AEM1200-02.14 - AEM1200, Introduction to Business...

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Unformatted text preview: AEM1200, Introduction to Business Management AEM1200, Wednesday 2/14 Business Ownership Forms of business ownership; Corporate governance Forms of Business Ownership Forms Sole proprietorship A business owned and managed by one person A legal form of business with two or more owners A llegal entity with authority to act and have liability separate from its egal owners owners The right to use a specific business’s name and sell its products or The services in a given territory services A business owned and controlled by the people who use it – producers, business consumers, or workers with similar needs who pool their resources for mutual gain. mutual Partnership Corporation Franchise Cooperatives Ownerships, Partnerships and Corporations (2009) Ownerships, The Major Ownership Decisions Ease to start and to terminate Scalability Ownership Distribution Ownership Transferability Personal Liability Taxation Sole Proprietorships Sole Ease of start/end Be your own boss Pride of ownership Leaving a legacy Retain profit No special taxes Unlimited liability Limited financial resources Difficulty in mgmt. Time commitment Few fringe benefits Limited growth Limited life span Major Types of Partnerships General Partnership All owners share in operating the business and in assuming liability for the business’ debts. A partnership with one or more general partners and one or more limited partners. General Partner -- An owner (partner) who has unlimited liability and is active in managing the firm. Limited Partner -- An owner who invests money in the business but enjoys limited liability. Limited Liability means that liability for the debts of the business is limited to the amount the limited partner puts into the company; personal assets are not at risk. Limited Partnership Types of Partners Partnerships Partnerships More financial resources Shared mgmt. Longer survival Disagreements among partners Difficult to terminate Unlimited liability Division of profits Corporations Corporations More money for investment Limited liability Separation of ownership/mgmt. Initial cost Paperwork Two tax returns Termination difficult Double taxation Corporate governance Ease of drawing talented employees Ease of ownership change Perpetual life Size Limited Liability Company A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships; LLCs have directors, directors and employees, plus the benefits of limited liability; Profits are taxed only as the personal income of the member (shareholder) Limited Liability Companies Advantages of LLCs: Disadvantages of LLCs: Limited liability Choice of taxation Flexible ownership rules Flexible distribution of profit and losses Operating flexibility No stock, therefore ownership is nontransferable Limited life span Fewer incentives Taxes Paperwork Kevin McGovern – Cornell Entrepreneur of the Year 2007 Kevin McGovern – Cornell Entrepreneur of the Year 2007 The fact of the matter is the better the agreement is up front the higher the probability of a successful relationship long term. The agreement should be in writing and you should iron out -- a shareholders agreement is a good, again, exercise in thinking through the issues, just like a business plan. What happens if somebody dies? What happens if somebody becomes disabled? What happens if they simply want to leave the business? Can they just leave and keep their shares? Is there a right of first refusal back for those shares? If somebody dies should the family continue to own the shares? Or should you buy back some part of it? All of those considerations are very important up front. Resolve them. A good lawyer, what he'll do is he'll give you his form so that you can think through it. There'll be no cost in the form. You can think through those issues, read through them, then come back to his office after you've thought it through as a team. Again, it's a good exercise in how you get along as partners, and you tell him how you want to modify his form. I mean that's a good way of doing it. But very important. Then there is the consideration of what kind of structure do you have initially, okay? And I'm a big proponent, you have to have a business entity. There are many different business entities: corporation, limited partnership, limited liability corporation. Why do you have to have one? Because all of those give you the benefit of insulating you from personal liability. And it's an insurance plan that's relatively inexpensive. To incorporate should be only hundreds of dollars, maybe a thousand dollars total legal fees etcetera and that's an insurance policy you have for the rest of your business career that you will not lose your home over this particular business venture. There are only a few ways that the law can pierce through that corporate veil and go after you personally and that's if you've been fraudulent, you set up that company just to not pay debts, or if you have a situation where it's the IRS