Tag Archives | corporation

Limited Liability Company (LLC)

See Also:
S Corporation
General Partnership
Limited Partnership
Partnership
Sole Proprietorship

Limited Liability Company (LLC) Definition

A Limited Liability Company or LLC is a business form which provides limited liability much like a corporation. There can be an unlimited number of members to the company. There are also many tax benefits that emerge from forming this type of business.

Limited Liability Company (LLC) Meaning

A Limited Liability Company means that it contains the same barrier to personal liability for actions by an employee or member of the company unless there is a case of fraud or gross negligence. Members are unlimited, but there are limitations in that all members must be domestic. In addition, a member can be anything like a private equity group, corporation, or any individual as long as they are an American citizen.


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Advantages of a Limited Liability Company (LLC)

Limited Liability Company (LLC) advantages range from taxes to the limited exposure by members discussed above. There are tax benefits in that an LLC has the choice of being taxed like a partnership or a corporation. The first option means that the profits and losses will flow through to the members, but this all depends on ownership percentages or an agreement by contract. Therefore, the IRS only taxes members once at the individual level. An LLC can choose to be taxed as a corporation as well. This means that the company would have certain salaries for its members and the actual entity will taxed as a whole.

Another large benefit of the Limited Liability Company is the ability of the company to own its own intellectual property. Because this is a private form, there is also greater protection from being acquired by other companies. This allows the company to grow at its own pace and make decisions without having to worry about pursuit of other companies.

Disadvantages of a Limited Liability Company (LLC)

One disadvantage of an LLC is the cost; it’s typically more expensive to operate than partnerships and/or proprietorships. There are annual state fees when you operate an LLC. In addition, banks usually have higher fees for LLCs than they do for other entities.

Another disadvantage is that you need to separate all records – business vs. personal. The money, meeting minutes, structure, and records all needs to be separate.

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Limited Liability Company

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Limited Liability Company

Originally posted by Jim Wilkinson on July 24, 2013. 

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Ten In-house Secrets For Reducing Your Company’s Legal Costs

See Also:
Tips on How to Manage Your Lawyer
What Relationship Should the General Counsel Have With the Board
How to Keep Your Corporate Veil Closed
Corporate Veil
Sunk Costs
Bankruptcy Costs

Ten In-house Secrets For Reducing Your Company’s Legal Costs

General Counsel,’ or “Chief Legal Officer,” is the job title of the lawyer who heads up the legal department in a corporation. As former general counsel of a small oil and gas company, as well as the assistant general counsel of two Fortune 100 corporations with annual sales exceeding a billion dollars per year, my job involved delivering and managing in-house legal services, managing external law firms, and contributing to corporate strategy. However, much of my time was occupied with finding ways to reduce your company’s legal costs.

Major corporations need a full-time general counsel, and supporting legal staff made up of other in-house lawyers and supporting administrative staff. However, smaller growth emerging companies may not have the luxury and the resources to hire such legal support. This article will assist you in developing legal management principles that can reduce cost and increase efficiency in your business. The primary goals of managing legal costs include the following:

  • Negotiating the cost per hour of a lawyer’s time
  • Reducing the number of hours of lawyer time required by the Company for external lawyers

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Reducing The Cost Per Hour for Legal Services

1. Recognize the ‘In-House’ Advantages

Corporations with in-house lawyers typically generate internal legal services at a cost per unit of time lower than hourly rates of external law firms. When legal services are delivered on-site, the lawyer becomes a familiar face, and can learn a lot about the company and the overall strategy of its management team. This makes it easier for the in-house lawyer to give pro-active advice that is in line with the company’s corporate strategy and business objectives. Having one lawyer responsible for delivery and management of all company legal requirements gives continuity critical to strategy implementation and facilitates cost management of the legal function.

2. Identify Legal Work Critical to the Strategy of the Company

Identify legal work critical to the core mission or strategy of the Company. Target doing it on an ‘in-house’ basis. As in other skill areas, the approach of ‘new economycompanies is to hire for core mission critical and strategy requirements. Then outsource the rest.

