Chapter 4

Master Limited Partnership (MLP)

-A master limited partnership (MLP) is a publicly-traded limited partnership. With a master limited partnership, limited partners still get the tax advantage and they are not liable, but these advantages are now combined with liquidity since MLPs are traded like equities. -An MLP must generate 90 percent of its revenue from natural resources. This can pertain to energy pipelines, energy storage, commodities, or real estate. The quarterly distributions to limited partners stem from cash flow. This is a positive because cash flow is seen as steady.

Uniform Partnership Act

-The Uniform Partnership Act was created in 1914 by the National Conference of Commissioners on Uniform State Laws (NCCUSL). As of the latest iteration of the act, 44 states and districts in the U.S. abide by it, including the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.1 The Uniform Partnership Act only applies to general liabilities and limited liability partnerships (LLPs). It does not apply to limited partnerships (LPs). -The intended goal of the Uniform Partnership Act is to provide guidance to various business relationships. This typically applies to small businesses and loose partnerships as larger businesses have detailed agreements in place that govern any changes in a business. The act governs how a partnership is created, the fiduciary duties of the partnership and its partners, and defines partnership assets and liabilities.

privately held company

A company that raises capital by selling their securities directly to investors rather than the general public.

public corporation

A corporation in which stock is sold to anyone who has the means to buy it

Joint Venture

A joint venture is a partnership established for a specific project or for a limited time. ii. The partners in a joint venture may be individuals or organizations, as in the case of international joint ventures. iii. Control of a joint venture may be shared equally, or one partner may control decision-making.

Sarbanes-Oxley Act

A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate.

Alien Corporation

An alien corporation is a corporation that was created in another country but is doing business in the U.S. The term is generally only used in the U.S., where other countries do not refer to U.S.-based corporations doing business internationally as alien corporations.

Elements of A Corporation

Board of Directors 2 types of stock: preferred and common

Incorporators

Individuals who sign the incorporation papers for a newly formed corporation.

semi-independent business

Partially free from outside control; not wholly depending on another's authority.

Why would secrecy in operating a business be important to an owner? What form of organization would be most appropriate for a business requiring great secrecy?

Secrecy is important to business owners because they do not want their competitors to learn their trade secrets. A sole proprietorship would probably be most appropriate for a business requiring great secrecy because the secret can be kept by the owner.

Model Business Corporation Act

The Model Business Corporation Act (MBCA) is a model act prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association. In 2002, it was followed by 24 states. The MBCA has been influential in shaping standards for United States corporate law.

Corporate charter

a legal document that the state issues to a company based on information the company provides in the articles of incorporation

General Partner

a partnership that involves a complete sharing in both the management and the liability of the business.

chartering the corporation

a specific procedure for incorporating a business. Most states require a minimum of 3 incorporators.

common stock

stock whose owners have voting rights in the corporation, yet do not receive preferential treatment regarding dividends

vertical merger

the combination of two or more firms involved in different stages of producing the same good or service

horizontal merger

when firms that make and sell similar products to the same customers merge

B Corporation

Also know as a benefit corporation, in which the company is legally required to adhere to socially beneficial practices, such as helping consumers, employees, or the environment

What affects how a business operates?

It's legal form determines how much it pays in taxes and how much control its owners have.

Corporate Raider

investor conducting a type of hostile corporate takeover against the wishes of the company

1. Name five advantages of a sole proprietorship.

1. Sole proprietorships are easy and inexpensive to form. 2. Sole proprietors do not have to discuss their operating plans with anyone. 3. All profits from a sole proprietorship belong to the owner. 4. A sole proprietor has direct control of the sole proprietorship and can make decisions without anyone else's approval. 5. Sole proprietorships have the most freedom from government regulations

List two different types of partnerships and describe each.

A general partnership is a complete sharing in the management of the business, and each partner has unlimited liability for the debts of the business. A limited partnership has at least one general partner who assumes unlimited liability and at least one limited partner whose liability is limited to his or her initial investment. A limited partner does not participate in the management of the business.

Examples of Sole Proprietorships

Amazon, Microsoft, Google, Disney and Under Armor.

Merger

Combination of two or more companies into a single firm a. A merger occurs when two companies combine to form a new company i. Horizontal merger: When firms that make and sell similar products merge. ii. Vertical merger: When companies operating at different but related levels of an industry merge. iii. Conglomerate merger: When firms in unrelated industries merge. b. Not all mergers are pleasant.

The most common example of a cooperative is a farm co-op. Explain the reasons for this and the benefits that result for members of cooperatives.

