Business Organization September 29, 2009

The Three Kinds of Organization Single Proprietorship Partnership Corporation

Most businesses are small. But most business is done by big businesses. Most small businesses fail within their first five years. John Kenneth Galbraith claimed that North American business is characterised by oligopoly rather than competition.

Time Warner, Disney, Murdoch, Bertlemann and Viacom (formerly CBS)

Detecting Oligopoly: the `four-firm concentration’: UK supermarkets: 74.4% UK brewers: 85% US music:80% US breakfast cereals: 80-90% US auto top three: 60% US computers:65% Counterexample: Internet porn

The Single Proprietorship Advantages: Simple Total Control Can use money as you like Disadvantages: Can lose all you own Limited capital Limited expertise

The Single Proprietorship Advantages: Simple Total Control Can use money as you like Disadvantages: Can lose all you own Limited capital Limited expertise

Cash Flow Problems You have an idea that can make $ in the first year, for an investment of $ But you have to get the $ first. How? i)Buy on credit Can do this explicitly, or just pay bills late. Either way costs about 25% plus loss of good will. Many suppliers offer a 2% discount for prompt payment.

Cash Flow Problems You have an idea that can make $ in the first year, for an investment of $ But you have to get the $ first. How? i)Buy on credit ii)Talk to the bank Bank will ask, ``What’s the collateral?’’ Mortgageable property? Track record? If not, they charge a risk premium.

Cash Flow Problems You have an idea that can make $ in the first year, for an investment of $ But you have to get the $ first. How? i)Buy on credit ii)Talk to the bank iii)Government help Bureaucratic overhead, may not be worth it.

Partnership AdvantagesDisadvantages More capital Easier Credit More Talent Retain Valuable Employees Liable for debts Limited Credit Arguments Frozen Investment

Liability for Debts The general partners are jointly and severally liable for the debts of the partnership. The only way to get out of this is to be a limited partner. The partnership may include the names of the general partners in the firm’s name, but not the word `Limited’ A partnership must be registered according to the law in the province.

Incorporating AdvantagesDisadvantages Limited liability More capital Professional management Costs money Corporate Tax Lack of privacy Loss of Control

Registration In BC, you have to submit a Memorandum of Association to the Registrar of Joint Stock Companies. This specifies who is applying, the amount of share capital, and the responsibility for debt. (If the shareholders’ liability is limited, the word `Limited’ must be the last word in the company name. Some provinces have a slightly different system, the letters patent.

The Corporation A corporation is a business which is legally distinct from its shareholders; that is, a corporation can owe money without its shareholders being responsible for the debt. Corporations are of two kinds, public and private. A private corporation has between 3 and 50 shareholders, and shares can be transferred only with the approval of the Board of Directors. The public must not be invited to buy shares. A public corporation can have as many shareholders as it likes and can sell shares to anyone.

Tax Advantages and Disadvantages Once you are incorporated, that part of the firm’s income that comes to you gets taxed twice – once at the corporate rate, once as it goes from the corporation to your pocket. Nevertheless, you can use incorporation to reduce the tax you pay….

Tax Advantages and Disadvantages Company (Pre-tax) Company (After-tax) You 25%

Tax Advantages and Disadvantages Company (pays wages) You 60%

Tax Advantages and Disadvantages Company You

Selling Shares Once you’re a corporation, how do you actually go about selling stock? For a small company, you usually have an investment banking firm act as an intermediary. They will market your shares and take a cut – perhaps 25% -- to pay for their efforts. If you’re a big company, the investment banker may underwrite the stock, that is, guarantee to buy all you want to sell. How much stock can you reserve for yourself?

Accounting A company needs to monitor its internal cash flows so it can diagnose its state of health. The two most important monitoring documents are the Income Statement and the Balance Sheet. These must be available to be checked by independent auditors, and made available to potential investors. Several diagnostic instruments can be applied to the accounting data.

Current AssetsFixed Assets

Current Liability Long-Term Liability Owed this year Owed in the more distant future

Diagnostics Current ratio = Total Current Assets Total Current Liabilities Working capital = Current Assets – Current Liabilities

Diagnostics Acid-test ratio = Cash & Accounts Receivable Total Current Liabilities (After-Tax) MARR = After-Tax Profits Total Assets