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Incorporate your buisness - Cooke R.A.

Cooke R.A. Incorporate your buisness - wiley publishing, 2004. - 256 p.
ISBN 0-471-66952-0
Download (direct link): incorporateyourbusiness2004.pdf
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One of the advantages of a corporation is that it formalizes this distinction between owners and employees, and it defines the ownership of equipment.
In its simplest form, the structure of a corporation is easy to set up and maintain. However, there are some options of which you should be aware; they may be applicable to your circumstances, and in some instances they could generate tax savings or, at least, keep you out of trouble with the IRS. So, with some trepidation about using a scary phrase, I say that what follows is a short, but simple, discourse about corporate structure and finance.
The Basic Corporation
In its simplest form, we can envision a corporation, called Arbar, Inc., which is owned 50 percent each by Arnold and Barbara. The only asset of the corporation is $100,000 in the corporate bank account. The source of the $100,000 was the $50,000 that Barbara and Arnold each paid for
5,000 shares of common stock at $10 per share.
At this point, I have to use some basic accounting and finance terms. If you find this an unfathomable area, read through the next paragraphs to get the gist of it and do not worry about signing up for an MBA program. If you are already familiar with the terms balance sheet, assets, liabilities, and equity, read on. If you are somewhere in between, here is a brief explanation of the basics.
Assets, Liabilities* and Equity
This initial picture of Arbar, Inc. can be laid out in a format called a balance sheet as in Table 4.1. Notice that the total of liabilities and equity on the right-hand side equal the total assets on the left-hand side. That is, the two sides of this report equal, or balance, each other. That is why it is
How to Structure a Corporation
ARBAR, INC. Initial Balance Sheet
Assets Liabilities
Cash $100,000 Total liabilities Equity 0
Common stock 100,000
Total equity 100,000
Total assets $100,000 Total liabilities & equity $100,000
TABLE 4.1 Initial Balance Sheet of Arbar, Inc.
called a balance sheet. There are three main parts to a balance sheet, and they can be defined as follows:
¦ An asset is something you own, such as your house and car. In the case of this corporation, it owns the $100,000 in the bank.
¦ A liability is the amount that the corporation would owe some third party. At this point, Arbar, Inc. owes no one. One of the first tasks by Barbara and Arnold is to buy two desks and two chairs in the name of the corporation. If they agreed the corporation would pay $1,000 for those items within 10 days, the balance sheet would change this way: Assets would be increased to $101,000 (cash and desks), and the $1,000 owed to the office supply company would appear as a liability on the right-hand side of the balance sheet. (It would still balance, as the total assets would be $101,000 and liabilities and equity on the right-hand side would be liabilities of $1,000 and equity of $100,000.
¦ Equity is the third part. You are probably familiar with the term equity in relation to owning your house. If the value of the house (an asset) is $150,000 and your mortgage balance is $100,000, your equity is the difference, or $50,000. Essentially, this same concept of equity applies to a corporation balance sheet, with some modification. (Accountants, for technical reasons we do not get into here, generally value assets as the price paid for them rather than the current market value—although there are some exceptions to that rule.) In the case of this corporation, the asset of $100,000 was created because that is what the stockholders (Arnold and Barbara) paid for their stock in the corporation. So the balance sheet, under the heading of equity, displays the stockholders’ ownership interests by listing that as the value of common stock. That equity interest is documented by stock certificates that are issued to Arnold and Barbara.
How to Invest in Your Corporation
We continue the example of Arbar, Inc. The corporation needed an additional $199,000 of equipment making a total investment in equipment of $200,000. While it could have bought half of this equipment with the $100,000 in the bank, it would have left the corporation with no operating capital. That is, it would have no funds with which to pay employees, buy advertising, and pay other expenses that are involved in day-to-day operations of the business. So Barbara and Arnold had to look elsewhere for funds with which to buy the equipment.
Each provided another $25,000 by purchasing additional stock, totaling $50,000. Their local friendly neighborhood banker agreed to loan the corporation $80,000, secured by the equipment that would be purchased. They now had $130,000 additional funds and needed $70,000 more.
How to Structure a Corporation
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