Business Finance Laws

Finances are obviously a huge part of doing business in a free market, and, as a result, many laws have been crafted to govern exactly how businesses are allowed to operate. These laws have many foci, but they are generally aimed to make sure that competition between corporations and businesses is always fair, that investors can trust in this fair competition, and that consumers are not taken advantage of by companies. You must know about these business finance laws, including the following:

Standard Antitrust Laws

Many financial deals are struck based on a bidding system, whereby companies bid for the right to provide goods and services to other companies. This system is supposed to make sure that companies can get the best possible prices on their goods, keeping the market competitive and forcing providers to work hard to keep their costs down -— or to provide a better product at the same price point.

One clear problem with this system is that companies could collude with one another in order to drive the prices up. For example, if two companies are bidding to provide parts and materials to a third company, the first two could meet privately in advance, agree that they are both going to put in bids that are much too high, and charge an inflated price for what they offer. To keep this from happening, antitrust laws have been set up. These are established in many rulings, including the Sherman Act. When it is suspected that these laws have been broken, both the Department of Justice and The Federal Trade Commission (FTC) may take action.

Bankruptcy Laws and Chapters

When a company is running out of money to pay its debts, it may have to file for bankruptcy. This is a process that can then eliminate the debt; though this is a very useful tool in the right situation, it can also be dangerous to use because of the negative impact on a credit rating, so it is to be used carefully. There are laws governing when certain types of bankruptcy can be used, what is and is not exempt, where filings must be made, and the like. These laws also establish different chapters -— or types -— of bankruptcy filings.

For example, two of the most popular are Chapter 7 and Chapter 11. With a Chapter 7 filing, a business is basically just shutting down. The owner has decided that the venture did not work out, and he or she is no longer earning money. The only value is in the assets that the business owns, such as machinery or real estate. Under a Chapter 7 filing, these things have to be sold —- which is why this is known as liquidation. The creditor is then able to collect a percentage of the debt when money is brought in from the liquidation, but all of it will never be reclaimed.

If the owner thinks that the business can still succeed, though, Chapter 11 may be used. This chapter sets up a reorganization plan. The business gets to work with the creditor to find a new plan to pay the debt off on an alternative schedule. Other alterations to the way the business runs may also be made. This way, the creditor can still collect on the debt, but the payments are not so crippling that they sink the company. Reorganization, for example, was used by Kmart when it filed for bankruptcy back in 2003.