Professional Corporations – Advantages and Disadvantages

What is a professional corporation(PC)?

A PC is a corporation owned and operated by one or more members of the same profession (e.g. physicians, lawyers, accountants, dentists). The services provided by the corporation are generally restricted to the practice of the profession.

Professional corporations are now allowed in every province and territory across Canada. In each province/territory, the professional regulatory body usually determines whether its members may incorporate. For example, the regulatory body for physicians, in all provinces and territories, allows physicians to incorporate.

How does it differ from a common corporation?

There are some significant differences between a professional corporation and a common

corporation such as:

  • Only members of the same profession can be shareholders of a professional corporation in many (but not all) provinces.
  • The officers and directors of a professional corporation must generally be shareholders of the corporation as well.
  • The professional corporation is generally subject to the investigative and regulatory powers of the regulatory body governing the profession.
  • A professional corporation will not protect a professional against personal liability for professional negligence.

As a result of these differences, some of the benefits commonly associated with a corporation may have a limited application for a professional corporation. This is further described below

Advantages of using a Professional Corporation

Potential tax savings

A reduced federal and provincial corporate tax rate is applied on the first $400,000 of professional income earned by a professional corporation. Some provinces apply the reduced tax rate on income of up to $500,000. The provincial limit varies by province. For 2010, the combined federal and provincial tax on income subject to the small business limit will range between approximately 11% and 19%. As a result of this lower rate, the combined corporate and shareholder taxes paid on professional services income is slightly lower than if such income were to be earned by you directly.

Potential tax deferral

Perhaps the most significant advantage of using a PC is the ability to defer taxes. Professional income earned through a corporation is taxed at two levels – once at the corporate level and then again at the shareholder level when the profits are distributed to you as dividend income.

Since income at the corporate level is taxed at a lower rate than your personal income, a tax deferral opportunity exists when the income is taxed in the corporation (at the lower rate) and is not distributed to the shareholder (i.e. you). The deferral ceases when a dividend is paid to you and you pay the tax on that dividend.

Let’s illustrate. If you earn a professional income of $500,000 per year as a sole proprietor and only need $200,000 of pre-tax income for personal expenses, you will be left with $300,000 that will be taxed at the highest marginal rate. Assuming a marginal tax rate of 47%, you will be left with $159,000 to invest.

On the other hand, if you incorporate the practice, the $300,000 will be left in the corporation and taxed at the small business rate. Assuming a corporate tax rate of 18%, the corporation will be left with $164,000 to invest.

That’s $87,000 more.

Sole proprietor Professional corporation

Income $500,000 $500,000

Personal needs ($200,000) ($200,000)

Remaining funds $300,000 $300,000

Taxes ($94,000) ($54,000)

Net funds $159,000 $246,000

Additional funds in the

professional corporation $87,000

The additional funds in the corporation may be used to pay off debt, purchase capital assets, acquire investments or fund an insurance policy

Flexible employee benefits

As an employee of a professional corporation, you can access certain types of employee benefits that would otherwise not be available if you were a sole proprietor or a partner in a partnership. For example, the corporation can establish an Individual Pension Plan (discussed later on) or a Retirement Compensation Arrangement (RCA) for you. These retirement savings vehicles can also provide you with possible creditor-protection benefits. An employee health and welfare trust can also be created to provide health benefits for you and your family.

Capital gains exemption

The Canadian tax rules permit that up to $750,000 in capital gains arising from the sale of the shares of a qualified small business corporation may be exempt from tax. This $750,000 capital gains exemption is also available for shares of a professional corporation, provided certain conditions are met. However, the ownership of a professional corporation may not be as easily transferable since, in many provinces, it can only be transferred to members of the same profession.

Flexibility in remuneration

You can choose to receive a combination of salary and dividends from a professional corporation. The decision is based on the combined corporate and shareholder taxes paid in your province of residence.

Limited commercial liability

A professional corporation does not generally protect you from personal liability for professional negligence. However shareholders of a professional corporation will have the same protection as other corporate shareholders when it comes to trade creditors.

Income splitting

You can split income through a corporation by paying dividends to adult family members who are shareholders of the corporation. This strategy may be less applicable to professional corporations situated in provinces where share ownership is restricted to members of a particular profession. However other income splitting strategies, such as hiring family members to work in the business and paying them a reasonable wage for services rendered, are still available through a professional corporation.

Multiple small business deductions

As a result of a Canada Revenue Agency (CRA) ruling, it is possible for professionals operating through a professional partnership to render their services through a professional corporation and be able to access multiple Small Business Deductions (SBDs).

Income earned up to the SBD limit of $400,000 is subject to a preferential tax rate (some provinces have a higher SBD). Historically, the SBD had to be shared among all corporate partners. Given CRA’s new ruling, professionals currently operating as a partnership should consider the benefits of setting up a professional corporation to take advantage of multiple SBDs.

Individual pension plan

An Individual Pension Plan (IPP) is a defined benefit pension plan that a professional corporation can set up for the professional. The IPP provides better annual contributions than RSP limits for those over 40. Assets in an IPP are protected from creditors; however, they may be subject to locking-in provisions during retirement. If you would like more information on IPPs, please consult your advisor.

Disadvantages of a Professional Corporation

Costs and complexity

The costs for establishing and maintaining a PC are usually higher than those of a sole proprietorship. Also, a professional corporation will incur more costs to file a corporate tax return, prepare T4 slips for salaries and T5 slips for dividends. A corporation is also subject to greater regulation and compliance than a sole proprietorship or partnership.

Employer health tax and EI premiums

Corporations in several provinces have to pay a provincial health tax levy once the corporate payroll has exceeded a certain threshold. Fortunately the basic amount you are not taxed on is fairly high (e.g. $400,000 in Ontario) so the impact of this tax on professional corporations may not be that significant.

Business losses

You cannot claim business losses incurred by a PC on your personal tax return; whereas, in a sole proprietorship, you may use the business losses to offset your personal income from other sources.

Liability for malpractice

As mentioned above, a professional corporation will not protect you from personal liability for professional negligence.

Who should use a professional corporation?

A PC can provide potential tax savings and tax deferral benefits. This may appeal to you if you do not require all of your income to live on. Professional corporations may also appeal to you if you wish to save for your retirement through alternative means, such as a pension plan or retirement compensation arrangement, or if you would like to limit your personal exposure to commercial liability.

Before incorporating, you should consider the cash-damming strategy, which converts all your non-deductible personal debt into tax-deductible business debt. Find out more
If you have questions on any of the issues discussed in this article, please speak with your advisor.

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What are S Corporations?

S Corporation is an elective provision that permits small business corporations and their shareholders to elect special income tax treatment. In S corporation status, corporate income tax can be avoided and shareholders can claim corporate losses. These are domestic corporations that can avoid double taxation by electing to be taxed under Subchapter S of the Internal Revenue Code. The S corporation cannot have more than 75 shareholders. Only certain entities and individuals are allowed to be shareholders. All S Corporation shareholders must be U.S. citizens or permanent resident aliens. S Corporations may have only one class of stock. It is exempted from federal income tax other than tax on certain capital gains and passive income.

S corporation is a for-profit corporation that begins to exist upon filing the Articles of Incorporation at the state level. S Corporation status can be obtained by submitting IRS form 2553 to the Internal Revenue Service. Taxation is done as a partnership or sole proprietorship rather than as a separate entity. For purposes of computing tax liability, income is “passed-through” to the shareholders in S corporation. Thus, the individual shareholder’s tax return will report the gain or loss generated by the S corporation.

The IRS treats corporate income and corporate losses very differently when a corporation has elected S Corporation status. Therefore, businesses that need the limited liability of a corporation and the pass-through tax treatment of a partnership will elect S corporation. In general, S corporation structure is preferred only when shareholders are employed at least half of the time within the corporation. In other words, the shareholders intemperately manage the corporation’s daily activities and income is distributed to them each year.

A financial advisor would be able to guide you in terms of S corporation status as to whether it would yield a profit for your business. If you plan to draw a very low salary and leave most of the corporate earnings in the corporation for reinvestment, S corporation may not be the right choice for you.

