Chapter 9: Corporate Governance Flashcards
Corporate Governance
The structure by which businesses are controlled
Entrepreneur
An individual who manages a business, assuming the risks in order to make a profit
Sole Proprietor
One owner of the business
Which entity is the least expensive and easiest to create?
Sole Proprietor
Does a sole proprietor need the government’s permission to open the business?
May need a license or permit
Can Joe Roberts just open his bar under the name of Tyler’s Sports Bar & Grill?
If you want to open a business in a name other than your own, must file a fictitious name registration; Allow government to see who owns the business
Can I open a business called Haha Food Markets?
Case where Wawa sued saying this is a name infringement; Court ruled that you can’t use a fictitious name that is misleading
Liability of a Sole Proprietor
Greatest liability because all the business debts belong to owner
How can a Sole Proprietor reduce his risk?
Can keep all of personal assets in joint names with a spouse and buy liability insurance
What are the tax implications of a Sole Proprietor?
Everything is on personal tax return; Business income goes on a “Schedule C”
How can a Sole Proprietor terminate its business?
Terminates whenever the owner stops doing business; No forms have to be filed with the government
What are the advantages to a Sole Proprietorship?
Owner is in complete control/receives all profits; Flexibility; Ease of creation/maitnence
What are the disadvantages to a Sole Proprietorship?
Owner is personally liable for all torts/contracts; Lacks continuity after death; Difficult to raise financing
Partnership
When two or more people operate a business as co-owners; Minimal cost
How do partners share in the profits and losses?
They will share in the profits/losses equally unless there is an agreement to the contrary
Can only individuals enter into a partnership?
It can also include other form of entities like a corporation
What forms can a Partnership be created in?
Oral, Written, Implication
Management of Partnership
Partnership agreement usually sets forth the rights and duties of the partners
Liability of Partnership
Each has an unlimited liability for the debts of the business
If a partner buys a car in the name of the business without the consent of the other, does it bind the other person?
Yes; Each partner is the agent for the partnership and can bind the others even if that person exceeded his or her authority
What are the tax implications of a Partnership?
Not a taxable entity; Profits and losses go on each person’s tax return “Schedule K-1”; Required to file an information return;
How can a Partnership terminate the business?
Terminates on happening on certain events such as a change in partners
What is the process for termination of a Partnership?
Two step– dissolution (when a partner ceases to be associated with the venue) and winding up
What are the advantages to a Partnership?
Easy to create/maintain; Informal; Partners share profits and losses equally
What are the disadvantages to a Partnership?
Partners personally liable for all torts/contracts; Dissolved upon death; Difficult to raise financing
Limited Partnership
Consists of one or more general partners and one or more limited partners
What are Limited Partnerships used for?
To raise revenue since the liability of the limited partners is limited to the person’s investment as long as they have no say in the operation of the business
True or False: Limited (silent) partner can’t complain how the business is run
True
How is a Limited Partnership formed?
Must file a Certificate of Limited Partnership with the state; Certificate must state that business is limited partnership
How is a Limited Partnership managed?
Business must be run by the general partners without the active participation of the limited partners
What is the liability of a Limited Partnership
Liability of a limited partner is restricted to the investment, but the general partners have unlimited liability
Example of Limited Partnership
Steve Starr; KOP Mall, How movies in Hollywood are made (Titanic)
Limited Liability Partnership (LLP)
Hybrid between a partnership and corporation
Who uses LLPs and for what reason?
Accountants, Lawyers, and Doctors uses them to avoid personal liability
Who is liable for an LLP?
The person who screwed up; Partners are not personally liable for the malpractice claims against the other partners
What are the legal requirements for an LLP?
Must be registered with the state as an LLP and the business must file a certificate of annual registration each year
What is the management for an LLP?
All manage the business on a routine basis
Family Limited Liability Partnership
New type of entity in which the partners are related to each other
What are Family Limited Liability Partnership used for?
As an estate planning tool for a client with a lot of money to save takes upon the person’s death
Hows do Family Limited Liability Partnerships work?
The owner transfers the assets to the partnership; Owner supervises business as general partner and family members are limited partners; Take the assets out of the person’s estate
Example of Family Limited Liability Partnership
Donald Trump and Father
Corporation
Separate and distinct entity apart form its owners; Owners become stockholders; Allows corp. to own its own assets, borrow money, and enter into own contracts
What happens if the Corporation goes bust?
The corporation is liable, not the owner; Ex: Trump casinos go bankrupt but he loses no money
How are Corporations created?
Created by state charter; Corporation birth certificate; Owners get stock and liability is limited to stock
Why are Corporations expensive to create?
