skateboard shop would be very different from that of an accounting firm. Values can be difficult to change once they’re in place, so it’s important to pay attention to the values you endorse and reward.
If you haven’t done so already, think carefully about how your business culture will reflect and uphold your values. Once you’ve done this, you can communicate these expectations to your team informally by modeling good behavior, and formally by creating an employee manual. Use OHD 3-23 to show the typical contents of an employee manual.
Job descriptions
The best way to clarify roles for your employees—and for yourself—is to create job descriptions. Even if you only have one or two employees, job descriptions clarify responsibility and serve as a motivating and measurement tool.
Hiring the right people
Interviewing is the key to good hiring decisions. If you’re not good at it, consider having a second person or a team help interview candidates. Don’t rush to find someone to fill a work gap. Instead, take time to find the right person, and always check references.
Communicating expectations
As a manager, you need to communicate your expectations clearly. What do you expect of each employee? Who is accountable for specific tasks? What is the deadline for task completion?
Workers who don’t have a clear sense of what is expected of them—either because expectations weren’t properly defined or keep changing—quickly lose focus and morale.
Good managers base their expectations on a desired outcome. Instead of micromanaging employees, they set a standard and timeframe for performance and allow employees to choose the pace and working methods they prefer.
This method only works when employees see the big picture, share the company’s goals and understand how their efforts fit together. Creating this sense of a shared mission is another task that falls to you as a manager.
Employee compensation and motivation
Discuss employee compensation as a means of motivation. Ask the question: As an employee, what motivates you to work hard and do your best? List answers on the board and discuss.
Often, motivators have little to do with money. Flexible work hours, learning and teamwork opportunities, or belief in a business’s mission may rank as high as money (or higher).
Measuring performance and rewarding excellence must be part of the motivation process. Discuss the following compensation and motivation categories:
Regular compensation includes salary, vacation time, holiday leave, sick leave, health and medical coverage.
Additional compensation and motivators include profit sharing, pension plans, flexible work hours, involvement in decision-making, reward programs and mentoring.
Remember: What you reward communicates what your business values. If you reward people for great customer service, great service becomes a priority rather than mere rhetoric.
Rewards are most effective when employees have input into creating them. Instead of assuming employees will be motivated by receiving a pair of fuzzy dice that say “World’s Greatest Employee,” ask them what would motivate them to excel.
Documenting employee performance
Evaluating and documenting your employees’ performance does three things:
It provides a written record of discussions relating to the employee’s effectiveness.
It serves as a basis for constructive feedback.
It gives you a written record of problems in case you have to fire someone. If a dispute arises regarding job performance, your documentation of discussions and meetings may be the key to avoiding legal troubles.
Firing
Firing people for the wrong reasons, or in the wrong way, can lead to serious problems! Documenting all communications and corrective actions is crucial. An initial probation period is also wise. Many smaller entrepreneurs favor a 60-day period.
There is a standard process for terminating an employee. Always adhere to it! Again, there may be legal consequences for mishandling employee discipline or termination. Your lawyer can help you understand these issues.
Leadership and team building
A leader creates an environment in which teams can innovate and thrive, and influences team members to contribute willingly and fully. This is the cornerstone of a successful company. By integrating various skills and personalities, teams become greater than the sum of their parts.
Today, a team often contains a mix of internal staff and outside contractors, some of whom may live in other states or countries. It might even be a virtual team, which communicates and collaborates via VoIP, videoconferencing, IMs and so forth. This makes leadership skills more important than ever. Use OHD 3-24 to explain the basics of leadership.
Location and Logistics
NOTE: If your class consists primarily of service providers, business location and evaluating suppliers will be the most important topics to discuss.
Briefly explain the concept of the supply chain and its importance to modern business. To assess your supply chain, you need to look at everything involved in sourcing, manufacturing, storing, selling, delivering and servicing products. Use OHD 3-25 to show supply chain elements.
All plans and decisions, from choosing a new facility to choosing suppliers and partners, should reflect an understanding of your supply chain and your place in your partners’ supply chains.
