Talking Business

                            SETTING UP A BUSINESS



If a  person  wishes  to  launch  a  new  business,  he  has  to  make  some
preparatory steps.


The first step is the selection of an appropriate  legal  form.  In  various
countries these forms differ. But usually they are  as  follows:  a  limited
liability company, a partnership and a sole proprietor.



There is a  basic  difference  between  these  forms.  A  limited  liability
company is a legal entity (legal person). In case of a  bankruptcy,  it  has
to reimburse (cover) its debts  with  all  its  assets,  but  the  creditors
cannot seize the assets owned by the company’s shareholders.



Sole proprietors or partners do not form a legal entity and  have  unlimited
liability. If their business goes  bankrupt,  they  have  to  reimburse  the
debts not  only  with  the  firm’s  assets  but  also  with  their  personal
belongings: money, houses, cars, etc.


For this reason, most businesses are set up as limited liability  companies.
The name of such a company ends with “Limited” in the UK or Canada and  with
“Inc.”, “Corp.” or “LLC” in the USA.

A limited liability company may be private or public. A private  company  is
usually founded by a small group of people who know each  other  and  intend
to do business together. A private company cannot sell  its  shares  to  the
public and if it the business is not successful  the  founders  loose  their
own money only.

A public company’s shares  are  traded  on  the  stock  market  and  may  be
purchased by millions of people all over the world. These  shareholders  are
not aware of the company’s day to day  performance  and  must  rely  on  the
professionalism  of  the  company’s  managers  and  their  reports.  If  the
management is poor or in case of the managers’ fraud, the  shareholders  may
loose billions of dollars.

Many  countries  have  special  regulatory  bodies   to   supervise   public
companies, such as the US Securities  Exchange  Commission.  Yet,  corporate
disasters  sometimes  happen.  One  of  the  most  recent  examples  is  the
bankruptcy of Enron Corporation, a giant supplier  of  energy  resources  in
the Western part of the United States.

The second step in setting up a  business  is  the  preparation  of  various
documents, such as: Memorandum of Association, Articles of  Association  and
Resolution of the founders on the appointment of directors.  The  Memorandum
contains the conditions,  on  which  the  founders  agree  to  set  up  this
business,  and  the  Articles  set  out  the  principles  of  the  company’s
formation and management: its name,  objectives,  share  capital,  rules  of
management, etc. The founders have to make the initial  investment  and  may
either hire the directors of  the  company  or  appoint  themselves  as  the
directors.

Every new business is to be registered with the official  company  register.
The UK has such registration offices in London and in  Edinburgh,  while  in
the USA each of the 50 states has its own register.
                             COMPANY PERFORMANCE


Any business is set up to make profit. But the  founders  sometimes  do  not
have enough experience or make serious mistakes,  which  result  in  losses.
The financial results of the company’s  operations  can  be  seen  from  its
financial reports.

There are at least three reasons for preparing such  reports.  First,  every
government  needs  to  collect  taxes  and   therefore   requires   detailed
information on the company’s performance,  revenues  and  expenses.  Second,
the  shareholders  need  to  know,  whether  the  company’s  management   is
professional enough, and  ask  for  confirmation  with  facts  and  figures.
Third, the company’s top executives  must  control  the  efficiency  of  the
company’s various departments and  the  input  of  each  department  in  the
company’s  operational  results.  The  reports  prepared  by  the  company’s
accounting department  are  often  verified  by  an  auditor,  which  is  an
independent public accountant. The auditor has to confirm that  the  reports
comply  with  legal  requirements   and   reflect   the   company’s   actual
performance.

There are a lot of reports submitted annually, semi-annually and  quarterly.
The most important one is the balance sheet, which describes  the  company’s
assets and liabilities as on the last date of each year. The assets are  the
values, which the company owns: money, buildings, equipment, raw  materials,
computer hardware and software, trade marks. The  liabilities  specify  what
the company owes, such as: share capital, credits received  from  banks  and
suppliers, other debts. If the amount 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  the  latter  case  they  say  that  the
company is “in the red”.

