Business Ownership/ Buying Existing Business

@huntersrace

Important issues when evaluating forms of ownership: tax considerations/ liability exposure/ start up and future capital requirements/ control/ managerial ability/ business goals/ management succession plans/ cost of formation

Forms of ownership: sole proprietorship/ general partnership/ limited partnership/ corporation/ S corp./ LLC

Sole Proprietorship: owned and managed by one individual (72% of all Bus)

• Advantages: simple to build/ least costly/ price incentive/ authority/ no legal rules/ easy to discontinue

• Disadvantages: limited skills & capabilities/ isolation feelings/ limited capital/ lack of business continuity

  • Unlimited personal liability- owner is personally liable for all the business debts

  • Greatest percentage of business/ corporations generate the largest portions of sales

The Partnership: 2+ people co-own a business for a purpose of making a profit (share assets/ liabilities/ profits)

• partnership agreement- document stating the terms that partners agree to operate business/ protect partners interest

• Revised uniform partnership act (RUPA): common ownership interest in business/ sharing profits and losses/ right to participate in managing operations/ compensated for expenses/ receive interest on loans/ received capital contributions if terminated/ have access to records/ receive formal accounting of business affairs

  • Obligated to share in any losses/ work without salary/ submit differences to majority vote/ give complete business affairs/ give formal accounting of business affairs/ place interest of partnership above own

• Advantages: easy to create/ complementary skills/ division of profits/ larger pool of capital/ ability to attract limited partners/ minimal government regulation/ flexibility/ taxation

  • General partners: unlimited liability for partnership debts/ active role in managing business

  • Limited partners: financial investors who can't participate in management (limited liability)

  • Silent partners: not active in the business but generally known as members of partnership

  • Dormant partners: not active or known to be members of the partnership

  • Limited partnership: composed of at least one general partner and one limited partner

• Disadvantages: unlimited liability of 1+ partner/ capital accumulation/ partnership interest-hard to dispose/ personality & authority conflicts/ partnerships bound by law of agency

• Limited Liability Partnerships: all partners are limited partners/ giving them advantages of LL for debt

Corporations: separate legal entity apart from its owners that receive the right to exist from the state its incorporated

• artificial being/ invisible/ intangible/ existing only in contemplation of the law/ accepts regulations in state

• seperate legal entity allows investors to limit liability to total of investment/ owners sign guarantees to pay

• does not protect owners held responsible for fraudulent/ criminal/ negligent acts

  • courts ignores LL shield: when owners use corporations assets for personal use/ fails to act responsibly creates stockholder risks/ makes financial misrepresentations/ taking unauthorized actions without approval

• Closely held corporation: shares are controlled by small number of people (often family/ friends/ employees)

• Publicly held corporation: large number of shareholders/ stock usually traded on the large stock exchange

• The C Corporation: separate legal entities/ pay taxes on net income at federal level/ must pay corporate tax rate and then stockholders pay individual tax rates on dividends/ Corporation profits are taxed twice (double taxation)

• The S corporation: legal trains of C Corp/ being taxed as partnership if it meets certain criteria

  • domestic/ certain shareholders, trusts, estates/ no partnership or corporation as shareholder/ no more than 100 shareholders/ issue one class of stock/ no ineligible corporation (financial institutions,/ insurance)

  • ⅓ ⅓ ⅓ rule of thumb: S corp. guideline to distribute ⅓ of earnings to shareholders for taxes/ ⅓ for growth/ ⅓ to pay debt- add funding for growth-or distribute to shareholders

Limited Liability Company: (like S Corp) cross between partnership/ corporation not subject to S. corporation restrictions

• Articles of organization: document that creates LLC by establishing name/ address/ management method/ duration

• Operating agreement: document that establishes for LLC the provisions governing how they operate

Advantages of buying existing business: successful existing businesses often continue to be successful/ superior location/ employees & supplies in place/ installed equipment with known production capacity/ inventory in place/ trade credit is established/ revenue begins as soon as entrepreneur starts/ previous owner knowledge/ easier financing/ high value

Disadvantages: cash requirements/ business is losing money/ paying for ill will/ non-suitable employees/ unsatisfactory location/ inefficient equipment or facilities/ challenge of implementing change/ obsolete inventory/ overpriced business/ worthless accounts receivable may be worth less than face value

Steps in acquiring a business

1. conduct self inventory/ objectivity analyzing skills/ abilities/ personal interests to evaluate business

2. develop a list of criteria that defines an ideal business for you/ potential candidates to meet criteria

3. due diligence process to meet criteria (analyzing financial statements/ good facilities) to minimize problems

4. explore various financing options to buy business/ negotiate deal with owner/ ensure smooth transition

The acquisition Process: approach the candidate/ sign non-disclosure doc/ letter of intent/ buyers due diligence/ draft the purchase agreement/ close the final deal/ begin transition

Hidden market- low profile companies that may be for sale but are not advertised as such