3. Recognize the Requirements of the Job and Obtain the Skills Needed

The ability to perform legal services at a high performance level is the primary basis of evaluation for a potential in-house counsel. Just as important are the in-house counsel’s ability to source and manage legal requirements that exceed his or her geographic, skill or time limitations. A third quality that you should desire in an in-house counsel is the ability to design and deliver internal legal liability reduction programs. They should accomplish this by creating standardized practices, materials, and processes aimed at reducing the Company’s legal costs over time. They should also reduce any potential legal liability, or risks, as the Company pursues its business goals and objectives.

4. Calculate Your Company’s Legal Costs

This requires adding up all of your legal bills for the previous year AND estimating the cost of productive executive time lost due to involvement in, concern about, or management of legal issues. Now you have identified the value of managing the Company’s legal environment. Adjust this amount upward or downward to reflect how you expect the current year’s business activity, and legal activity, to compare to the past year for the same activity. You can label the adjusted amount as your Company’s ‘projected legal costs.’

5. Assess the Cost of ‘In-House’ Employee vs External Lawyer ‘A La Carte’

Assess the cost of bringing a full-time lawyer on board as an employee (‘in-house’ employee cost). Then compare the cost to buying legal services from an external lawyer ‘a la carte.’ Recognize the value of educational, business, legal, ‘in-house’ and management experience and skills necessary to do the legal job for the Company as it is now and as you plan it to be in the future. Remember technical and industry knowledge may be important candidate factors. The fully loaded ‘in-house’ employee cost for an in-house lawyer recognizes lawyer recruitment fees, salary, executive benefits, support staff, allocated office space, office furniture, equipment, law library and electronic legal research costs, law society and practice insurance annual fees, and costs of ongoing legal education courses. If there is a risk that the newly hired in-house lawyer will not work out, then an allowance for costs of severance is prudent.

6. Compare the Projected Legal Costs to the Fully-Loaded ‘In-House’ Employee Cost

Make sure that you compare ‘apples to apples’. Avoid the “pitfall” of hiring an in-house lawyer that is too junior to do the job that you need done. This could be because of lack of experience, skills and knowledge. This could actually increase your Company’s costs because of the need to use external lawyers to supplement the work of your under skilled in-house lawyer. Of course, the more junior a lawyer is in experience level, the lower their salary for employment. But all other costs (which usually exceed salary) are more or less the same regardless of experience level of the lawyer employed.

7. Consider Permanent Outsourcing

If a new full-time ‘in-house’ employee is not in your Company’s current plans, due to staffing freezes, lack of desired flexibility, or other reasons, consider going for the ‘in-house’ advantages by permanent outsourcing. Some common benefits identified for outsourcing legal services for your Company include the following:

(a) strategic benefits such as an ability to focus company resources on its core business, access to better, and more efficient, technology
(b) operational benefits such as access to legal expertise, and experience, not otherwise available in the marketplace, scalable solutions, increased accountability
(c) financial benefits such as cost reduction and the “freeing-up” of capital for key projects

8. Consider Outsourcing

If you do not require a ‘full time equivalent’ for your company’s mission-critical and strategic legal work, then consider outsourcing. Outsourced legal services provide an opportunity to buy the services you need on a flexible, scalable basis. For example, The Phillips Law Group offers experienced in-house lawyers on a flexible schedule based on your Company’s legal requirements; such schedule can include a morning a week to full time. The services for such in-house lawyers can be priced on an hourly fee arrangement. They can also be priced on an alternative billing arrangement, such as target-fees, monthly retainer, project fees, or other basis. They work on-site at your premises. The pricing model reflects aggressive use of labor-saving technology and a belief that your Company should not pay any more for legal services than that which is absolutely necessary.

