Form of Bussiness

7/31/2019 Form of Bussiness

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BUSINESS ORGANIZATION

Meaning: Art of establishing effective coordination, technique

of efficient operations, concerned with the study of methods and procedure, purpose of earningprofits, covers different functions of business

Objective:EfficiencyDivision of work

Delegation


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Functions:ProductionMarketingFinancePersonnel

Significance: Facilitates administrationEnsures specializationFacilitates growth & diversification


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Social Responsibility:Causes:

Public opinions

Trade union movementConsumerismEducationPublic relation

Managerial resolutionsRationale:Long term self-interest of businessEnsuring law & orderMaintenance of free enterpriseCreation of societyMoral justificationProfitable opportunitiesSystem interdependence


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Areas:Utilization & conservation of national resource

Promoting the interest of various groups in societyTo work within the framework of the lawsEnvironmental planningPhilosophy of the Country

ResponsibilityInternal: Shareholders Workers

External:ConsumersSuppliersGovernmentCommunity


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PROMOTION OF BUSINESS

Meaning: Promotion begins when, an idea is conceived,

preliminary & detailed investigation, feasibility of the idea, provision of funds & resources

Entrepreneurial decisions:Choice of form of businessFinancing prepositionSelection of line of businessProject reportLocation of businessSize of unitMachines & equipmentsLabour force


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Legal Forms ofBusiness

Sole Proprietorships Partnerships Corporations

General Partnership

Limited Partnership

Master Limited

Partnership

Regular Corporation

Subchapter S

Corporation(S-Corporation)


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Sole Proprietorship -- Advantages

Ease of StartupLittle legal documentationNo co-owners to consult

Least expensive to startPride of OwnershipRetention of profitsNo Business Income Tax

Ease of formation & dissolutionDirect motivation & incentiveQuick decision & prompt actionSecrecyFlexibility in management


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Sole Proprietorship -- Disadvantages

Unlimited LiabilityLimited Life Business ends when ownerleaves the business

Limited Access to Start-up CapitalLimited Access to CreditLimited Management ExpertiseDifficulty in Hiring EmployeesProprietor not considered an employee


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Partnership


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Partnerships

Two or more ownersLeast numerous form 7.7% of allbusinesses

Partnership AgreementSpecifies rights and obligations of partnersIf written, called the Articles of Partnership

(Articles of Co-partnership)


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Partnership -- Advantages

Greater Access to CapitalGreater Access to CreditRetention of ProfitsMore Management ExpertiseNo Business Income Tax


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Partnership -- Disadvantages

Shared ProfitsUnlimited Liability for General Partners Each partner has Agency power Limited Life

Business ends when any partner withdrawsManagement Disagreements

Frozen Investment


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Types of Partners

General PartnerUnlimited LiabilityAssumes Management Role

Limited PartnerLiability limited to InvestmentMay not take active managerial role

Every partnership must have at least onegeneral partner


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Types of Partners

General PartnershipAll partners are general partners

Limited PartnershipOne or more limited partners

Master Limited PartnershipOwned & managed like a corporation

Taxed like a partnershipShares may be sold


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General Partnership

A partnership can be defined as anassociation of 2 or more persons to carry onas co-owners a business for profit . Partnerships are quasi-legal entities: they canhold title and exercise certain property rightsbut partnerships cannot sue in their own nameand do not pay taxes.

Partnerships are regulated in all states (exceptLouisiana) by the Uniform Partnership Act,which controls many aspects of thepartnership but allows the partners to modify

some provisions.


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General Partnership

The financial issues (and other aspects ofoperation of the partnership) arecontrolled by the partnership agreement

(or articles of partnership), whichdescribes the manner in which thepartnership is run and the responsibilitiesof the partners.

The partnership agreement must providefor the formation, maintenance, anddissolution of the partnership (because allpartnerships end).


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General Partnership

The liability of partners is "joint and several";each partner is considered to be the agent ofthe other, and thus all partners are liable forthe acts of a single partner.A partnership pays no taxes; it is a conduit fortax purposes. The partnership does file afederal tax return, on Form 1065; this formreports the partnership's income, itsexpenses, and the partners' profit (or loss).There are distinct advantages anddisadvantages to going into a partnership arrangement.


