Corporation and Its Relationship

Before you read

Vocabulary task

1. The word ‘business’ can be surrounded by other words in various patterns. Use dictionaries to fill in the table below according to the patterns given.

noun/adjective + ‘business’	“business’ + noun	verb + ‘business’
coal business …	business address …	to set up a business …

2. Word building: complete the following table with the appropriate derivatives.

Verb	Noun	Adjective
	fluctuation
	influence
	structure
	reflection
	availability
	mobility
	finance
	selectivity
	legality
	requirement

Key terms

1. Choose the Russian equivalents for the English terms in the left-hand column.

1) legal structure	a) индивидуальное предпринимательство
2) tax law	b) партнёрство
3) capital	c) передача собственности
4) sole proprietorship	d) форма собственности
5) partnership	e)коммерческая страховая ответственность/страховая ответственность предприятия
6) corporation	f) налоговое обязательство/ начисленный налог
7) business liability	g) корпорация
8) tax liability	h) коммерческая тайна
9) ownership transfer	i) налоговое законодательство
10) business secrecy	j) капитал
11) form of ownership	k) организационно-правовая форма (компании)

2. Match up the terms from Ex. 1 with their definitions on the right.

1) tax law	a) a business structure in which an individual and his/her company are considered a single entity for tax and liability purposes, i.e. there is no legal distinction between the owner and the business
2) business liability	b) a nominate contract between individuals who agree to carry on an enterprise, contribute to it by combining property, knowledge or activities and share its profit
3) tax liability	c) a form of business organization which is chartered by a state and given many legal rights as an entity separate from its owners
4) sole proprietorship	d) a responsibility resulting from breach of a duty or an obligation arising from an action or a failure to take action in a normal cause of a business
5) partnership	e) an area of legal study dealing with rules applicable to taxation
6) corporation	f) a legal form of an organization i.e. how it is defined and established in law
7) legal structure	g) a debt to the government incurred by a tax payer after credits and payments are made

Think ahead

1. What is more attractive to you to work for a start-up or for corporation?

2. Do you agree that “to be successful, you have to have your heart in your business, and your business in your heart”? (Thomas Watson)

3. What skills does going into business require?

Text 1.1 Read the text and answer the question: Why is it very important to make the right decision on choosing the legal structure of your business?

Business Ownership Selection

Before you enter the complex arena of business and its myriad of laws which influence your freedom of choice and mobility of action, you must first choose the legal structure for your business that will best suit your needs and the needs of your particular business. In order to intelligently select the legal structure for your business, you must ask yourself, “What are my alternatives?”

There are many reasons today for an owner or would-be owners of businesses to look at the legal structure of their firms. The changing tax laws and fluctuating availability of capital are just two situations which re­quire managers to review what legal structure best meets their needs.

There are three principal kinds of business structures: the sole proprietorship (the sole trader), the partnership and the corporation. Each has certain general advantages and disadvantages, but they must all be weighed to reflect your specific cir­cumstances, goals and needs. Which of the forms is right for your business depends on the type of business you are going to run, on how many owners you have and on your financial condition. There is no choice that would suit every business. Business owners have to pick up the structure that best meets their needs. There are several important factors to consider:

– potential risks and liabilities of your business;

– formalities and expenses involved in establishing and maintaining various business structures;

– income tax liability;

– investment needs;

– degree of control over retaining the business;

– possibility of transferring ownership;

– degree of secrecy,

To appreciate these considerations, each form of ownership in relation to these important factors is to be examined.

