SETTIINESSIf a person wishes to launch a newbusiness, he has to make some preparatory steps.The first step is theselection of an appropriate legal form. In various countries these formsdiffer. But usually they are as follows a limited liability company, apartnership and a sole proprietor. There is a basic differencebetween these forms.A limited liability company is a legal entity legalperson . In case of a bankruptcy, it has to reimburse cover its debts withall its assets, but the creditors cannot seize the assets owned by thecompany s shareholders.Sole proprietors or partnersdo not form a legal entity and have unlimited liability.
If their business goesbankrupt, they have to reimburse the debts not only with the firm s assets butalso with their personal belongings money, houses, cars, etc. For thisreason, most businesses are set up as limited liability companies.The name ofsuch a company ends with Limited in the UK or Canada and with Inc Corp. or LLC in the USA.A limitedliability company may be private or public.
A private company is usuallyfounded by a small group of people who know each other and intend to dobusiness together. A private company cannot sell its shares to the public andif it the business is not successful the founders loose their own money only.A public company sshares are traded on the stock market and may be purchased by millions ofpeople all over the world.These shareholders are not aware of the company sday to day performance and must rely on the professionalism of the company smanagers and their reports.
If the management is poor or in case of themanagers fraud, the shareholders may loose billions of dollars.Many countrieshave special regulatory bodies to supervise public companies, such as the USSecurities Exchange Commission. Yet, corporate disasters sometimes happen.Oneof the most recent examples is the bankruptcy of Enron Corporation, a giantsupplier of energy resources in the Western part of the United States.The second stepin setting up a business is the preparation of various documents, such as Memorandum of Association, Articles of Association and Resolution of thefounders on the appointment of directors.
The Memorandum contains theconditions, on which the founders agree to set up this business, and theArticles set out the principles of the company s formation and management itsname, objectives, share capital, rules of management, etc. The founders have tomake the initial investment and may either hire the directors of the company orappoint themselves as the directors.Every newbusiness is to be registered with the official company register.
The UK hassuch registration offices in London and in Edinburgh, while in the USA each ofthe 50 states has its own register.COMPANY PERFORMANCEAny business isset up to make profit. But the founders sometimes do not have enough experienceor make serious mistakes, which result in losses.The financial results of thecompany s operations can be seen from its financial reports.There are atleast three reasons for preparing such reports.
First, every government needsto collect taxes and therefore requires detailed information on the company sperformance, revenues and expenses. Second, the shareholders need to know,whether the company s management is professional enough, and ask for confirmationwith facts and figures.Third, the company s top executives must control theefficiency of the company s various departments and the input of eachdepartment in the company s operational results.
The reports prepared by thecompany s accounting department are often verified by an auditor, which is anindependent public accountant. The auditor has to confirm that the reportscomply with legal requirements and reflect the company s actual performance.There are a lotof reports submitted annually, semi-annually and quarterly.The most importantone is the balance sheet, which describes the company s assets and liabilitiesas on the last date of each year. The assets are the values, which the companyowns money, buildings, equipment, raw materials, computer hardware andsoftware, trade marks.
The liabilities specify what the company owes, such as share capital, credits received from banks and suppliers, other debts. If theamount of assets is higher than that of the liabilities, the company has profit.If the liabilities are higher than the assets, the company has losses.In thelatter case they say that the company is in the red . Money transfersbetween the company and its partners during the year are shown on the statementof cash flows.
Cash is the most liquid asset, which is as important for thecompany s activities as blood for a human body. If a company has huge fixedassets land, buildings, equipment but does not have enough money, it is asign of financial problems.There are manyother reports, letters, notes and messages, which a company has to submit.Someof them are very colourful, with photographs and illustrations and look likeadvertising material.
But their contents are usually a summary of the above twodocuments and additional comments to them.If we deduct thecompany s expenses from its revenues, the result is gross profit before taxes.If we further deduct taxes from the gross profit, the result is net profit,which may be distributed among the shareholders as their dividends or may bereinvested.The shareholders adopt a resolution on this matter at their annualmeeting.
Often they decide to use half of the net profit for dividends and toreinvest the other half. The net profit may also be carried forward to the nextyear. The amounts brought forward from the previous year are known as retainedearnings of the company.Companies areusually reluctant do not wish to pay taxes and there are legal ways to avoidsome of them. The company s ability to save on taxation depends on theprofessionalism of its accountants.The easiest way to avoid taxes is toincrease expenses through purchasing new machinery, investing in newtechnologies, making money transfers to charity foundations.
While taxavoidance is allowed, tax evasion is a crime. The company s executive body theboard of directors is responsible for the correctness of the informationsubmitted to the government. The personal liability is on the chief executiveofficer the board chairperson and the chief financial officer who sign thereports.If the information contained in the documents is not correct and ifthe company tries to evade taxes, these persons may be fined or even jailed.
Otherwise, they may escape to another country, which sometimes happens.THESTOCK MARKETA century ago, the size of enterpriseswas rather small, each of them usually employed several dozen workers, and mostbusiness companies were family-owned. Further industrial growth required moreintensive financing and family capitals became insufficient.This gave birth toshare capital, which can combine financial resources of many people into a poolfor starting a big project.The most visible representatives of sharecapital are public limited companies, such as British Petroleum, Royal DutchShell or General Motors.
They raise money on the stock market by issuingsecurities, mostly shares and bonds.Ordinary shares common stock in USA form the largest part of the whole securities market.A shareholder owningordinary shares can vote at the annual shareholders meeting, which reviews thecompany s reports, takes decisions on the company s plans and the distributionof the company s profit.
The meeting may decide to distribute the dividends tothe shareholders or to reinvest the profit. If the company has no profit or haslosses, the owner of ordinary shares will receive no dividends.Each ordinary share has its face valueand its market price. The face value is indicated on the share certificate butone cannot sell or buy the share at the face value.The market price isestablished at the stock exchange, where the shares are quoted and traded.
Themarket price may be several times higher or lower than the face value becauseit depends on the general market situation and on the performance of thecompany.When the country s economy grows, thestock market usually has an upward trend, the market prices of shares go up andthe stock exchange traders say that the market is bullish . If the market has a downward trend, themarket prices of shares go down and the market becomes bearish .Many companies issue preference shares preferred stock in USA . These shares give the shareholder a guaranteed,stable income fixed as a percentage of their face value.
But preference sharesdo not let their owner to vote at the shareholders meetings.Some companies issue bonds. Thesesecurities provide their owner with stable income, the same as preferenceshares do. But unlike ordinary or preference shares, bonds are redeemable.Itmeans that the company issuing bonds has an obligation to redeem them or buythem back at the face value after a certain period of time, usually afterseveral years.
There was a stock market boom during thelatest decade of the twentieth century.Many people became active in shoppingfor financial products and invested much of their wealth in securities. Theyexpected that the markets would grow rapidly in the coming years and hoped toearn money through buying securities at lower prices and selling them at higherprices.But these expectations were ruined by asudden economic crisis.
Now the Western economies have been in recession forabout two years and the market price of most securities is much lower thantheir face value. It is a very sad situation for the shareholders, because theycannot return their shares to the issuing companies and get their money back.They can only sell these shares at their market price, if somebody will buythem.