Transcript Business Organizations

Business Organizations
PARTNERSHIPS,
CORPORATIONS
AND THE VARIANTS
Contact Information
 Prof. Bruce W. McCann
 [email protected]
 (707) 874-9204
Course Books
CORPORATIONS AND OTHER BUSINESS
ORGANIZATIONS: CASES, MATERIALS
PROBLEMS
S M I D D Y A N D C U N N I N G H A M ( 7 TH E D . ) ( ©
2010, LEXISNEXIS)
BUSINESS ASSOCIATIONS: AGENCY,
PARTNERSHIPS, LLCS, AND CORPORATIONS
2010 STATUTES AND RULES
KLEIN, RAMSEYER AND BAINBRIDGE
FINAL GRADE:
 10%
Based on the quality of your class
preparation and participation and your
assigned projects. [To be determined at
end of year.]
 45%
Grade on Midterm.
 45%
Grade on Final.
Fun With Corporate Law - Enron
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Guilty pleas: 18
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• Ben Glisan Jr.
5 years.
• Lea Fastow
1 year.
• Andrew Fastow
6 years.
• Richard Causey
5 years, 6 months.
• Michael Kopper
3 years, 1 month.
• Mark Koenig
18 months plus probation.
• Paula Rieker
2 years' probation.
• Timothy Belden
2 years’ probation.
• Jeffrey Richter
2 years’ probation.
• Lawrence Lawyer
2 years' probation.
• Dave Delainey
2 years, 6 months.
• Ken Rice
2 years, 3 months.
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• Kevin Hannon
Sentenced to 2 years.
• John M. Forney
2 years’ probation.
• Timothy Despain
4 years' probation.
• David Bermingham
3 years, 1 month.
• Giles Darby
3 years, 1 month.
• Gary Mulgrew
3 years, 1 month.
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Jury conviction: 4
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• Ken Lay
Died before sentencing; conviction vacated.
• Jeff Skilling
24 years, 4 months in prison.
• Dan Boyle
3 years, 10 months.
• James A. Brown
3 years, 10 months.
Acquittal: 2
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Fun With Corporate Law - Tyco
High-living CEO stole from Tyco, jury finds
Kozlowski, former finance chief face 30 years if appeals fail
 NEW YORK — In the wave of prosecutions against business
executives that followed the boom of the late 1990s, L. Dennis
Kozlowski came to be portrayed as the poster child for corporate
excess.
 The former Tyco CEO’s first trial last year was a parade of eyepopping largesse: an $18 million Manhattan apartment, a $6,000
shower curtain and an infamous $2 million party on the island of
Sardinia in the Mediterranean.
 Prosecutors said Kozlowski financed the lavish lifestyle with money
he pillaged from Tyco — and on Friday, a jury convicted him and
another executive of looting the company of $600 million.
THE UNIFYING THEME BEHIND ALL OF THE
STRUCTURES WE WILL STUDY
EACH IS DESIGNED TO ALLOCATE RISK AND
REWARD TO FACILITATE INVESTMENT
“Risk” Means Who Gets Stuck With The Bill
 When we speak of “risk” we mean who will suffer the
loss if the business cannot pay its debts (defaults)?
 To answer the question, you need to know:
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1. What is the form of the business?
2. What kind of debt is it?
A. Secured
 B. Unsecured
C. Recourse
D. Nonrecourse
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What Will We Be Talking About?
 Two Umbrella Types of Entities:
 Limited personal liability for owners
Limited partnership
 Limited Liability Company
 Corporation
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No protection from personal liability:
General partnership
 Sole proprietorship
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How It Is Supposed to Work
Reward
and Risk
Low
Risk
Increases,
Reward
Increases
The one
taking
the
greatest
risk gets
the
greatest
reward
Sole Proprietorship
 Single Owner (or husband and wife)
 Default form of ownership – no legal filing required
 Everyone else in organization works for that owner
 Owner is personally liable for all debt except non-
recourse
 The business is not a separate identity independent
of owner
 All profits and losses flow directly through to that
owner on his or her tax return
How Are You Doing? The Balance Sheet
Assets
Cash from
Owner
Liabilities
Equity
$25,000
$100,000
Taxes
$30,000
Library Bill
$10,000
TOTALS
+
$10,000
Bank Loan
Building
=
$110,000
$65,000
$45,000
The Debt-Equity Relationship
Control
(Equity)
Liquidity
(Debt)
Lec. 7, pp 239-286 Corps.
Prof. McCann
The Owner’s Dilemma: Use Debt or Equity
 Say Owner (O) borrows $50,000 from the bank and puts
in $50,000 of her own money to fund the business.
 Assume the business earns (after expenses) $12,000 a
year.
 Assume the bank charges 10% for the loan, or $5,000 per
year in interest.
 She is better off with the loan because she has a $7,000
profit personally ($12,000-$5,000) on an investment of
$50,000 (of her money), or 14%. That is 2% better than
the 12% the business earned. That is what is referred to
as LEVERAGE.
Leverage Simplified
 You use debt to finance when you will earn more on
the investment (in percentage terms) than you pay in
interest on the loan.
Magnifying Leverage
 What if O puts in only 25% and 75% is borrowed?
 Assume, again, $100,000 total investment, with 75%
borrowed at 10% interest.
 Business earns $12,000
 Is O better off borrowing or using equity?
Voilá
 Interest at 10% on $75,000 = $7,500
 Revenue minus interest = $12,000-$7,500=$4,500
 Owner’s Investment= $25,000
 Owner’s ROI (Return On Investment) =
$4,500/$25,000 = 18%
 Note: Same relationships are true if she sells the
business and pays off the loan.
But What Happened With the Risk?
 It seems the more risk she put on the bank, the more
reward she got.
 In the real world, how does the bank protect itself?
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Recourse debt (personal guarantees)
Security (sometimes in excess of 100% of the debt)
Increased interest rates on riskier loans
Controls on debt/equity ratio of a business (“skin in the
game”)