7. Incorporation, Corporate Tax

Question 1

why create larger firms (main ideas)

Answer 1

• exploit economies of scale
• vertical integrate
• exploit growth opportunities

Question 2

why create larger firms (in detailed)

Answer 2

• single-owner managed firms
  • avoid many organizational problems, but not all
  • is limited with regard to growth (market share)
  • forgoes benefit of economies of scale (=declining average cost)
  • may have difficulties to vertically integrate
• creating a larger firm requires:
  • functioning capital markets
  • separation of ownership and control (management)
  • an organizational architecture (decision rights, performance
  measurement, reward system)

Question 3

(market) transaction cost

Answer 3

• identify partner
• specifying terms
• enforcing terms of contract

Question 4

optimal degree of integration

Answer 4

• the advantage of integration (of transactions) is saved

- integration leads to organization cost:
   • delegation
   • control
   • incentives
   • communication

Question 5

partnership and incorporation

Answer 5

sources:

• general law
• constitution of the firm (contract among owners)
• contracts with employers, factor delivers, banks

areas

• contributions to firm’s capital
• liability for losses
• voting rights / co-determination

Question 6

profit (equations)

Answer 6

• operating profit = revenue - variable cost
• EBIT = operating profit - fixed cost
• EBT = EBIT - interest payment
• net earnings = EBT - corporate taxes
• dividends = net earnings - retained earnings
• corp. taxes = corp. income tax + trade tax

Question 7

owner contribution

Answer 7

• balance sheet lists assets (productive P, cash C) and funding sources (equity E, debt D) of a firm
• the balance sheet is balance: E + D = P + C (funding = usage of money)
• Equity E = (P+C) - D
• retained earnings increase E, losses decrease E
• Equity: owners contribution (capital) and cumulated retained earnings/losses

Question 8

partnership vs. incorporation

Answer 8

• some legal forms create a legal entity
• the legal entity (not its owners) owns its assets
• the owners of a corporation are not liable for losses beyond the entity they’ve provided
• a corporation pays corporate income tax, owners of all firms pay personal income tax on their dividends

Question 9

criteria for defining legal forms

Answer 9

1. foundation (contract, notary / registration, cost)
2. formal requirements, minimum capital
3. integration of new partners
4. management of daily operations
5. ownership of the firm’s asset
6. liabilities for losses / damages
7. profit distribution
8. mandatory financial statements
9. taxation of firm / owners

Question 10

single-person enterprise

Answer 10

• no minimum capital required
• single person only
• liable personally and unlimitedly
• single entrepreneur gains profits and suffers losses of the business activities
• single-person representation
• registration in Commercial Register necessary if Commercial Business
• income tax, trade tax, turnover tax

Question 11

eK

Answer 11

• no legal entity
• no contract required, just registration
• solo responsibility for managing the firm
• fully liable (with his private assets) for the operations of the firm
• personal income tax

Question 12

GbR

Answer 12

• group of 2 or more who pursue a common goal
• no notarization / registration required
• owners fully / commonly liable
• personal taxes
• profits/loss shared

Question 13

GmbH (limited liability company)

Answer 13

• minimum capital 25k
• no access to private property of partners, only the company is liable with its property
• managing directors is liable for violation of legal obligations
• profit-sharing depends on the capital share of the shareholder
• dividends are paid per share, no loss sharing
• external management and representation possible
• in case of several company directors, the principle of joint business management and joint representation applied
• decision making: majority principle
• register in Commercial Business necessary
• obligatory notarization
• corporate tax, personal tax, turn-over tax

Question 14

UG

Answer 14

• variation of the GmbH for single-owners (who have less than 25k)
• charter needs to be notarized and registered
• minimum capital of 1k needs to be paid as a prerequisite for registration
• 25% of profit have to be retained each year
• legal entity, corporate income tax

Question 15

AG

Answer 15

• owners buy shares → authorized capital as part of firm’s equity
• corporate charter has to be authorized, registered, published
• minimum capital 50k → 25% has to be paid before registration
• shares are tradable
• formal requirement: management board, supervisor board, annual assembly

Question 16

OHG (general partnership)

Answer 16

• no minimum capital required
• at least 2 partner necessary
• primary and unlimited liability of all partners with their property for obligation against the company (fully liable)
• generally equal sharing of profits and losses
• single representation and single management by one of the partners possible
• decision making: unanimity principle
• no notarization, registration necessary

Question 17

taxation of corporation

Answer 17

• value added tax: collected and transferred to authorities by the company
• trade tax: applies to commercial activities
• corporate income tax on EBT: to be paid by incorporated firms, but not by partnerships or eK
• personal income tax on paid dividends / profit shares