Cooperatives are organizations composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization. Farm co-ops are beneficial because they can purchase supplies, such as fertilizer and seed, in large quantities at discounted prices and pass the savings on to member farmers. They also store and market grain, help distribute members' products more efficiently than each farmer could on an individual basis and advertise members' products. They allow farmers to save money and to earn a higher profit.

1. Which form of business requires the most specialization of skills? Which requires the least? Why?

Corporations allow the most specialization of skills. Sole proprietorships probably require the least specialization; sole proprietors must be able to "wear many hats" and perform many functions. The number of employees in a corporation allows for a high degree of specialization, whereas a sole proprietorship with a small number of employees cannot afford the specialization possible in a larger company.

Types of Corporations

Domestic Corporation Foreign Corporation Alien Corporation Private Corporation Public Corporation Quasi-public Corporations Nonprofit corporations

Etsy and the sole proprietorship

Etsy takes a percentage of sales and provides online services to 2 million sellers of more than 50 million products. women make up 87% of Etsy sellers.

Which form of business organization has the least government regulation? Which has the most?

Sole proprietorships have the least government regulation. Public corporations have the most regulation.

Private Corporation

-a corporation owned by just one or a few people who are closely involved in managing the business -Often family and they own all of the corporation's stock and no stock is sold to the public. -not required to disclose financial information -must pay taxes.

white knight

A more acceptable firm that is willing to acquire a threatened company

Differentiate among the different types of corporations. Can you supply an example of each type?

A private corporation is owned by just one or a few people who are closely involved in managing the business. These people, often a family, own all of the corporation's stock, and no stock is sold to the public. Examples will vary, but Levi Strauss & Co. is a private corporation. The stock of a public corporation is not held in the hands of a few persons. Instead, its stock may be bought, sold, or traded by anyone. Wal-Mart, IBM, Apple, and ExxonMobil are public corporations. Quasi-public corporations such as NASA or the U.S. Postal Service are owned and operated by federal, state, or local governments. Nonprofit corporations are not owned by the government and focus on providing a service rather than earning a profit. The University of Southern California, the American Red Cross, and Greenpeace are examples of such organizations.

preemptive right

A provision in the corporate charter or bylaws that gives common stockholders the right to purchase on a pro rata basis new issues of common stock (or convertible securities).

Preferred stock

A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do.

articles of incorporation

Articles of incorporation are a set of formal documents filed with a government body to legally document the creation of a corporation. Articles of incorporation generally contain pertinent information, such as the firm's name, street address, agent for service of process, and the amount and type of stock to be issued.

shark repellant

Management requires a large majority of stockholders to approve a takeover

merger mania

Merger mania is a catch-all phrase used to describe bouts of frenzied deal-making activity, often at the top of the merger and acquisition (M&A) cycle. It is associated with companies paying crazy prices, financed by excessive levels of debt, in a desperate attempt to quickly boost revenues and profits.

Sole Proprietorship

Ownership: A business owned by one person Taxation: Individual income taxed Liability: Unlimited Use: Owned by a single individual and is the easiest way to conduct business The most common form of business organization in the US but they net far fewer sales and less income. Examples: retailers, restaurants, hair salons, flower shops, dog kennels, and independent grocery stores. Also, direct selling such as Mary Kay, Avon, etc. Most sole proprietorships focus on services rather than the manufacture of goods as that requires a lot of capital generally not available to small businesses. Generally owned by women. Typically employ fewer than 50 people.

Partnership

Ownership: A business that has two or more owners who share the business. Taxation: Individual owners' income taxed Liability: Somewhat limited Use: Easiest way for 2 individuals to conduct business

Corporation

Ownership: An entity owned by many stockholders. Taxation: Corporate and shareholder taxed Liability: Limited Use: A legal entity with shareholders or stockholders

Limited Liability Company (LLC)

Ownership: Unlimited number of shareholders Taxation: Taxed as a partnership (individual owners' income taxed) Liability: Limited Use: Avoid personal lawsuits i. A limited liability company (LLC) is a form of business ownership that provides limited liability but is taxed like a partnership. ii. A major reason for using the LLC form is to protect members' personal assets; they are also flexible, simple to run, and do not require the members to hold meetings, keep minutes, or make resolutions.

S Corporation

Ownership: Up to 100 shareholders Taxation: Taxed as a partnership (individual owners' income taxed) Liability: Limited Use: A legal entity with tax advantages for restricted number of shareholders i. An S corporation is a form of business ownership that is taxed as though it were a partnership. ii. Advantages include simple taxation, limited liability of shareholders, perpetual life, and ability to shift income and appreciation to others. iii. Disadvantages include restrictions on the number (75) and types (individuals, estates, and certain trusts) of shareholders and the difficulty of formation and operation.

