Business Organizations Outline

Professor Baynes

Business Organizations

Spring 2011

I. Introduction to Basic Business Principles

Corporations:

BASICS

i. A separate entity:

1. A legal fiction separate from members; fictional

ii. Not a Default Provision: Papers must be filed w/ the Secretary of State.

iii. A corporation had shareholders(SH) /stockholders(SKH) which are owners

1. Have documentation indicating ownership.

2. Elect a Board of Directors (B of D); usually at an annual meeting

a. B of D technically manages and oversees the company

b. Usually elects officers to do day to day mgnt

i. Officers delegate responsibilities/tasks to employees

c. Creates pyramid: Bottom to top

i. Shareholders àB of D àOfficers à Employees

ADVANTAGES:

(1) Use of other people’s money

(2) Free Transferability of shares (ownership)

(3) Limited Liability for SH

a. If the Corporation does something wrong àSH are only liable up to their individual investment. (Corp is responsible)

b. Purpose: Encourage Free Enterprise (Otherwise fewer people would invest)

(4) Management of the Corporation

a. Usually Clear lines as to what officers/managers can do.

b. More centralized than a partnership

DISADVANTAGES:

(1) Taxes: can be double taxation.

a. Corp pays tax on the profits it makes b/c it is a separate entity.

a. Profits = Income – Expenses

b. SH pay tax in dividends.

a. Net profits (after tax) may be taken in whole or part to pay dividends. SH pay tax on this (double tax).

b. Corp may however decide to reinvest in the Company.

c. Avoiding Double Taxation:

1. SubChapter S:

a. Requirements:

i. Less than 75 SHs

b. Benefit: No 2xe tax; only SH (not corp taxes) paid

2. Paying Higher Salaries

a. Pay higher salaries (to managers/officers/etc.) so profits are 0.

b. One problem here is that their may be factions. If all are equal SHs they can vote and one can be “frozen out”

i. Example: Maj. can vote w/o “e” on B of D and decide not to pay dividends (Deprive “E” of right to manage and receive dividend income

(2) “Freeze Outs” in a Closely Held Corp. (less than 35 shareholders)

1. Factions could “freeze out” one person

2. Frozen out by

a. Not placed on Bd.

b. Take away person’s ability to make $ by making a sh

i. Don’t have to pay dividends

3. Hard to sell minority shares because buyers realize that they can be frozen out

a. & because it is not publicly traded

(2) Other Business Organizations: This is all about Relationships

a. Sole Proprietorship: (One Person)

i. Single Person operating naturally; no form needed (paperwork)

ii. Advantages:

1.

**In advising a Business a lot depends on its FORM**

Solely Reap all profits (100%) à Profits=Income(revenue) – Expenses

2. Sole Decision Makers

iii. Disadvantages:

1. Sole Burden and Costs

2. Directly Liable for alll debts.

iv. TAXES:

1. Incomized Expenses are taxed once

2. Income from Bus. is added to any other income one has

b. Partnership:

i. Two or more people act in concert (In association with each other) and share profits.

ii. Default Provision: no Agreement Needed.

iii. BASICS:

1. This is an aggregation of equal partners (Default Provision)

2. All Have a Right to manage

iv. TAXES:

1. Partnership is not taxed itself.

a. Avoids Double Taxation à not treated as a separate legal entity

2. Each partner is taxed on his share of the profits.

(3) Public Corporation

a. Initial Public Offering (IPO): One incorporating may wish to do an IPO.

i. Selling of shares to the public (Publicly traded)

ii. This is as opposed to a small close knit corporation which usually has 35 or less SHs.

b. Separation of Ownership & Control:

i. Owners do not have control; percent