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.

Keys For Using a S Corporation

If you have been considering forming a corporation or other business entity to provide yourself with limited liability and financing options in your business venture, you have made an important first step. You may have compared the tax benefits of corporations and limited liability companies or limited partnerships. If you have done so, you likely realized that corporations are taxed twice, while limited liability companies and limited partnerships are taxed once. While a corporation’s profits are taxed once as the corporation’s income and again when the profits are distributed as dividends, a limited liability company or limited partnership’s profits flow through the entity and are only taxed once as personal income to the individual member of the limited liability company or partner in the limited partnership. This is referred to as flow-through taxation. Based solely on the tax treatment of corporations, you may be prepared to use a limited liability company or limited partnership for your business.

While limited liability companies and limited partnerships feature outstanding charging order protection, Nevada has recently extended such protection to corporations with between two and seventy-five shareholders.

Before you decide which business entity to use, there is one more option for you to consider. If you choose to use a limited liability company or a limited partnership, your business may limit its financing options. Financing for a limited liability company or a limited partnership may not be as readily available as financing for a corporation, because interests in such entities are not as transferable as interests, or shares of stock, in a corporation. An S-corporation is the alternative that provides both financing options and flow-through taxation; however, to be treated as an S-corporation, your business must do the following:

o Incorporate the Business – As with a regular corporation, referred to as a C-corporation, an S-corporation must prepare and file Articles of Incorporation with the state, prepare and operate under Bylaws, operate under a Board of Directors and corporate officers, and engage in corporate formalities.

o File an S-Corporation Election Form – To be eligible for S-corporation tax treatment, the corporation must (1) be a corporation organized in any U.S. state, (2) not be an ineligible corporation (certain types of businesses are not eligible), and (3) have only one class of stock. If eligible, the corporation may file an S-corporation election form, Form 2553, with the Internal Revenue Service within forty-five days after incorporating. While this will allow flow-through federal taxation, it is important to note that five states do not recognize S-corporations and may tax the corporation as a C-corporation. It is also important to note that S-corporations are not eligible for certain tax deductions that C-corporations may enjoy.

o Notice and Obey S-Corporation Limitations – Once the corporation has made its S-corporation election, it must notice and obey the limitations on S-corporations to maintain its flow-through tax status. If the corporation violates any of the following limitations, it will lose S-corporation status and will not be eligible for flow-through taxation for five years: (1) it must have one hundred or fewer shareholders; (2) all of its shareholders must be individuals, descendants’ estates, estates of individuals in bankruptcy, or certain trusts, because business entities may not be shareholders; and, (3) all of its shareholders must either be United States citizens or resident aliens in the United States (nonresident aliens may not be shareholders). If the corporation loses its flow-through tax status, the Internal Revenue Service will treat it as a C-corporation.

Every business is unique. Your business’s form should be based on your specific circumstances. While the limitation on the number and types of shareholders allowed in S-corporations may affect financing options, such limitations may have less practical importance than the limitations on financing options created by using a limited liability company or a limited partnership. Accordingly, S-corporations’ tax benefits, management structure and transferability of shares may provide the benefits that your business needs in an entity that also provides you with limited liability. By considering your business’s options and choosing the best available business form, you will ensure that you take advantage of available opportunities.

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 com
e 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 organisat

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.

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, 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, 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 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.


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 info
rmation 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.


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

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

Small Business Tax Tip – Corporation, LLC, Partnership or Proprietorship?

Sometimes it’s the small decisions — or lack of a decision — that have the greatest effect on your business.

Take the choice of what type of legal structure you use to operate your business. Many small business owners are so excited about starting their businesses that they give little or no thought to this very important decision. Should you incorporate? Form an LLC? A partnership? Would you be better off just doing nothing and running your business as a sole proprietorship?

Before you take the advice of the first person you ask or the first book you read, consider all of the legal, tax, financial and operational effects of your choice. Let’s look at your choices one by one.

Sole Proprietorship

When you open your business without a partner (a spouse does not usually count as a partner for this purpose) and without filing any paperwork to choose one of the other business types, you are automatically a sole proprietorship. You are doing business with your customers directly as yourself, an individual. This is true even if you have a name for your business and file “fictitious name” or “doing business as” papers with your state or local government.

For income tax purposes, there are no separate forms to file for the business. You simply attach Schedule C to your Form 1040. Schedule C is where you summarize your business revenues and expenses. You pay tax on any profit at the regular individual tax rates. If you have a loss, you can usually deduct the loss against your other income.