Stock

Shares of a corporation that may be bought or sold.

Compare the liability of the owners of partnerships, sole proprietorships, and corporations.

Sole proprietors have the greatest liability because, as sole owners, they have no one to share the burden with if they fail or are sued. General partners also have great liability, but it is shared among all the general partners. The liability of limited partners and corporate stockholders is limited to their initial investment.

Contrast how profits are distributed in sole proprietorships, partnerships, and corporations.

Sole proprietorships keep all profits and decide how to use them. In a partnership, profits are distributed to the owners in the proportions specified in the articles of partnership. Corporate profits are distributed to the owners in the form of dividend payments, but only after all other expenses have been paid.

1. Would you rather own preferred stock or common stock? Why?

The answer depends on what type of involvement in the firm the stockholder desires. Preferred stock owners receive a fixed dividend before common stockholders can receive any dividends on their shares. The disadvantage of preferred stock is that their owners have no voting right to elect the board of directors. Although common stock owners receive no preferential treatment in the distribution of profits, they do get to vote on members of the board of directors and other important issues relevant to the operation of the firm.

Initial Public Offering (IPO)

The first public offering of a corporation's stock.

Global Dividend Index

The index is comprised of 100 common stocks from around the world that offer high dividend yields. The index is part of the S&P Dividend Opportunities Series which aims to provide income-seeking investors with exposure to global high-yielding common stocks while meeting diversification, stability, and tradability requirements.

Taken Private

The process by which a publicly held company has its outstanding shares purchased by an individual or by a small group of individuals who wish to obtain complete ownership and control.

What are the three principal forms of organizing a business?

The three primary forms of business that we will examine are sole proprietorship, partnership, and corporation

Limited Partnership

a business organization that has at least one general partner, who assumes unlimited liability, and at least one limited partner, whose liability is limited to his or her investment in the business 1. Limited partnerships exist for risky investment projects where the chance of loss is great. a. Limited partners are barred from participating in the management of the business, but they share in the profits. b. A master limited partnership is a limited partnership traded on securities exchanges ex: law & accounting firms.

domestic corporation

a corporation in the state in which it is chartered.

Board of Directors

a group of individuals, elected by the stockholders to oversee the general operation of the corporation, who set the corporation's long-range objectives

leveraged buyout

a purchase in which a group of investors borrows money from banks and other institutions to acquire a company (or a division of one), using the assets of the purchased company to guarantee repayment of the loan a. is the purchase of a company by a group of investors with borrowed money, using the assets of the company to guarantee repayment of the loan. i. Merger mania is what happened in the 1980s and 1990s during a prolonged wave of mergers and acquisitions. ii. Some people view mergers and acquisitions favorably, pointing out that they boost corporations' stock prices and market value, to the benefit of their stockholders. iii. Mergers can be controversial, with critics arguing that they hurt companies because management has to focus excessively on avoiding takeovers.

Corporations

a. A corporation is a legal entity created by the state, with assets and liabilities distinct from those of the owner of the corporation. i. Legally, a corporation has many of the rights, duties, and powers of a person, including the right to receive, own, and transfer property. They can enter into contracts with individuals or with other legal entities, and they can sue and be sued in court. ii. Represent the majority of sales and income in the U.S. iii. Corporations are typically owned by many individuals and organizations who own shares of the business, called stock. Thus, corporate owners are called stockholders or shareholders. 1. Stockholders can buy, sell, give or receive as gifts, or inherit their shares of stock. 2. Stockholders are entitled to all profits that are left after all the corporation's other obligations have been paid; these are distributed in the form of cash payments called dividends. However, some corporations may retain profits to expand the business

acquisition

a. An acquisition occurs when one company purchases another usually by buying its stock. i. Corporate raider: A company or individual who wants to acquire or take over another company and first offers to buy some or all of its stock at a premium in a tender offer. ii. Poison pill: The firm allows stockholders to buy more shares of a stock at lower prices than the current market value to head off a hostile takeover. iii. Shark repellant: Management requires a large majority of stockholders to approve a takeover. iv. White knight: A more acceptable firm that is willing to acquire a threatened company.

