The Legal Setting

Abstract

This chapter describes the legal setting. The financial manager needs to be aware of certain basic aspects of business law, as the environment within which financial decisions are made is molded by such regulation. Organizing as a sole proprietorship has important tax consequences. Profits of a sole proprietorship are fully taxed at the owner's individual income tax rates. There are no further levies to be faced if funds are subsequently transferred from the business to its owner. This is in contrast to a corporate setting where corporate levies are paid on business profits, but the owners face additional personal taxes if they withdraw funds from the business through dividends, whether a sole proprietorship is advantageous or disadvantageous from a tax point of view are a complex question that cannot be answered in a general way. It depends on a variety of factors, including individual and corporate tax rates and the amount and timing of cash withdrawals from the business.