Do Business Well

If the company needs more money, you can lend your own funds to the corporation. The interest you earn is deductible to the company. Later you can pay back the loan. Of course, this principal passes back to you without tax. If you had capitalized the corporation at a higher level instead of using this loan technique, you would not have received tax-advantaged interest. Additionally, if you wanted to take out your original capital it might be seen as a dividend. In any case it would require the transfer of stock that would reduce your ownership if there was more than one owner. Continue Reading »

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A corporation is owned by its stockholders. There may be one stockholder holding all the shares, or there may be millions of shareholders holding various amounts of shares. Without going into details that are far beyond the scope of a business this size, I should point out that it is also possible for corporations to sell various classes of shares with various rights and preferences. For the very small business, we can limit our discussion to two types of simple corporations: the regular, or “C” corporation, which is taxed directly by the IRS; and the “Sub S” corporation, where the earnings are passed through to the stockholders, who must pay the tax personally.

Both of these forms limit the financial exposure of the owners to their actual investment and any value in the corporation beyond that investment. This is the single greatest advantage of a corporation. However, the shareholders can lose this protection if they don’t completely separate the affairs of the corporation from their own personal affairs. They must also be certain that the amount of the original investment is clearly adequate to protect the public and the vendors from the likely activities of the corporation. Continue Reading »

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Here are two examples of what can happen. Let’s say that you currently own your own home, which is worth $150,000, and it has a mortgage of $70,000. You also have stocks and other holdings worth $25,000. You intend to open the business with your savings of $20,000. After six months in business, you decide to close down due to continuous losses. You are out of cash and owe suppliers $40,000. You signed a lease that has eighteen months to go at $500 per month. You also failed to pay employee tax deposits of $10,000.

Your vendors, the landlord, and the government will go after your home, stock, and anything else that isn’t nailed down to collect the $59,000 you owe. And they will have every legal right. Continue Reading »

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A network documentary once showed in poignant detail how forced separation from the companies to which they had devoted their most productive years had affected several managers. For some, the effect was disastrous—a loss of confidence, of identity, even of belief in the system that could permit this to happen. Each had worked hard and well for his or her company. “How could they do this to me?” was the question that each, in his or her own way, asked.

One response to this question was given by Lord Edward Thurlow, an English jurist and statesman of the 18th century who asked, “Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?”

While it is true that corporations work best when they appreciate the human potential of their employees, it is also true that people are, on the corporate books, a cost variable of paramount importance. Without the ability to control such costs, no corporation could survive. And though the managers of some corporations do it more gracefully or logically than others, in the end, the necessity to maintain itself in the marketplace by controlling the size and cost of its work force is an essential function of all corporations. Continue Reading »

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