There are many commercial arrangements by which merchandise may be sold. The most common are outright purchase and consignment. In the outright purchase arrangement, merchandise is acquired, title is transferred from the seller to the buyer, and the purchase price is due when the goods are delivered. Under a typical consignment arrangement, the consignor delivers an item to a consignee. The consignee does not make an outright purchase of the goods, but rather, agrees to remit to the consignor the proceeds of sales less the consignment commission as sales are made. Generally, the consignee is under no obligation to sell the goods and may return them to the consignor at any time.
Friday, October 9, 2009
Wednesday, October 7, 2009
ADVANTAGES OF GOING PUBLIC
Access to capital and increased prestige are some of the motivating forces behind going public. Issuing stock has the advantage of raising capital without obligating the business to repay loans. The additional capital allows for continued growth, even when earnings and bank loans are insufficient to meet expansion objectives. Also, a successful public offering can improve net worth and debt-toequity ratio, thereby increasing credibility and financing leverage with lenders.
Public offerings also enhance a company’s prestige by increasing its visibility within the business community. The prestige of going public can be an effective device for attracting top-rate management executives. In turn, a strong management team is often the key to both increasing profitability and attracting new investors. In fact, during the growth of the high-tech industry bubble, stock options were essential for attracting and keeping employees. Public stock provides
its owners with the ability to sell more easily when an exit strategy is desired.
Public offerings also enhance a company’s prestige by increasing its visibility within the business community. The prestige of going public can be an effective device for attracting top-rate management executives. In turn, a strong management team is often the key to both increasing profitability and attracting new investors. In fact, during the growth of the high-tech industry bubble, stock options were essential for attracting and keeping employees. Public stock provides
its owners with the ability to sell more easily when an exit strategy is desired.
Going Public
At some point, you may determine that you wish to obtain capital from investors rather than borrow from lenders. You may, therefore, consider having your business conduct a public securities offering. Each year, many private businesses go public. According to Chris Meyer, analyst for Morgan Stanley, in 2005 there were 1,600 initial public offerings (IPOs) valued at $170 billion, and in the first half of 2006, there were 745 IPOs valued at $103 billion. However, some small companies that went public have become disillusioned and are returning to their former private status. It is worthwhile to look at the pros and cons of going public and some of the factors you should consider before making that crucial decision.
Borrowing from Banks
Commercial loans can be a valuable source of needed capital for qualified business borrowers. Small businesses sometimes seek loans from institutional lenders, such as credit unions, insurance companies, and pension trusts.
Unfortunately, institutional lenders other than banks will rarely deal with small businesses, particularly when the potential borrower does not have an extensive track record. It is for this reason the focus of this chapter is on bank lending. You should, however, consider these other sources of funds when seeking a loan. Most institutional lenders follow the same procedures as banks and demand the same type of information.
Lending policies vary dramatically from institution to institution. You should talk to several banks to determine which might be likely to lend to your business and which have the most favorable loan terms. While lenders, by nature, are conservative in their lending policies, you may discover some to be more flexible than others. To save time and increase the chances of loan approval, it makes sense to first approach those banks that are most likely to view your proposal favorably and whose lending criteria you feel you can meet. You should not necessarily limit your search for a loan to your community. A statewide, regional, or even national search may be necessary before you find the right combination of willing lender and favorable terms. With the Internet, this is not as difficult as it once was.
Unfortunately, institutional lenders other than banks will rarely deal with small businesses, particularly when the potential borrower does not have an extensive track record. It is for this reason the focus of this chapter is on bank lending. You should, however, consider these other sources of funds when seeking a loan. Most institutional lenders follow the same procedures as banks and demand the same type of information.
Lending policies vary dramatically from institution to institution. You should talk to several banks to determine which might be likely to lend to your business and which have the most favorable loan terms. While lenders, by nature, are conservative in their lending policies, you may discover some to be more flexible than others. To save time and increase the chances of loan approval, it makes sense to first approach those banks that are most likely to view your proposal favorably and whose lending criteria you feel you can meet. You should not necessarily limit your search for a loan to your community. A statewide, regional, or even national search may be necessary before you find the right combination of willing lender and favorable terms. With the Internet, this is not as difficult as it once was.