Disadvantages of Sole Proprietorship

a. Disadvantages of Sole Proprietorships i. The sole proprietor has unlimited liability in meeting the debts of the business; if the business cannot pay its obligations, the owner's personal, nonbusiness holdings might have to be used to pay the debt. ii. Limited Sources of Funds 1. There are a limited number of financial sources from which the sole proprietor can borrow (bank, friends, family, and the Small Business Administration). 2. Additionally, sole proprietors might have to pay higher interest rates on funds borrowed from banks than do large corporations because they are considered higher risks. 3. The proprietor may have to pledge personal assets to guarantee loans. iii. The sole proprietor must be able to perform many functions and possess skills in diverse areas such as management, marketing, finance, accounting, and personnel. iv. The life expectancy of a sole proprietorship is directly related to that of the owner and his or her ability to work. v. It is usually difficult for a small sole proprietorship to offer the same wages, benefits, and advancement possibilities that are often found in a large corporation. vi. Taxation 1. Under current tax rates, sole proprietors pay a higher marginal tax rate than do small corporations on income of less than $75,000. 2. The tax effect often determines whether a sole proprietor incorporates the business. b. An example of a sole proprietorship might be an entrepreneur opening up a delicatessen. As a sole proprietor, he keeps his profits but is personally responsible for all risks and financial obligations.

foreign corporation

an existing corporation (or other type of corporate entity, such as a limited liability company or LLC) that conducts business in a state or jurisdiction other than where it was originally incorporated. The term applies both to domestic corporations that are incorporated in another state and to corporations that are incorporated in a nation other than the United States (known as "alien corporations"). All states require that foreign corporations register with the state before conducting business in the state.

tender offer

an offer to purchase the stock of a firm targeted for acquisition at a price just high enough to tempt stockholders to sell their shares

company

any organization engaged in a commercial enterprise and can refer to a sole proprietorship, a partnership or a corporation

S corporation

corporation taxed as though it were a partnership with restrictions on shareholders

Quasi-public corporations

corporations owned and operated by the federal, state, or local government. The focus is to provide a service to citizens, such as mail delivery and NASA, rather than earning a profit.

inside directors

directors who are employees of the company

outside directors

directors who are not company employees

cooperative business (co-op)

i. A cooperative (co-op) is an organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization. Examples are Oglethorpe Power Corp., Ocean Spray, and REI. ii. The co-op is set up not to make money for itself but to help its members make money. iii. The most common example of a co-op is found in farming or agricultural organizations. iv. Purchasing, distribution, and advertising savings can benefit the co-op members.

Creating a Corporation

i. A corporation is created under the laws of the state in which it incorporates, a procedure sometimes referred to as chartering. 1. In most states, the company name must end in "company," "corporation," "incorporated," or "limited" to show that the owners have limited liability. 2. The individuals who create the corporation are known as the incorporators. 3. Articles of incorporation must be completed and filed with the appropriate state office (often the secretary of state). 4. Articles of incorporation contain basic information about the business, including: a. Name and address of the corporation. b. Objectives of the corporation. c. Classes of stock (common, preferred, voting, nonvoting) and the number of shares of each class of stock to be issued. d. Expected life of the corporation (usually forever). e. Financial capital required at the time of incorporation. f. Provision for transferring shares of stock between owners. g. Provisions for the regulation of internal corporate affairs. h. Address of the business office registered with the state of incorporation. i. Names and addresses of the initial board of directors. j. Names and addresses of incorporators. ii. Based on the information in the articles of incorporation, a corporate charter is issued by the state to create the corporation. The then owners establish the corporation's bylaws and elect a board of directors.

Articles of Partnership

i. Articles of partnership are legal documents that set forth the basic agreement between partners. ii. Usually specify the money or assets each partner has contributed to the partnership (called partnership capital); each partner's individual management role or duty; how the profits and losses of the partnership will be divided among the partners; and how a partner may leave the partnership and any other restrictions that might apply to the agreement.

Advantages of Partnership

i. Ease of Organization 1. Starting a partnership requires little more than drawing up articles of partnership. 2. The name of the partnership should be registered with the state. ii. Availability of Capital and Credit 1. When a business has several partners, the partnership can rely on a combination of talents and pooled financial resources. 2. Partnerships tend to be larger than sole proprietorships and thus have greater earning power and higher credit ratings. iii. Partnerships can provide diverse skills because partners are able to specialize in their areas of expertise. iv. Small partnerships can react quickly to changes in the business environment. v. The partnership has fewer regulatory controls over its activities than the public corporation.

Keys to Successful Partnerships

i. Keeping profit sharing and ownership equal ii. Partners' skill sets should complement each other iii. Honesty is critical iv. Maintain face-to-face communication v. Maintain transparency vi. Be aware of funding constraints so one partner does not get stuck with additional debt vii. To be successful, you need experience. So, tailor your business to your skills. viii. Family should be a priority, try to minimize business problems so you can enjoy your family. ix. Do not fall in love with "the idea" and forget to actually implement the idea. x. Be optimistic but also realistic in terms of sales, growth, and planning.