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Advantages

Generally higher earnings than solo optometristsShared overhead, less capital outlay per partner

compared to solo optometristsOffice coverage during vacations, illness, personalholidaysConsultation with partners for business and patient

management decisionsExpanded hours, convenience for patientsInvestment in career protected and equity establishedfor retirement, disability, or death


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Loss of independence

Personality conflicts with partners or the spousesof partnersDifferences in professional ideas andphilosophiesUnequal distribution of patient loadUnequal distribution of income based onproductivity of the partners

Disadvantages


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Company:PromotionIncorporation or RegistrationFloatation or Capital SubscriptionCommencement of Business


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Advantages :Limited liabilityEase in management with a teamBetter reputation

Disadvantages :High regulation formalitiesLate decisions

Partnership:Combination of capitalLabour & specialized skill or managerial talentTwo or more personsCarry on business jointly


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Advantages:Facility of formation

Scope of individual abilityProtection of minority interest

Disadvantages: Limited resources

Limitation on capital & organizing powerRisks of implied authorityLack of public confidence

Types :

Partnership at willParticular partnershipJoint ventureLimited partnership


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Kinds of Partners:Active or working partnerSleeping or dormant partnerNominal partnerPartner in profits onlySub-partnerLimited partnerPartner by estoppels or holding out

Rights of Partners:Take part in managementBe consulted in business mattersHave access to & to inspect & copy any of books of the firmShare profit & lossesEntitled to get 6% interest on capital p.a. in anyloan to firmTo retireTo act in emergency


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Duties of Partners:

Must observe good faith towards other partnerIndemnify the firm for any loss by his fraud andwillful conductBound to attend diligently to his duties

To hold & use the property of the firm for thepurpose of business onlyJointly & severally liable for all debtsTo act within his authority


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COMPANY

Complex form of business organization, permanentexistence, limited liabilities, common seal toauthorize

Advantages:

Large recoursesLimited liabilitiesContinuity of existenceEfficient management

Transfer of shareDemocratic set up


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Disadvantages :

Difficult in formationSeparation of ownership & managementSpeculation of shareLack of secrecy

Fraudulent managementDelay in decision making

Classification :On the basis of incorporation :

IncorporatedUn-incorporated


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On the basis of liability:

Limited liabilityUnlimited liability

Nationality:IndianForeign

On the basis of number of members: PublicPrivate

Independence:IndependentHoldingSubsidiary


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Ownership:Government

Non-GovernmentCo-operative Organization :

Limited meansProfit not a motive

VoluntarilyCommon interestFeatures:

VoluntaryEqual voting rightsDemocratic managementImportance to service motiveSales on cash basisDistribution of dividend


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Advantages: Open membershipService MottoCheaper ratesDemocratic managementLow management costSurplus shared by members

Disadvantages: Lack of capitalLack of unity among membersPolitical Interference


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PUBLIC ENTERPRISE

Concern owned & managed by the state or anypublic authority, social interests, nationalized orsocialized industry, government undertaking,known as Public Sector

Advantages: Growth of key & heavy industriesAvoidance of uncertaintyPlanned progressGreater

Better & cheaper productsPrevents the concentration of wealthStrengthens the defense measuresHelps in distribution of essential goods


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No exploitation of labourcapital or managementPreservation of national wealth

Disadvantages :GreaterBetter & cheaper production is a mythTop heavy administration

Nepotism and favoritismDelay in decision

Importance: Creation of the social basis facilitates balanced

economic growthSpeed up the pace of industrializationRemove regional economic imbalancesEquitable distribution of wealth


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SIZE OF BUSINESS UNIT

Refers to scale of its organization operationsSize of Business:

Scale of organization depends on nature of business & market

Combination of recoursesMeasures of Size:

Net worthTotal Assets

EmployeesPower & materials usedValue of output


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Industrial Location:

Development of industry at specific place dependson needed means of industryFactors affecting location: Physical Factors:

Availability of raw material,PowerClimatic conditions

Economic Factor :Labour

TransportCapitalSale centersBanking


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Political Factor:Peace & security

Government policyWebers theory of Location : enunciated by Prof.

