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Thus, the corporation and LLC, with their limited liability, continuity, and transferability, seem to be the obvious choices for this potentially growing and successful business. As with Phil, it becomes necessary to decide whether to make the subchapter S election or choose an LLC to achieve tax passthrough. This decision will be made on the basis of the parties‟ projections. Are there likely to be serious losses in the short term, which might be usable on their personal tax returns? Will there be a need for significant capital expenditures, thus indicating a need for the low-end corporate tax rates? Will the company offer a variety of employee benefits that our principals would wish to exclude from their taxable income? Is the company likely to generate more profit than can be distributed in the form of reasonable compensation, thus calling for the elimination of the corporate-level tax? If these factors seem to favor a tax pass-through entity, the principals will likely analyze the choice between subchapter S and LLC in a manner similar to Phil. In addition, they may find the LLC‟s lack of eligibility rules attractive in the short run should they ever consider the possibility of corporate or foreign investors, or creative divisions of equity. Conclusion These and the many other factors described in this chapter deserve careful consideration by the thousands of entrepreneurs forming businesses every month. After the basic decision to start a new business itself, the choice of the appropriate form for the business may well be the most significant decision facing the entrepreneur in the short run. Internet Links Problems Jake and Carolyn were convinced that their high-tech invention could revolutionize telecommunications. And apparently they were not too far off in that estimation, since they had gotten very positive early indications from a number of venture capital firms they had approached with the idea. Most of the venture capitalists had told Jake and Carolyn that they would be interested in making a substantial investment in a company to be formed to exploit the invention as soon as Jake and Carolyn had produced a working prototype. This would cost some money in design and engineering expenses, which Jake and Carolyn would pay with their own funds, but after that, all future development and marketing costs would be defrayed by the investors. What form of business entity should Jake and Carolyn choose for this business? Acting upon their mutual love of cupcakes, Lauren and Claire were going into the bakery business together. Although neither of them had any capital to invest in the business, they were fortunate to have parents who were willing to lend money to the business on a favorable interest rate and
epayment schedule. Lauren and Claire‟s projections showed that for at least the first 12 months of the business the costs of renting space and equipment and paying their employees would outpace their revenue, even with Lauren and Claire taking out virtually nothing for themselves. But they were convinced that the business would turn profitable after a year‟s time. What form of business entity should Lauren and Claire choose for their bakery? For Further Reading Bischoff, William, Choosing the Right Business Entity: Tax Practitioner’s Guide (Gaithersburg, MD: Aspen Publishers, 2001). Diamond, Michael R., How to Incorporate: A Handbook for Entrepreneurs and Professionals (Hoboken, NJ: John Wiley & Sons, 2007). Mancuso, Anthony, LLC or Corporation? How to Choose the Right Form for Your Business (Berkeley, CA: Nolo, 2008). Shenkman, Martin M., Starting a Limited Liability Company (Hoboken, NJ: John Wiley & Sons, 2003). Spadaccini, Michael, Business Structures: Forming a Corporation, LLC, Partnership or Sole Proprietorship (Irvine, CA: Entrepreneur Press, 2007). Steingold, Fred, Legal Guide for Starting & Running a Small Business (Berkeley, CA: Nolo, 2006). Williamson, Harvey J., Handbook on the Law of Small Business Enterprises (Louisville, CO: Argyle Publishing Company, 2006). 9 Taxes and Business Decisions Richard P. Mandel
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Table of Contents Title Page Copyri
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Chapter 6 - Planning Capital Expend
Page 5 and 6:
For Further Reading Part IV - Manag
Page 7 and 8:
Successful Postmerger Implementatio
Page 10 and 11:
This book is printed on acid-free p
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Syllabus How Chapter Topics in This
Page 14 and 15:
Some of these experts are full-time
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About the Contributors Richard T. B
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Advances in Quantitative Analysis o
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enterprise development. Dr. Zachara
Page 22 and 23:
The left side shows Nutrimin‟s in
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Gail, let‟s go over this balance
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Gail, do you have any questions abo
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11. Not all expenses are cash outfl
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Financial Statements: Who Uses Them
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profitability to keep investing for
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Financial Accounting Standards It i
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Downloadable Resources for this cha
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Next, we explain each of these thre
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liquidity. Or, more simply, achievi
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If these ratios are seriously defic
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The debt-to-equity ratio is evaluat
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year 1 to year 3. The net effect wa
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to rate of return on the equity. Th
Page 50 and 51:
Other types of comparisons of finan
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income/sales), asset turnover (sale
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successful businesspeople should ha
Page 58 and 59:
More than a decade ago, a special c
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companies is used for illustration.