Concept check

1. Which two reasons can justify caution in selecting a legal structure of the business?

2. What are main kinds of business structures?

3. What factors should be taken into account in choosing a legal structure for your business? Add to the list.

READING II

SOLE PROPRIETORSHIP

Before you read

Key terms

1. Choose the Russian equivalents on the right for the following English words and word combinations on the left.

1) loan institution 2) credit standing 3) bankruptcy claim 4) personal asset (assets) 5) bank loan 6) operational problem 7) corporate income tax

a) кредитоспособность b) заявление о банкротстве c) налог на прибыль [доход] корпорации, корпоративный налог на прибыль d) проблема деловой активности e) кредитное учреждение f) кредит, банковская ссуда (заём) g) личное имущество (активы)

2. Match up the terms on the left with their definitions on the right. Translate the terms into Russian.

1) asset 2) income 3) profit 4) shareholder/ stockholder 5) wage 6) salary 7) dissolution 8) recession

a) money gained in business; excess of revenue over expenses b) anything owned by a person, a company that has money value and may be sold for debts c) slowing of business and industrial activity d) total sum of money received during a given period e) an owner of shares in a company f) fixed regular payment (monthly or quarterly) for professional or office work g) the closing down or dismissal of an assembly, partnership, or official body; disintegration h) payment made or received for manual work or service, esp. on daily, hourly, weekly or piece-work basis

Think ahead

If you were to establish a small business such as a restaurant, would you prefer to be the only owner of it? Why?

Text 1.2 Read the text, give brief characteristics of а sole proprietorship and list its advantages and disadvantages.

Special Appeal to a Start-up

A sole proprietorship is a business owned by one person. It offers a special appeal to those just starting in business because it provides a form of own­ership where proprietors can own and operate a business for their own profit. Most sole proprietors own and manage businesses such as restaurants, drug stores, corner grocery shops, beauty parlours, construction firms and farms.

Sole proprietorships enjoy many advantages which are the reasons why the sole proprietorship has become the simplest form of business ownership in terms of its organisation and registration. Sole proprietorships operate under the simplest tax structure afforded to individuals, they avoid the often higher and more complex corporate taxes. As the owner's personal assets and in­come are evaluated by loan institutions, the credit standings of sole proprietorships are often excellent. Just as easy are the steps required to dissolve a sole proprietorship. The only requirement is to insure that all debts are paid. The sole proprietor can decide when to operate, when to take a vacation, and for how long, when to expand or open a new entity, which people to hire, what mer­chandise to purchase, and many other planned and on-the-spot decisions. This flex­ibility gives the sole proprietor a wide range of freedom. All after-tax profits are for the sole use of the sole proprietor. This is a real moti­vator, which helps increase the satisfaction of working for oneself (being self-employed). A sole proprietorship offers the most confidential method of operation. Because there are no stockholders and board of directors, there is no need for annual reports and for routinely sharing information with others. In addition to this finan­cial secrecy, operational secrecy is also provided, which makes it difficult for com­petitors to copy the proprietor’s strategies.

Compared to the advantages, there are relatively few disadvantages for a sole pro­prietorship, although the disadvantages that do exist are important. In a sole proprietorship, all assets, both business and personal, are subject to claims of business creditors. This condition is calledunlimited liability, which is the main disadvantage of sole proprietorships. It is an advantage when a sole proprietor wants a bank loan. But it is a distinct disadvantage, should a sole proprietor claim bankruptcy. In fact, a large percentage of small businesses fail each year, and the owners lose their businesses, including their personal assets. A sole proprietorship is not permanent. When the owner dies, the business is auto­matically dissolved. If the business is passed on to family members, a new propri­etorship must be formed. Sickness or a serious accident on the part of the owner could also create operational problems for a sole proprietorship and thus force it into dissolution.

In addition, sole proprietorships are very vulnerable during recessions. They are limited in size to the amount of capital raised by the owner through loans. The lack of capital may also cause operational disadvantages. A sole proprietorship may have to be situated in poorer locations and may not be able to attract em­ployees. For this reason, a business requiring large amounts of capital should not be organised as a sole proprietorship. In a sole proprietorship, employees are limited in many ways: wages and salaries are often lower and there is little room for advancement. Therefore, it is common for good employees to work for larger competitors or to start their own business. It is important to remember that having and keeping competent em­ployees is a key to the success of any business.

