Corporate Finance

Topics: Investment, Bond, Time value of money Pages: 94 (28281 words) Published: March 6, 2013
Chapter 1

Note: the summaries at the end of each chapter are good study tools.

A corporation is a permanent entity, legally distinct from its owners, who are called shareholders or stockholders. A corporation confers limited liability to its owners: shareholders cannot be held personally responsible for the corporations’ debts; they only stand to lose their investment. To incorporate, you work with a lawyer to prepare articles of incorporation, which set out the purpose of the business and how it is to be financed, managed, and governed. You may incorporate your firm federally under the Canadian Business Corporation Act, or provincially, under the relevant provincial laws. The corporation is considered a resident of its jurisdiction.

Public company: corporation whose shares are listed for trading on a stock exchange. Private company: corporation whose shares are privately owned.

More than 2,000 public companies exist in Canada. Public companies can offer shares for sales to raise financing, and in return they provide detailed financial information in their annual reports and make timely disclosure of significant corporate events. Private companies are not required to do this. All corporations have a board of directors, selected by shareholders and given responsibility of overseeing the activities of the corporation. The legal separation of ownership and management is one distinctive feature of corporation. Separation gives corporations permanence; however the extent of this separation differs. In a private corporation, the shareholders are on the board of directors and often are also top managers. In public corporations, this is neither feasible for desirable; large, public corporations have thousands of shareholders. One reason not all companies incorporate is cost, in both time and money, of managing the corporation’s legal machinery. A disadvantage for corporations is double taxation. Corporations pay tax on their profits, then shareholders are taxed on the dividends they receive or if they sell their shares at a profit. For public corporations, the additional disadvantages are the expense of maintaining a stock listing, compliance with government requirements and securities laws, and sharing of information with the public.

A sole proprietorship is a business owned and operated by one individual. The proprietor is personally liable for all the firm’s obligations (unlimited liability). Advantages are the ease with which it can be established and the lack of regulations governing it. More suited for a small company. Taxed only once as personal income.

A partnership is a business owned by two or more people who are personally responsible for all its liabilities. The partnership agreement will set out how management decisions are to be made and the proportion of profits for each partner. The partners then pay personal income taxes on their share of the profits. Sole proprietorships and partnerships are flow-through entities because they do not pay income tax on operating profits and do not file tax returns, unlike corporations. Partnerships have the disadvantage of unlimited liability. Many professional business are organized as partnerships, such as accounting, legal, and management consulting firms.

Hybrid forms of business organization: in a limited partnership, partners are classified as general or limited. General partners manage the business and have unlimited personal liability, and limited partners are liable only for the money they contributed and cannot take part in the day-to-day management of the partnership. There are also limited liability partnerships (LLPs), or limited liability companies (LLCs), in which both partners have limited liability. Limited partnerships and limited liability partnerships are flow-through entities. A professional corporation (PC) is commonly used by doctors, lawyers, and accountants, and has limited liability...
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