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The identification of nonrecurring
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The Dow Chemical single-step income
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is a pretax measure, but income fro
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Sources: Companies‟ annual report
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Exhibit 3.11 Examples of discontinu
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amortization purposes, the Company
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Examples of nonrecurring items disc
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During Fiscal 2006, inventory quant
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The nonrecurring items of Boston Sc
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The disclosure presented earlier in
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gains or losses that appear as part
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ecurring as for Kimberly-Clark, the
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Summarizing Nonrecurring Items and
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This example of using the SEB works
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Exhibit 3.27 Other income (expense)
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Source: Pfizer, Inc., annual report
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Exhibit 3.30 Acquisitions note: Pfi
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Source: Pfizer, Inc., annual report
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Exhibit 3.33 Cost-reduction initiat
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Exhibit 3.36 Share-based payment no
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The Pfizer Worksheet Analysis: Down
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Some Further Points on the Pfizer W
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• It is common to treat items as
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FedEx Corporation (2007) First Sola
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1 The American Institute of Certifi
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28 These alternative translation me
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If you need some instruction in Exc
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To solve using Excel, open your Exc
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As you can see from the previous ex
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C6 = 5 • Now enter the “=” si
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Ordinary Annuity An ordinary annuit
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To confirm that the number of payme
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The FV of this first payment into t
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Exhibit 4.15 Finding the future val
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Exhibit 4.18 Finding the present va
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From Exhibit 4.20, we see that as t
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Exhibit 4.22 Amortization schedule
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Exhibit 4.25 Regular cash flows wit
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Internet Links For Further Reading
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Investors who are risk averse will
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considering the risk of a single as
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Portfolio Risk Stand-alone risk is
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In spite of unique or diversifiable
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If a particular stock is highly sus
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The formula tells us that, to begin
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for the entire market of stocks sin
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The dividend per share for preferre
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If you are able to determine the cu
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Debt finance is the lower-cost meth
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We don‟t observe many firms whose
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Capital Structure in Practice Finan
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are able to observe regularities in
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dividends and capital gains. We wil
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where EBIT is earnings before inter
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Since long-term debt holders have a
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accept more investment projects. Re
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A beer company is considering build
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accounts receivable, and tabulates
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profit by the tax rate determines t
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Accounting profit often mixes varia
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The concept that future cash flows
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Like project A, project C also cost
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The after-tax interest rate is the
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equal mix of debt and equity, its d
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The payback period rule stipulates
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The IRR rule is appealing in that i
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complete with its real options is g
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What does it matter that one invest
Page 210 and 211: Exhibit 7.3 Time line in dollars an
Page 212 and 213: There are a number of countries in
Page 214 and 215: eturn of 10% on its investments in
Page 216 and 217: Exhibit 7.12 Summary of exchange ra
Page 218 and 219: and so will the value of the liabil
Page 220 and 221: Source: CIA, World Factbook, availa
Page 222 and 223: Exhibit 7.18 Net present value of c
Page 224 and 225: equired interest payments to be pai
Page 226 and 227: So if the assistant treasurer was r
Page 228 and 229: This theory is far from perfect, as
Page 230 and 231: The Consulting Firm Jennifer, Jean,
Page 232 and 233: part by a statute, the Uniform Limi
Page 234 and 235: formation in Delaware (or any state
Page 236 and 237: purpose of requiring qualification.
