Reading Financial Reports For Dummies. Lita Epstein

sole responsibility is to find ways to avoid taxation.

      Getting familiar with reporting requirements

      A company must meet several requirements to keep its corporate veil of protection in place. For example, corporations must hold board meetings, and the minutes from those meetings detail the actions the company must take to prove it's operating as a corporation. The actions that must be shown in the minutes include:

       Establishment of banking associations and any changes to those arrangements

       Loans from either shareholders or third parties

       The sale or redemption of stock shares

       The payment of dividends

       Authorization of salaries or bonuses for officers and key executives (Yep, those multimillion-dollar bonuses you've been hearing about as major corporate scandals must be voted on in board meetings. The actual list of salaries doesn't have to be in the minutes but can be included as an attachment.)

       Any purchases, sales, or leases of corporate assets

       The purchase of another company

       Any merger with another company

       Changes to the Articles of Incorporation or bylaws

       Election of corporate officers and directors

      

These corporate minutes are official records of the company, and the IRS, state taxing authorities, and courts can review them. If a company and its owners are sued and the company wants to invoke the veil of corporate protection, it must have these board minutes in place to prove that it operated as a corporation.

      If a C corporation's ownership is kept among family and friends, it can be flexible about its reporting requirements. However, many C corporations have outside investors and creditors who require formal financial reporting that meets GAAP standards (for more on this topic, see Chapter 17). Also, most C corporations must have their financial reports audited. I talk more about the auditing process in Chapter 17.

Chapter 3

      Public or Private: How Company Structure Affects the Books

      IN THIS CHAPTER

      

Looking at the private side of business

      

Checking out the public world of corporations

      

Filing government and shareholder reports

      

Seeing what happens when a company decides to go public

      Not every company wants to be under public scrutiny. Although some firms operate in the public arena by selling shares to the general public on the open market, others prefer to keep ownership within a closed circle of friends or investors. When company owners contemplate whether to keep their business private or to take it public, they're making a decision that can permanently change the company's direction.

      In this chapter, I explain the differences between public and private companies, the advantages and disadvantages of each, and how the decision about whether to go public or stay private impacts a company's financial reporting requirements. I also describe the process involved when company owners decide to take their business public.

Investigating Private Companies

      Private companies don't sell stock to the general public, so they don't have to report to the government (except for filing their tax returns, of course) or answer to the public. No matter how big or small these companies are, they can operate behind closed doors.

      

KEEPING IT IN THE FAMILY

      Mars, one of the world's largest private companies, makes some of your favorite candies — 3 Musketeers, M&M's, and Snickers. Mars has never gone public, which means it has never sold its shares of stock to the general public. The company is still owned and operated by the family that founded it.

      Frank and Ethel Mars, who made candy in the kitchen of their Tacoma, Washington, home, started Mars in 1911. Their first worldwide success was the Milky Way bar, which became known as the Mars bar in Europe in the 1920s.

      Today Mars is a $40 billion business with operations in more than 56 countries and sales of its products in over 100 countries. Mars isn't just making candy anymore, either. It also manufactures Whiskas and Pedigree pet food, Uncle Ben's rice products, vending systems, electronics for automated payment systems, and information technology related to its manufacturing operations. The family is still in control of all these businesses and makes the decisions about which businesses to add to its portfolio.

      One of Mars's five key principles that shape its business is “Freedom.” The company's statement about the importance of freedom clearly describes why the family decided to stay private:

      Private ownership allows Mars to remain free. The nature of freedom demands that it be used responsibly by Associates and units alike. Our way of doing business allows us to remain free as a company and gives Associates as individuals the freedom to innovate, act and grow while achieving our common goals. This creates the kind of environment in which we are all excited to work. Our private ownership, unanimity of purpose and high ethical standards allow us to move quickly in exploring new ground, act boldly in the face of competition, and take risks wherever they are justified. Above all, our private ownership gives us the freedom to take a long-term perspective on making investments, building businesses and providing for the wellbeing of our Associates. This spirit has driven Mars in the past. It remains for each of us to make it the guiding force for our future.

A private company gives owners the freedom to make choices for the firm without having to worry about outside investors’ opinions. Of course, to maintain that freedom, the company must be able to raise the funds necessary for the business to grow — through either profits, debt funding, or investments from family and friends.

      Checking out the benefits

      Private companies maintain absolute control over business operations. With absolute control, owners don't have to worry about what the public thinks of its operations, nor do they have to worry about the quarterly race to meet the numbers to satisfy Wall Street's profit watch. The company's owners are the only ones who worry about profit levels and whether the company is meeting its goals, which they can do in the privacy of a boardroom. Further advantages of private ownership include

       Confidentiality: Private companies can keep their records under wraps, unlike public companies, which must file quarterly financial statements with the Securities and Exchange Commission (SEC) and various state agencies. Competitors can take advantage of the information that public companies disclose, whereas private companies can leave their competitors guessing and even hide a short-term problem.Owners of private companies also like the secrecy they can keep about their personal net worth. Although public companies must disclose the number of shares their officers, directors, and major shareholders hold, private companies have no obligation to release these ownership