Most new sole proprietors know the product and service technology of their business but are not competent managers. The sole proprietor must have skills in pricing, buying, promotion, sales, personnel, finance, etc. Larger businesses, whether corporations or partnerships, will have many specialists to make decisions in these areas. Sole proprietors must do everything themselves. Often, they must rely on out­side consultants or seek additional training.

Concept check

1. What type of entrepreneurs is the sole proprietorship most suitable to? Why?

2. What spheres of economy are the most attractive for this form of business organisation?

3. What are the advantages and disadvantages of a sole proprietorship. Look back at the text and fill in the charts.

4. What skills must a sole proprietor have?

5. Match up the half-sentences on the left with those on the right.

1) The sole proprietorship is usually defined as 2) The proprietor is not required 3) A small business owner might select 4) If a sole trader succeeds, 5) The individual proprietor is responsible for 6) The enterprise may be terminated

a) upon illness or death of the owner. b) the sole proprietorships to begin with. c) to share profits with anyone. d) the business which is owned and operated by one person. e) he/she can form a partnership or corporation. f) the full amount of business debts.

6. Read each statement and decide whether it is true or false. Explain your choice.

1) To set up a sole proprietorship is rather expensive.

2) There are no co-owners or partners to consult in a sole proprietorship.

3) The liability of the sole proprietors extends to all their assets.

4) A sole proprietorship is the most widespread form of a small business organisation.

5) The lack of capital may also cause operational disadvantages.

6) In a sole proprietorship, employees have unlimited liability.

READING III

PARTNERSHIP

Before you read

Key terms

Match the terms on the left with the definitions on the right and give their Russian equivalents.

1) expertise 2) expense 3) earnings 4) associate 5) real estate 6) wholesale 7) retail sale

a) sales of goods to the general public b) land and buildings c) sales of goods to shopkeepers for resale to the public d) money received in return for work e) an outflow of money to another person or group to pay for an item or service f) a person who has been joined with others in work g) expert skill or knowledge in a particular field

Think ahead

What business is the most suitable to: a small shop, a firm of solicitors, a large commercial bank? Explain your viewpoint.

Text 1.3 Read the text and identify different kinds of partners.

Professional Services? – Yes

Apartnership is a form of business organisation in which two or more owners are associated. It is similar to a proprietorship in most respect, except the number of owners. A partnership may be based on a written contract. It is unwise for anyone to enter a partnership without a careful and clearly written contract. Typically, lawyers, doctors, accountants, and other professional services can form partnerships. However, finance, real estate, and insurance firms rank first, and wholesale and retail establishments rank second in the total number of part­nerships. Partnerships are not well suited for large businesses.

Partnerships are classified as either general or limited.General (unlimited) partnershipsare the most common type of partnerships. This form of partnership is owned by general partners who are usually active in the business and who must assume un­limited liability. Limited partnerships, in contrast, must contain at least one general partner who must assume unlimited liability for all business debts and limited partners. Limited partners are attracted to this form of partnership because it offers them an opportunity to invest their capital without being involved in active management. In fact, limited partners are forbidden by law to participate in the management function. Limited partnerships do offer general partners the possibility of raising additional capital without giving up managerial control of the business.

General and limited partners can also be secret, silent, dormant, or nominal. The type of a partner an individual chooses depends largely on the degree of involvement the individual wants in the partnership or the types of expertise he or she brings to the business. Secret partners are active in the business, but are not known to the general public. Silent partners are known to the general public, but are not active in the management of the business. Often these partners are local or national celebrities. A dormant partner is neither active in management nor known to the public. This type of partner is often a limited partner. Nominal partners invest no capital in a partnership and thus are not true partners. Instead, they often provide experience, special skills, or other non­monetary factors of value to the business. Thus, they give an impression that they are, or sometimes claim to be, part owners in a business.