or tax liability the government goes right through your corporation. So on that subject I must tell you, may sure you pay your withholding taxes for a corporation. Now you're paying payroll there's something you leave out, the 7%. If you're not paying that on a monthly basis to the IRS they will go after you personally. So you never, ever keep that money. You always pay that in. But back to legal structure. Once I've convinced you now you have to have a business structure the decision as to whether you want to be a normal corporation, which is known as a C corporation, a subchapter S corporation, which is basically an equivalent to a partnership because all the investors do not pay corporate tax, they only pay individual tax and all the income is allocated out to the partners or whether you do a limited liability company depends on a lot of tax issues and structuring issues which you don't want me to go through in this particular session. But yes, one of those forms. Limited liability corp., C corp. or subchapter S. Not a partnership. Where there's a partnership you have total liability in partnership. Not a proprietorship, that's where you've an individual. But in a partnership all the partners have individual liability and creditors can go right after you. A limited partnership has insulation. So it's a limited partnership, limited liability corporation, subchapter S or C corporation. Franchises Franchises + Management & Management marketing ass’t marketing + Personal ownership + Recognized name + Financial advice & Financial ass’t ass’t + Lower failure rate High start-up costs Shared Profit Management Management regulation regulation - Coattail effects - Restrictions on selling - Fraudulent Fraudulent franchisors franchisors Cooperatives Cooperatives A business owned and controlled by the people who use business it – producers, consumers, or workers with similar needs who pool their resources for mutual gain; who Eg. Greenstar Markets. Over 100 million people are members of over 47,000 Over cooperatives in the U.S.A. cooperatives Top three: Nationwide Mutual (insurance), CHS, Inc. (food and Top agriculture), Dairy Farmers of America (food and agriculture) agriculture), Uncommitted directors; “Dead-weight” members Lack of transparency Lack of enough capital Avoid “Not-for-profit” organizations Organization whose primary objective is to Organization support some issue or matter of private interest or public concern for non-commercial purposes; or Main characteristics (US) Main No profits, profit distribution or stock issuance; Does not pay taxes; Monetary contributions to not for profit organizations Monetary are not included in taxable income. are 501-c3 section of the US tax code. Corporate governance Corporate The relationship of a company to its The shareholders and, more broadly, to society The Board of Directors The The Sarbanes-Oxley Act The Public Company Accounting Oversight Board Prohibit audit firms from doing a variety of non-audit Prohibit work for their clients Independent audit committees Independent Forbid company loans to company executives Top executives must certify company accounts Protects whistleblowers Section 404 makes managers responsible for Section maintaining an “adequate internal control structure and procedures for financial reporting”; and demands that companies' auditors “attest” to the management's assessment of these controls and disclose any “material weaknesses”. weaknesses”. Criticisms of the Corporate Form Criticisms “…the corporation is a psychopath. Like all psychopaths, the firm is the singularly self-interested: its purpose is to create wealth for its shareholders. And, like all psychopaths, the firm is irresponsible, because it puts others at risk to satisfy its profit-maximising goal, harming employees and customers, and damaging the environment. The corporation manipulates everything. It is grandiose, always insisting that it is the best, or number one. It has no empathy, refuses to accept responsibility for its actions and feels no remorse. It relates to others only superficially, via make-believe versions of itself manufactured by public-relations consultants and marketing men. In short, if the metaphor of the firm as person is a valid one, then the corporation is clinically insane… Through their psychopathic pursuit of profit, (corporations) make good people do bad things.” make Review of the documentary “The Corporation”, The Economist, 5/6/2004 CORPORATION, n. An ingenious device for obtaining individual profit without individual responsibility. without Ambrose Bierce's Devil's Dictionary Ambrose Devil's Takeaways Takeaways There are many ways to organize a business; In terms of flexibility and ability to grow, the In corporation form is the most successful form of organization in the U.S. economy organization But also presents the most governance problems Franchising and cooperatives are alternative Franchising ways to exercise entrepreneurial control over organizations. organizations. ...
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