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Corporate Governance and Accounting Standards in Oman: An Empirical Study on Practices

RELEVANCE:

In recent years, the Oman economy has undergone a number of reforms, resulting in a more market-oriented economy. Particularly, the financial impetus extended by the Sultanate of Oman had signaled the beginning of a positive trend. The size of Oman industry is becoming much bigger and the expectations of various concerned parties are also increasing, which can be satisfied only by good Corporate Governance.

The importance of good Corporate Governance has also been increasingly recognized by the industry for improving the firms’ competitiveness, better corporate performance and better relationship with all stakeholders(1). In oman also the industries have obliged to reform their principles of Governance, for which, Oman companies will now be required to make more and more elaborate disclosures than have been making hitherto. This necessiates to adhere to the uniform and proper accounting standards, as the standards reduce discretion, discrepancy and enhances not only the degree of transparency in sharing of information with the parties concerned but also reinforces the broader role the directors need to play for achieving Corporate objectives in the midst of challenges and adversities.

Here, the Corporate Governance is a voluntary, ethical code of business concerned with the morals, ethics, values, parameters, conduct and behavior of the company and its management. The corporate responsibility begins with the directors who are the mind and soul of a firm.

The Board is expected to act as conscience-keeper of the corporate vision and mission, and devise the right type of systems for organizational effectiveness and satisfaction of stakeholders. Thus, the Corporate Governance is a system of accountability primarily directed towards the shareholders in addition to maximizing the shareholders’ welfare(2), where the debate on disclosure/ transparency issues of Corporate Governance eventually centres around the proper accounting standards and their practices and issues, as the application of accounting standards give a lot of confidence to the corporate management and make the disclosure more effective and ensure the good Corporate Governance to promote a healthy investment climate.

Thus, the study of practices of accounting standards is an important and relevant issue of good Corporate Governance in the present environment, as the standards are viewed as a technical response to call for better financial accounting and reporting; or as a reflection of a society’s changing expectations of corporate behavior and a vehicle in social and political monitoring and control of the enterprise(3).

STUDY:

The old ways of selective and conservative reporting is yielding place to more transparent and voluntary disclosures, in tune with the changing times. There is no alternative to adopting by the corporate entities of new standards of accountability, where the accountability is largely a matter of disclosure, of transparency, of explaining a company’s activities to those to whom the company has responsibilities(4) i.e. the disclosure in simple, understandable and comparable form, forms clearly the basis for accountability, which can be provided only if companies adopt uniform accounting policies and disclose adequate information about the accounting standards followed. Thus, accounting standards ensure the comprehensive disclosure of the corporate’s accountability, which may be regarded as a prime issue and a pre requisite for good Corporate Governance.

An examination of practices of accounting standards, and their issues in Oman industry may help to understand the existing practices of accounting standards, which in turn help in designing the effective standard practices so as to ensure good Corporate Governance leading to a healthy investment environment.

In this context, an attempt is made here to examine the accounting standards and their practices in Oman, with a view to strengthen the accounting standards and improve their practices for good Corporate Governance. The data for the study are obtained from the annual reports (published during 2001-’02) of ten Omani companies of different nature, selected from the top companies in terms of assets. The sample consisted of 6 private and 4 public companies. The simple per centage method is used to analyze the data. The authenticity of the data is verified with the opinions of management, who are aware of the company affairs and Corporate Governance. The corporates’ perceptions on the relevance of accounting standards for good Corporate Governance in the context of Oman are also examined.

STANDARDS IN OMAN:

In any country, the awareness and competitiveness among the corporates would be strengthened when they understand each other and compare their performance, for which the simple, understandable and comparable disclosure is an important instrument. The main objective of disclosure would be fulfilled and the utility of the disclosure towards good Corporate Governance would be improved when the disclosure is done on the basis of uniform and consistent accounting standards. Thus, the development and the practice of uniform accounting standards has become an essential ingredient of Corporate Governance and the various bodies have been contributing their wisdom to strengthen the standards to make the Corporate Governance more effective in the context of the changing corporate environment. The corporate management is also now feeling the pressure for reforming accounting practices and level of transparency emanating from alert lenders, regulatory agencies, financial analysts and above all, board of directors who realize that it is the quality of information which will determine how efficiently they have discharged their responsibilities towards the good Corporate Governance.

In Oman, though the financial statements have been prepared in accordance with International Accounting standards issued by the International Accounting Standards Committee (IASC), interpretations issued by the Standing Interpretation Committee of the IASC and the requirements of the Commercial Companies Law of the Sultanate of Oman and the disclosure requirements set out in the rules for disclosure issued by the Capital Market Authority of the Sultanate of Oman, the disclosure is inadequate and is a negative phenomenon to a country which wishes to be strengthened further, because it cannot hope to tap the GDR market with inadequate financial disclosures, since the more transparent activities of a company governed by the proper accounting standards, the more accurately will its securities be valued(5).

The International Accounting Standards followed in Oman industry are Presentation of Financial Statements (IAS 1); Inventories (IAS 2); Cash Flow Statements (IAS 7); Net Profit or Loss for the period (IAS 8); Fundamental Errors & Changes in Accounting policies (IAS 9); Events After the Balancesheet Date (IAS 10); Construction Contracts (IAS 11); Income Taxes (IAS 12); Segment Reporting (IAS 14); Effects of Changing Prices (IAS 15); Property, Plant and Equipment (IAS 16); Leases (IAS 17); Revenue (IAS 18); Employment Benefits (IAS 19); Accounting for Govt. Grants & Govt. Assistance (IAS 20); Effects of Changes in Foreign Exchange Rates (IAS 21); Business Combinations (IAS 22); Borrowing Costs (IAS 23); Related Party Disclosures (IAS 24); Retirement Benefit Plans (IAS 26); Consolidated Financial Statements (IAS 27); Investments in Associates (IAS 28), Hyperinflationary Economies (IAS 29); Banks & Similar Financial Institutions (IAS 30); Interests in Joint Ventures (IAS 31); Financial Instruments: Disclosure & Presentation (IAS 32); Earnings Per Share (IAS 33); Interim Financial Reporting (IAS 34); Discontinuing Operations (IAS 35); Impairment of Assets (IAS 36); Provisions, Contingent Liabilities & Assets (IAS 37); Intangible Assets (IAS 38); Financial Instruments: Recognition & Measurement (IAS 39); Investment Property (IAS 40); Agriculture (IAS 41).

Though the Oman industry has been following all the International Accounting Standards, in practice, some of them are not free from criticism due to certain inherent weaknesses. The practices of these standards in the Oman industries and the gaps are discussed in what follows with a view to strengthen them for ensuring the good Corporate Governance.

PRACTICES:

The primary and secondary data collected from the select companies are carefully examined to find the extent of compliance with the accounting standards and issues in corporate practices. Some of the important findings are as follows:

i) Perceptions on the relevance of Accounting Standards for Corporate Governance: Except one sample of private companies which has not disclosed its opinion, all others (90% of the sample) have expressed the accounting standards as more relevant for Corporate Governance.

ii) Practices of Accounting Policies Disclosed in Annual Reports: The majority of the sample companies (80%) disclosed twenty to twenty five policies and the remaining is equally distributed between less than twenty and more than twenty five standards disclosed by the select companies. All the select public limited companies have complied with twenty to twenty five accounting standards.

iii) Practices of Inventory Valuation: The sample companies have adopted either the lower of cost or net realisable value or moving average methods for the inventory valuation.

iv) Practices of Preparation of Cash Flow Statement: All the select companies have presented cash flow and changes in equity statements.

v) Corporate Practices of Depreciation: The study revealed that the majority of the sample companies (90%) have followed straight line method for the computation of depreciation and the remaining followed diminishing value method. Further examination revealed that all sample public companies followed the straight line method of depreciation.

vi) Practices of Construction Contracts: The sample consists of one construction company, which has followed per cent of completion method.

vii) Practices of Research & Development: None of the select companies has disclosed the expenditure on research and development.

viii) Practices of other Standards: The study revealed that the accounting practices related to fundamental errors and changes, effects of changing prices, business combinations, hyperinflationary economies, financial statements of banks and similar financial institutions and agriculture were not disclosed by any of the select companies as the companies are not concerned with such activities.