A partnership has many of the advantages of a sole proprietorship. Each partner has control over the business and shares in profits and losses. The result is that the motivation to succeed is great. As a partnership may have any number of members, it is possible for individuals with talents in different operations of a business to team up. Moreover, employees with ability and ambition may be induced to stay on in the hope of of being admitted to membership in the firm. This is a common practice in accounting, law and management consulting firms. These may have a large number of partners. Since a partnership is formed as a private contract between members, no government permission is necessary. Business matters normally need not be shared with any person other than the partners. Thus, where secrecy is advantageous, as in many professional and finan­cial businesses, a partnership form is likely to be used. The private contractual nature of a written agreement can be drawn up in a short time and at the modest legal expense.

An important advantage of a partnership as compared to an individual proprietorship is that it often enables a firm to secure greater. By pooling resources, several individuals may go into business when one person alone could not. Since personal assets of more individuals are subject to liability for a firm’s debts, creditors may be more willing to make loans to a partnership. There may also be tax advantages to a partnership. In a partnership, as in a proprietorship, taxes are paid by individual partners on earnings they accrue. But a partnership as a form of organisation does not pay income taxes.

The fact that there are only a small number of partnerships means that there are some major disadvantages. The major disadvantage of a partnership is the unlimited personal liability of general partners. Each general partner shares jointly in the liability of the business. All the assets, both business and personal, of each partner are subject to claims. If one partner cannot pay off the debts, then the other is responsible for them. Only limited part­ners have limited liability. A further disadvantage of the partnership is its instability. Some partnerships endure for long periods of time. But when a partner dies, retires or withdraws from a partnership, a new partnership must legally be established. If a partner, even a limited one, withdraws from the firm, that partner's share must be liquidated. Usually, it is sold to a person the other partners will accept. Owner conflicts are typical of the partnership. Many partners were originally social friends who later find that friends do not nec­essarily make good business associates. Most disagreements in partnerships are around divided authority. For example, one partner may want to hire an employee, while the other partner doesn’t. Like a sole proprietorship, a partnership is limited to the amount of capital in­vestment provided by a few partners and the capital they can borrow. Although a partnership may have an excellent credit rating, it would be most difficult to borrow large sums of capital needed to operate and maintain a major national business.

Concept check

1. Find words in the texts to complete the sentences.

1) A … … is active in business and assumes unlimited liability.

2) A … … is active in business but not known to the public.

3) A … … doesn’t participate in the management function.

4) A … … is inactive but may be known as a partner.

5) A … … is inactive and isn’t known to the public.

6) A … … doesn’t invest money in business.

2. Read the sentences and decide whether they are true or false. Explain your choice.

1) Partners are motivated to apply their best abilities by direct sharing of the profit.

2) To establish a partnership a government permission is required.

3) Creditors are unwilling to make loans to a partnership.

4) A general partner is responsible for the full amount of business debts.

5) Withdrawal of any partner constitutes automatic dissolution of a partnership.

6) Friends are the best business associates.

7) There are relative difficulties in obtaining large sums of capital.

8) A partnership may be more flexible in the decision making process than a sole proprietorship.

3. Choose from the following to complete the diagram below with advantages and disadvantages of a partnership.

1) unlimited liability of at least one partner

2) relative freedom from government control

3) low organisation cost

4) relative difficulties in raising capital

5) unstable life

6) great motivation

7) difficulties in relationship between partners

8) tax privileges

READING IV

CORPORATION

Before you read

Key terms

1. Match up the words on the left with their definitions on the right. Suggest the Russian equivalents for the terms.

1) corporation 2) customer 3) legal entity 4) venture capital 5) registrar 6) stock exchange 7) draft 8) amendment 9) payroll

a) a change proposed or made to a rule or a regulation b) a place where stocks are publicly bought or sold c) an organization that has a legal right to make contracts and pay debts d) a person or a company whose duty is to keep records or registers e) a group of persons authorized to act as an individual for business purpose f) outline of something (usually in the form of rough notes) g) money invested in a possibly risky new business h) a person who buys things i) a list of a company’s employees and the amount of money they are to be paid

2. Chose the Russian equivalents for the English terms.

1) Private limited corporation (company) 2) Public limited corporation (company) 3) Memorandum of Association 4) Articles of Association/ Bylaws 5) Initial Public Offering

a) устав компании b) закрытое акционерное общество c) первоначальное публичное предложение d) учредительный договор e) открытое акционерное общество

Think ahead

Is there any similarity between a natural person and a corporation?

