Учебно-методический комплекс дисциплины «иностранный язык (профессиональный)»
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live without but would be unhappy to give up. How many of those could you produce yourself?
wants. Do you know any of those organizations have developed? 4. Functions of management have been covered in this lecture. Managers will use different styles or techniques in order to carry out these functions. What would you consider to be the style, from the following list, of a manager with whom you are familiar ? autocratic democratic persuasive consultative Does this manager combine styles or use particular styles depending upon the situation? 5. Draw the pyramid structure of part of an organization or department with which you are familiar, inserting job titles where possible. Theme II. Forms of Business Organizations (Sole Proprietorship). Lecture 2. Learning Objectives: An understanding of the material in this lecture should enable the student to
2. Know Business Owner Objectives. 3. Identify the distinguishing characteristics of sole proprietorship. 4. Describe eight primary factors that define how a business is structured and operated. 5.Describe distinguishing Characteristic of Sole Proprietorship 6. Describe the major advantages and disadvantages of sole proprietorship. We begin our education of the business market with a review of the different forms a business can take. The form is fundamental to the way the business operates; how it is taxed; what liability its owners have; how expenses, compensation and benefits are treated; and the problems that the business owner may encounter. Businesses in the United States can be organized in one of three basic legal forms: • Sole proprietorship • Partnerships • Corporations To complicate matters, there are variations of each of these forms. In addition, a hybrid form known as a limited liability company, with characteristics of both a corporation and a partnership, is now available in all states. The following list identifies the 10 forms of business found in the United States: 1. Sole proprietorship 2. General partnership 3. Limited partnership 4. Family limited partnership 5. Professional partnership 6. C Corporation 7. S Corporation 8. Limited liability company 9. Professional corporation 10. Personal service corporation To a financial advisor working in the business market, understanding the differences between business forms is important but not necessarily easy. The differences are not always apparent to the outside observer. In fact, in deciding how a business will be taxed, the Internal Revenue Service looks at how a business operates instead of what it calls itself, and taxes it accordingly. There are eight primary factors that define how a business is structured and operates. These factors are: 1. creation — how the business is started 2. management — how it is managed and operates on a daily basis 3. ownership — who owns the business’s property and assets 4. profit — how the business’s profits and losses are distributed 5. liability — who is accountable for the business’s legal responsibilities 6. taxation — how the business is taxed 7. continuity — the length of the business’s life 8. termination — how the business can be terminated Familiarity with each of these areas will help you understand the unique problems facing your business prospects. A working knowledge of the elements of the business will help you understand what the owner(s) has invested, not just in financial terms, but also in time, energy and emotion. You will develop a better understanding of what your clients have at risk, the concerns they have, and the conflicts they face. This working knowledge of the elements of business will also help you focus your clients on the need to plan for the future. The better you understand the various types of business organizations—their characteristics, advantages, and disadvantages—the better you can identify needs and create solutions. Knowledge breeds confidence, trust, and success. Problems of Closely Held Businesses This lecture focuses on the closely held business, which is defined as a business not traded on a securities exchange and where ownership is not typically available through shares offered for public sale. The business is controlled by a small group of people who are generally involved in the day-to-day operation of the business and who provide services for the business. The owners of a closely held business face numerous problems. Some are inherent in the organizational structure of the small business and others exist in enterprises of all sizes. Many problems facing the business owner, such as survival in the marketplace, are obvious. The business owner may not recognize other problems, such as the reduction in business income resulting from the loss of a key employee due to death or disability, until the incident occurs. Many problems facing the business owner can be avoided, or at least reduced, through proper planning. To plan intelligently to avoid or handle future problems, it is necessary to identify the potential problems and form objectives. Your role as a financial services professional is to help business owners or professionals recognize these problems and to assist in formulating plans that are appropriate for the special needs of each client. The purpose of this chapter is to discuss typical problems faced by the closely held business owner or professional. Possible solutions to these problems will be discussed in subsequent lectures. Choosing the Form of Business Organization Business owners are faced with a number of choices when selecting the form of enterprise. They may elect to operate unincorporated, as a sole proprietorship, a partnership, or a limited-liability company (LLC); or they may incorporate as a regular (C) corporation or as an S corporation. The choice of ownership form is not irrevocable, and owners of existing businesses often decide to change the form as circumstances dictate. For example, the sole proprietor might wonder if the benefits of switching to the corporate form of ownership are worth the costs of incorporation. Or perhaps the owners of an existing closely held corporation are considering what the tax advantages would be if they switched to a subchapter S form of business. The choice of a form of ownership is a complex decision facing all business owners because it will have a significant impact on the initial start-up cost, the control and flexibility in management, the taxation of the business and individual owners, the ability of the firm to raise capital, and the business risks absorbed by the individual owners. Business