From the analyses of practices and general discussions, some of prime issues of accounting standards in the context of Oman are identified and presented here under in brief.

ISSUES:

i) Disclosure of Accounting Policies is followed by most of the sample companies, since it is mandatory. The items stated under accounting policies or notes are more or less same in all the concerns selected for the study, but the treatment of some items were not similar to the other concerns.

The requirement of the disclosure standard is only to disclose the material facts, what is the material or immaterial it would be decided by the organization, where the influence of personal judgement is expected in the absence of concrete guidelines. Therefore, the existence of the standard is doubtful.

ii) In few accounting standards, such as, valuation of inventories and depreciation accounting, the alternative accounting treatment is allowed. This kind of flexibility creates problems in judging the quality and reliability of financial statements of an enterprise and the different methods are followed for different companies or for different periods, the possibility of inter-unit, intra-industry or inter-period comparison is impaired. The lack of comparability renders the financial information less useful and creates confusion in the minds of the investing public.

iii) In case of construction contracts, the standard provides for adoption of either completed contract method or percentage of completion method for recognition of profit on completed contract, which attracts the same limitation of comparability.

iv) The hybrid method of accounting i.e. accounting for income on cash basis and expenditure on accrual (mercantile basis), followed by corporates, conveniently allows them to manipulate their reports.

v) The standards setting process is closed and narrow and the execution is unsound , that causes the various practices and imperfect disclosure, which defeats the prime objective of accounting standards in achieving the good Corporate Governance.

vi) The adoption of IAS in toto without looking into their relevance in the context of Oman industrial environment, lacks the focus on the domestic problems and indigenisation.

The following suggestion are made on the basis of discussions with the corporates to solve the above issues and to improve the utility of accounting standards for ensuring good Corporate Governance.

SUGGESTIONS:

i) The most important suggestion for strengthening the accounting standards to improve the quality reporting thus Corporate Governance values, is focusing on the local conditions, improving the relevance i.e. indigenisation of accounting standards to make the standards more suitable or appropriate to the existing industrial phenomenon in Oman.

ii) The Capital Market Authority in Oman in consultation with other professionals and regulatory bodies should evolve some mechanism to limit the scope of alternative methods available within an accounting standard. Thus,the use of uniform accounting standards would enhance the qualitative and comparability dimensions of financial statement and reporting.

iii) The establishment of harmony among the applicable laws like Companies Act, Income Tax Act, Banking Regulations etc., which have significant bearing on different items of financial statements, would give true and fair view of business.

iv) The formulation of comprehensive and indigeneous standards, like accounting for changes in prices, inflationary economies, segment accounting, accounting for joint ventures, earning per share, investment in subsidiaries, associates etc., useful to make accounting standards more user friendly and international acceptable.

To sum up, though the entire industrial community in Oman has been following the International Accounting Standards and adopting disclosure practices to ensure true and fair view of the economic activities, still a lot more needs to be done to promote good corporate governance and a healthy investment climate. The other middle east countries, which adopt the policy of liberalization and intend to increase in international capital market activities due to globalization should learn that reducing the variety of approaches in the each accounting standards, formulating the comprehensive and indigeneous standards and making all accounting standards as mandatory have to be given top priority for attaining the required objectives, otherwise it will be exceedingly difficult for Oman investors to trust the Corporate Governance.

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* The article is presented in Accounting, Commerce & Finance: The Islamic Perspective International Conference V, held in Brisbane, Australia during 15-17, June 2004.

REFERENCES:

1. Tiwary, Ojha, Arun Kumar, “Corporate Governance in India: What it Means and What it needs?”, The Indian Journal of Commerce, New Delhi, Oct-Dec,1998, p.154.

2. Chandratre, KR, “Role of Board of Directors in Emerging Dimensions of Corporate Governance and Impending Changes in Company Law, The Chartered Secretary, The Institute of Chartered Secretary of India, New Delhi, May 97, p. 505.

3. R.I.Ticker, “Corporate Responsibility, Institutional Governance and the Roles of Accounting Standards” in Michael Bromwich and Anthony G. Hopwood (Eds.), Accounting Standards Setting, An International Perspective, Pitman Books Ltd., London, 1883, p.27., Cited in Lele RK, Jawahar Lal, “Accounting Theory”, Himalaya Publishing House, New Delhi, 96,p.56.

4. Sir Adrian Cadbury, “Developments in Corporate Governance”, The Company Secretary, The Institute of Chartered Secretary of India, New Delhi, May 97, p. 497.

5. The Report of the Cadbury Committee on “Financial Aspects of Corporate Governance”, The Company Secretary, The Institute of Chartered Secretary of India, New Delhi, May 97, p. 573.

6. Verma, Garg, Singh, “Disclosure of Accounting Standards Vis-à-vis Company Characteristics: A Study of Indian Corporate Sector”, The Indian Journal of Commerce, New Delhi, Oct-Dec,1998, p.131.

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Nevada State Corporation – The Number 1 Reason to Incorporate in Nevada

It’s Extremely Difficult for Anyone to Pierce Your Nevada State Corporate Veil

First, what exactly does “piercing the corporate veil” mean? When you form a corporation, whether it’s in Nevada, California, Texas or wherever, you must follow certain corporate formalities. Remember, a nevada state corporation can do everything you can do except act or think, so it does those things through your board of directors, officers and shareholders. If your corporation does not keep accurate records of meetings by minutes, and if the corporation commingles funds, it makes it easier for someone to pierce your corporate veil if the corporation is involved in a lawsuit.

Low capitalization is another reason why corporate veils get pierced. In some states, like California, we recommend that you capitalize your corporation with at least $1,000. If you don’t, it’s easier for someone to prove that you are simply the alter ego of the nevada state corporation (one and the same as the corporation), and then pierce your corporate veil! How does Nevada feel about this? Nevada is called a “thin capital state,” meaning you can form a corporation in Nevada for as little as $100. Also, Nevada has a certain attitude about piercing the corporate veil, which is why major corporations domicile in Nevada. Let’s explain.

The Nevada State Test – Trying to Pierce the Corporate Veil

First, in Nevada, anyone trying to sue you must pass a three-prong test. They must prove all three parts to pierce your corporate veil:
The corporation must be influenced and governed by the person asserted to be the alter ego.

There must be such unity of interest and ownership that one is inseparable from the other.

The facts must be such that adherence to the corporate fiction of a separate entity would, under the circumstances, sanction fraud or promote injustice.

The burden of proof for all three “general requirements” is on the plaintiff who is seeking to pierce the veil, and a failure to prove any of the three will result in your veil not being pierced! Essentially, Nevada says that unless they can prove fraud, your corporate veil will not be pierced. That is awesome protection.

Nevada State Corporation – Case In Point

The landmark case that proves this point is the case of Roland vs. Lepire (1983). We recommend that you keep accurate corporate records to protect your corporate veil, and make sure you have adequate capitalization as well. In Roland, the corporation had a negative net worth at the time of the trial so it was clear it was inadequately capitalized. On top of that, the corporation never held formal directors or shareholders meetings, never started or kept a corporate minute book, never paid dividends, and didn’t pay salaries to the officers or directors. On the other hand, the corporation managed to secure a corporate checking account, as well as a general contractor’s license and a framing contractor’s license, “both in its name”.

What happened? The court concluded that, “Although the evidence does show that the corporation was undercapitalized and that there was little existence separate and apart from [the two key shareholders]evidence was insufficient to support a finding that appellants were the alter ego of the corporation.” The Nevada Supreme Court has made clear that unless the plaintiff acting against you is able to meet the burden of proving that “the financial setup of your corporation is only a sham and caused an injustice, ” your veil is unlikely to be pierced.

