Small Business Management #6

Sources of Capital

(There is no one best way to finance a business) 1. Personal Capital 2. Equity Capital - Capital that is invested or available in the ownership of a business. Capital received for an interest in the ownership of a business. - It is considered to be less risky than a loan because you don't have to pay it back. 3. *Debt Equity / Debt Capital / Borrowed Capital* - Any borrowed or loaned capital invested in the business must be repaid by creditors.

Distribution of initial investment

*Fixtures* - Fitting fastened to a building in such a way that they are considered to be a part of it *Equipment* - Property of a relative permanent nature that are not intended for resale.

Advantages of a Sole Proprietorship

- Ease of starting - is the easiest legal form of business ownership to start of the ones we will talk about. Simplest and cheapest way to start an operation. - Low cost of organization. - Freedom to manage and promptness of action- the owner can make decisions and take action without delay. No interference from partners, shareholders or directors. - Profit incentive - the real motivator, which increases the satisfaction of working for oneself and makes it easier to bear the long hours of hard work. Has title to all business assets. - Secrecy. - Owner usually knows the employees and customers personally - this is due to the small size of the business. - Unique credit standing - because the sole proprietor's nonbusiness assets are available to business creditors, the credit standing of such businesses may well be excellent.

Lawyers

-Use a lawyer after carefully reading all documents that would pertain to your purchasing a business - The lawyer should go over all agreements before you signed any documents.

Mortgage

A claim given by the borrower to the leader against the borrower's property in return for a loan.

Commercial Loans

A debt based funding arrangement that a business cans set up with a financial institution.

Trade Credit

A form of credit that is extended by one business to another business to help finance distribution of producer's goods. "Buy now, pay later"

Proprietorship / Sole Proprietorship

A legal form of ownership whereby the business is owned and operated by one person who bears unlimited liability for the enterprise

Mortgage Loan

A loan secured by a mortgage on property

Limited Liability Company (Not Corporation / LLC)

A new form of business ownership (approved in most states since approximately 1994); Which combines aspects of partnerships with the limited liability of a corporation; owners known as members. - LLC's are popular vehicles for family owned businesses and professional service organizations. - It has grown in popularity because it offers the simplicity of a sole proprietorship and the liability protection of a corporation. - According to many attorneys the LLC is usually the best choice for new businesses. - It is important to check the special requirements of each state because they vary in some aspects.

Limited Partner

A partner in a limited partnership who is not active in its management and has limited personal liability.

General Partner

A partner in limited partnership who has unlimited personal liability.

Limited Partnership

A partnership with at least one general partner and one or more limited partners. (This is a specialized form of organization that are used by small firms).

Stock

A share in the ownership of a corporation.

S Corporation / Subchapter S Corporation

A type of corporation that offers limited liability to its owners but is taxed by the federal government as a partnership. I.E. - Permits the business to retain limited liability feature of a C Corporation while offering more favorable tax treatment on income.

Partnership

A voluntary association of two or more people who have combined their resources to carry on as a co-owners of a lawful enterprise for their joint profit. - Because it is of a voluntary nature, the owners can set it up quickly - It avoids many of the legal requirements involving a corporation. - There is the ability to share the workload as well as the emotional and financial burdens of a business and gain management talent that might otherwise break the budget. - Some believe personal conflicts (that are common) in partnerships more than offset the benefits as partners often fall short of one another's expectations.

Articles of Partnership

A written document that states explicitly the rights and duties of partners in a partnership.

Determining the Amount Necessary To Finance

*Line of Credit* - An understanding between a bank and the business indicating the maximum amount the bank is willing to loan.

Sole Proprietor

*Most basic business form* An individual who owns a sole proprietorship and is considered to be self-employed

Corporation

An artificial being invisible, intangible and existing in contemplation of law; an entity that has a distinct existence separate and apart from the existence of its individual members.

C Corporation

An ordinary corporation

Venture Capitalists

Anyone that invested in or financially or sponsors a new business

Factoring

Obtaining cash before payments are received from customers by selling off one's accounts receivables to a third party.

Small business Administration

Offers a variety of loans for various purposes.

Angel Investors

Private investors willing to supply financing for new and/or risky small private venture start-ups.

State and Regional Development Commissions

Provides incentives and programs providing grants, tax credits, etc.

Board of Directors

The governing body that us elected by the stockholders of a corporation.

Stockholder

The holder of a person owning stock in a corporation

Corporation Charter

The written application for permission to incorporate that is approved by a state official.

Using A Business Broker

There are paid professionals who will be glad to help you as much as you want.