Reducing The Quantity Of Legal Services Required

9. Divide Your Company’s Legal Functions into Four Categories

Divide your Company’s legal functions into the following four categories:

  • Maintenance-related
  • Avoidable,
  • Transaction-related
  • Crisis-related

Then adopt management plans for each of those categories. Avoidable legal expenses are those that can be reduced through training employees responsible for causing them. An example would be targeting reduction of wrongful dismissal lawsuits by developing standard Company employment contracts and providing related training to the human resources staff.

10. Develop Standardized Materials and Procedures to Delegate Low-Level Legal Functions

Develop standardized materials and procedures to delegate low-level legal functions to business staff. Then have a lawyer monitor those functions. Functions relating to the Company’s compliance status and asset maintenance (e.g. routine procurement contracts, company and securities compliance filings, trademark and patent renewals) may offer a substantial opportunity to save money. Completion and return of standard forms can be delegated to trained staff and then monitored by a lawyer. Your Company can develop a process to review all patents and trademarks. Make sure that the Company is exploiting them, or has a potential use or revenue from each, before spending money to renew registrations.

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company's legal costs, reducing your company's legal costs

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See related article:
Tips on How to Manage Your Lawyer

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S Corporation vs C Corporation

See Also:
S Corporation
C Corporation
Limited Liability Company (LLC)

S Corporation vs C Corporation

Although these two entities are very similar, there has always been a debate between an S corporation vs C corporation. The S corporation vs C corporation debate has been ongoing for a while. The following are some major differences that exist which may help an entity choose the proper class of corporation.

Double Taxation

In a C corporation, the entity is forced to pay Federal Income Taxes at the entity level and again at the individual level when it distributes dividends to its shareholders. This double taxation is a huge disadvantage to the C corporation. It acts as a flow through entity much like a partnership. Each individual is only taxed on their earnings from the s corp at the individual level on schedule E of the IRS form 1040.

# of Shareholders

An S corporation can only have 100 shareholders total. This is good if it is a smaller company. However, for larger companies, this is simply not possible because of the amount of cash flow needed to finance a larger corporation. Consider all family members within the S corporation as only one shareholder. This means that there is a way in which there could be more than 100 shareholders. It also means that S corporation holders can increase their interest in the business without losing the status of an S corp.

Forms of Stock

C corps can issue several different forms of stock to obtain financing for its operations. In comparison, an S corporation can only have one class of stock. The C corporation’s advantage is that it has the ability to issue preferred shares or other classes depending on its needs.

Type of Company

You can form S corps only after you set a company as a C corp or a Limited Liability Company (LLC). This is a disadvantage for entities that would like the S corporation status (i.e. partnerships because of the similarities between the two).

Note: This is by no means all of the S corporation and C corporation differences. However, our list includes some of the main ones that influence a company to go one way or another.


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Reverse Stock Split

See Also:
Common Stock Definition
Intrinsic Value – Stock Options
Stock Options Basics
Treasury Stock (Repurchased Shares)

Reverse Stock Split

A reverse split is a procedure that is the exact opposite of a stock split. It involves reducing the number of shares for the corporation while maintaining the same market value. However, the cost per share will be worth more in the market after a reverse stock split occurs.

Reverse Stock Split Meaning

A reverse stock split is usually performed by companies that are going through some financial difficulty and their price may be too low. Some exchanges require that a company maintain a certain price per share to be listed. For example, the U.S. exchanges require a stock price to be above $1 to be listed. If a company’s stock price were approaching this $1 then the company might perform a reverse split to try and up the price per share and keep the company listed.

Reverse Stock Split Example

Blokbusta Inc. has been a declining business the past couple of years. It’s stock price has steadily declined from the $20 Per share two years ago, and prospects for the company are not looking favorable. The current price per share has dropped to $2 per share. To be listed on the exchange that it is currently on the price per share must be listed at least $1. Worried that Blokbusta might fall below the $1 mark before it can turn around the company, Blokbusta performs a reverse split of 10 to 1. There are currently 100,000 shares outstanding. What is the new stock price?

The current market value of the stock is $200,000 (100,000 shrs. * $2/shr.)

The new amount of shares will be 10,000 (100,000/10)

Thus the new price per share will be $20 per share ($200,000/10,000 shrs.)

