The legal structure of business enterprises
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UNIT I THE LEGAL STRUCTURE OF BUSINESS ENTERPRISES SECTION A
1.A.1. Read the following texts: THE SOLE PROPRIETORSHIP A sole proprietorship is the simplest form of business ownership. Not surprisingly, the vast majority of small businesses are set up as sole proprietorships. A sole proprietorship has but one owner (sole proprietor, or sole trader) who may engage in any form of legal business activity any time and anywhere. Sole proprietorships are easy to set and maintain. No legal formalities are required to start or operate the business other than securing a local or state business licence. For example, if you are a freelance photographer or writer, a craftsman who takes jobs on a contract basis, or a sales person who receives only commissions, you are automatically a sole proprietor. The owner of the business is responsible for raising and investing funds which may come from the owner’s personal or borrowed financial resources. A sole proprietor keeps all profits derived from the operation, but must also bear all losses. The owner has the authority to make all decisions relating to business, as there are no co-owners, he or she can hire employees or work with independent consultants and still retain the sole proprietorship form of ownership. Unlimited liability is the main disadvantage borne by a sole proprietorship. The owner is financially responsible for satisfying all business debts and/or losses suffered by the firm, even to the point of sacrificing his or her personal property to pay off any liability. A business organized as a sole proprietorship will likely have a hard time raising capital since shares of the business cannot be sold. The life span of the business is also uncertain. As soon as the owner decides not have the business anymore, or the owner dies, the business ceases to exist. THE PARTNERSHIP A partnership (also known as a general partnership) is formed when two or more people agree to work together and carry on a business activity. This agreement can be oral or, otherwise, partners can enter into a written agreement known as the Articles of Partnership. No local or state filings are required to set up a partnership. With regard to taxes, the partnership is not a separate taxable entity, but instead the profits pass through to the partners who pay for them as income tax. The distinguished feature of a partnership is the unlimited liability of the partners. Each partner is personally liable for all the commitments of the partnership, including all debts incurred by any of the partners on behalf of the partnership. For example, Dr. Smith may be one of the ten partners in a medical partnership, he is not responsible for only 10 percent of partnership obligations. He is responsible for 100 percent, even though he owns only a 10 percent interest. If Dr. Smith’s other partners are unable to pay their respective shares, he must pay the entire amount. Because each of the partners has unlimited personal liability, the general partnership is the single most dangerous form for conducting business. Not only is a partner liable for contacts entered into by other partners, each partner is also liable for the other partner’s negligence. THE LIMITED PARTNERSHIP The limited partnership is a legal structure similar to the general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). The GPs in a limited partnership have unlimited joint and several liability for the debts of the partnership. At the same time they have management control and share the profits of the firm in predefined proportions. The LPs are the ones who invest, do not participate in running the partnership and have no management authority. Their liability is limited to the amount of their investment. In the United States limited partnerships are most common in the film industry or in types of businesses that focus on a single or limited term project. They are also useful in “labour-capital” partnerships, where one or more financial backers prefer to contribute money or resources while the other partner performs the actual work. Well-known limited partnerships include Bloomberg L.P. and CNN. Comprehension 1.A.2. Answer the questions based on the texts:
1.A.3. Agree or disagree with the following statements:
single projects. 1.A.4. Complete the text using the words in the box: Requisites for Success positive, profound, light, successful, important, appropriate, sufficient, hard, applicable, tight, considerable, promptly (1) .……. sole proprietors should possess a (2) ….…. outlook and enthusiasm. They should work (3) …….. , particularly during the first several years. They need to be (4) …….. on their feet, (5) .……. responding to customers’ demands. It is (6) …….. for sole proprietors to have (7) ……. education and possess (8) …….. business experience. They should be able to plan, organize and keep (9) …….. financial control. It is recommended that sole proprietors, being self-starters, should select an (10) …….. type of business in which they have both (11) …….. skills and (12) …….. interest. 1.A.5. Match the words with similar meanings:
1.A.6. Choose the noun which collocates with the following groups of verbs, translate the collocations into Russian:
1.A.7. Render into English: Индивидуальное предпринимательство. Индивидуальный предприниматель определяет место своей деятельности и вкладывает в дело свой личный капитал. Все, что ему нужно, - это иметь достаточные для начала дела средства и знать местные законы. Это простейшая и самая дешевая форма предпринимательства. Преимущества: - проще всего начать; - дешевле всего организовать; - самая гибкая структура, ибо в ваших руках все полномочия. Недостатки: - неограниченная личная ответственность за долги и ответственность перед законом; - нестабильность. Ваша болезнь или смерть – угроза для Вашего бизнеса; - бремя ответственности и ограниченность ресурсов; - личные дела легко спутать с бизнесом. Товарищество. Вы и еще один или больше человек согласились объединить свою собственность и создать товарищество. Вам необходимо только составить письменное соглашение о разделе капитала и дивидендов между участниками (Agreement of Capital and Dividends Share) и устав (Statute), где оговорены все положения об управлении товариществом. Для товарищества предусмотрен неограниченный срок деятельности и неограниченная ответственность по крайней мере одного из партнеров. Преимущества: - просто организовать; - рабочая нагрузка, идеи, опыт и ответственность делятся между партнерами; - потенциальные дополнительные источники капитала; - участники не платят корпоративного налога; - каждый из основных партнеров может действовать от имени товарищества. Недостатки: - основные партнеры имеют неограниченную личную ответственность; - в случае банкротства партнеры с наибольшими личными взносами теряют больше; - бывает сложно правильно определить долю участия каждого партнера в делах фирмы; - трудно избавиться от плохого партнера. SECTION B