In addition to income tax, you must pay self employment tax on your business profit. The self employment tax rate is 15.3% on the first $94,200 (for 2006) of profit, and 2.9% on any amount over $94,200. The tax is designed to replace the social security and medicare taxes you and your employer pay when you have a regular job. Since you’re both “employer” and “employee,” you pay twice as much as you would if you worked for someone else.

The biggest pitfall of being a sole proprietor is your legal liability. If someone is injured, whether physically, financially, emotionally, etc. as a result of your business activities, you can be sued personally. In today’s litigious environment where people are sued at the drop of a hat, this is a risk no serious business owner should take lightly. While insurance may offer some protection, you still run the risk of losing your personal assets, and/or of having to file bankruptcy, due to a lawsuit.

While this form of business may be fine for some part-time or “sideline” businesses, most small business owners should choose a different option.


When you co-own a business with one or more other people and don’t choose one of the other business types, you are automatically a partnership. (Technically, a “general partnership.”) While a sole proprietorship is low on the list of desirable business structures for a small business, a partnership is even lower.

Like a sole proprietorship, you can be sued personally for any harm you cause as a result of your business activities. Even worse, you can be sued for any harm caused by your partner! Not only that, if your partner signs a contract or takes out a loan on behalf of the business, you are automatically bound by the terms of that contract, whether you agree with it or not. This is scary stuff, and I simply never recommend this structure. This is an example where “doing nothing” can be a big mistake.

Income tax wise, a partnership must file a Form 1065, U.S. Return of Partnership Income, to report its revenues and expenses. The partnership itself does not pay income taxes. Rather, each partner reports his share of the profit or loss from the business on his individual tax return. As with a sole proprietorship, an active partner must pay the 15.3% self employment tax on his first $94,200 (for 2006) of the partnership income, and 2.9% on any amount above that.

There is a different kind of partnership, called a Limited Partnership, that restricts the liability of certain “passive” partners, called limited partners. This is used primarily in real estate syndications and is outside the scope of this article.

The bottom line on partnerships: Stay away from them.


A corporation is a separate legal entity, or legal “person” if you will, formed by filing certain documents with a state government. Most big companies you’re familiar with are corporations, and will usually have the word “corporation” or “Inc.” in their business name. Corporations have several advantages, including the ability to raise money by selling stock, and the fact that each owner’s, or stockholder’s, risk is limited to their investment in the company. A corporation can have one owner, or millions of owners, or any number in between.

As mentioned above, your risk in case of a lawsuit is generally limited to the amount of money you have invested in the corporation. There are important exceptions to this general rule, a few of which are worth mentioning. First, if you are in one of the classic professions, usually including doctors, lawyers, accountants, and engineers among others, you cannot escape personal liability for your professional activities. In other words, if you’re a doctor and you amputate the wrong leg on a patient, you can still be sued personally. On the other hand, if a patient trips over a chair in your waiting room and breaks their leg, the normal corporate protection would apply.

A second exception has to do with how you operate your business, and how you present yourself to the outside world. When you form and run a corporation, you are obligated to make sure everyone you deal with knows they’re dealing with a corporation. So, for example, you would want to make sure you included your full corporate name on all letterhead, business cards, advertising etc. You don’t want anyone to be able to say they thought they were dealing with you as an individual and not your corporation.

Another liability exception has to do with recordkeeping. This is where many small business owners get themselves in trouble. A corporation must maintain books and records separate from that of its owners. Also, by definition a corporation issues stock and has a board of directors. That board of directors must have a meeting at least once per year, and formal minutes must be kept. Any significant activities of the corporation, such as taking out a loan, usually require approval by the board. Now the reality is that in a small business you may be the owner and only member of the board of directors. But you still have to keep up the formalities required by your state, and the state where you incorporated (if different). If you don’t, a good attorney might argue that you should be able to be sued personally, thereby “piercing the corporate veil” and leaving your personal assets exposed. An IRS agent can make the same claim, thereby disallowing certain deductions and tax benefits you receive by operating as a corporation. So consult a competent attorney, and make sure your corporate books and records meet the legal requirements.

For state law purposes, a corporation is a corporation. But for tax purposes, a corporation can be either a regular “C corporation” or receive special tax status by being an “S corporation.”

C Corporation

Unless a corporation qualifies for and chooses to be an S corporation, it is automatically classified as a C corporation. A C corporation pays taxes on its profits, and files a Form 1120 with the IRS. Any excess profit is then distributed to the corporation’s owners, or stockholders. These profit distributions are called dividends, and the stockholders must pay income taxes on them. This is why it is said that a C corporation r
esults in “double taxation.” Notice that the corporation’s profits are taxed twice: Once at the corporate level, and again when distributed to the owners.

