Mkt_421_Wk_1

Vulgamore Wk. 1 Brian Vulgamore FIN419 June 4, 2012 Jennifer Stapp Vulgamore Wk. 1 When a group of people start a business, they have to decide if they will start that business under a partnership or a limited liability corporation. In a general partnership, partners have unlimited liability and each of them is legally liable for the debts of the partnerships. A limited liability corporation is an entity created by law giving it the powers of an individual. If the group of people decided to incorporate, they would not have any liability with the exception of what money they have invested into the company. If the group decided to start as a partnership, they could always incorporate later. Corporations make up only about 15% of all business organizations, and this 15% accounts for nearly 90% of business receipts and about 80% of net profits for business word-wide. The owners of a corporation trade their cash for both common stock and preferred stock and are called stockholders (Gitman, 2009). A corporation is set up as a democracy and the shareholders vote on the outcome of the company. There can be as few as one person in a limited liability corporation and that person can own every share in the company. A corporation does not have to sell its stock publicly. The profits are paid back to the individuals based on the number of shares they own in the company. If an owner decides to separate from the corporation, they can simply sell their shares. There are no assets to liquidate as they are property of the corporation. If the corporation incurs debt that it cannot pay, the debtors can only acquire what assets that corporation owns. The owners of the corporation have no personal liability. The remaining 85% of businesses are either sole proprietorships or partnerships. In either of these scenarios the parties involved in a general partnership are personally liable for any debts the company incurs even if the partnership cannot pay the debt. There are different types of partnerships to consider. The first is the general partnership. A general partnership consists of two or more people with both money and a business plan come together to begin a business. In this general partnership, each member of the partnership is liable for any costs incurred while doing business. They could lose any personal assets they have if the business were to fail. There is a partnership called a limited liability partnership. In a limited liability partnership only one or more partners have unlimited liability; the remaining partners are only liable for their own acts of negligence or malpractice but not for those of the other partners (Gitman, 2009). The limited partners are not allowed to take an active role in the firm’s management. An example of this is an attorney who joins a firm and is paid for the work he does. He is not paid on the profit of the firm, and a partner would have the right to terminate his employment. If his track record is good, he may even eventually be added to the partnership as a limited partner. As a limited partner, he could benefit from increased job security, increased income, and status. As a limited partner, however, he cannot take an active role managing the firm. An advantage would be that he is only responsible for any negligence or malpractice that he caused. General partnerships are risky ventures. If they purchased equipment for the business, such as items for a restaurant, it would be challenging to liquidate that equipment if they dissolved the partnership for some reason. Unless one partner could buy out the other partner, those items would have to be sold. It would be likely that they would be able to get the true value for the items. A partnership may rely on one person’s skills and another person’s financing. If one of the partner’s skills declined, the partnership would decline. There are too many risks involved when dealing with human behavior and good faith. If I were to start a business with another person, I would be likely to start a limited liability corporation. I would do this only if I had the capital to own a larger share of the company than the others involved. This would give me the ability to make the operational decisions I needed to make. It would also protect both my personal assets from getting taken because of the negligence of those I was in business with. It would also protect the company assets from the other partner taking what personally belonged to him prior to starting the company. I would have the option of purchasing some of all of his shares and would not have to close the business down if it were still performing well. Reference Gitman, L. J. (2009). Principles of managerial finance (12th ed.). Boston, MA: Pearson Addison Wesley.