Owner Objectives. Owners often have several objectives when selecting the form of ownership under which the business will operate: • start-up costs and formalities of operation • control of the business and management • flexibility in business operations • ability of the business to raise funds • limiting the liability of owners from business operations • overall tax burden • business continuity and termination • compensation and fringe benefits The priority ranking of these goals will differ from one individual to the next, but the typical business owner or professional shares all to some extent. The following discussion of forms of business organization will examine how each form of business impacts these objectives. The Sole Proprietorship It is natural to begin with sole proprietorships because they are the simplest and most numerous form of business. There are over 17 million sole proprietorships in this country, representing over 73 percent of all businesses. Thousands of new ones begin each year. More than 90 percent of all sole proprietorships are one-person operations. Most others have a very small number of employees. Less than 8 percent have more than eight employees. Background on Sole Proprietorship By definition, a sole proprietorship is an unincorporated business owned by one person. A sole proprietor may run the business directly or may hire others to run it, but ultimately it is the sole proprietor’s decisions that determine the firm’s destiny. Typically, a sole proprietor performs most of the major functions such as overall manager, sales manager and finance manager. Since the proprietor is the sole owner of the business, there is generally no need for any agreements or formalities. The proprietorship has its roots in the earliest days of commerce. In primitive economic society, each person depended for survival on his or her own work. This system gave way to the first age of specialization. In those days, there was no such thing as life insurance and disability income insurance. When the proprietor became disabled or died, the family was suddenly destitute. There were no alternatives, no preplanned solutions. Today’s proprietor lives a much more complex life precisely because specialization has created a highly interdependent business community. Although an electrical contractor may be self-employed, he or she cannot survive without the work of thousands of other people in hundreds of other organizations that produce tools and equipment that are a contractor’s stock in trade. The interdependence of business organizations provides you with the greatest opportunity for endless-chain prospecting among business owners. You can get referrals to a proprietor’s suppliers, to the supplier’s customers, and to their suppliers, without end. There is a large existing network that can be tapped. Distinguishing Characteristic of Sole Proprietorship The majority of sole proprietorships today operate on a relatively small scale, where the capital and credit of one person is adequate. The real distinguishing feature of a sole proprietorship is not size; it is the unlimited and unshared responsibility of the sole owner. Advantages of Sole Proprietorship Why choose this form of business rather than another? What are the advantages of sole proprietorships? Simplicity—Starting a sole proprietorship is relatively simple. This is probably why such a large proportion of all businesses are proprietorships. The only legal formalities are applying for appropriate state or local permits and licenses and filing a special certificate if the sole proprietor intends to operate the business under a name other than his or her own. Similarly, no legal action is required to terminate a sole proprietorship. When a sole proprietor wants to quit for whatever reason, he or she simply satisfies any outstanding contracts and financial obligations and takes on no new business. Autonomy—Autonomy is one of the hallmarks of the sole proprietorship. Far more than any other form of business, the sole proprietorship exemplifies one of the advantages and glittering attractions of going into business alone: freedom of action. There is no boss to criticize a sole proprietor’s work. There is no partner who must be consulted on decisions and who may begrudge splitting the profits. There is no board of directors to second-guess the decisions of the sole proprietor or enforce a distasteful policy. Neither is there partnership agreement, a corporate charter from the state, or corporate bylaws to limit the scope of the sole proprietor’s powers. At will, the owner may expand operations or contract them, move to another location, seize or ignore opportunities, sell or liquidate. In short, the proprietor may do virtually whatever he or she wants. Sole Gain—Related to this aspect of the proprietorship is the fact that all profits belong to the sole owner. Just as all of the responsibilities of the business fall solely on the owner, so do all the benefits. There are no partners to share the proceeds. There are no stockholders to claim dividends. Single Tax—The sole proprietor and the sole proprietor’s business are taxed as a single unit. The sole proprietor files Form 1040, and along with it Schedule C ("Profit or Loss from Business or Profession"). All profits of the business are personal income to the sole proprietor even any portion not withdrawn. There is no separate federal income tax reporting for the proprietorship. This is known as pass-through taxation. Shelter Income—Along with other forms of business, the sole proprietor enjoys the tax advantage of reducing taxable income by charging off costs of doing business as "expenses." Not all "expenses" are actual expenditures. Depreciation expenses are the best example of this advantage. A business may have a profit of $25,000 in terms of actual gain over actual operating costs. On the tax report, however, the owner can deduct depreciation of buildings and equipment. Depreciation doesn’t necessarily mean the equipment or building is wearing out; it just means that the business owner can deduct the cost of the equipment over a prescribed period of time. If depreciation totals $10,000 this year, the proprietor pays income tax on only $15,000 instead of $25,000. Disadvantages of Sole Proprietorship Operating as a sole proprietorship has a number of disadvantages. Most of these disadvantages spring from the very feature that makes the sole proprietorship form of business so attractive-the complete identity of the business with its owner. Limited Resources—one disadvantage is that of limited resources. The capital available to a sole proprietorship is limited by