The Nevada state corporation appears as an “Iron Fortress” to creditors. In fact, the corporate veil has only been pierced two times in Nevada in the last 23 years! And that was a case where the corporation was actually doing business in Nevada and had committed fraud against a Nevada resident.

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S Corporation Versus Limited Liability Company – An Overview

One of the most important business decisions a business owner will make is to choose a legal entity through which to conduct business. Often times, the decision is narrowed down to two types of entities: (1) the California S Corporation (S Corp), or the California limited liability company (LLC). Both the California S Corp and the LLC provide varying levels of personal asset protection for the business owner, varying tax advantages and disadvantages, and varying complexity in the day to day operations of the business, amongst other differences. The purpose of this article is to highlight some of the key differences when making the choice between a California LLC or a California S Corp.

Important Considerations When Choosing a Business Entity.
Owners of newly formed businesses often find sorting out the differences between the two entities to be overwhelming. However, as a general rule, when deciding whether or not to organize as a S Corp or a LLC it is usually most productive to narrow the focus on three key areas that will be important considerations for a business owner:

  1. Limiting potential personal liability to the owners from the liabilities associated with the business, and the requisite formalities associated with maintain such limited liability;
  2. Limiting potential taxes associated with the business; and
  3. Addressing any other special circumstances applicable or important to the owners.

Achieving the Goal of the Owners with Minimal Compromise.
However, before addressing these three issues, it is important to first determine how many owners the new entity will have (referred to as “shareholders” in the context of an S Corp, and “members” in the context of a LLC). The number of owners is very important. Determining the most important consideration where there is only owner is relatively straightforward. However, in representations involving more than one owner, each owner will often have differing objectives or areas which they feel are the key priority for the business. For example, given two owners, the first owner’s priority could be to obtain certain tax consequences above all else, while the second owner may be more concerned with flexibility with respect to ownership interests, or the allocation of the businesses’ profits and loss. In this situation, it is usually best for the attorney to take a step back, look at the overall purpose of the owner’s business, and choose the entity which would best achieve the varying goals of the owner with minimal compromises.

An Overview of the California S Corporation.
An S Corporation is a legal entity which limits the potential personal liability to the owners from the liabilities associated with the business, provided that it is properly formed and maintained.

1. S Corporation – To Limit Liability, Respecting Corporate Formalities is Essential.
With regards to proper corporate formation, unfortunately I have seen too many instances where a corporation was initially formed for a minimal cost, by a non-lawyer, using an online service (who usually misrepresent the service they are offering), or by some other means, but then once the basic milestone of receiving the stamped Articles of Incorporation from the California Secretary of State is achieved, there is never any follow through with any of the other documents that are required under California law. The end result is that the corporation is improperly formed, and right from the onset, the owners have needlessly exposed themselves to liability in the form that at some point in the future, an aggrieved party may successfully “pierce the corporate veil“. What does this mean? It means that an aggrieved party may look through the corporation to the personal assets of the owner.

With regards to proper maintenance of a corporation, a California S Corporation must observe certain corporate formalities. In comparison to a California limited liability company, it is often thought that the S Corp has more burdensome maintenance requirements than the LLC. In other words, the S Corp is the more formal entity between the two.

For example, if the S Corp is chosen as the entity, in order to afford maximum limited liability protection (and avoid the potential for a piercing action): (1) the corporation should properly notice, hold and document annual meetings of the shareholders and directors, in addition to any special meetings of the board of directors necessary to authorize and affirm certain corporate acts, (2) the corporation should timely file all required documents required under applicable law; (2) the corporation should be funded with a sufficient amount of capital, and should not be inadequately capitalized; (3) the owners should keep the corporation’s corporate minute book in order and up to date, and should sign all documents where the corporation is a party, in their capacity as an officer or authorized agent of the corporation; and (4) corporate funds should never be mingled with other personal funds of the owners.

2. S Corporation – Tax Considerations.
In general, a S Corporation does not pay federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to the shareholders pro rata in accordance with their ownership interest. The shareholders must then report the income or loss on their own individual income tax returns (this form of taxation means makes the S Corporation a type of “flow through” entity). This flow through taxation of an S Corporation is different from a C Corporation, because there is only a tax at the shareholder level. The owners in a C Corporation on the other hand experience what is called “double taxation” in that the entity is taxed separately from the shareholders. In other words, first the corporation is taxed, and then the shareholders are also taxed.

Although the S Corporation’s avoidance of double taxation in the form of pass through taxation is often viewed as one of its primary advantages, one consideration that can be viewed as a disadvantage is that there are strict eligibility requirements for S corporations.

It is also important to note that similar to a LLC, the S Corp must pay an $800 California state franchise tax for the privilege of doing business in California. However, and one big advantage of the S Corporation is that it avoids the gross receipts tax of the LLC, in which gross receipts of an LLC over $250,000 are taxed.

3. S Corporation – Other Considerations.

Eligibility Requirements of the S Corporation.
For a corporation to be eligible for S status it must adhere to fairly strict shareholder requirements. For example, a S Corporation must limit the number of permitted shareholders to 100; the shareholders must be individuals who are United States citizens or legal United States residents (this means that another corporation cannot be a shareholder in a S Corporation), or the shareholder must be a certain type of qualified trust or estate. When there is a qualified trust that is a shareholder of an S corporation, each potential current beneficiary of the trust is treated as a separate shareholder. Related shareholders, whether owning shares directly or by deemed ownership as a beneficiary of a trust, may be treated as a single shareholder pursuant to family attribution rules.

Another very important requirement is that S Corporations are limited to only one class of stock, and in that regard are less flexible with respect to special economic terms that you would often find in a limited liability company Operating Agreement.

Management and Control of the S Corporation.
The three key categories concerning management and control in an S Corporation are the (i) Directors, (ii) Officers, and (iii) Shareholders. Corporations are managed by a Board of Directors, who appoint officers to run the day-to-day business operations of the corporation. The Officers (including a President, Secretary, and Treasurer) are considered agents for the corporation, and are granted with authority to bind the corporation. Shareholders (in other words, the owners) elect the Board of Directors, but have no right to participate in the day-to-day management of the corporation, unless elected as a director, or appointed as an officer. In a typical small business S Corporation, it is not uncommon to for a single individual Shareholder/owner to also serve as both an Officer and/or a Director (in addition to their ownership role as a shareholder).

Transfer Issues in a S Corporation.
In the context of a S corporation, ownership is evidenced by stock certificates, which must be issued to each owner as part of the corporate formation. Usually, significant changes in ownership in a corporation are memorialized in a Stock Purchase Agreement, Asset Purchase Agreement, or occasionally, other forms of acquisition or transfer documents. Whenever stock (sometimes referred to as shares) are transferred, it is always very important to thoroughly review the corporate documents to determine if the shares are bound any Shareholder Agreement (also sometimes referred to as a Buy-Sell Agreement) which may place limitations on transferability.

An Overview of the California Limited Liability Company.
Similar to the California S Corporation, a California limited liability company is a legal entity which affords its owners protection from potential personal liability associated with the business, but again with the proviso that such entity is properly formed and maintained.

1. LLC – Relaxed Requirements Compared to S-Corporation, But Don’t Get Too Relaxed.
With regard to formation, to form a California limited liability company, the owners must file Articles of Organization (as opposed to the Articles of Incorporation filed for a corporation), agree on key business points to be outlined in a company Operating Agreement, file a Statement of Information with the California Secretary of State, amongst various other requirements which are beyond the scope of this article. Unfortunately, too many times I have seen LLC company kits in my office where the Articles of Organization for the LLC were filed and then, not much else happened after that. In such cases, typically, the membership certificates are not issued, no Statement of Information was ever filed, and an inadequate “plain vanilla” (although the online service that sold it bills it as “custom”) Operating Agreement lies in the company kit, unsigned and untouched. The situation is compounded further when several years after formation a disagreement amongst owners arises about distributions or allocations, and the key business terms (that were to become a formal Operating Agreement) are instead buried in roughly outlined emails. Needless to say, this is not something you should let happen with your business.