Taxation of Partnerships

i. Partnerships are quasi-taxable organizations, which means they do not pay taxes; the individual partners report their share of the profits on their individual tax returns and are taxed at the ordinary income tax rate for individuals.

Disadvantages of Corporations

i. The corporation pays taxes on its income, and stockholders pay taxes on the dividend distributions they receive from the company. ii. The formation of a corporation can be costly and may require the services of an attorney. iii. Financial and other proprietary information must be disclosed to shareholders, creditors, and the Securities and Exchange Commission (SEC)—which oversees the securities of corporations—and competitors may be able to access these documents. iv. Employee-Owner Separation 1. Non-owner employees may feel that their work benefits only the owners. Employee stock ownership plans (ESOPs) give shares of the company's stock to employees to help create more of a partnership between the company and the employees and to boost productivity

Advantages of Corporations

i. The owners' maximum liability or potential loss is equal to their original investment. ii. Stockholders can sell or trade shares of stock without causing the termination of the corporation. iii. The corporation may continue its existence forever or until the owners agree to sell it or to liquidate its assets. iv. External Sources of Funds 1. Long-term funds can be raised more easily by a public corporation than by partnerships or sole proprietorships. 2. The firm can raise new funds by selling new shares or bonds to the public. v. Readily available external financing makes it easier for a business to expand into national and international markets.

Advantages of Sole Proprietorship

i. They have the advantage of a simple management structure and the ability to make quick decisions. ii. Ease and Cost of Formation 1. requiring only state and local licenses and permits where applicable. 2. An entrepreneur starting a new sole proprietorship must find a suitable site from which to operate the business. Many small businesses started out in their founders' garages. iii. Sole proprietorships have the advantage of secrecy as operating plans and financial reports do not have to be disclosed to others. iv. All profits from the business belong to the owner. v. The proprietor has complete control over how the business is run. 1. This control allows the proprietor to respond quickly to competitive conditions or to changes in the economy. vi. Sole proprietorships have the greatest degree of freedom from government regulation.1. Nonetheless, proprietors must ensure that the follow all laws that do apply to their business. ii. Taxation 1. Profits from the business are considered the personal income of the sole proprietor and are taxed at individual tax rates. 2. The sole proprietor can also establish a tax-exempt retirement or profit-sharing account, which is exempt from current income tax. iii. A sole proprietorship can be dissolved easily; the only legal condition is that all loans must be paid off.

Disadvantages of Partnership

i. i. Limited partners have no voice in management and bear most of the risk of the business. ii. Partnerships may be subject to disagreements when the goals and objectives of one partner change; many partnership disputes wind up in court. iii. Unlimited Liability 1. In general partnerships, the general partners have unlimited liability for total debts the business incurs; this disadvantage increases if one partner has greater personal financial resources. 2. The disadvantage is reduced for limited partners, who can only lose their initial investment. iv. All partners are responsible for the business actions and decisions of all other partners. i. Life of the Partnership 1. A partnership is terminated upon the death or withdrawal of a partner. 2. In very large partnerships, provisions for continuation of the partnership may be provided for in the articles of partnership. 3. Selling a partnership interest has the same effect as the death or withdrawal of a partner, and it is difficult to place a value on the partner's share of the partnership. ii. The distribution of the profits as specified in the articles of partnership may not reflect each partner's contribution. iii. Limited Sources of Funds 1. There are limits to sources of funds (capital) available to a partnership because there is no public value placed on the business. 2. Partnerships may have to pay higher interest rates on borrowed funds than do large corporations because they may be considered greater risks.

Tax Policy Center (TPC) is officially the Urban-Brookings Tax Policy Center

is a nonpartisan think tank based in Washington D.C. A joint venture of the Urban Institute and the Brookings Institution, it aims to provide independent analyses of current and longer-term tax issues and to communicate its analyses to the public and to policymakers. TPC combines national specialists in tax, expenditure, budget policy, and microsimulation modeling to concentrate on five overarching areas of tax policy: fair, simple, and efficient taxation, social policy in the tax code, business tax reform, long-term implications of tax and budget choices, and state tax issues.

Dividends

profits of a corporation that are distributed in the form of cash payments to stockholders

poison pill

the firm allows stockholders to buy more shares of stock at prices lower than the current market value

conglomerate merger

the joining of firms in completely unrelated industries

BV

the most frequently used legal entity in the Netherlands for business purposes and is equivalent to a LLC.

partnership capital

total money and property contributed by partners for permanent use by the partnership