Many legal fees and costs; Must create Articles of Incorporation and State must issue a charter
Articles of Incorporation
Include name, purpose, duration, capital structure (share of stock), Registered office (address of attorney)
What is the continuity of a Corporation
A corporation is a separate entity, so its status does not change with the death or sale of stock by shareholder; Ex: Steve Jobs & Apple
What is the management of a Corporation
Shareholders elect the Board of Directors; Directors set policy and appoint officers; Officers run business on daily basis
What is the liability of a Corporation
Owners liability limited to capital contribution; Can be liable if he or she guarantees corporate debt; Owners always liable for payroll taxes of corporation
Pierce Corporate Veil–Is there ever a time where you can go after a person directly?
Disregard the corporate entity when you go and do business
What is the taxation for a Corporation?
Double taxation; Business and Shareholders both pay taxes
Is there any way of getting around double taxation?
Subchapter S Corporation
How does a Subchapter S Corporation avoid double taxation?
Profits and losses go on the personal tax return of the stockholders and not on the corporate return; Only applies to small corporations, not big businesses
What is the liability for a Subchapter S Corporation
No personal liability
Subchapter S Corporation Small Business Requirements
(1) Must be a domestic corporation; (2) Can’t be part of another business; (3) Can’t have moe than 100 shareholders; (4) Can be no non-resident alients
What percentage of retail sales in USA come from franchises?
50%
Why do owners like franchises?
Has instant name recognition and given help in running the business; Ex: McDonalds
Franchise
Arrangement in which the owner of a trademark, trade name, or copyright allows another to offer its products for sale or use in the geographic area
Franchisor
Owner of business idea (grants the right)
Franchisee
Owner of the store offering the item to the public (buys the right)
Distributorship
Involves a manufacturing concern that licenses a dealer to sell its product such as a car dealership
Chain Style Business
One in which the franchisee operates the business under the name of the franchisor and uses standardized methods of operations; Ex: McDonalds, Wendys
Manufacturing Franchise
When the franchisor provides the franchisee with an essential ingredient or formula to make a particular product; Ex: Coca-Cola
Franchise Agreement
Contract governed by state and federal laws that govern these types of businesses
What is included in a franchise agreement?
Spells out terms of relationship including payment for franchise, purchase of products from franchisor and cost of advertising; Percentage of profits go to franchise
Can a franchise agreement be terminated?
Franchise may able for a set number of years; There can be a termination clause that alls the license to be revoked if the franchisee fails to do certain things
Top Franchises
Anytime Fitness, Denny’s, DD, 7/11, McDonalds, Subway, Servpro, Supercuts, Hampton Inn, Jimmy Johns
Corporate Governance/Rules/Regulations
Requires that they be vigilante of these legal mandates when selling products, offering stock to the public, or when determining the compensation for the officers of the enterprise
Why were some of the best business practices created?
Response to a scandal or economic collapse
Where did corporate governance all begin?
As a result of the Great Depression
Securities and Exchange Commission (SEC)
Created following Great Depression; Protects investors, maintains fair/efficient markets, and regulates capital formation
What principle is the SEC based upon?
All investors should have access to the same information about an investment before buying item and as long as they own it
The Securities Exchange Act of 1933
Allows the SEC to regulate the trading of stocks, to investigate securities fraud, and to regulate securities dealers; Mandates all information be available to public
What must corporations going public do?
File a Registration Statement wit the SEC; Prospectus must be provided to investor
What type of information must corporations give out?
Significant provisions of the security, how the proceeds of the sale are to be used, the management of the company, and a certified financial statement
What does the SEA 1933 seek to do?
Increase corporate accountability for public trading companies through a number of incentives
What must the CEO now do according to the SEA 1933?
Certify the validity of the financial statements and there can be no personal loans to officers and directors
The Securities Exchange Act of 1934
Act regulates the subsequent sale of securities and requires registration of brokers and dealers of the markets in which securities are sold
Example of SEA 1934
NY and American Stock Exchanges
Insider Trading
SEA 1934 defines it as the buying or selling of a security, in breach of fiduciary duty or other relationship of trust and confidence, while in possession of non-public information about the security
Dodd-Frank Act
Places a number of restrictions on the financial industry with the intention of preventing another collapse like Lehman Brothers; Protects consumers from improper bank loans and mortgage practices
What is the major thrust of the Dodd-Frank Act?
Prevents excessive risk-taking that cause the financial meltdown of the Great Recession
Anti-Trust Laws
Designed to prevent or control monopolies that restrict free trade and competition
What is the goal of Anti-Trust Laws?
Make businesses compete fairly and to prevent price fixing
Sherman Antitrust Act
First law enacted to prohibit monopolies and trusts