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S Corporation

An S corporation (S-Corp), also called a subchapter S corporation, is a type of business organization that is structured like a corporation but taxed like a partnership. Find the applicable law in Chapter 1, Subchapter S, of the Internal Revenue Code. S-corps do not have to pay corporate income taxes. Instead, include the company’s profits and losses in the tax filings of the individual shareholders. To qualify as an S-corp, a company must be a domestic entity. The company must also have no more than 100 shareholders. The company must meet other specific requirements.

Advantages and Disadvantages of a S Corporation (S-Corp)

The primary advantage of the S-corp is the tax benefit. S-corps do not have to pay corporate income taxes. Also, it offers owners limited liability protection with the S-corp status. On the other hand, establishing an S-corp can involve significant legal and accounting costs. And S-corps are only allowed to issue one type of stock (typically common stock), which can limit the entity’s ability to raise capital.

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S corporation, S-Corp
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S corporation, S-Corp

See Also:

Partnership
General Partnership
Limited Partnership
Sole Proprietorship

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Responsibility Center

Responsibility Center Definition

In accounting, a responsibility center refers to an organizational subunit in a corporation. For instance, a large corporation may consist of numerous smaller business groups or divisions, some or all of these organizational subunits could be set up as responsibility centers.

The manager of a responsibility center is responsible for the activities of the organizational subunit. In addition, they are responsible for the results of specified financial and non-financial performance measurements. The concept of the responsibility center as an organizational subunit in a larger corporation is a part of the larger concept of a responsibility accounting system.

Furthermore, there are four different types of responsibility centers. These different types include the following:

Responsibility Accounting

Responsibility accounting is a system of organizational architecture designed to promote goal congruence among managers and employees in a company or organization. It is also intended to appropriately measure and evaluate the performance of people and organizational subunits within the corporation. Many also employ responsibility accounting systems to ensure both responsibility and accountability among the hierarchy of the ranks within the organization.

Types of Responsibility Centers

The following include the types of responsibility centers:

1. Cost Center / Discretionary Cost Center
2. Revenue Center
3. Profit Center
4. Investment Center

Cost center managers are responsible for the incurring as well as controlling costs in their organizational subunit.

Discretionary cost center managers are typically responsible for adhering to a budget.

Revenue center managers are responsible for revenues generated by their organizational subunit.

Profit center managers are responsible for revenues and expenses generated as well as incurred by their organizational subunit.

Investment center managers are profit as well as the capital investments required to generate the profit.


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Responsibility Center

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Responsibility Center

 

Sources:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

Barfield, Jesse T., Michael R. Kinney, Cecily A. Raiborn. “Cost Accounting Traditions and Innovations,” West Publishing Company, St. Paul, MN, 1994.

 

See Also:
Service Department Costs
Transfer Pricing
Value Drivers: Building Reliable Systems to Sustain Growth
Value Chain
Cost Driver

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Preferred Stocks (Preferred Share)

Preferred Stocks (Preferred Share) Definition

Like common stock, shares of preferred stocks (preferred share) represent ownership of a public corporation. However, unlike common stock, preferred stock typically does not give the owner voting rights.

Preferred stock usually pays a dividend. But due to its preferred status, preferred stockholders will receive dividend payments before common stockholders. For example, if, for whatever reason, the company does not have enough cash to meet all of its dividend payment obligations, the common stockholders will not begin to receive dividends until after all of the preferred stockholders have received their dividends.

Likewise, if the company were to go out of business and liquidate its assets, preferred stockholders have seniority over common stock holders. Preferred stockholders have a higher ranking claim to the liquidated assets than common stockholders. Common stockholders will not have access to liquidated assets until all of the preferred stock holders have been paid off.

Preferred stock may have a convertible provision, allowing it to be exchanged for shares of common stock under certain specified circumstances.


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Preferred Stocks

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Preferred Stocks

See Also:
Company Valuation
Fixed Income Securities
Arrears
Subscription (Preemptive) Rights

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