Alfred Weber of Germany in 1909, causes influencelocation

Primary:Cost of landBuildingPower labour

TransportSecondary:

Deviation from transport cost


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Criticism:

Unrealistic approachMore selective than deductiveStudy of only transport and labourRest factors not included

More importance to technical aspectsFlorences theory of Industrial Location: Approach of theory:

Localization coefficient

Localization multiple


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Criticism :

Incapable of explaining industrial location,No significance of quantity producedNo attention toward the local characteristicsDifficult to calculate the tendency on the basis of multiples

Plant Layout : Plan of installing of plant & machineryObjectives:

Best production on minimum costMaximum utilization of movable & immovable

propertyProviding best servicesSafety against accidents


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Factors affecting Plant Layout :Weight of materials & products

Form of the machinesCheckingProspective needs of the factoryMinimum shifting

Type of Plant Layout:Line (product) layout, (Process) functionalProduct process layout

Techniques of Plant Layout :Process flow chartProcess flow diagramMachine data cardsTemplateScale model layout


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Business Combination:Combination of various units for common objects

Objects:Reduction in the costDevelopment of mutual co-operating feelingLarge scale production

Regulating the marketReasonable return of investment

Advantages :Economy & finance

Economy in administrationEconomy in distributionEconomy in productionMaintaining selling price


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Advantages:Rise of big businessOver capitalizationExploitation of labour

Unequal distributionKinds of Combination:

HorizontalVertical

LateralCircularDiagonal


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Cause of Combination:Elimination of competition & Price WarEconomics of large scale businessEffects of trade cyclesRise of joint stock companiesTechnical progress


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Professional Associations

or Corporations


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Corporations are artificial creations of law,endowed with certain characteristics:

right of perpetual successionseparation of ownership and management

transfer of ownership through sale of sharesof stockright to hold title, sue, claim tax benefitsobligation to pay income taxliability for acts or omissions of employees


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Corporations enjoy certain advantages anddisadvantages when compared to other types

of business organizations: Advantages

Tax benefits (deductible insurance, retirementplans)Medical expenses reimbursement plansEmployee insurance plansSick payBetter administrative organizationTransferability of ownershipContinuity of existenceLimitations on legal liability


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Disadvantages

Cost of formation and operation arecomparatively greaterIncreased taxes (35% for PAs and PCs)Accumulated earnings tax (39.6% over

$150,000)Increased retirement plan costsGreater business complexity

Loss of independenceDisclosure requirements comparativelygreaterLicensees with different degrees (OD and MD)cannot be shareholders in some states


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Articles of incorporation are filed in the state by the

incorporators (only one is needed) to describe thepurpose of the corporation, its stockholders, and itsmanagement.

In a professional association (PA) or corporation(PC) the PA or PC may be formed by one or morelicensed professionals, who constitute both ownershipand management. Only licensed professionals canown stock and serve on the Board of Directors;however, non-professionals can be Officers.


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Structure of Corporations

Shareholders(owners)

electBoard of Directors(long term management)who electOfficers(day-to-day management)

S f P f i l


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Structure of ProfessionalAssociations/Corporations

Shareholders(owners; may be one person;must be professional licensee)

electBoard of Directors(long-term management; may be one person;must be professional licensee)

who electOfficers(day-to-day management; may be one person; doesnot have to be professional licensee)


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The PA or PC is responsible for its contracts, debts,and the negligence of its employees.

The shareholders (owner) are not responsible fordebts or liability claims, although in a one licenseePA or PC if the licensee is negligent he or she will beindividually responsible and the PA or PC will also

be responsible as employer.


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PAs or PCs pay a federal income tax; a "double tax" ispossible, if the PA or PC has a profit (35% bracket)

and the shareholder-employee is paid a salary (10% to35% bracket). PAs or PCs must file an annual taxreturn, on Form 1120.

Most states also charge an income tax for corporations.In Alabama, for example, the tax rate is 5% of taxableincome.

A business privilege tax is also levied in Alabamaagainst corporations and LLCs, at the rate of $1 per$1,000 of taxable income, or a minimum of $100.


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Subchapter S Corporations


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Small corporations may elect to be taxedunder Subchapter S of the tax code.S Corporations pay no income tax, rather

being taxed in the same manner as apartnership or LLC.Shareholders of an S Corporation do not haveto be like-kind professional licensees; thus anoptometrist may share ownership withanother professional (such as an optician) ornonprofessional (such as a spouse). An S Corporation is limited by law to 100


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To create an S Corporation, first abusiness corporation must be formed,then it must elect Subchapter S status.The election must be unanimous amongthe shareholders.The election must be made during the first

month of the tax year (or in the monthpreceding).