Page 238 and 239: Phil‟s death may terminate the bu
Page 240 and 241: the transfer. This means that if Br
Page 242 and 243: These rules extend to tort liabilit
Page 244 and 245: In the absence of a meeting, stockh
Page 246 and 247: A more detailed discussion on the b
Page 248 and 249: Partnerships If possible, the resul
Page 250 and 251: associated with this arrangement ar
Page 252 and 253: Partnerships are also not separate
Page 254 and 255: For most start-up businesses, howev
Page 256 and 257: form, even at the risk of some unli
Page 258 and 259: likely that our consultants will be
Page 264 and 265: It is not possible to fully describ
Page 266 and 267: usiness corporation for all purpose
Page 268 and 269: a cash-basis taxpayer to be taxed a
Page 270 and 271: The Tax Reform Act of 1986 substant
Page 272 and 273: limit is the product of the value o
Page 274 and 275: he would have spent anyway. In fact
Page 276 and 277: protect Brad from the scenario of h
Page 278 and 279: paying for the privilege. If the st
Page 280 and 281: The second tax scenario attaches to
Page 282 and 283: include that nullity in his taxable
Page 284 and 285: then the capital gain to be taxed h
Page 286 and 287: Most relevant to Morris is Section
Page 288 and 289: To begin with, the ESOP will have t
Page 290 and 291: general partner of a limited partne
Page 292 and 293: small businesses) is also subject t
Page 294 and 295: oth Lisa and Brad would be free to
Page 296 and 297: Assume that a limited liability com
Page 298 and 299: corporations, and had been audited
Page 300 and 301: There is plenty of blame from the c
Page 302 and 303: • An important study about top ma
Page 304 and 305: • The federal government made at
Page 306 and 307: $79.7 million for other services, a
Page 308 and 309: Budgets offer a variety of benefits
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determine the impact of specific pr
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Exhibit 11.2 Budget variance report
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udget, we just add more to it next
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income statement. The financial bud
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For a manufacturing company, cost o
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C&G‟s Gift Shop has a policy to m
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Meeting cash obligations as they co
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was unusually low, say, due to the
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A fixed budget, sometimes called a
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A large part of the budget selling
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• Centralized resource allocation
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Merewitz, Leonard, and Stephen H. S
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This chapter starts with a discussi
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Interestingly the numbers for quart
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Exhibit 12.4 Scenarion analysis.
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Pitfalls Although this analytic tec
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Exhibit 12.6 Variable cost element
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Variable Cost as a Function of Outp
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If scenario 2 yields a lower profit
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Microsoft certainly does not price
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If it is determined that dumping ha
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Leaving government agencies and not
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transaction processing. Each proces
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Exhibit 13.3 E-commerce transaction
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To summarize the analysis, the busi
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Capacity costs are probably the mos
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which it was, but for the inventory
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They called this strategic cost man
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A closer study, however, revealed s
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the benefits of business planning.
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The last type of plan is called a d
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The Business Plan We will progress
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Hook the Reader That means having t
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Industry The goal of this section i
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upscale suburban client who wants p
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Company and Product Description Com
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Exhibit 14.8 shows the competitive
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Exhibit 14.9a Advertising schedule.
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Scope of Operations What is the pro
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Development Time Line A development
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By law, most organization types req
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As mentioned in the development pla
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that can be depreciated, you should
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1 Special thanks to Matt Feczko, Mi
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For better or worse, the business e
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Leeson bet and lost. Japanese stock
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Between February and April 1994, Da
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LTCM could be picky when it came to
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An investor who wished to invest in
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Similarly, the swaps market has rev
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speculator would suffer losses equa
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American manufacturer will suffer l
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The ease with which futures facilit
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Exhibit 15.1 Call option payoff dia
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Exhibit 15.2 Payoff diagram for a w
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Notice that the put option payoff r
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Bank, owns a large block of NASDAQ
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can be tailored so that the money r
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Finally, the last step is to choose
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3 Fischer Black, who co-invented th
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not include assets that the firm ha
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Thus, a business valuation will usu
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Negative • Acme is highly depende
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Exhibit 16.3 Acme Manufacturing, In
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Profitability ratios reflect the re
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When we talk about the value of a b
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This example illustrates that with
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Income Approach: Discounted Cash Fl
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Exhibit 16.5 Acme Manufacturing, In
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Victoria explains that the second p
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Victoria analyzes Acme‟s audited
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In summary, the discounted cash flo
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Adjustment for Illiquidity As previ
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51% position sells for a higher pri
