Chapter 1 Finance 310

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Chapter 1 Starting up a Proprietorship    Proprietorship-an unincorporated business owned by one individual Easy to start Three advantages o Easily and inexpensively formed o Few government regulations o Its income is not subject to public taxation  Three limitations o May be difficult for them to obtain capital needed for growth o Proprietor has unlimited personal liability o Life of a proprietorship is limited to the life of the founder   Used primarily for small businesses Only account for 13% of sales based on dollar even though 80% of all businesses are proprietorships

Partnership  Whenever two or more persons or entities associate to conduct a noncorporate business for profit  Partners can potentially lose all of their personal assets including assets not invested because each partner is liable for the partnerships debts  Limited partnership- wherein certain partners are designated general partners and others limited partners

o Limited partners can lose only the amount of their investment in the partnership while the general partners have unlimited liability o Common in real estate, oil, equipment leasing ventures and venture capital o Limited Liability Partnership (LLP) or Limited Liability Compnay (LLC) all partners enjoy limited liability with regard to the business’s liabilities and their potential losses are limited to their investment in the LLC Corporation  A legal entity created under state laws, and it is separate and distinct from its owners and managers  This separation gives it three advantages 1. Unlimited life 2. Easy transferablitiy 3. Limited liability   Easy to make money Two disadvantages

 Corporate earnings may be subject to double taxation  Setting up a corporation involves preparing a charter, writing a set of bylaws, and fulfilling the many required state and federal reports, which are more complex and time consuming than creating a proprietorship or partnership  Charter-

 Name of the proposed corporation  Types of activates it will pursue

 Amount of capital stock  Number of directors  Names and addresses of directors  It is filed with the secretary of state in which the firm will be incorporated and when it is approved the corporation is officially in existence Bylaws

 A set of rules drawn up by the founders of the corporation 1. How directors are to be elected 2. Whether the existing stockholders will have the first right to buy any new shares the firm issues 3. Procedures for changing the bylaws themselves

Professional Corporations (PC)/ Professional Association (PA)

 Do not relieve the participants of professional (malpractice) liability  The motivation behind the professional corporation was to provide a way for groups of professionals to incorporate and thus avoid certain types of unlimited liability yet still be held responsible for professional liability

S Corporations

 Depending on requirements met and regarding to size and number of stockholders, owners can establish a corporation but elect to be taxed as if the business were a proprietorship or partnership

 Initial Public offering-Selling stock to the public at large  After an IPO corporations support their growth by borrowing from banks, issuing debts or selling additional shares of stock

 Agency Problem-managers are hired as agents to act on behalf of the owners  Corporate Governance- Where agency problems can be addressed

 Market Price- the stock price that we observe in the financial markets  If the market price reflects all relevant information, then the observed price is also the intrinsic or fundamental price

 Investors rarely have all relevant information  When we say managements objective should be to maximize stockholder wealth, we really mean it is to maximize the fundamental price of the firms common stock not just the current market price

 Other objectives of firms include: managers who make the actual decisions are interested in their own...
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