Developing Your Business Plan
In order to establish a viable business, it is essential to plan. This means that the entrepreneurs must determine where they intend to have the business go; what it will sell; who it will compete against; and, how it will develop.
In addition, every business needs capital at one time or another. This funding might be sought as bank loans, other conventional forms of financing, or as venture capital. It might also be obtained through a public sale of securities (discussed in Chapter 6). No matter what the source of financing, an important first step is the preparation of a business plan. This can aid a banker, venture capitalist, or prospective owner in evaluating your company.
A business plan may be considered a road map to determine the course your business will travel from start-up to full operation. The structure and content of your business plan will vary depending upon such factors as the company’s stage of development, the nature of the business, and the type of markets it will serve. There is a host of different formats that have been used for business plans. Although the order of presentation is by no means standard, each of the following
topics should be addressed in structuring any business plan. In addition, there are numerous software packages available to assist you in creating your business plan.
In addition, every business needs capital at one time or another. This funding might be sought as bank loans, other conventional forms of financing, or as venture capital. It might also be obtained through a public sale of securities (discussed in Chapter 6). No matter what the source of financing, an important first step is the preparation of a business plan. This can aid a banker, venture capitalist, or prospective owner in evaluating your company.
A business plan may be considered a road map to determine the course your business will travel from start-up to full operation. The structure and content of your business plan will vary depending upon such factors as the company’s stage of development, the nature of the business, and the type of markets it will serve. There is a host of different formats that have been used for business plans. Although the order of presentation is by no means standard, each of the following
topics should be addressed in structuring any business plan. In addition, there are numerous software packages available to assist you in creating your business plan.
Business Organization Checklist
As discussed in the previous chapter, there is a host of business forms available for the entrepreneur. These forms range from the simplest—sole proprietorships—to more structured organizations, such as partnerships, corporations, limited liability companies, and limited liability partnerships. The structure of your business will depend upon a number of considerations. Creating any of these business forms is a rather simple process, but to do it right and enjoy all the advantages, it is highly recommended that you consult a competent business lawyer. Of course, a lawyer’s time costs money, but you can save some money if you come properly prepared. The following are some of the points you should be prepared to discuss with your lawyer.
LIMITED PARTNERSHIPS
The limited partnership is a hybrid containing elements of both partnerships and corporations. A limited partnership may be formed by parties who wish to invest in a business and share in its profits, but seek to limit their risk to the amount of their investment. The law provides such limited risk for the limited partner, but only so long as the limited partner plays no active role in the dayto-day management and operation of the business. In effect, the limited partner is very much like an investor who buys a few shares of stock in a corporation, but has no significant role in running the business.
PARTNERSHIPS AND JOINT VENTURES
A partnership is defined by most state laws as an association of two or more persons to conduct, as co-owners, a business for profit. No formalities are required. In fact, in some cases, people have been held to be partners even though they never had any intention of forming a partnership. For example, if you lend a friend some money to start a business and the friend agrees to pay you a certain percentage of whatever profit is made, you may be your friend’s partner in the Organizing Your Business • eyes of the law, even though you take no part in running the business. This is important, because each partner is subject to unlimited personal liability for the debts of the partnership. Each partner is also liable for the negligence of another
partner and of the partnership’s employees when a negligent act occurs in the usual course of business. A joint venture is a partnership for a limited or specific purpose, rather than one that continues for an indefinite or specified time. For example, an arrangement whereby two or more persons or businesses agree to build a single house and sell it for profit is a joint venture. An agreement to develop numerous properties over a period of time is a partnership.
partner and of the partnership’s employees when a negligent act occurs in the usual course of business. A joint venture is a partnership for a limited or specific purpose, rather than one that continues for an indefinite or specified time. For example, an arrangement whereby two or more persons or businesses agree to build a single house and sell it for profit is a joint venture. An agreement to develop numerous properties over a period of time is a partnership.
SOLE PROPRIETORSHIPS
The technical name sole proprietorship may be unfamiliar to you, but chances are you are operating under this form now. The sole proprietorship is an unincorporated business owned by one person. As a form of business, it is elegant in its simplicity. All it requires is a little money and work. Legal requirements are few and simple. A business license and registering the name of the business, if you operate it under a name other than your own, are generally all you need.
