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1. Please read Chapter 5: Legal Structure from your textbook. You can also review any lecture notes posted on blackboard and any material you find over the internet on the subjects covered in Chapter 5. Reflect on the material you've read via reflective writing. Please pay attention to the rubric posted on blackboard while you're working on your writing Legal Structure Why is it important? Tax provisions Distribution of liability Ability to raise capital Legal Structure Types: . Proprietorship Partnership Corporations Publicly held corporation Closely held corporation Subchapter corporation Joint Ventures Proprietorship Simplest form of legal structure One individual owns, operates, and controls the firm Income of the firm - Personal income of the owner Losses of the firm accrue directly to owner Owner is taxed as an individual No separate tax for the firm Proprietorship Liabilities incurred by the firm are the owner's personal liabilities Owner must cover them from personal fortune. Ability of the firm to generate capital is limited by the personal assets of the owner. Life of the proprietorship = Life of the owner Proprietorship - Example: Entrepreneur owns a truck and acts as a free agent in hauling earthwork or materials Partnership Ownership of the firm is shared by partners to a degree defined in the initial charter of the partnership. Assets = Personal assets of all partners Control of the firm is divided among general partners Profit and losses divided proportionally. Partnership Liability of each partner is not limited. One partner may carry more liability in case of a major loss. Example: Partne Personal Ownershi Fortune P $1,400,000 40% B $800,000 30% $100,000 30% Partnership If the firm is liable for $1,000,000 the proportional shares of each would be: A: $400,000 B: $300,000 C: $300,000 .C will not be able to pay $300,000 pays $100,000 Remaining $900,000 is paid by A and B. A's share now: 4/7 * 900,000 $$14.286 B's share now: 3/7 * 900,000 - $385,714 Partnership In case of profit: Partners share proportionally. A: 40%; B: 30%;C 30% Division of ownership: . Capital assets contributed Other contributions Expertise . Trademark Name recognition Intellectual property, et Limited Partners Allows a person to enter a partnership with limited liability. Limited partners: Have no control over the management of the firm. Share the profit and losses with other partners proportionally to participation Have limited liability (limited to the capital investment made) Limited partner's contribution must be tangible. Partnership . Every partnership must have at least one general partner Partnership terminates when one of the general partners dies. Provisions can be made to provide for continuity of the firm. Action of any partner is binding on all other partners. Corporations A corporation is a separate legal entity. Created under the law in a state in which it is chartered. . Mostly established by applying to the office of the Secretary of State. The Secretary of State issues a chartering document and approves the initial issuance of stock in the corporation. Stocks: Establish the levels of ownership Corporations Corporation: Stockholders Board of Directors Officers Corporations Closely held corporations: All stock held by a small number of person Publicly held corporations: Allows its stock to be bought and sold freely in the market. Upon establishment: A number of stocks are issued with an arbitrary value. Book Value = Net Worth / No. of Shares Market Value - What buyers will pay Corporations Company can sell stock to raise capital . Only those assets that belong to the firm can be used for settlemento claims in the event of bankruptcy or damage suits. Double taxation: Tax is collected on the profit of the company. After the profit is distributed to shareholders, the same profit is taxed as personal income . Corporations Company can sell stock to raise capital . Only those assets that belong to the firm can be used for settlemento claims in the event of bankruptcy or damage suits. Double taxation: Tax is collected on the profit of the company. After the profit is distributed to shareholders, the same profit is taxed as personal income Corporations Level of stockholder control is reduced. Life of the corporation is perpetual . Good for raising capital Legal Structure Selection of an appropriate structure depends on: Taxation Establishing costs Risk and liability . Continuity of the firm - Administrative flexibility and impact of structure on decision making Laws constraining operations Attraction of capital Corporations Company can sell stock to raise capital . Only those assets that belong to the firm can be used for settlemento claims in the event of bankruptcy or damage suits. Double taxation: Tax is collected on the profit of the company. After the profit is distributed to shareholders, the same profit is taxed as personal income Corporations Level of stockholder control is reduced. Life of the corporation is perpetual . Good for raising capital Legal Structure Selection of an appropriate structure depends on: Taxation Establishing costs Risk and liability . Continuity of the firm - Administrative flexibility and impact of structure on decision making Laws constraining operations Attraction of capital Comparison Tax Proprietorship Partnership Tax on personal income tax Tax on personal salary and on earnings whether or earnings not they are withdrawn Corporation Lower taxes in some cases." Dividends are not