Business Location
NOTE: Estimating the costs associated with siting, warehousing and equipment will be necessary for the financial sessions. If they don’t have current or historical figures, encourage them to get quotes wherever possible.
Students should look closely at the pros and cons of their business site. Is it convenient for customers? What about for employees and vendors? What are the occupancy expenses? Is the location adequate for growth? Are renovations needed? If so, what are the costs?
Warehousing
Smaller businesses often don’t need a warehouse. As your business grows, warehousing usually becomes more important. Making a decision under pressure is never ideal, so think about your warehousing needs before your business outgrows its current space. Where possible, choose a flexible space that will allow you to cope easily with increased demand.
One option is to look at storage options across your supply chain. You may be able to expand your manufacturing warehouse capacity by having vendors hold components until you need them. Or maybe you can transfer finished goods to wholesalers, distributors and customers. Either way, your goal should be to develop a supply chain that lowers your carrying costs, meets customer needs and allows you to focus on the things you do best.
Evaluating Suppliers and Vendors
Just as your marketing goals guide you in pricing your product, they should guide you in choosing suppliers and vendors. A low price does you no good if the product doesn’t fit your strategic goals or can’t be delivered when you need it, so always consider these criteria:
Quality and service
Location
Technical skill
Reputation and business ethics
Competitive pricing
Cultural fit and communications
You’re only as good as the weakest link in your supply chain, so look for partners who will match your dedication to quality and customer service. You need to feel confident that your suppliers can meet your needs, so visit their facilities and compare them to those of rival companies.
Once you choose a supplier, create performance criteria and review them regularly. Are their deliveries on time? Is quality management adequate? Are communications timely, professional and accurate? It’s also a good idea to identify alternative sources in case of supplier problems.
Inventory Management
For retailers, inventory consists of merchandise. For manufacturers, it consists of raw materials, work in process and finished goods. Managing inventory is equally essential to financial management and to customer service; the goal is to maximize your ability to meet customer needs while minimizing the costs of ordering, processing and storing inventory. Consequences of poor inventory management include:
Cash flow problems
Higher income taxes
Lost sales due to lack of product availability
Higher disposal costs for obsolete or spoiled goods
Some small businesses look at the benefits of buying materials in bulk without considering inventory costs. Always weigh cost savings against the cost of holding excess inventory (which includes the opportunity cost of not using this money for another, more profitable purpose).
Don’t take advantage of discounts and special offers until you’ve looked carefully at your past and current sales figures. If you only sold 100 glow-in-the-dark bowties in the last three years, getting a great deal on 1,000 may not be a bargain!
Inventory turnover
One way to measure the health of your business is to monitor inventory turnover, or stockturn. Are running shoes selling faster than golf shoes? Are mysteries selling faster than kids’ books?
If your stockturn is too fast, you may be spending too much time and money reordering, in addition to paying extra freight costs. You may also be losing sales due to lack of product. If stockturn is too slow, you may be offering the wrong product, targeting the wrong customers, charging the wrong price or advertising too little.
Your ideal stockturn rate depends on your industry and product. For example, cookies need to turn over much more quickly than jewelry. You can find helpful guidelines and benchmarks in industry publications. We’ll come back to this topic in later sessions.
Inventory control
Tracking inventory doesn’t just help you keep your products in stock. It also gives you the opportunity to improve, discount or eliminate slow-selling and obsolete merchandise. If time allows, discuss electronic inventory control such as RFID and POS systems. Whether you have time to discuss these tools or not, emphasize that the students’ current system may not be adequate for planned growth, and encourage them to look into current options and costs.
Work Period
Homework Review—Session 2
Discuss the worksheets from WORKBOOK SESSION 2. Ask if there were any difficulties in finding or understanding industry research information. Be prepared to offer encouragement, advice and alternatives for students who struggled with this assignment.
Workbook Preview—Session 3
NOTE: Your students may be alarmed by the number of worksheets in this session. However, many exercises are relatively easy to complete, and some of them are not essential to the Writing Your Business Plan assignment. In practical terms, the primary goals of this session are to choose a legal structure and to estimate costs needed for the upcoming financial sessions. That’s where students should apply most of their efforts.
