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Aging business owner becomes less ambitious and begins to siphon funds from the business. Reaping the benefits of earlier sacrafices.
Transfer of growth interests (common stock or general partnership interests) in a family business by a senior family member who retains other rights (preferred stock or lmited partnership interests.
An S Corporation can issue preferred stock.
What are the forms of business organization?
- Sole proprietorship
- Partnership (general and limited)
- Limited liability company
- C Corporation
- S Corporation
List the issues in selecting a form of business organization.
- Ease and expense of formation
- Flexibility in operations
- Ability to raise capital
- Liability of owners
- Income taxation
- Compensation and fringe benefits for owners
List the four general risk exposures of the closely held business.
- Losses suffered by business property.
- Loss in income or increase in expenses due to losses (consequential or indirect) suffered by the business property.
- Liability to third parties resulting from business activities.
- Personal exposures.
When would a buiness be subject to a loss for property not actually owned at the time the loss occurs?
- Properties that are leased,
- Held for others,
- held as collateral for the business
What is a consequential loss?
Losses that decrease the net income of a business as a result of a direct loss.
- Net income can be decreased for either of two reasons.
- First, the gross receipts may be reduced if operations are curtailed due to a direct loss.
- Second, a firm may be subject to increased operating expenses as a result of a direct loss.
Property loss exposures
- Loss of value of owned assets
- Loss of valueof nonowned assets
- Consequential losses
List nonowned assets that present a property loss exposure?
- Assets bought or sold
- Assets leased
- Assets held as bailee
- Assets held as collateral
List two types of consequential losses.
- Reduced income
- Added expenses
What are the four forms of business enterprises?
- Limited liability company (LLC)
Termination of a proprietorship
- Bankruptcy of the proprietor.
- Legal incapacity of the proprietor.
- Death of the proprietor.
- A change in the law that makes the businewss of the proprietorship illegal.
How is a sole proprietorship formed?
By the owner's transfer of assets to the business.
What are the causes of termination of a proprietorship?
Voluntary acton of the owner.
- By operation of law:
- 1. Bankruptcy of the proprietor
- 2. Legal incapacity of the proprietor
- 3. Death of the proprietor
- 4. A change in the law that makes the business illegal
List the steps that must be taken to form a corporation.
- 1. Select the state in which to incorporate.
- 2. Choose the name for the corporation.
- 3. Prepare preincorporation subscription agreements or contracts to buy the corporation's securities.
- 4. Prepare and file the articles of incorporation.
- 5. Prepare the corporate bylaws.
- 6. Prepare a corporate minutes book, stock certificates, and corporate seal.
- 7. Conduct organizational meetings adn record the minutes.
- 8. Issue the stock certificates.
Explain the extent to which a corporation can can acquire its own stock.
State law determines a corporation's right to acquire its own stock.
Usually it may do so if the acquistion serves a business purpose and it is not detrimental to the owners or creditors (meaning the corporation has adequate surplus).
What are the principal responsibilities of the board of directors?
- 1. Hire and fire officers.
- 2. Delegage management authority to officers.
- 3. Setting officer's compensaiton.
- 4. Make major business decisions.
- 5. Obtain credit for the company.
- 6. Declare dividends.
From what source do officers of a corporation derive their authority?
From the board of directors as spelled out in the corporate bylaws.
How does management of a closely held corporation differe from a publicly traded one?
Management of a closely held corporation is more like that of a partnership than a publicly held corporation. The owners are often heavily involved in day-to-day managment activieis in a closely held corporation. Also, a single majority shareholder often plays many roles.
What is meant by double taxation and how closely held corporations can typically avoid this burden.
Double taxation refers to the fact that earnings of a cropration are subject to taxation at the corporate level and, if pai dout as dividends to the owners, taxed again at the individual level. In a closely held corporation, much of this problem can be avoided by paying the corporate earnings as salaries to the owners. The salary payments are deductible by the corporation if they represent "reasonable compensation," thereby eliminating all or most of hits taxable income. the owners can decide to retain someof the corproate earnings within the company, thereby eliminateing taxation at the level of the individual shareholder.