With regard to maintenance, a California limited liability company is often thought of as having relaxed requirements with respect to formalities in comparison to a S Corp. Although meetings are not required, we suggest that the owner(s) still properly notice, hold and document meetings of the members to bolster the personal limited liability protection.

2. LLC – Tax Considerations.
For federal income tax purposes, by default, an LLC is treated by as a flow-through entity. This means, that if there is only one member in the LLC, the LLC is treated as a flow through entity for tax purposes, and profits and losses would be reported on Schedule C of the owner’s individual income tax return. In the event there are multiple members, the default rule is that the LLC is taxed as partnership, which is required to report income and loss on IRS Form 1065. Under partnership tax treatment, each member of the LLC annually receives a Form K-1 reporting the member’s distributive share of the LLC’s income or loss that is then reported on the member’s individual income tax return. It is important to note that an LLC may elect to be taxed in other ways that are beyond the scope of this article.

Similar to the S Corporation, a California LLC must pay the $800 California state franchise tax. However, one significant disadvantage for a business operating as an LLC is that it must pay an additional California tax on gross receipts over $250,000. This is an annual tax, and its effect can be seen in the table below:

LLC Fee

California “Total Income”

$900.

$250,000 or more, but less than $500,000

$2,500.

$500,000 or more, but less than $1,000,000

$6,000

$1,000,000 or more, but less than $5,000,000

$11,790

$5,000,000 or more

In other words, depending on income, a California business operating as an LLC could be subject to an additional $11,790 tax which is not taxable to a S Corporation.

3. S Corporation – Other Considerations.

Eligibility Requirements
In comparison to the S Corporation, the LLC is a more flexible entity, both in terms of who can be an owner, and the structuring of economic sharing arrangements between the members. For example, a LLC would be implicated where two partners desired to be equal owners but have a disproportionate allocation of profits and losses.

Management and Control.
As compared to a S Corporation, a California LLC is a much more flexible with respect to management and control issues. In comparison to the Officer, Directors, and Shareholders who each play separate roles in a S Corporation, an a LLC, management and control lies either with the members (in a so called “member-managed LLC”) or with the managers (in a so called “manager-managed LLC”). The key difference is that in a member managed LLC, each member is authorized as an agent to bind the LLC by virtue of membership, whereas in a manager managed LLC, there is a centralized management committee in the form of the managing members.

Transfer Issues.
Similar to the S corporation, transferability of a member’s interest can be accomplished easily so long as it is not precluded in the Operating Agreement or some other legal document such as a Membership Buy/Sell Agreement. Before the transfer of any LLC Membership Interest, one should always consult the provisions of the LLC Operating Agreement to check for any transfer restrictions.

What Entity Should I Choose For My California Business?
In any new business, it is important to always keep the three key areas in mind, namely: (i) limited liability and the formalities required to maintain it; (ii) the tax consequences; and (iii) special circumstances applicable to the owners. There is no “one size fits all” legal entity, and the choice must be made with careful deliberation about the long term ramifications.

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Cultureship – Exploring Corporate Culture and Better Ways

This article is about the creation of more productive and more satisfying corporate culture.

The object is to bring together in practical and sustainable ways increased workplace performance and superior workplace fulfilment. We seek to provide organisations with the insights, skills and mechanisms to develop and embed great corporate culture.

We are not presenting this introduction as a dogmatic “to do” list -corporate culture is too subtle and too complex for glib approaches – but we do believe that we have the necessary experience across many corporate cultures to be able to offer useful general insights.

Nor is it self-promoting consultant-speak, typified by claims of miracle organisational development breakthroughs – but we do believe that powerful corporate cultural possibilities lie untapped within many organisations.

Higher Performance & Greater Fulfilment

We seek to stimulate fresh ways about how you can better spot, consider and react to some of the major, ongoing challenges which face just about every organisation at some time.

Our intent is not to offer up an image which paints everything as bleakly as possible, simply so that we can set ourselves up as the source of all wisdom.

Our purpose is rather to alert organisations to the full potential of corporate culture as a key analytical tool and a framework for better practice. We also help remove individuals’ own particular barriers and stimulate more productive and fulfilling relationships throughout organisations.

Cultureship is our unique approach. Our organisational analysis and practical implementation work are based on a belief in the power of the underlying cycle of organisational excellence we identify as Community, Contribution & Recognition.

Just as Leadership is about understanding and developing leaders, so Cultureship is about understanding and developing corporate cultures.

Cultureship is the practice of researching an organisation’s culture and seeking its development via Community, Contribution & Recognition (CCR). We believe, quite simply, that people need to feel part of a productive community, they must to be able to play a full and active role in supporting and building that community – and they should be acknowledged and rewarded in multiple ways.

Based on Goodness, aiming for Excellence

We start from a recognition that there are great things going on within many organisations. There are also pockets of excellence frequently to be found within organisations which otherwise suffer generally from appalling corporate cultures. We think it is more useful to liberate goodness and excellence than it is to concentrate on producing typologies of badness and failure.

We couple what is always good within organisations with an explicit exploration of the higher values which can be embedded, enacted and enjoyed within individual organisations. This credo, as an everyday guide to corporate behaviour, is written-up into a consensual and detailed Cultureship Contract for each organisation.

By way of example, The Cultureship Practice’s own Contract is built on Integrity, Hope, Reciprocity, Knowledge and Excellence. It is something against which we actively wish others to measure us – and it is also a yardstick against we measure ourselves.

In our client work, we develop detailed contexts and behavioural expectations around each bespoke set of higher values – these are not empty mission statements to be pinned up on corridor noticeboards, overlooked and ignored.

Furthermore, our work is closely guided by three central beliefs, based on our extensive work in organisations of many sizes and sectors.

o The first is that people, when they come together in a productive community, can achieve superb and sustainable results.
o The second is that it is almost inevitably the case that a bad place to work is a place of bad work, no matter what excuses or evasions are offered.
o The third is that corporate culture is not something which can be willed, imagined, bullied or manipulated into place; corporate culture, in the final analysis, is a matter of the heart – and it either feels right, or it feels very wrong.

And at a more general level is our commitment that corporate culture must always be explained and understood in relation to real workplaces and real organisational experiences.

To achieve this authentic connection, we focus our practice around stories, both to which everyone who works in organisations can relate generally and also ones specific to individual organisations.

One of the first things we do when we engage with organisations is to look at the preconceptions – the paradigms – through which their people view corporate culture. We capture the general assumptions and the narratives people tell to explain how their organisations operate.

We consider how these flows of corporate culture shape everyday relationships: we gain a sense of the pace, rhythm and shape of an organisation. We go on to build an understanding of how corporate culture carries through into the broader successes and failures of an organisation.

It is incredibly revealing to understand what people at all levels within an organisation are saying, what they are not saying – and also what they do not even think could be said.

The following statements – composite, but in our experience utterly typical – capture many of the recurrent core themes of corporate culture that are presented to us when we ask the question: “What kind of corporate culture do you have in this organisation?”

“I dunno – isn’t that just something senior managers and consultants talk about?”

Corporate Culture as a Fad

One of the most commonly overlooked factors in considering corporate culture is that there are frequently quite radically different cultures and cultural viewpoints in play, both in different sections of any organisation and within different grades of seniority. To overlook this messy reality is to begin any corporate culture initiative on very shaky foundations indeed.

The view expressed above is one we have frequently encountered amongst middle management and frontline staff.

By itself it is not necessarily too much of a problem. It could, however, be linked to Changemania, the syndrome we have identified whereby some leaders are forever grabbing out at the next, new organisational fad.

It might also be associated with poor communications within a company. Sometimes we find that middle and junior management and frontline staff tend to operate to a large extent as a self-regulating “organisation within an organisation”, substantially disconnected from their senior management and leadership.

Whatever the causes of this sense of disconnection from various top-down initiatives, a core shared idea across these kinds of comments is that corporate culture is a manufactured imposition. This view fails to appreciate that the current lived reality of assumptions and expectations amongst this group of people is their corporate culture, not just some state of temporary cultural neutrality. It is important to remember there is no such thing as a “corporate culture vacuum”.

