MANA 3325 – Thurburn Lecture 09-12-13 Slides

1. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Corporation Form of Ownership • A separate legal entity from its owners. • Unlimited Life • Taxable What Types of Corporations are there?

2. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Corporation Form of Ownership Types of corporations: • Domestic – a corporation doing business in the state in which it is incorporated. • Foreign – a corporation doing business in a state other than the state in which it is incorporated. • Alien – a corporation formed in another country but doing business in the United States.

3. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Corporation Form of Ownership Types of corporations: • Publicly held – a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges. • Closely held – a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends. What are the advantages of a corporation?

4. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Advantages of Corporation: • Limited liability of stockholders • Ability to attract capital • Ability to continue indefinitely • Transferable ownership

5. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Corporation Claims of Corporation’s Creditors barrier barrier Corporation’s Assets Shareholder’s Personal Assets Shareholder’s Personal Assets

6. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Partnership Claims of Partnership’s Creditors Corporate General Partner Assets BARRIER Partnership’s Assets Limited Partner’s Personal Assets BARRIER Corporate Shareholders What are Disadvantages of Coropration?

7. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Dis-Advantages of Corporation: • Cost and time of incorporation process • Double taxation • Potential for diminished managerial incentives • Legal requirements and regulatory “red tape” • Potential loss of control by founder(s) What information goes into the Articles of Incorporation?

8. MANA 3325 – Thurburn Lecture 09-12-13 Slides Start Here Forms of Business Ownership Articles of Incorporation/Charter: • Name • Purpose • Life Span… or unending • Incorporator(s) Information • Place of Business • Shares Authorized • Capital Required • Preemptive Rights – Anti-dilutive Provisions • Shareholder Restrictions • Officer(s) Information • Rules - Bylaws

9. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership What is an S Corporation?

10. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership S Corporation • No different from any other corporation from a legal perspective. • An S corporation is taxed like a partnership, passing all of its profits (or losses) through to individual shareholders. • To elect “S” status, all shareholders must consent, and the corporation must file with the IRS within the first 75 days of its tax year. What are the Advantages of an S Corp?

11. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership S Corporation Advantages: • Retains all of the advantages of regular corporation: • Continuity of existence • Transferability of ownership • Limited personal liability for owners What are the Dis-Advantages of an S Corp?

12. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership S Corporation Dis-Advantages: • Entrepreneurs considering both S and C status should review the impact of the decision on their companies. • S corporation status is usually beneficial to start-up companies anticipating net losses because founders can use the loss to offset other income, and lower their tax bill.

13. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership S Corporation Claims of S Corporation’s Creditors barrier barrier S Corporation’s Assets Shareholder’s Personal Assets Shareholder’s Personal Assets

14. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Limited Liability Company (LLC): Resembles an S Corporation but is not subject to the same restrictions. Two documents required: • Articles of organization • Operating agreement

15. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Limited Liability Company Claims of LLC’s Creditors barrier barrier LLC’s Assets Member’s Personal Assets Member’s Personal Assets What is a Professional Corporation?

16. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Professional Corporation: • Designed for professions – lawyers, doctors, dentists, accountants and other professionals • Created in the same manner as a corporation • Identified by the abbreviations: • P.C. – Professional Corporation • P.A. – Professional Association • S.C. – Service Corporation What Limitation must a PC comply with?

17. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Professional Corporation Limitations: Shares Owned By Licensed Professionals. At least One Incorporator must be Licensed. At least One Director must be Licensed. Articles must designate Personal Services to be provided. Licensing Board Certifies that All Shares are held by Duly Licensed Individuals. What is a Joint Venture?

18. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Joint Venture: Much like a partnership, but it: • Is formed for a specific purpose • Has a beginning and an end

19. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Factors to Consider when choosing a Form of Ownership: Tax considerations Liability exposure Start-up and future capital requirements Control Managerial ability Business goals Management succession plans Cost of formation

20. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership What would be the best form of ownership for… A Local Restaurant? A Food Truck Business? A Lawn Care Business? A Chiropractor? A Software Company? A Consulting/Coaching Business?

21. MANA 3325 – Thurburn Lecture 09-17-13 Slides Forms of Business Ownership Is there a Form of Ownership that is better than the others? Is there a Form of Ownership that is worse that the others? Is there a Form of Ownership that is evil?

22. MANA 3325 – Thurburn Lecture 09-17-13 Slides Forms of Business Ownership How does the SEC requiring Quarterly Reports help Investors and the economy in general? How dies it hurt Investors and the economy in General?

