Principles of Finance: Exam Terminology Notes
Chapter 1.
Legal forms of business organization
A. Sole proprietorship: A business owned by a single person and which has a minimum amount of legal structure.
1. Advantages
a. Easily established with few complications
b. Minimal organizational costs
c. Does not have to share profits or control with others
2. Disadvantages
a. Unlimited liability for the owner
b. Owner must absorb all losses
c. Equity capital limited to the owner’s personal investment
d. Business terminates immediately upon death of owner
B. Partnership: An association of two or more individuals coming together as co-owners to operate a business for profit.
1. Two types of partnerships
a. General partnership: Relationship between partners is dictated by the partnership agreement.
(l) Advantages
(a) Minimal organizational requirements
(b) Negligible government regulations
(2) Disadvantages
(a) All partners have unlimited liability
(b) Difficult to raise large amounts of capital
(c) Partnership dissolved by the death or withdrawal of general partner
b. Limited partnership
(l) Advantages
(a) For the limited partners, liability limited to the amount of capital invested in the company
(b) Withdrawal or death of a limited partner does not affect continuity of the business
(c) Stronger inducement in raising capital
(2) Disadvantages
(a) There must be at least one general partner who has unlimited liability in the partnership
(b) Names of limited partners may not appear in the name of the firm
(c) Limited partners may not participate in the management of the business
(d) More expensive to organize than general partnership, as a written agreement is mandatory
C. The corporation: An "impersonal" legal entity having the power to purchase, sell, and own assets and to incur liabilities while existing separately and apart from its owners.
1. Ownership is evidenced by shares of stock
2. Advantages
a. Limited liability of owners
b. Ease of transferability of ownership
Legal forms of business organization
A. Sole proprietorship: A business owned by a single person and which has a minimum amount of legal structure.
1. Advantages
a. Easily established with few complications
b. Minimal organizational costs
c. Does not have to share profits or control with others
2. Disadvantages
a. Unlimited liability for the owner
b. Owner must absorb all losses
c. Equity capital limited to the owner’s personal investment
d. Business terminates immediately upon death of owner
B. Partnership: An association of two or more individuals coming together as co-owners to operate a business for profit.
1. Two types of partnerships
a. General partnership: Relationship between partners is dictated by the partnership agreement.
(l) Advantages
(a) Minimal organizational requirements
(b) Negligible government regulations
(2) Disadvantages
(a) All partners have unlimited liability
(b) Difficult to raise large amounts of capital
(c) Partnership dissolved by the death or withdrawal of general partner
b. Limited partnership
(l) Advantages
(a) For the limited partners, liability limited to the amount of capital invested in the company
(b) Withdrawal or death of a limited partner does not affect continuity of the business
(c) Stronger inducement in raising capital
(2) Disadvantages
(a) There must be at least one general partner who has unlimited liability in the partnership
(b) Names of limited partners may not appear in the name of the firm
(c) Limited partners may not participate in the management of the business
(d) More expensive to organize than general partnership, as a written agreement is mandatory
C. The corporation: An "impersonal" legal entity having the power to purchase, sell, and own assets and to incur liabilities while existing separately and apart from its owners.
1. Ownership is evidenced by shares of stock
2. Advantages
a. Limited liability of owners
b. Ease of transferability of ownership