Disadvantages of a Sole Proprietorship

1. *Unlimited risks* - there are no limits on the owner's personal liability. I.E. the owner has unlimited liability. 2. *Unlimited Liability* - Liability on the part of the owner extends beyond the owner's investment in the business. 3. Limited Size - May outgrow this legal form of business ownership 4. Limited Life - The death of the owner terminates the legal existence of a sole proprietorship. Also, if the owner becomes badly injured in an accident and hospitalized for an extended period of time the business could be ruined. 5. Limited Management Ability - The owner is the jack of all trades 6. Limited opportunities for employees - many will use this type of a business as a stepping stone for other employment. 7. Difficulty in raising capital - most money comes from the owner.

Types of Capital Needed

1. *Working Capital / Circulating Capital - The differences between current assets and current liabilities. 2. *Fixed Capital* - Long term capital that is invested in the small business; also, funds invested in such long-term assets as: land, building, machinery, furniture, fixtures and other equipment.

Advantages of Partnerships

1. Combined management, talent, and capital. There is pooling of managerial talents and capital. 2. Easy to form - legal requirements are often limited to registering the name of the business and purchasing any necessary permits. Also, the voluntary nature allows the owners to set the partnership up quickly. 3. Efficiency of labor - the ability of the partners to share the workload as well as emotional and financial burdens of the enterprise. 4. Each partner contributes his goodwill - general partners are very concerned with the operation of the business. 5. Possible retention of valuable employees 6. Possibility of raising more capital - partners can pool their funds. 7. Has a good credit standing - banks and suppliers may be more willing to extend credit standing - banks and suppliers may be more willing to extend credit or grant larger loans to a partnership over a sole proprietorship.

Advantages of a C Corporation

1. Continuity in existence even if the owner leaves the business or dies 2. Ease of ownership - Allow for many owners 3. Limited liability for directors, officers, shareholders and employees 4. Large financial capability and unlimited growth potential 5. Specialized Management 6. Is a legal entity

Advantages of LLC

1. Corporate like limited liability and asset protection 2. Flexibility of partnership 3. No significant requirements 4. Tax status of partnership 5. Less record keeping

Disadvantages of a S Corporation

1. Formation and on going expenses - to operate as an S Corporation, it is necessary to first incorporate the business by filing Articles of Incorporation with your desired state of incorporation, obtain a registered agent for the company and pay the appropriate fees. 2. Cannot have more than 100 shareholders 3. Closer IRS scrutiny 4. Owners sometimes have to pay taxes on profit distributions that they do not receive if profit is reinvested back into the company.

Disadvantages of LLC

1. If not properly structured, can be taxed as "C" Corporation 2. Must have limited life (usually 30 years) 3. Self-employment taxes 4. Due to newness, there is no well developed body of case law or IRS rulings

Disadvantages of Partnerships

1. Lack of continuity (limited life) - A partnership is legally ended upon the death, withdrawal or insanity of a partner. 2. Decisions binding on both parties - If one business partner makes a business decision, even when they don't consult other partners, all partners are responsible for the one partner's business decision. 3. Frozen investments - It is easy to invest money in a partnership, but sometimes hard to get out. 4. Unlimited liability of general partners. 5. Managerial difficulties because leadership is shared - Many people believe that the personal conflicts that are common in partnerships more than offset the benefits and partners often fall short of one another's expectations. So decision making is more complicated in a partnership 6. Possibility of unsatisfactory division of profits because of ability and effort put forth.

Disadvantages of a C Corporation

1. Legal restrictions on activities 2. Separation of ownership and control 3. Lack of personal interest 4. Double taxation 5. Lack of privacy 6. Difficult to create

Advantages of a S Corporation

1. Protected assets - An S Corporation protects the personal assets of its shareholders 2. Pass through taxation - an S Corporation does not pay federal taxes at the corporate level. Any business income or loss is "passed through" to shareholders who report it on their personal income tax returns. 3. Tax-favorable characterizations of income - S Corporation shares-holders can be employees of the business and draw salaries as employees. 4. Straightforward transfer of ownership - Interests in an S Corporation can be freely transferred without triggering adverse tax consequences. 5. Heightened credibility - Operating as an S Corporation may help a new business establish credibility with potential customers, employees, vendors and partners because they see the owners have made a formal commitment to their business.

Ways To Make Financing More Affordable

1. Separation the real estate ownership from the business ownership, so the new owner leases rather than purchases the building assets. 2. Leasing equipment, furniture and fixtures. 3. Selling off excessive inventories, if any, in an orderly fashion. 4. Factoring accounts receivable.

Legal Entity

A business organization that is recognized by laws as a separate legal being.

Collateral

Stocks, bands or other property that is given to a lender of money to hold a pledge that the loan will be repaid.

Finance

The business function of effectively obtaining and using funds