Texts 1.4 Read the text and answer the questions: How long has а сorporation been in existence? Why do people form corporations? What are two types of corporations in English-American law?

Synonym of Big Business

The most widely quoted definition of a corporation was made by US Chief Justice Marshall in 1819. He referred to a corporation as “an artificial being, invisible, intangible, and existing only in contemplation of the law”. In other words, a corporation is an artificial being endowed by law with the rights, legal powers and duties of a natural person. An artificial person known as a corporation is created by law. Like natural persons, a corporation may own property, incur debts and be sued for damages. Legally, it is the corporation and not its stockholders or officers that buys buildings and machinery, sells goods, borrows money and engages in lawsuits. Unlike natural persons, a corporation may not vote or be sent to jail. However, natural persons usually own a corporation. Natural persons determine and carry out its policies. But these natural persons do not directly own any of the corporation’s property.

Corporation and Its Relationship

The corporation is not exactly a modern invention. In the Middle Ages, the corporate form was used by the Roman Catholic Church as a device to hold church property separate from any property held by individuals. As you already know, sole proprietors and general partners have unlimited liability for debts. If the business does badly and cannot pay its debts, any creditor can have it declared bankrupt. The unsuccessful business people may have to sell nearly all personal possessions in order to pay their debts. This is why most people doing business form limited companies. A limited company is a legal entity separate from its owners and is only liable for the amount of capital that has been invested in it. If a limited company goes bankrupt, it is wound up and its assets are liquidated (i.e. sold) to pay the debts. If the assets do not cover the liabilities or the debts, they remain unpaid. The creditors simply do not get all their money back.

Most companies begin as private limited companies. Their owners have to put up the capital themselves, or borrow from friends or a bank, perhaps a bank specialising in venture capital. The founders have to write a Memorandum of Association (GB) or a Certificate of Incorporation (US), which states the company’s name, its purpose, its registered office or premises and the amount of authorised share capital. They also write the Articles of Association (GB) or Bylaws (US), which set out the duties of directors and the rights of shareholders (GB) or stockholders (US). They send these documents to the registrar of companies.

A successful, growing company can apply to a stock exchange to become a public limited company or a listed company (US). Selling shares for the first time at the Stock Exchange is called Initial Public Offering (IPO) or floating a company (making a flotation). Publicly quoted companies have to fulfil a large number of requirements, including sending their stockholders an independently-audited report every year, which contains the year’s trading results and a statement of their financial position.

Corporations can have many structures, but the most typical corporation organisational structure consists of the board of directors, officers, employees and the shareholders or owners. In larger corporations, each of these groups may involve many people. The primary responsibility of the board of directors is to protect stockholders’ investment. They are elected by stockholders. Shareholders delegate power of management to the board of directors. The board of directors reports on the business’s success and progress to the stockholders, normally via an annual or quarterly report. While not involved in the daily operations of the business, they set the company’s mission and structure. The board of directors is responsible for drafting and amending the company's charter and appointing committees if necessary. The directors, along with officers, are protected from the company’s liabilities. The board appoints the officers. The officers are the president or CEO (Chief Executive Officer), the vice president, as well as a treasurer of the corporation. These people are appointed by and report to the board of directors. They are responsible for business operations. Their main responsibility is to act in the best interests of the corporation. This may or may not always align with the board of director’s wishes. Employees are those who make the business run. They carry out the various tasks associated with the company's mission. Employees report to the officers of the company.