Money transfers between the company and its partners  during  the  year  are
shown on the statement of cash flows. Cash is the most liquid  asset,  which
is as important for the company’s activities as blood for a human  body.  If
a company has huge fixed assets (land, buildings, equipment)  but  does  not
have enough money, it is a sign of financial problems.

There are many other reports, letters, notes and messages, which  a  company
has to submit. Some  of  them  are  very  colourful,  with  photographs  and
illustrations and look like advertising material.  But  their  contents  are
usually a summary of the above two  documents  and  additional  comments  to
them.

If we deduct the company’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 be reinvested. The shareholders  adopt  a  resolution
on this matter at their annual meeting. Often they decide  to  use  half  of
the net profit for dividends and to reinvest the other half. The net  profit
may also be carried forward to the next year. The  amounts  brought  forward
from the previous year are known as “retained earnings” of the company.

Companies are usually reluctant (do not wish) to pay  taxes  and  there  are
legal ways to avoid some of them. The company’s ability to save on  taxation
depends on the professionalism of its accountants. The easiest way to  avoid
taxes is to increase expenses through purchasing  new  machinery,  investing
in new technologies, making money transfers to charity foundations.

While tax avoidance is allowed,  tax  evasion  is  a  crime.  The  company’s
executive body (the board of directors) is responsible for  the  correctness
of the information submitted to the government. The  personal  liability  is
on the chief  executive  officer  (the  board  chairperson)  and  the  chief
financial officer who sign the reports. If the information contained in  the
documents is not correct and if the company  tries  to  evade  taxes,  these
persons may be fined or even jailed. Otherwise, they may escape  to  another
country, which sometimes happens.

                              THE STOCK MARKET



A century ago, the size of  enterprises  was  rather  small,  each  of  them
usually employed several dozen workers, and  most  business  companies  were
family-owned. Further industrial growth required  more  intensive  financing
and family capitals became insufficient. This gave birth to  share  capital,
which can combine financial  resources  of  many  people  into  a  pool  for
starting a big project.

The most  visible  representatives  of  share  capital  are  public  limited
companies, such as British Petroleum, Royal Dutch Shell or  General  Motors.
They raise money on the stock market by issuing  securities,  mostly  shares
and bonds.

Ordinary shares (common stock in USA) form the largest  part  of  the  whole
securities market. A shareholder owning ordinary  shares  can  vote  at  the
annual shareholders’ meeting, which reviews  the  company’s  reports,  takes
decisions on the company’s plans  and  the  distribution  of  the  company’s
profit.  The  meeting  may  decide  to  distribute  the  dividends  to   the
shareholders or to reinvest the profit. If the company has no profit or  has
losses, the owner of ordinary shares will receive no dividends.

Each ordinary share has its face value and its market price. The face  value
is indicated on the share certificate but one cannot sell or buy  the  share
at the face value. The market price is established at  the  stock  exchange,
where the shares are quoted and traded. The  market  price  may  be  several
times higher or lower than the face value because it depends on the  general
market situation and on the performance of the company.

When the country’s economy grows, the stock market  usually  has  an  upward
trend, the market prices of shares go up and the stock exchange traders  say
that the market is “bullish”.  If the  market  has  a  downward  trend,  the
market 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  shares  do  not  let  their
owner to vote at the shareholders’ meetings.

Some companies issue  bonds.  These  securities  provide  their  owner  with
stable income, the same as preference shares  do.  But  unlike  ordinary  or
preference shares, bonds are redeemable. It means that the  company  issuing
bonds has an obligation to redeem them or buy them back at  the  face  value
after a certain period of time, usually after several years.

There was a stock market boom during the  latest  decade  of  the  twentieth
century. Many people became active in shopping for  financial  products  and
invested much of their wealth in securities. They expected that the  markets
would grow rapidly in the coming years  and  hoped  to  earn  money  through
buying securities at lower prices and selling them at higher prices.



But these expectations were ruined by a  sudden  economic  crisis.  Now  the
Western economies have been in recession for about two years and the  market
price of most securities is much lower than their face value. It is  a  very
sad situation for the shareholders, because they cannot 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 buy them.