Management Team and Employee Management Worksheets
These worksheets are likely to give students the most trouble. If necessary, explain again how they work in sequence to build a management and personnel team.
Identify owners/managers on the Internal Management Team Worksheet.
Analyze the knowledge and skills of your internal management team as they relate to key management activities. This helps you decide what functions you can perform in-house and what functions you may need to outsource. If time allows, have students begin filling out the Management Skills Worksheet to make sure they understand how to use it.
Once you know what knowledge and skills you and your key management personnel have, you can decide what external team members you need. Have students look at the Outside Services Worksheet and remind them that they will need to research costs. Also, discuss the use of an advisory board as a low-cost way to enhance expertise.
Determine additional personnel needs for daily operations. The Employee Management Worksheets are left until after the other decisions have been made, because personnel is one of the largest expenses a business incurs.
Once personnel positions are identified, it’s time to calculate costs. Show students how to use the Employee Salary/Wages & Benefits Worksheets, and then how to summarize those monthly costs into the Employee Salary/Wages & Benefits Summary Worksheet. Do a sample calculation, or have students break into groups to work on it with your help.
Other worksheets
Have students turn to the Insurance Needs Worksheet on page 3-57, again reminding them to research costs by contacting their insurance agent and getting at least two other bids. Briefly review the purpose of the Intellectual Property Worksheet, the Continuity Planning Worksheet, and the Other Risks Worksheet. Again, emphasize the need to research costs.
Assignment Review—Session 4
Have students look at the Assignment for Session 4 at the bottom of the Session 3 Student Outline. Stress the importance of reading the Session 4 text before the next class.
Use OHD 1-13 to show the first half of the NxLeveL® Business Plan Outline,so students understand how the writing assignment fits into Section III, Parts A and B. Use the NxLeveL® sample business plans to show how these sections of the business plan can be written.
Overheads for Session 3
OHD	3-1	Sole Proprietorship—Pros and Cons
OHD	3-2	General Partnership—Pros and Cons
OHD 	3-3	Limited Partnership—Pros and Cons
OHD 	3-4	Corporation—Pros and Cons
OHD 	3-5	S Corporation—Pros and Cons
OHD 	3-6	Limited Liability Company—Pros and Cons
OHD 	3-7	Cooperatives—Pros and Cons
OHD	3-8	Government Regulations
OHD	3-9	Independent Contractor or Employee?
OHD	3-10	Four Basic Contract Elements
OHD 	3-11	Common Lease Types
OHD	3-12	Protecting Intellectual Property
OHD 	3-13	Types of Insurance
OHD 	3-14	Tips for Lowering Insurance Costs
OHD 	3-15	Business Continuity Planning
OHD	3-16	Traditional Organizational Chart
OHD 	3-17	Optional Organizational Chart
OHD	3-18	Building an Organizational Structure
OHD	3-19	Key Management Goals
OHD 	3-20	Pros and Cons of Outsourcing
OHD 	3-21	Guidelines for Outsourcing
OHD 	3-22	Basic Employee Management Tasks
OHD	3-23	Typical Employee Manual Sections
OHD	3-24	Laws of Leadership
OHD	3-25	Supply Chain Elements
Suggested Supplemental Materials for Session 3
Copies of legal statutes and legal entity information for your state, as well as info on fee schedules, trademarks, etc.
Articles from current business magazines on management and legal matters
Articles on continuity planning, emphasizing the typical failure of small businesses to have an adequate data backup system
Example of an employee manual (be sure to remove any proprietary information!)
ACA notice of coverage options
Example of a business continuity plan
NxLeveL® sample business plans
Articles or YouTube videos on leadership
You have the option of finding reputable articles and publications for use in class, or suggesting that students search them out on their own and share what they find with the rest of the class. Keep track of supplemental materials you used by making notes below.
Supplemental materials used for Session 3
Notes

Learning Objectives
Understand how to select the right legal structure. Understand where to get help with legal issues. Understand business insurance, continuity planning and other risk management needs. Identify internal and external management team members. Understand employee motivation and team-building. Understand basic supply chain concepts.