LEGL 2700 1nd Edition Exam 3 Study Guide Business Organizations Lecture 10 What are the 7 business organizations Sole Proprietorship o Doesn t require any paperwork to be established o A single person doing business o Law automatically creates this organization o That person has total control over the business o Income is just subject to personal taxation your own taxes o Disadvantages Cant transfer his or her ownership to other people Major liability no separation between owners liability and business liability Partnerships o Creation can be automatic based on business conduct o Can happen unintentionally o 2 or more people with a common interest in the business o Share in profits and losses o No double taxation taxed personally o Consequences Both are personally liable unlimited liability Joint and several liability for any injuries Not popular among those that know business Corporations o Require filing o Have a lot of formal requirements o Government structure requirements etc o Most formal business entity o One huge advantage High degree of transferability Equity interest easy to buy and sell shares o Limited liability o Investors shareholders are liable up to the amount of their investment o Disadvantage Double taxation Corporation is taxed and shareholders are taxed Limited Partnerships o Require filing o Special partnership of 2 different classes o Two types of partners o General partners have equity liability is personal in addition to what they have at stake in the partnership decision making rights o Limited partners only have liability up to the amount they invest have no decision making S corporations o Less formal than corporations o Not many shareholders have a cap normally less than 100 o Resemble partnerships o Not double taxed LLC s o o o o o o o o o o o LLP S o o o o o o o o limited liability corporations Personal taxation Limited liability Very popular No personal liability Equity holders are liable up to the amount of their investment Formal filing for creation Highly customizable More of a membership General commerce Disadvantage Expensive Less transferability than corporations Limited liability partnerships No double taxation Personal taxation Very popular No personal liability Equity holders are liable up to the amount of their investment More popular for law firms accounting firms etc Disadvantage Expensive Less transferability than corporations What do Corporations have Large Amounts of Equity o o o o o Gap between ownership and management Shares are transferable with the rights No negotiation Shares are like cash Most shares are created equal Standard share 1 vote transferable not restricted Restricted Stock not easily transferred used for compensating your officers or employees o Shareholders elect board to oversee management while monitoring and improving What are the 2 Types of Shareholding Suits 1 Shareholder derivative law suits a When shareholders are asserting a claim against an officer on behalf of the company b Accusing the officer of a wrong to the corporation c Harmed the company in some way d Suing in order to recover for the corporation 2 Shareholder direct law suits a Has do to with shareholding rights like voting b Deal with the payment of dividends c Direct shareholding benefits d Company legally has to pay Business Finance Lecture 11 What are the 4 general stages of business finance 1 Angel Investing Stage a talking about early stage business funding b call friends and family to ask them for money c more informal d Typical first stage 2 Venture Capital Stage a Next stage b An investment during the early stages with the goal of seeing that company grow c Usually targets high growth companies d Focused on equity investments 3 Private Debt and Private Equity Markets a Go to small number of investors and say hey do you want to buy an equity position in this company or hey would you extend me some credit b Normally banks pension funds companies insurance companies private placements c Far fewer requirements 4 IPO s and Capital Markets a Broadest b Initial public offerings when you take your equity to a public market corporations are the default business organization for doing that c Debt can be sold as bonds on the public market What is Debt Exchanging money for a promise to pay Extending credit Adds interest within a certain amount of time A contract contractual rights of payment Rights to collateral in case person does not pay The Cons of Debt o Get squeezed with your cash flow o Assets get less attractive once they have a security interest The more valuable the loan the more the loan agreement will say What is Equity stake Equity Selling ownership and money There Is no promise to pay here No contract with equity Comes with Voting rights Directors and officers owe you duties No contractual right to payments Shareholders are the last to get paid in a bankruptcy situation Normally more expensive If you grow you can end up paying a whole lot more than a normal loan would If the company fails you lose investment When selling o We give up voting rights o We give up decision making What are Sovereign Governments Any country like Russia France Cuba etc Can get loans from banks other countries world bank etc Can get debt Can issue bonds Cant issue equity but because you can t own a sovereign government it doesn t have shareholders For sovereigns there is no such thing as bankruptcy When a sovereign restructures Negotiates a settlement Restructures as many bonds as possible A Hold Out is those bond holders that did not participate and restructure the loans EX Those hold outs in Argentina have sued Argentina in New York asking for the full amount Capital Markets and Securities Regulation Lecture 12 What are Securities Not security interests Include notes stocks bonds treasury bills etc Tend to have in common as an instrument that represents something else Example stock represents the rights What is the Securities and Exchange Commission most important regulatory agency for capital markets Administers federal securities law Established in 1934 Broad goals of protecting investors Facilitating the flow of accurate financial information Maintaining fair and stable markets exchanges Has quasi legislative functions o Creates rules and regulations Important Laws Securities Act of 1933 Going public Disclosures that you have publicize financial information that potential investors should know Doesn t apply to private offerings or intra state offerings