1.B.1. Read the following texts: THE CORPORATION A corporation (a large company, usually with several subsidiaries) is a separate legal entity set up to conduct business. In modern times corporations have become an increasingly dominant part of economic life. People rely on corporations for employment, for their goods and services, for economic growth and social development. The defining feature of a corporation is its legal independence from the people who create it. If a corporation fails, shareholders will only lose their investment, but will not be responsible for the corporation’s debts and obligations. Their liability will be limited to the value of their share capital, e.i. the amount of cash they have contributed to the corporation. Limited liability greatly reduces the risk for potential shareholders and increases both the number of willing shareholders and the amount of share capital they are likely to invest. The shareholders (who are, in fact, the owners of the corporation) are not directly involved in the day-to-day running of the corporation. Instead, they delegate the management function to a group of qualified professionals, elected by the shareholders and known as a Board of Directors. The assets and the lifespan of a corporation exist beyond the lifetime of its shareholders. This allows for stability and accumulation of capital which becomes available for investment in larger size and linger term projects. STARTING A COMPANY When people start (or set up) companies they have to prepare a set of documents to be filed with the local or state authorities. In the UK these documents include:
There are two types of limited companies – private limited companies (which have “Ltd.” at the end of their name) and public limited companies (which have “PLC” at the end). Shares of private limited companies cannot be sold on the open market unless all the shareholders agree to sell to a particular buyer. The shares of PLCs are publicly traded on the stock exchange. Comprehension 1.B.2. Answer the questions based on the text:
1.B.3. Agree or disagree with the following statements:
1.B.4. Read the text and fill the gaps with the prepositions where necessary: “Large media corporations, together … computer companies such as Microsoft and Intel, are planning to make your computer obey … them instead … you”. Richard Stallman, founder of the Free Software Foundation Bill Gates, born 28 October 1955, is the head (1)… the software company Microsoft and one (2)… the world’s wealthiest men. Microsoft was founded (3)… Gates (4)… the 1970s. In 1981 the company was incorporated (5)… Microsoft, Inc., with Gates (6)… president and chairman. In March 1986 Microsoft held an initial public offering (IPO) (7)… 2.5 million shares which raised $ 61 million. Within a year the stock had risen (8)… $ 28 (9)… $ 85, making Bill Gates a billionaire (10)… the age (11)… 31. The corporation is run (12)… a Board (13)… Directors consisting (14)… ten people. The Board members are elected every year (15)… the annual shareholder’s meeting. With yearly revenues (16)… more than $ 32 billion, Microsoft Corporation is more than the largest software company (17)… the world: it is a cultural phenomenon. The company’s core business is based (18)… developing, manufacturing and licensing software products. The head (19)… Microsoft Bill Gates has a reputation (20)… an intense businessman who typically works 16-hour days and (21)… the first five years (22)… establishing the corporation took only two three-day vacations. His business tactics are known (23)… quite aggressive and are often described (24)… the motto “embrace, extend and extinguish”. Microsoft initially embraces a competing standard or product, then extends it to produce their own incompatible version (25)… the software or standard, which (26)… time extinguishes (27)… competition that does not or cannot use Microsoft’s new version. However, despite (28)… the criticism, (29)… January 2007 The wall Street Journal Reputation Quotient survey came (30)… the conclusion that Microsoft had the world’s best corporate reputation, citing strong financial performance, vision and leadership, and the charitable deeds (31)… the Bill & Melinda Gates Foundation. 1.B.5. Match the term on the left with the definition on the right: 1. subsidiary a. all that belongs to a company and has a value 2. limited liability b. funds raised by a company through the issue of shares 3. authorized share c. document which establishes the internal capital regulations of the company’s activities 4. assets d. company that is wholly or partially owned by another, called the parent company 5. Memorandum of e. a company’s or a person’s debts Association 6. liabilities f. money raised from any transaction or sales 7. revenue g. document giving details of a company’s name, registered office and purpose. 8. Articles of h. responsibility for debts up to the value of the Association company’s share capital 1.B.6. Choose the correct alternative to complete each sentence: If a person or business has more debts than money to pay them, this means they have more (1) …. than assets, and they are (2) …. . If a (3) …. Takes the matter to court, the person or company is declared bankrupt. A bankrupt company goes into liquidation or is wound up. The court appoints a liquidator who realizes (i.e. sells) the company’s (4) …. in order to repay creditors. A failing business can choose voluntarily winding up, in which case it appoints its own liquidator. In America a (5) …. in difficulty can propose a recovery plan, it is then temporarily protected from its creditors and given some time to attempt to solve its problems. A failing business that knows it has no reasonable chance of avoiding bankruptcy should stop trading. Continuing to (6) …. , and building up debts with creditors that will never be paid, is called wrongful trading and is illegal. There are limits to limited liability!