23. MANA 3325 – Thurburn Lecture 09-17-13 Slides Forms of Business Ownership Four Primary Ways to Manipulate Income and Losses: Move Expenses from This month to Next… Move Revenues from This month to Next… Move Expenses from Next month to This… Move Revenues from Next month to This.

24. MANA 3325 – Thurburn Lecture 09-17-13 Slides Forms of Business Ownership Able Co. Data… Sole Proprietorship $10,000,000 in Sales $1,000,000 in Taxable Net Income Expenditure of $10,000 in December on an Advertising Expense for January. This is a Prepaid Item but it is small. No Shareholders No Loans. Expensing in the current year saves approx. $3,000 in taxes. Is this ‘wrong’ to do?

25. MANA 3325 – Thurburn Lecture 09-17-13 Slides Forms of Business Ownership Able Co. Data… Corporation $10,000,000 in Sales $1,000,000 in Taxable Net Income Expenditure of $10,000 in December on an Advertising Expense for January. This is a Prepaid Item but it is small. No Shareholders other than Mr. Able. No Loans. Expensing in the current year saves approx. $3,000 in taxes. Is this ‘wrong’ to do?

26. MANA 3325 – Thurburn Lecture 09-17-13 Slides Forms of Business Ownership Able Co. Data… $10,000,000 in Sales $1,000,000 in Taxable Net Income Expenditure of $10,000 in December on an Advertising Expense for January. This is a Prepaid Item but it is small. 5 Family Members are shareholders. No Loans. No Audit. Expensing in the current year saves approx. $3,000 in taxes. Is this ‘wrong’ to do?

27. MANA 3325 – Thurburn Lecture 09-17-13 Slides Forms of Business Ownership Able Co. Data… $10,000,000 in Sales $1,000,000 in Taxable Net Income Expenditure of $100,000 in December on an Advertising Expense for January. This is a Prepaid Item but it is small. 5 Family Members are shareholders. No Loans. No Audit. Expensing in the current year saves approx. $30,000 in taxes. Is this ‘wrong’ to do?

28. MANA 3325 – Thurburn Lecture 09-17-13 Slides Forms of Business Ownership Able Co. Data… $10,000,000 in Sales $1,000,000 in Taxable Net Income Expenditure of $500,000 in December on an Advertising Expense for January. This is a Prepaid Item. 5 Family Members are shareholders. No Loans. No Audit. Expensing in the current year saves approx. $150,000 in taxes. Is this ‘wrong’ to do?

29. MANA 3325 – Thurburn Lecture 09-17-13 Slides Forms of Business Ownership Able Co. Data… $100,000,000 in Sales $10,000,000 in Taxable Net Income Expenditure of $1,000,000 in December on an Advertising Expense for January. This is a Prepaid Item. 100 shareholders own 35% of the company. Able owns the rest. No Loans. No Audit. Expensing in the current year saves approx. $300,000 in taxes. Is this ‘wrong’ to do?

30. MANA 3325 – Thurburn Lecture 09-17-13 Slides Forms of Business Ownership Able Co. Data… $1,000,000,000 in Sales $100,000,000 in Taxable Net Income Expenditure of $10,000,000 in December on an Advertising Expense for January. This is a Prepaid Item. 100,000 shareholders own 90% of the company. Able owns the rest. Loans Audit for the SEC Expensing in the current year saves approx. $30,000,000 in taxes. Is this ‘wrong’ to do?

31. MANA 3325 – Thurburn Lecture 09-17-13 Slides Forms of Business Ownership Able Co. Data… $10,000,000,000 in Sales $1,000,000,000 in Taxable Net Income Revenues of $1,000,000 in January are Accelerated by signing a Contract with another company. This is a Prepaid Item by the other company … a Liability to Able. It is ‘Not Significant’ to the overall picture of the company but it adds $.02 to the Earnings per Share. 100,000 shareholders own 90% of the company. Able owns the rest. Loans Audit for the SEC Expensing in the current year saves approx. $3,000,000 in taxes. Is this ‘wrong’ to do?

32. MANA 3325 – Thurburn Lecture 09-17-13 Slides Forms of Business Ownership Able Co. Data… Is it wrong if it is Not Significant? Is it wrong if the Other Company is 100% separate from Able? Is it wrong if the Other Company is 99% owned by other shareholders and 1% owned by Able? Where do you draw the line?