Due to this double taxation, most small businesses are not well served by being a C corporation. That said, there are very limited circumstances where a C corporation can be used by a small business owner in order to gain certain tax advantages. Check with your tax advisor.

S Corporation

Subchapter S of the Internal Revenue Code was created and reworked by Congress late in in the 20th Century in order to allow small business owners to incorporate without being subject to double taxation. Thus, the “S corporation” was born, and has been the preferred tax structure for small businesses ever since (but see the section on LLCs below).

With an S corporation, the corporation files a Form 1120S with the IRS, but the corporation does not pay income tax (with a few rare exceptions). Rather, each owner pays tax on her share of the corporation’s profits, much like a partner in a partnership. The difference here of course, is that since it is a corporation under state law, there are none of the legal liability problems associated with partnerships. And since the corporation does not pay income tax, there is no double taxation as there is with a C corporation. In effect, it allows a corporation to be taxed like a partnership.

Unlike a partnership, if handled properly, you do not pay self employment taxes on the profits of the S corporation. Instead, you are paid a salary, and the applicable social security, medicare and other payroll taxes are paid accordingly. Any dividends in excess of your salary are not subject to payroll or self employment taxes. So if you have a low salary and high dividends, you save 15.3% in taxes on the dividend portion. Of course the IRS knows this, and they require you to pay yourself a “reasonable” salary. How much salary you should pay yourself vs. dividend distributions is a much debated topic between taxpayers and the IRS, and also offers many opportunities for tax planning.

Not every corporation is qualified to be an S corporation, though most small businesses qualify. There are restrictions on such things as the number of stockholders and what type of entities can be stockholders. The basic purpose of the rules is to prevent large, publicly traded companies from qualifying, and to prevent various tax avoidance schemes using trusts and foreign entities.

A corporation must elect S status no later than the 15th day of the third month of the year in which it wishes to be treated as an S corporation. For example, for a calendar year business, a corporation must make the election by March 15, 2008 in order to be treated as an S corporation for 2008. You make the election by filing Form 2553, which must be approved by the IRS in order for it be effective.

Overall, the S corporation is an excellent structure for most small businesses.

Limited Liability Company (LLC)

The newest of the business structures is the limited liability company or LLC. The LLC affords much the same protection against lawsuits as the corporation, without most of the somewhat burdensome paperwork and recordkeeping requirements, such as stock certificates, board of directors meetings, board minutes, etc. In addition, the LLC is very flexible from a tax standpoint, allowing you the choice to be taxed as either a C corporation, an S corporation, a sole proprietorship (for businesses with one owner) or a partnership (two or more owners).

Each state has its own rules for who can form an LLC, but most states now allow an LLC to have just one owner (that wasn’t always the case). Most small businesses will qualify. Forming an LLC is usually quite simple and relatively inexpensive, and can often be done right over the internet.

For tax purposes, an LLC with one owner will be taxed as a sole proprietorship, unless the owner makes an election to be taxed as a corporation (C or S). An LLC with multiple owners will automatically be taxed as a partnership, unless the LLC chooses to be taxed as a corporation (C or S). Do you see the beauty of this structure? You get liability protection akin to a corporation, but you don’t have all the nit picky paperwork to do and the “corporate book” to maintain. At the same time, you get to choose how you’re treated for tax purposes! That’s enough to make a tax accountant’s heart flutter!

As you can probably tell, I really like the LLC structure. My own business, Thomas Norton & Company, LLC, is obviously structured this way. I have also elected to be taxed as an S corporation, since it gives me certain advantages in my circumstances. It should be noted that you can start an LLC and be taxed as a sole proprietorship at first, and elect to be treated as an S corporation at some future date.

Though the S corporation still rules the roost among small businesses, the LLC is fast making inroads as more and more business owners discover its simplicity, flexibility and effectiveness.

Which Structure is Best for You?

Since your circumstances might be different, you should consult a qualified tax advisor before making this important decision. That said, most small businesses are and should be structured as either an S corporation or an LLC. Whether your LLC should be taxed as a sole proprietorship, partnership, C corporation or S corporation is very situation dependent, so ask that tax advisor what he or she thinks.

No matter what form of business you choose, make sure it is a conscious choice, made after carefully considering the legal and tax ramifications involved. While it may seem mundane, it is one of the most important business choices you will ever make.