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Because an S Corporation pays no taxes, itavoids the "double tax" imposed onearnings of a PA or PC. Employees of an SCorporation are paid salaries, on which

individual income tax is imposed.Employees of S Corporations mayparticipate in tax-deferred retirement plans,such as Keogh defined benefit and definedcontribution plans, and 401(k) plans, thusproviding tax benefits similar to thoseoffered by PAs and PCs.


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Potential tax savings can be realized in an SCorporation by the payment of dividends (areturn of profit earned by the business) to theowners.

If an annual dividend is paid, although theamount is subject to income tax, it is notsubject to Social Security/Medicare tax.Example: after all expenses and salaries arepaid, there is a profit of $20,000, which istaxable income for the 2 owners but notsubject to Social Security/Medicarewithholding.This represents a savings of 15.3%, which isthe Social Securit /Medicare tax ercenta e


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Tax writeoffs are not the same for SCorporations as for PAs and PCs; for example,life and disability insurance premiums may bededucted by a professional association orcorporation, but not by an S Corporation.Liability is similar to that of a professionalassociation or corporation: an optometrist-

shareholder is not personally liable for thenegligence of another optometrist-shareholder; rather, the S Corporation isresponsible.


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Corporations

Generally larger than other forms (Except forS-Corporation)

20.1% of all U.S. Businesses

Account for 87.1% of all U.S. Business IncomeConsidered a separate legal entity

Owners called Stockholders or Shareholders

Ownership evidenced by Stock Certificate Governed by Board of Directors


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Corporations -- Advantages

Limited LiabilityEase of Ownership TransferUnlimited Life

Greater Access to CapitalSpecialized Management Expertise


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Corporations -- Disadvantages

More difficult & costly to formRequires a Corporate Charter

Subject to greater governmental scrutiny

Diluted earningsDouble taxation

C ti


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Corporations vs.Sole Proprietorships

SP CorpIncome $1,000,000 $1,000,000Expenses 500,000 500,000EBT $500,000 $500,000

(Assume Business Tax Rate = 50%)Business Tax 0 250,000Net Profit $500,000 $250,000

(Assume a 30% Personal Tax Rate)Personal Tax 150,000 75,000$ to Owners $350,000 $175,000


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Corporate Charter

Legal Permission to Operate as aCorporationIssued by state

May not conduct business as a corporationwithout a charter


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Contents of a Corporate Charter

Company Name & AddressNames & addresses of IncorporatorsPurpose of the Corporation

Maximum amount of stock & Classes of Stockto be issuedRights & Privileges of stockholders

Length of time the corporation is to exist


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Stockholder Rights

Common StockVotes in corporate mattersOne vote per share owned

Preferred StockNo voting rightsDividend claims are paid 1 st

Dividend

Distribution of earnings to the stockholders ofa corporation

Organizational Chart


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Owners/ Stockholders/ Shareholders

Chief ExecutiveOfficer (CEO)

Board of Directors

President

SeniorVice President

Vice PresidentFinance

Vice PresidentProduction

Vice PresidentMarketing

Vice PresidentHuman Resources

Organizational Chart


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Types of Corporations

Government-Owned Corporationaka Public Corporation Owned & operated by governmentPost office, NASA, FDIC

Quasi-Government Corporation Aka Quasi -Public Corporation Privately owned, government controlled monopolyPublic utilities, Fannie Mae, Freddie Mac, SallieMae

Private CorporationOwned by individuals or other companies


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Not-For-Profit CorporationOrganized to provide a social, educational,religious, or other serviceHabitat for Humanity, Red Cross

For-Profit CorporationClosed CorporationStock owned by relatively few peopleStock not sold to general public

Open CorporationStock is bought and sold on security exchangesCan be purchased by any individual


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S-Corporation (Subchapter-S Corporation)Corporate structure designed for small businessTaxed as a partnership if there are 75 or fewerstockholdersNo non-resident alien stockholdersOnly one class of stock

Limited-Liability Company (LLC)Combines the benefits of a corporation &partnershipNot limited to 75 stockholders


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Mergers & Acquisitions

Hostile takeoverTypes of mergers

Horizontal: Similar products / services

Vertical: Different but related firmsConglomerate: Completely different industriesMerger Trends

Divestiture

Leveraged Buyout (LBO)

Form of Bussiness

Documents

Transcript of Form of Bussiness