the personal financial resources of the owner and his or her ability to obtain credit and borrow money. The sole proprietor has no way to raise funds from outside investors without ceasing to be a sole proprietorship. For this reason, sole proprietorships generally are not practical in large business ventures that demand major capital inputs. The sole proprietorship form also is limited in terms of business talent and ability. The success of the business generally is tied to the ingenuity, initiative, resourcefulness, and managerial abilities of the sole owner. Even if a sole proprietor is a skilled manager, the business probably will decline any time this person is sick or disabled. In addition, a sole proprietor typically would be reluctant to undertake projects that require a variety of specialized technical skills Unlimited and Unshared Liability—Another drawback to the sole proprietorship form of business is that the sole proprietor’s financial liability is unlimited and unshared. There is no distinction between the sole proprietor’s business assets and liabilities and his or her personal assets and liabilities. In the event of business failure, creditors can come after personal assets and business assets, as they are one and the same. If the sole proprietor dies or becomes disabled, and if there isn’t adequate insurance or other funds to pay off the debts and pay an income to the family, the family can be completely wiped out financially. There is no legal protection against the claims of business creditors. While the law permits creditors to make claims on all of the sole proprietor’s material assets, it protects the owner’s family by protecting the owner’s life insurance. Both the death benefits and the cash values of the policies are generally untouchable by creditors-with the U.S. Government being the major exception. This could literally be the only asset the proprietor is allowed to keep. This protection against the claims of creditors is strong motivation toward the purchase of life insurance, especially cash value life insurance. Business Dies with the Sole Proprietor. No disadvantage of a sole proprietorship could be more significant to a financial advisor than the fact that—without planning—the business dies when the sole proprietor dies. This means that the family’s source of income is cut off. The sole proprietor’s need here is life insurance to continue the family’s income. It doesn’t matter whether this is called personal insurance or business insurance; it is life insurance that allows the family to maintain itself and meet its financial obligations. In general, state laws provide that all of a sole proprietor’s business activities cease at the owner’s death. Unless the sole proprietor’s Last Will and Testament expressly states that the business may be continued, it almost certainly will be terminated at the owner’s death. Even with a will, the business may not survive without planning. All assets pass into the exclusive possession of the personal representative of the deceased’s estate to be administered under the supervision of the appropriate courts. The laws provide further that the personal representative must pay all of the business and personal debts of the proprietor and liquidate any remaining assets. (Personal representative is a generic term used instead of executor, executrix, administrator or administratrix.) Only essential transactions are permitted after the owner’s death. If the personal representative continues to run the business and enters into transactions not approved by the courts, the representative is held personally liable for any losses incurred as a result. If the deceased had included a ’hold harmless’ clause in the will, the personal representative will not be held liable for losses incurred. Whose Price? “Business owner, if you were in a position today where you had to sell your business, you would want to do it at your price rather than at the buyer’s price. Isn’t that so? “Chances are you don’t want to sell out, but the day might come when your family must sell. When that day comes, they would rather sell at their price. But unless you take action while you’re here, they might have no choice but to sell at the buyer’s price. “Wouldn’t it make sense to guarantee your price so this won’t happen?” Given these facts, the personal representative is not likely to want to continue the business. In the absence of advance planning and legal authorization, it is unlikely that the business will be sold as a going concern (an intact operating business). Lack of planning, therefore, usually means heavy financial losses because assets must generally be sold piecemeal under forced-sale circumstances. Buyers hold all the advantages in a forced-sale situation. The deceased’s personal representative needs cash to settle the estate and therefore must sell the assets. Life insurance on the sole proprietor will provide the personal representative with cash to settle the estate taxes and other debts. This means that there will now be time to sell the business. The pressure will be off, and the personal representative can get a better price for the business. As mentioned, the business can be continued if the deceased’s will give such authorization. Without authorization in the owner’s will or through a court, the personal representative would be foolish to try to continue the business because it is a no-win situation. That is, the personal representative would be personally responsible for any losses but could not pocket any gains. Barring authorization through the will, the business legally could be continued only if all of the proprietor’s heirs are adults who agree to the continuation, – and if there is enough cash to pay administration costs and death taxes. If one or more of the heirs is a minor, continuation of the business would require assent of the trustee/guardian and authorization by the courts. Even with authorization, the heirs might do a bad job of running the business. For example, considering the heirs’ lack of experience, suppliers may not extend credit. Customers may not come back. Despite this, someone may decide to continue the decedent’s business, even without legal authorization. This might be the decedent’s personal representative, a family member, an employee, or some combination of interested individuals. Only rarely, however, does a sole proprietorship continue to operate profitably after losing the experience and expertise of its owner. Even if the heirs have the legal authority to continue the business, they may have little or no practical chance to succeed. |
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