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examples. The proper application of
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The subject of this chapter is grow
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Finally, an acquisition can be effe
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M&A activity has been the focus of
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companies continue to make the same
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equals was taking on a distinctive
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Anatomy of a Successful Acquirer: T
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employees kept their original jobs
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where ΔCF t is the incremental cas
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where it‟s ultimately buried. Suc
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The following example summarizes th
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make sure that you are at least awa
Page 493 and 494:
acquisition, there is no immediate
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its vascular business, which was so
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While all employees should be part
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makes strategic and financial sense
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Bhagat, Sanjai, Ming Dong, David Hi
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The 2008 financial crisis underscor
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Source: Plunkett’s Outsourcing &
Page 509 and 510:
To summarize: Trends • Large numb
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Companies are becoming increasingly
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What steps should a company follow
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• Results of meetings with vendor
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• Breach of contract and remedies
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Assuming the project or service rev
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The answer is: profits. The company
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19 Information Technology and You D
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People‟s lives have been turned u
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its self-contained rechargeable bat
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Random-Access Memory (RAM) Random-a
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On laptop computers and PDAs, the s
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Operating System An operating syste
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the spreadsheet software together w
Page 539 and 540:
Exhibit 19.5 Pro forma sales and in
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Database Software A database is a c
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Internet e-mail addresses often con
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Personal Finance Software There are
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There are several different approac
Page 549 and 550:
One of the major attractions of the
Page 551 and 552:
While not a new version of the Web
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industrial revolution, and has occu
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Dummies Inc. has a series of books
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organization. This chapter is desig
Page 561 and 562:
As technology has evolved, the term
Page 563 and 564:
While the software mentioned earlie
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Most of the focus of the investor c
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Data Access and OLAP Before the lat
Page 569 and 570:
Exhibit 20.5 illustrates a differen
Page 571 and 572:
Productivity Tools Workers expect t
Page 573 and 574:
Client-server technology is based o
Page 575 and 576:
Today, most programmers write in C+
Page 577 and 578:
Exhibit 20.6 is a model of a typica
Page 579 and 580:
No treatment of relational database
Page 581 and 582:
Online analytical processing (OLAP)
Page 583 and 584:
server) and the rest on the users
Page 585 and 586:
the other operational departments w
Page 587:
The world of business has changed d
Page 591:
Chaffey, Dave, E-Commerce and E-Com
Page 595 and 596:
According to the results of the sur
Page 597 and 598:
understand the financial situation
Page 599 and 600:
MBA graduates who are hoping to ent
Page 601 and 602:
Summary Financial services opportun
Page 603 and 604:
Let‟s begin with the “I left it
Page 605 and 606:
MBA student: “Well, I go to [Grea
Page 607 and 608:
Aiming for Your Goals For career ch
Page 609 and 610:
Networking is generally regarded as
Page 611 and 612:
Let‟s begin with some key assumpt
Page 613 and 614:
like, or moving ahead in the compan
Page 618 and 619:
Accrual accounting: An accounting m
Page 620 and 621:
Cash flow: Cash that is spent or re
Page 622 and 623:
Distribution channel: A chain of in
Page 624 and 625:
Goodwill: As it relates to valuatio
Page 626 and 627:
Management’s discussion and analy
Page 628 and 629:
Ordinary annuity: An annuity that p
Page 630 and 631:
Securities and Exchange Commission
Page 632 and 633:
Vertical merger: A merger in which
Page 634 and 635:
about activity-based costing progre
Page 636 and 637:
Application systems ARPAnet Arthur
Page 638 and 639:
Bell Labs Benefit measurement Beta
Page 640 and 641:
goal orientation legal and contract
Page 642 and 643:
segment information note share-base
Page 644 and 645:
process of purpose of real world us
Page 646 and 647:
uy/build decision capital budget in
Page 648 and 649:
written resume Careers in corporate
Page 650 and 651:
Cell Center for Research in Securit
Page 652 and 653:
Compensation and ownership Competit
Page 654 and 655:
Corporate culture Corporate debt in
Page 656 and 657:
profit planning from an internal pe
Page 658 and 659:
Data Data access and OLAP Database
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Askin Capital Management Barings Ba
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market approach publicly traded gui
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Electronic data interchange (EDI) E
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Extensible markup language (XML) Ex
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short term liquidity users and uses
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Fourth generation programming (4GL)
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Going private Going private transac
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Hypertext links Hypertext markup la
Page 676 and 677:
Information technology and the firm
Page 678 and 679:
International Accounting Standards
Page 680 and 681:
Last-in-first out (LIFO) vs. curren
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Long call option payoff Longer-term
Page 684 and 685:
Market risks Market size and struct
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Motivation to outsource Multiple IR
Page 688 and 689:
Nonrecurring items defined disclosu
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Operational complexity Operational
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Outsourcing metrics Overhead Over-t
Page 694 and 695:
Personal end game Personal expense
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Price competition Price decreases P
Page 698 and 699:
Projected cash flow statements Proj
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Relevant range Relevant range assum
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Risk sharing Risk transfer Risk vs.
Page 704 and 705:
Short call option payoff Short part
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Spot price Spreadsheet software Spr
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Summarizing nonrecurring items and
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acquisition the business dividends
Page 712 and 713:
Timmon‟s Model of Opportunity Rec
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U.S. immigration quotas U.S. Intern
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discounting with discount rate form
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