Whether everyday existence is lived out as just muddling along the corporate highway whilst dodging the deepest potholes, or actually doing quite well in patches despite unresolved structural and people issues, one of the biggest misconceptions around corporate culture is that there are “weak” cultures and “strong” cultures.

There is always a strong culture, whether its trajectory is set towards high achievement, or downwards at the mutual evasion of responsibility.

Our point is not to establish if there is a culture – we take it as fact that there is one. Our focus is whether it is acting as far as is possible in advancing corporate performance whilst respecting and fostering human needs, all of this coming together in an upwards spiral of excellence. Sadly, in a lot of organisations the culture isn’t discussed in any way other than as a distant commitment on a website, e.g. “We foster an innovative culture”.

Managers hear “positive culture” pleas from the Board, employees hear of new “cultural synergy” training exercises and other buzzword-laden initiatives. All the while, the actual corporate culture/s continue all around the organisation.

And as for the people who say “I dunno”, it’s likely that they have felt disengaged from the organisational objectives for some time.

“Well, I don’t know about anyone else because I keep myself to myself a lot of the time, although I suspect many others feel the same way. It’s easier just to keep your head down and get on – so there isn’t really a culture here.”

Corporate Culture as Survival

Isolation, fear and inertia might not feel like a recognisable culture – or certainly not a culture to be cherished. However, to the individuals concerned such a situation very much constitutes a corporate culture – and it is both very real and also unpleasant.

And despite a veneer of commitment and productivity, many people will be spending much more time obsessed with not making mistakes than in forging strong relationships and driving forward new and better ways of working.

We have encountered survivalist views such as these – more often than not in private – from all levels within organisations, right up to the top on occasions but usually stopping just below it.

“There’s a lot of friction and a lot of ill-feeling and stress which I feel right in the middle of. What kind of a culture would you call that?”

Corporate Culture as Conflict

At The Cultureship Practice we believe that a substantial amount of the productive potential of many organisations is burnt up in friction and conflict. There is heat instead of light, noise instead of excitement.

The comment leading this section is typical of how many middle managers feel, caught between the edicts of leadership and the disgruntlement of the frontline.

There are two main processes at work here. The first is a lingering and still quite common assumption that the workplace inevitably has to be a place of bitter struggle.

Somehow and at some time a sea change took place between a widespread viewpoint of our labour as a natural part of life to support our homes, families, health and society and the widespread corporate characterisation of our labour as a win-at-costs grim struggle.

There is too much imagery of battlefields in business-speak, too many threats of crushing, breaking and smashing.

The implicit argument is that much of organisational life must revolve around conflict and that organisations themselves are inevitably places of conflict.

We simply reject these arguments as wrong. They are morally wrong in that they fail to recognise human needs, they are socially wrong in that they fail to recognise the sustainable productivity of community, and they are scientifically flawed in that they misunderstand the mainsprings of motivation.

Force and willpower are dubious motivators short-term and inherently unsustainable in the longer-term.

The Cultureship Practice drives all its research and implementation around what we call the Performance-Fulfilment Axis, focusing in on the drivers of Community, Contribution & Recognition (CCR).

These are not weak values – but neither are they values of misplaced posturing and machismo. They reject friction, conflict and hypocrisy in favour of smoother relationships, co-operation and integrity.

These are tribal values, strong and compelling. There is an invitation to come into the stockade and to be a significant part. But with these opportunities to be included and valued come strong responsibilities. The entry door to the stockade is also an exit for those who ultimately reject CCR.

So much for the general Organisational Conflict Paradigm. The second main dimension of conflict we frequently encounter arises within individual organisations from their specific internal processes and cultures.

Cultural misalignment of personnel (within layers of seniority, sections and departments and also between individuals), conflicting flows of communication, omissions and over-generalisations of missions and visions, the misidentification of the causes of friction and a moral failure to embrace culture as an asset all play their part.

A direct operational objective of Cultureship is the seeking out and smoothing away of these friction points. These are rubbing points within relationships and understandings which we identify as Cultural Hotspots.

In our experience, genuinely strong organisations don’t do conflict – people within them are too busy getting on with each other and getting on with being productive. And enjoying the positive feedback and mutuality that spins the CCR cycle round again.

“Culture? That’s a bit ‘New Age’, isn’t it? This is a business after all. I am here to make money and so is everyone else.”

Corporate Culture as Weakness

Even within organisations where overt conflict has been banished, there is still frequently a tendency to fight shy of anything that is seen to veer away from accepted business-speak.

And whilst the specific comment above is one that we would very often encounter, say, within professional practices, the underlying sentiments are implicit throughout swathes of both the public and private sectors.

The common language of organisational development, human resources and management training too frequently veers towards expressing all things with certainty, mathematical precision and a depersonalised, emotion-free dryness.

Again, the focus of The Cultureship Practice is not to threaten performance by overly concentrating on people. On the contrary, we enhance performance by clearly accepting that thinking and feeling people are the bedrock of superior productivity.

Superb working relationships and workplace results are achievable through working with and through the feelings of others. Superior Corporate Culture is not a luxury indulgence and it is certainly not a sign of weakness.

“We seek to create a supportive and dynamic culture, which is flexible and responsive to change and which ensures a sustainable organisation for all stakeholders.”

Corporate Culture as the Vision Statement alone

There is nothing intrinsically wrong with many vision statements such as the one above. In fact, if the above aspiration was translated through into inspiration and onwards into execution, that would be unequivocally brilliant!

Problems occur when leaders create messages such as the one above for managers to recite parrot fashion and for frontline staff to stare at in blank astonishment. The daily lived reality continues unchanged in the face of such grand statements, with the only lasting result that authority and credibility has seeped a little further away.

Corporate culture, when it works well and recreates itself in ongoing organisational and human excellence, is a relatively simple and elemental force.

However, unpicking complex issues and unpacking accumulated corporate baggage requires much, much more focus than simply plucking some desirable cultural attributes out of the air and committing them to business plans and staff newsletters.

Hearts might be in the right place – but great corporate culture also requires calm and questioning heads.

“Oh it’s really good! We have regular meetings, which are minuted and circulated, we all know what is going in the organisation, our processes make it a really efficient place to work and we’ve recently been awarded a customer service prize.”

Corporate Culture as Process

Again, taken at face value, all of the actions and processes above are good and quite probably reflect deserved credit on those responsible and involved. But therein lies the need to look further – culture is being described as process. Where are the people? What are their expectations, assumptions and habits? How is their personal and group CCR connecting with corporate objectives.

The perfectly planned meetings and their painstaking writing-up could just as easily be pacing stultifying mediocrity as sparking engaged excellence.

However, what is shining through in this particular statement is enthusiasm. It comes back to our core mission time and again, which is to blow on sparks wherever we find them.

“In my team we all actually get on pretty well and we all seem to enjoy working hard together to get things done. I can’t really speak for other departments or the rest of the organisation.”

Corporate Culture as Compartmentalised Individuals

There is a great deal of talk about “joined-up” working and “silo mentalities” both across the public sector and also within many larger private sector companies.

Both of these sectors also frequently encounter fresh challenges to their organisational shapes and responsiveness due to their continual redesigns, amalgamations, mergers and acquisitions.

Size and disruption are agents of cultural disruption. It may be, as reflected in the statement above, that groups of people might enjoy significant CCR within their local working environments. However, this is to sell short the latent potential of more inclusive and superior corporate cultures.

Personal experience, however satisfying on a group level, lacks the vital, broader social context. This extra dimension might well further enhance personal fulfilment – but it will almost certainly take corporate objectives such as innovation and productivity to new levels.

And this also leads us into the ongoing tension regarding active corporate culture intervention. On the one hand there are frequently strong potential rewards to be pursued. On the other are the attractions of a more laissez-fair attitude towards a considerable degree of complexity, variance, physical separateness and corporate isolation.