deductible; double taxing. Taxes on dividends, that is, money actually received More complex and expensive. Meeting must be held Limited to assets of corporation Costs and procedures No special legal procedure: in starting apply for licenses, register with IRS Size of risk Personal liability Continuity of the concem No continuity on death of proprietor General: Easy-Oral agreement Limited: More difficult-must closely adhere to state law Personal liabilities: Extent of personal fortune. Limited: each partner is protected: loss of limited partner cannot exceed initial investment Dissolution: No continuity on death of partner. Surviving partners can buy share if in agreement Decisions and policies implemented by oral agreement Laws are also well defined: a license may be required Perpetual (charter can expire) Adaptability of administration Influences of applicable laws Attraction of additional capital Simplicity of organization: direct control Laws are well defined; no limit on doing business in various states Limited potential for capital expansion. Borrowing: line of credit: personal fortune investment Directors-good if involved Policy decisions predefined by by-laws Foreign corporation status: requires legal counsel on permanent basis Issue securities, collateral provided by corporate assets: issue stock Better, more capital, limited partner concept Reflective Writing Rubric Minimally meets the Meets most of the criteria criterion Does not meet criterion at all Features present in the reflective writing product Meets criteria fully Presenting the key Complete concepts of the subject Does not copy the lesson as understood by the student Covers all concepts but not really in his/her own words Partial coverage of concepts No concepts covered 2 Describing the relationship Qualitative interpretation between the various used to compose the concepts relationship in the words of the student Not able to interpret Surface description of Qualitative interpretation used to compose the relationship Some attempt to compose the relationship 3 Student relates key concepts to his/her own life experiences Shows clear understanding of how the concepts occur in everyday situations Shows partial understanding of how the concepts occur in everyday situations Mention of everyday situations without any explanation of how they relate to concepts under study in current sections No relationships to his/her own life experiences are given 4 Student formulates his/her own question(s). Student sets out a question that is not clearly formulated No questions given Student realizes that there are concepts in the textbook that she does not under- stand and elaborates a clear question Student notes the difference between his/her own ideas and the ones in the textbooks without any discussion 1. Please read Chapter 5: Legal Structure from your textbook. You can also review any lecture notes posted on blackboard and any material you find over the internet on the subjects covered in Chapter 5. Reflect on the material you've read via reflective writing. Please pay attention to the rubric posted on blackboard while you're working on your writing Legal Structure Why is it important? Tax provisions Distribution of liability Ability to raise capital Legal Structure Types: . Proprietorship Partnership Corporations Publicly held corporation Closely held corporation Subchapter corporation Joint Ventures Proprietorship Simplest form of legal structure One individual owns, operates, and controls the firm Income of the firm - Personal income of the owner Losses of the firm accrue directly to owner Owner is taxed as an individual No separate tax for the firm Proprietorship Liabilities incurred by the firm are the owner's personal liabilities Owner must cover them from personal fortune. Ability of the firm to generate capital is limited by the personal assets of the owner. Life of the proprietorship = Life of the owner Proprietorship - Example: Entrepreneur owns a truck and acts as a free agent in hauling earthwork or materials Partnership Ownership of the firm is shared by partners to a degree defined in the initial charter of the partnership. Assets = Personal assets of all partners Control of the firm is divided among general partners Profit and losses divided proportionally. Partnership Liability of each partner is not limited. One partner may carry more liability in case of a major loss. Example: Partne Personal Ownershi Fortune P $1,400,000 40% B $800,000 30% $100,000 30% Partnership If the firm is liable for $1,000,000 the proportional shares of each would be: A: $400,000 B: $300,000 C: $300,000 .C will not be able to pay $300,000 pays $100,000 Remaining $900,000 is paid by A and B. A's share now: 4/7 * 900,000 $$14.286 B's share now: 3/7 * 900,000 - $385,714 Partnership In case of profit: Partners share proportionally. A: 40%; B: 30%;C 30% Division of ownership: . Capital assets contributed Other contributions Expertise . Trademark Name recognition Intellectual property, et Limited Partners Allows a person to enter a partnership with limited liability. Limited partners: Have no control over the management of the firm. Share the profit and losses with other partners proportionally to participation Have limited liability (limited to the capital investment made) Limited partner's contribution must be tangible. Partnership . Every partnership must have at least one general partner Partnership terminates when one of the general partners dies. Provisions can be made to provide for continuity of the firm. Action