The ownership may be 100 percent in the hands of one individual, divided within a family or a few individuals, or spread among tens of thousands or millions. Though stockholders may not participate in day-to-day management, major stockholders carry great weight in influencing corporate decisions. This group routinely votes on election and removal of directors, amending bylaws (major corporate changes (mergers, sales, dissolution, etc.), and disposition of corporate assets as well as on amendment of the Articles of Incorporation. Other stockholders may participate in these activities, but to a lesser extent.

The main advantage of the corporate form is that stockholders of a corporation have limited liability – no personal liability for the debts of the corporation. The corporation is legally responsible forits debts. Obviously, it is easier to raise capital by issuing shares if investors know that their risk of loss is limited to the amount they have put in.

Another advantage is that the separation of corporate ownership and management through allowing non-owners to hold positions of status and power encourages managerial talent. Also, allowing key managers to obtain shares of stock, often on advantageous terms, enables many managers to enjoy a part in ownership. One more advantage of thecorporation form is easy transferability of ownership through freedom to buy and sell shares. If investors like the company and the way it is going, they buy. If they do not, they sell. Death, retirement or withdrawal of any stockholder do not affect the life of the corporation. This form permits larger businesses than are usually pos­sible under the proprietorship or partnership.

A corporation must pay income taxes on its profits. Stockholders must also pay income taxes on their dividends. This double taxation is a disadvantage. As mentioned above, individual stockholders are not likely to have any control over the corporation. In large corporations, they have no practical choice but to vote for directors proposed by the corporation's management group. As management and ownership are separated in all but the smallest corporations, managers may not have a direct interest in the profitable growth of the company. Officers and managers are, of course, employees of the corporation. They draw salaries from the corporation; and as long as they are on the payroll, they are paid regardless of the company’s performance. Since a corporation is set up by law, it is subject to certain governmen­tal requirements that do not apply to proprietors and partners. First, reports must be made to stockholders. When there are many stockholders, there can be little secrecy about assets, profits, costs and sales. The company may have to disclose detailed information about its assets and operations. Those who lend money to corporations must think about getting it back. If a corporation goes bankrupt, creditors can look only to corporation assets for satisfying their claims.

Concept check

1. Read each statement and decide whether it is true or false. Explain your point of view.

1) The corporation is the least complex of the three business structures.

2) Ownership is readily transferable in the corporation.

3) In the case of illness, death or other cause for the loss of an officer, the corporation stops to exist.

4) Delegation of management is one of the advantages of the corporation.

5) Corporation provides top management with fewer incentives because they usually don’t share the profit.

6) Double taxation is one of the disadvantages of the corporation.

7) The level of secrecy in the corporation is greater in than in the partnership.

8) Stockholders may vote by selling and buying stocks.

2. Ask questions that may produce the following answers.

1) A corporation is an artificial being endowed by law with the rights, powers and duties of a natural person.

2) Corporations have to send their stockholders a report every year including audited financial statements.

3) The board of directors is responsible for drafting and amending the company’s charter.

4) Usually, a corporation is chartered for long life until its dissolution.

5) Because management and ownership are separated, managers may not have a direct interest in. a company’s profitable growth.

Key learning points · Selection of the form of ownership depends on the type of business, number of owners and financial conditions. · The sole proprietorship is a business structure where the only owner enjoys profits and takes on risks. · The partnership is an association of two or more persons to carry on as co-owners of a business for profit. · The corporation is a legal entity with the rights, duties and powers of a private person. It can receive, own and transfer property, sue and to be sued, and enter into contracts.

ROUND-TABLE SESSION

1) Look back at the texts in Readings I-IV to fill in the chart.

3). Make a presentation of business ownership forms. Be ready to give pros and cons of each form. Justify your viewpoint. Don’t forget to speak about

– different types of companies for a particular form of ownership endurance of business structures

– degree of control

– necessity of investments

– taxation, etc.

4) Hold a Questions & Answers (Q&A) session.

Дата добавления: 2015-10-23