Clumsy and misguided intervention may well backfire, creating wholesale disengagement, leaving the organisation worse off than if it had done little or nothing. Multiple and ineffective initiatives will undoubtedly leave many personnel across all levels of seniority both disenchanted and increasingly disengaged.

However, with strong pressure for higher productivity, leaner and more focused working practices, continual innovation and the demands of performance management, corporate culture is almost inevitably the focus of attention at some time in most organisations.

This is why The Cultureship Practice seeks a thorough understanding of each and every organisation before seeking any active cultural work. One-size-fits-all interventions can easily work themselves out in practice as one-size-fits-nobody.

Bringing people together clumsily can easily drive them further apart and back into themselves.

But bringing them together well in Community, Contribution & Recognition can work wonders. There is everything to play for in helping people to step forwards from the limitations of their individual compartments. Once again, though, it is the enthusiasm of individuals which must be the starting point, not a sense of generic failure.

CCR is a set of higher values, built around integrity, which is a quality admired by most but felt to be personally attainable by few. However, we believe that great corporate culture centres on doing the right thing well and that this mindset is achievable throughout organisations.

There is no fundamental reason why reciprocity and goodness need not be the norm.

“There’s a great culture. We have setbacks, obviously, but we feel we can talk about things openly. It feels like there’s something really together, involving and rewarding going on.”

Corporate Culture as Community, Contribution & Recognition

Breaking through to higher levels of productive and rewarding corporate culture often rests on having the permission and safety to discuss concerns, shortages, failings and problems.

We frequently encounter organisations that have meetings about this and that, reporting for just about everything, reviews of reviews and a whole slew of quality and personnel standards. And yet people still bite their lips, seethe in frustration and feel that they exist in an alternative reality to the received orthodoxy of rationalism and performance-managed productivity. In this call for constructive openness, we are very clear that we are advocating neither a whinge culture, nor a blame culture.

Again, it goes back to the notion of tribal values. Groups who fail to face their challenges, honestly and in a spirit of co-operation, cannot hope to flourish. This is the underlying story of many once great civilisations which simply withered away off the face of the Earth.

Today, many formerly great organisations continue on their own sorry slides into oblivion.

In referring back to the opening comment of this final cultural tale, great cultures are actually the easiest to spot. They feel great – and great achievements are seen within them.

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Corporate Governance: Investing in the Emerging Market of the Czech Republic

In the securities market of the Czech Republic corporate governance plays a crucial role in instilling investor confidence and ensuring an efficient market. Post the fall of Communism, the economy was transitioned from state owned to capitalist in a very short time. Since then, the Czech Republic has come a long way to quickly reach standards of other capitalist markets and successfully obtain accession into the European Union. As the market continues its progression, the need for transparency of information and alignment between board members and managers in firms greatens.

From the Czech Republic’s voucher privatization program in 1992 to the late 1990’s, corporate governance was viewed negatively and/or non-existent for publicly traded Czech companies. A path began with a lack of regulation, continued with a lack of enforcement, and finally turned directions beginning in 1998 with the Securities Commission Act. Even now, as Czech companies attempt to become more competitive on a global scale in the market, the realization amongst firms of the need for structured corporate governance and more transparency in their reporting of information takes hold as a continued effort necessary to report and align enterprise goals with those of other stakeholders.

Through an analysis of the top ten publicly traded companies, in terms of market capitalization, on the Prague Stock Exchange, I will assess the availability of information regarding corporate governance in order to discern the current state of compliance with the Corporate Governance Code. This information will serve as a benchmark and will allow investors to relate the positions of the largest companies on the PSE to other companies within the Czech Republic, and apply the knowledge generally to the Czech securities market. The results allow investors and other stakeholders to get an idea of corporate governance practices and the transparency of information in the companies operating in the Czech Republic today.

Current State of Corporate Governance

I turn now to the analysis of the corporate governance disclosure in today’s Czech market. Using the ten largest publicly traded companies (see Table 1) listed on the Prague Stock Exchange in terms of market capitalization, I will determine the degree of their stated corporate governance policy disclosure as found in their most recent annual reports. This is the 2004 annual report for all of the companies. Furthermore, I will briefly assess the availability of information on the companies’ websites.

Table 1
Top Ten Listed Companies on the PSE

Rank Company Market Cap. (Mil. CZK)Market Cap. (Mil. USD)

1 ČEZ 402,881 16,293

2 Erste Bank 317,598 12,844

3 Český Telecom 160,014 6,471

4 Komerční Banka 128,397 5,193

5 Unipetrol 42,922 1,736

6 Zentiva 41,683 1,686

7 CETV 39,718 1,606

8 Philip Morris ČR 32,816 1,327

9 Severočeské Doly 14,434 584

10 Prazská Energetika 11,492 465

Source: Prague Stock Exchange, Novermber 2005

ČEZ

ČEZ, a joint stock company, is the largest power conglomerate in Central and Eastern Europe. The company’s website has an investor section with information on shares, bonds, and financial information, and lists the date of the annual general meeting, but does not provide information specifically related to corporate governance practices and structure in general. Shareholder structure, relations, and dividends are presented on the website. Within the annual report, ČEZ follows the German corporate governance model, and has key members of the board also part of management. Board structure and board members are discussed extensively. The board of directors meets weekly as a matter of practice, where the requirement is monthly. The company complies with the Commercial Code concerning protection of shareholder rights, and bases its corporate governance on the Corporate Governance Code. The ČEZ Group actually participated in the 2004 drafting of the Corporate Governance Code. Overall, the company reports on most of the key corporate governance areas, but does not have one section devoted to their policy, making it necessary to scan the entire report for relevant information.

Erste Bank

Erste Bank, based in Austria, is the leading financial services provider in Central Europe. Its website contains an investor relations area in which detailed information is provided, and also a corporate governance section in which the company discloses it follows the Austrian Code of Corporate Governance in practice. In the annual report, the company discloses it follows all of the statutory rules of the Code, and adheres to most of the recommendations. It directs individuals to the website for the actual provisions of corporate governance, making the information accessible, but not detailed within the annual report itself. Furthermore, policies regarding shareholder rights were not easy to discern.

Český Telecom

Český Telecom is a telecommunications group that operates primarily in the Czech Republic. The company has a website with shareholder information including board structure and notification of the annual general meeting. In addition, access to the company’s annual report leads to extensive corporate governance discussion. The company acknowledges improved reporting in this area beginning with the 2004 annual report as compared to previous annual reports, and as stated in the 2002 annual report, the company will be in full compliance of the Corporate Governance Code by 2005. One note made in the report includes a list of the members of the supervisory board that qualify as independent, an important provision as recommended by the 2004 Code.

Komerční Banka

Komerční Banka is among the most important banks in the Czech Republic and the Central and Eastern European region, and provides comprehensive services for clients in retail, corporate, and investment banking. The company’s website provides access to key shareholder information, and has an investor relations section. However, there is not a specific corporate governance section. Accessing the annual report allows one to see most of the requirements of corporate governance, but there is neither specific mention of their general policy towards corporate governance nor mention of their adherence or lack there of to the Corporate Governance Code.

Unipetrol

Unipetrol, a group of companies that operate in the chemical industries sector of the Czech Republic, is a major company in Central Europe. The company’s website has direct links to board members as well as an investor page with access to its annual reports, but does not provide detailed corporate governance information. The annual report does not improve upon the corporate governance policy of the company. There is no statement concerning the company’s policy towards corporate governance, and the information given is primarily a list of board members. Qualifications are not given, and shareholder rights are not disclosed or discussed.

Zentiva

Zentiva is a pharmaceutical group that holds leading positions in the Czech and Slovak markets, and amongst the largest players in Central and Eastern Europe. Zentiva’s website provides extensive corporate governance information, including the actual rules governing the boards. Investor relations also has a prominent position on the company’s website, and lists shareholder information, the date of the general meeting, and other important information. As stated in the annual report, the company adheres to the Dutch Corporate Governance Code.