Organizing Your Business
Everyone in business knows that survival requires careful financial planning, yet few fully realize the importance of selecting the best legal form for the business. Small businesses have little need for the sophisticated organizational structures utilized in large, publicly traded corporations, but since all entrepreneurs must pay taxes, obtain loans, and expose themselves to potential liability with every sale they make, it only makes sense to structure one’s business so as to address
these issues.
Every business has an organizational form best suited to it. When I counsel people on organizing their businesses, I usually adopt a two-step approach. First, we discuss various aspects of taxes and liability in order to decide which of the basic legal structures is best. There are only a handful of basic forms—the sole proprietorship, the partnership, the corporation, the limited liability company, the limited liability partnership, and a few hybrids. Once we have decided which of these is most appropriate, we go into the organizational documents, such as partnership agreements, corporate bylaws, or operating agreements. These documents define the day-to-day operations of a business and must be tailored to individual situations.
What I offer here is an explanation of the features of each of these kinds of organizations, including their advantages and disadvantages. This should give you an idea of which form might be best for your business. I discuss potential problems, but since I cannot go into a full discussion of the more intricate details cannot be had here, you should consult an experienced business attorney before deciding to adopt any particular structure. My purpose is to facilitate your communication with your lawyer and to enable you to better understand the choices available.
these issues.
Every business has an organizational form best suited to it. When I counsel people on organizing their businesses, I usually adopt a two-step approach. First, we discuss various aspects of taxes and liability in order to decide which of the basic legal structures is best. There are only a handful of basic forms—the sole proprietorship, the partnership, the corporation, the limited liability company, the limited liability partnership, and a few hybrids. Once we have decided which of these is most appropriate, we go into the organizational documents, such as partnership agreements, corporate bylaws, or operating agreements. These documents define the day-to-day operations of a business and must be tailored to individual situations.
What I offer here is an explanation of the features of each of these kinds of organizations, including their advantages and disadvantages. This should give you an idea of which form might be best for your business. I discuss potential problems, but since I cannot go into a full discussion of the more intricate details cannot be had here, you should consult an experienced business attorney before deciding to adopt any particular structure. My purpose is to facilitate your communication with your lawyer and to enable you to better understand the choices available.
FINDING AN ACCOUNTANT
In addition to an attorney, most small businesses will need the services of a competent accountant to aid with tax planning, the filing of periodic reports, and annual tax returns. Finding an ccountant with whom your business is compatible is similar to finding an attorney. You should ask around and learn which accountants are servicing businesses similar to yours. State professional accounting associations may also provide a referral service or point you to a directory of accountants in your area. You should interview prospective accountants to determine whether you feel you can work with them and whether you feel their skills will be compatible with your business needs.
Using a Lawyer
Once you have completed the interview process, select the person who appears to best satisfy your needs. One of the first items you should discuss with your lawyer is the fee structure. You are entitled to an estimate. However, unless you enter into an agreement to the contrary with the attorney, the estimate is just that. Business lawyers generally charge by the hour, though you may be quoted a flat rate for a specific service, such as incorporation or a simple will.
Evaluating a Lawyer
One method by which you can attempt to evaluate an attorney in regard to representing business clients is by consulting the Martindale-Hubbell Law Directory in your local county law library or online at www.martindale.com.
While this may be useful, the mere fact that an attorney’s name does not appear in the book should not be given too much weight, since there is a significant charge for being included and some lawyers may have chosen not to pay for the listing. You may also wish to search the World Wide Web. Many law firms have established websites. The larger firms usually include extensive information about the firm, its practice areas, and its attorneys.
While this may be useful, the mere fact that an attorney’s name does not appear in the book should not be given too much weight, since there is a significant charge for being included and some lawyers may have chosen not to pay for the listing. You may also wish to search the World Wide Web. Many law firms have established websites. The larger firms usually include extensive information about the firm, its practice areas, and its attorneys.
FINDING A LAWYER
If you do not know any attorneys, ask other businesspeople if they know anygood ones. You want either a lawyer who specializes in business or a general practitioner who has many satisfied business clients. Finding the lawyer who is right for you may require that you shop around a bit. Most local and state bar associations have referral services. A good tip is to find out who is in the business law section of the state or local bar association or who has served on special bar ommittees dealing with law reform. It may also be useful to find out if any articles covering the area of law with which you are concerned have been published in either scholarly journals or continuing legal education publications, and if the author is available to assist you.
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