1.B.7. Render into English: Корпорация Создание корпорации – это наиболее сложный и дорогостоящий путь организации бизнеса. Корпорации выпускают акции, которые определяют форму раздела собственности. В закрытых корпорациях лишь немногие люди владеют акциями и торгуют ими непосредственно, а в открытых акции продают любому человеку, желающему их купить, через брокеров. Прежде всего должна быть проведена подписка на акции и подготовлены необходимые для регистрации документы. Далее предстоит получить разрешение властей на создание корпорации с указанием ее прав и ограничений на ее деятельность. Собственность корпорации юридически четко определена в отношении каждого собственника. Собственниками корпорации часто являются не те люди, которые ею руководят (собственниками корпорации являются акционеры, а менеджеры – не обязательно). Цены на акции растут или падают в зависимости от того, насколько хорошо работает фирма и насколько она нравится обществу. Общественное мнение может повлиять на цены почти в той же мере, как и ее работа. Преимущества: - мера ответственности держателей акций ограничена суммой их личных взносов; - преемственность, так как право на собственность может быть передано другим участникам; - проще привлечь капитал; - корпорация не исчезает, если основатель/партнер умирает; - возможность использования знаний и опыта многих людей. Недостатки: - по сравнению с товариществом для обычных корпораций существуют ограничения на пенсионный фонд и отчисления на зарплату; - права акционеров ограничены Уставом, интересы меньшинства часто ущемлены; - очень трудно создать или ликвидировать; - подлежат чрезмерному регулированию; - руководство обычно ориентируется на главных держателей акций и соблюдает их интересы; - меньшая свобода деятельности. 1.B.8. Read the following text. Answer the questions which come after it. Small Business in the USA: An S-Corporation Is not Always Best. It is generally believed that small companies should incorporate as S-corporations. While an S-corporation enjoys many corporate attributes (the main is that the owners of a corporation do not expose their personal assets to corporate liability), it is treated like a partnership for the purpose of determining its Federal income tax liability. At the end of each fiscal year, its total earnings (or losses) are prorated to each shareholder, and these earnings (or losses) are incorporated into their individual income tax returns. Among the advantages of the S-corporation for small business is no “double taxation” – paying an income tax on corporate net income, and then paying an individual income tax on the dividend income subsequently distributed by the corporation. Thus, an S-corporation “generally will not be liable for federal income tax”. If losses are incurred during the start-up period (or any other period), these losses can be deducted each year from the shareholders’ tax returns. All income, losses, credits and deductions are “washed through” an S-corporation at the end of fiscal year, and carried directly to the individual tax return for each shareholder. Being emptied out at the end of each fiscal year, the S-corporation has no retained earnings account. For most small businesses, the S-corporation has long been the preferred corporate structure. The operational accounting is simpler, and accounting, legal and administrative expenses are minimized. Shareholders receive the immediate benefits of earnings without “double taxation”, and the shelter of tax deductive losses on their individual tax returns. There are sound reasons to state that this is generally the most popular corporate structure. However, for small businesses that are growing rapidly, the conventional C-corporation status may turn out to be more preferable. The primary motivation for such a change would be the ability to retain and reinvest earnings in the expanding business. The maximum Federal income tax rate for C-corporation is 34 percent for taxable income up to $10.0 million, whereas the maximum tax rate on S-corporation income is now the maximum individual rate of 39.6 percent. At the other end of the range, the Federal tax on of corporate income of $100,000 is $22,250 for a C-corporation, whereas the incremental tax on this income added to other income of the shareholder in an S-corporation could be as high as $39,600 if the shareholders are already in the maximum tax bracket. If the business is striving to retain and reinvest all possible cash during a period of strong growth, it will obviously forgo distributing cash dividends thereby avoiding the problem of “double taxation”. The maximum tax will be effectively reduced by more than 16 percent, and substantial funds will then be retained to meet the capital needs of the expanding enterprise. Discounting the effects of depreciation charges, this shift of corporate structure yields almost a 10 percent increase in net cash flow. 1.B.9. Answer the following questions:
SECTION C |
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