CETV

Central European Media Enterprises, or CME, is traded on the Prague Stock Exchange as CETV. The company, based in Bermuda, is an international television broadcasting company, and operates a group of networks and stations across Central and Eastern Europe. The company’s website includes the members of the board and their qualifications, as well as financial results and company policies such as their Code of Ethics. Interestingly, analyst reports regarding CME are accessible on the company’s website. CME is listed on NASDAQ, so annual report information is accessible through their website under SEC filings.

Philip Morris ČR

Philip Morris ČR is an affiliate of Philip Morris International, whose parent company is Altria Group. The website for Philip Morris directs all investors inquiring about shareholder information to its parent company’s website, although some financial data, its general meeting date, and agenda is disclosed for its Kutna Hora location in the Czech Republic. Just as was the case for CETV, Altria Group has extensive information disclosed in its SEC filings. On the Altria Group website, corporate governance is discussed extensively, and the by-laws as well as board members and governance guidelines are listed.

Severočeské Doly

Severočeské Doly is the largest producer of brown coal in the Czech Republic. The company mines, processes, and sells brown coal and its by-products. The company’s website lists the board members and their qualifications and shareholder structure. There is no area dedicated to corporate governance structure or policy. Within the annual report, the company disclosed they do not comply with the Corporate Governance Code, but it does respect the legal requirements and it hopes to adopt more principles in the future. Key areas of corporate governance are easy to find in the report, and although the company states it does not follow the Code, it does an extremely good job of reporting required as well as recommended information.

Prazská Energetika

Prazská Energetika is an electricity purchasing, distribution, and sales company operating in Prague and Roztoky, and an electricity trader in the wholesale market in the Czech Republic. Prazská Energetika’s website lists the management and board members, shareholder structure, and provides access to its annual reports. There is not a section specifically for corporate governance. In the annual report, the company reports statutory information as required by the Commercial Code, but does not go into great detail about corporate governance specifically. Furthermore, it does not mention its adherence to any part of the Corporate Governance Code.

Conclusions

After reviewing the information provided either on the listed companies’ website or their annual report (see Table 2), it was discovered that the transparency of information has been achieved. At least as stated, most all of the companies comply with statutory provisions of the Commercial Code and other Acts, and six of the ten companies comply with the recommendations of the Corporate Governance Code. Of the four that have not adopted the principles of the Code, some mention of the corporate governance policy is made through the disclosure of the relevant information.

I have found that companies listed on the Prague Stock Exchange with a large market capitalization have improved upon their corporate governance reporting in their 2004 annual reports from previous years. Steps have been taken by these companies to adopt the recommendations of the Corporate Governance Code even before they have become statutory regulations. Although these are stated measures that have been taken, it is assumed the policies are followed as a result of the auditor statement concerning the reporting of information contained in the annual reports. Overall, investor confidence in the Czech securities market should improve in light of the increasing transparency of information, and the future legislation of additional corporate governance requirements will improve upon this further.

Table 2

Results of Company Analysis

Disclosure of Information ČEZ EB CT KB U Z CETV PMČR SD PE

Does the company disclose Y Y Y Y N Y Y Y Y Y
corporate governance structure
and policy?

Does the company use the Y Y* Y N N Y** Y*** Y*** N N
Corporate Governance Code
as a basis?

Is shareholder ownership Y Y Y Y N Y Y Y Y Y
disclosed and voting rights?

Board membership & Y Y Y Y Y Y Y Y Y Y
qualifications disclosed?

Board member remuneration Y Y Y Y Y Y Y Y Y Y
disclosed?

Does the website contain a N Y N N N Y N Y N N
corporate governance area?

*Austrian Code of Corporate Governance
**Dutch Corporate Governance Code
***United States Securities and Exchange Commission Requirements
Source: 2004 Annual Reports for Respective Companies

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Save Your Time When Looking For A Home

In the event that you’re looking for a house, you might find that you will have a hard time looking through all of the home details available online to try and discover the perfect house. As opposed to endeavoring to do everything within the bit of extra time you have, you should request help from a real estate agent.

A real estate agent can save a large amount of free time along with stress with your search to find a new home. They’re going to be ready to take the time to check your price range along with exactly what you are searching for to make sure they have a solid idea of exactly what you may need. Then, they are going to spend some time to search for a house for you personally. While this may take a little bit of time, odds are it’ll be faster than you searching by yourself because they do not need to browse around your work schedule. They’re going to be able to invest lots of time perusing the accessible homes to locate one that will be best for you. After they find a few houses they feel will be perfect, they are able to take you to evaluate them.

In case you are inquisitive about understanding a little more about how a realtor can save you both spare time and aggravation, take a look at this  right now. After that, phone your real estate agent and start working together with them to be able to locate the ideal house for you personally.

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The Way to Sweep Customers off Their Feet

Selling property is just not as easy as numerous think. It will take months associated with planning and perhaps months before you decide to market. This is certainly normal and the process should never be taken gently. It isn’t achievable to market advertise your house in just a week, regardless of what you have been told. The process is crucial and how a person deal with it is going to determine how fast you anchor a buyer for your home. Here are a few other things to be aware of.

Do not make an effort to guess what you can do to please the consumer. It is true that each seller can feel they can add value for the house without having investing lots of money. People never have to be able to renovate your kitchen or bathrooms (unless they will really need it), but make certain everything is actually clean. Putting up a fresh layer of fairly neutral paint or even steam cleaning the carpets can go a long way. If you go only at that alone, make sure you are equipped with here are some. If you must be present, usually do not talk a lot. Simply answer the questions introduced and nothing else.

An experienced Realtor helps keep you up to date with each go to and should become frank regarding the changes that must definitely be done to offer a property. If you believe the real estate agent is prone to exaggerating the positive aspects of the home, and is not doing every thing possible to sell it, you might like to consider changing agencies. If the house takes too long to promote, the problem is possibly with the cost. Pause and inquire of a new Realtor to benefit the home. They ought to also suggest on achievable changes to make it more vibrant. Stop by my company to find out more.

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Cheap automobile insurance in Seattle, WA and Miami, FL.

auto insurance in new yorkLaws and requirements for insurance are complicated and change from state to state. There are numerous and varying kinds of coverage you decide on from, whether full liability or personal injury protection. Some states require certain coverage types while others make it optional. The big apple has some some complicated  requirements and Seattle auto insurance options so lets review them.

Liability

Every states requires liability, the most basic coverage , The big apple included. New York auto insurance laws require $25,000, $50,000 or $10,000 in coverage. These figures cover bodily injury liability per person, total bodily injury per accident, and property damage per accident, respectively.

New York State is unique for the reason that it will take twice the bodily injury liability limits in the event the accident brings about death, using the limits to $50,000/$100,000. Owning a car is expensive in NYC or car insurance in Miami.

Personal Injury Protection

Personal injury protection or PIP is required in Ny, along with several other states. It is really an extended type of auto coverage which helps with medical costs and can cover lost pay along with other miscellaneous charges.

Medical care coverage

Ny is exactly what is called a “no-fault” state. All people that have New York auto insurance have to have this coverage. This covers the insured’s medical costs, regardless of fault. There is certainly some controversy over this sort of coverage because it is generally expensive and is considered to create redundant coverage once the insured even offers regular medical insurance.

Uninsured/Underinsured Motorist Coverage

Uninsured/underinsured motorist coverage is optional in certain states but, needed in New York. This coverage will take care of the insured, as much as the limits they’ve purchased, if they’re in a accident caused by another driver which driver is not insured or doesn’t need sufficient insurance to pay for the total liability. Another common case that this kind of insurance coverage is helpful is in the event of your hit and run.

Other Ny Auto Insurance Requirements

The big apple State requires that car insurance remain in effect while a vehicle is registered, regardless set up vehicle has been used. If a vehicle isn’t used, New York State requires that plates are returned towards the state to cancel the registration.

Ny automobile insurance law necessitates that New York drivers have insurance in the state, out of state insurance is not acceptable. This state also requires that the insurance should be inside the same name because the registered owner. Neglecting to follow along with this requirement will result in a lapse of insurance and the registration is going to be suspended; the owners’ license may also be suspended if the lapse exceeds 90 days.

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