of any partner is binding on all other partners. Corporations A corporation is a separate legal entity. Created under the law in a state in which it is chartered. . Mostly established by applying to the office of the Secretary of State. The Secretary of State issues a chartering document and approves the initial issuance of stock in the corporation. Stocks: Establish the levels of ownership Corporations Corporation: Stockholders Board of Directors Officers Corporations Closely held corporations: All stock held by a small number of person Publicly held corporations: Allows its stock to be bought and sold freely in the market. Upon establishment: A number of stocks are issued with an arbitrary value. Book Value = Net Worth / No. of Shares Market Value - What buyers will pay Corporations Company can sell stock to raise capital . Only those assets that belong to the firm can be used for settlemento claims in the event of bankruptcy or damage suits. Double taxation: Tax is collected on the profit of the company. After the profit is distributed to shareholders, the same profit is taxed as personal income . Corporations Company can sell stock to raise capital . Only those assets that belong to the firm can be used for settlemento claims in the event of bankruptcy or damage suits. Double taxation: Tax is collected on the profit of the company. After the profit is distributed to shareholders, the same profit is taxed as personal income Corporations Level of stockholder control is reduced. Life of the corporation is perpetual . Good for raising capital Legal Structure Selection of an appropriate structure depends on: Taxation Establishing costs Risk and liability . Continuity of the firm - Administrative flexibility and impact of structure on decision making Laws constraining operations Attraction of capital Corporations Company can sell stock to raise capital . Only those assets that belong to the firm can be used for settlemento claims in the event of bankruptcy or damage suits. Double taxation: Tax is collected on the profit of the company. After the profit is distributed to shareholders, the same profit is taxed as personal income Corporations Level of stockholder control is reduced. Life of the corporation is perpetual . Good for raising capital Legal Structure Selection of an appropriate structure depends on: Taxation Establishing costs Risk and liability . Continuity of the firm - Administrative flexibility and impact of structure on decision making Laws constraining operations Attraction of capital Comparison Tax Proprietorship Partnership Tax on personal income tax Tax on personal salary and on earnings whether or earnings not they are withdrawn Corporation Lower taxes in some cases." Dividends are not deductible; double taxing. Taxes on dividends, that is, money actually received More complex and expensive. Meeting must be held Limited to assets of corporation Costs and procedures No special legal procedure: in starting apply for licenses, register with IRS Size of risk Personal liability Continuity of the concem No continuity on death of proprietor General: Easy-Oral agreement Limited: More difficult-must closely adhere to state law Personal liabilities: Extent of personal fortune. Limited: each partner is protected: loss of limited partner cannot exceed initial investment Dissolution: No continuity on death of partner. Surviving partners can buy share if in agreement Decisions and policies implemented by oral agreement Laws are also well defined: a license may be required Perpetual (charter can expire) Adaptability of administration Influences of applicable laws Attraction of additional capital Simplicity of organization: direct control Laws are well defined; no limit on doing business in various states Limited potential for capital expansion. Borrowing: line of credit: personal fortune investment Directors-good if involved Policy decisions predefined by by-laws Foreign corporation status: requires legal counsel on permanent basis Issue securities, collateral provided by corporate assets: issue stock Better, more capital, limited partner concept Reflective Writing Rubric Minimally meets the Meets most of the criteria criterion Does not meet criterion at all Features present in the reflective writing product Meets criteria fully Presenting the key Complete concepts of the subject Does not copy the lesson as understood by the student Covers all concepts but not really in his/her own words Partial coverage of concepts No concepts covered 2 Describing the relationship Qualitative interpretation between the various used to compose the concepts relationship in the words of the student Not able to interpret Surface description of Qualitative interpretation used to compose the relationship Some attempt to compose the relationship 3 Student relates key concepts to his/her own life experiences Shows clear understanding of how the concepts occur in everyday situations Shows partial understanding of how the concepts occur in everyday situations Mention of everyday situations without any explanation of how they relate to concepts under study in current sections No relationships to his/her own life experiences are given 4 Student formulates his/her own question(s). Student sets out a question that is not clearly formulated No questions given Student realizes that there are concepts in the textbook that she does not under- stand and elaborates a clear question Student notes the difference between his/her own ideas and the ones in the textbooks without any discussion