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The Corporation(Chapter 1) (4 Types of Firms (Limited Liability Company…
The Corporation(Chapter 1)
4 Types of Firms
Partnership
Association of
two/ more individual
joint together as co-owners to operate a business for profit, joint responsibility involve
partnership agreement, better access of capital/skill
, continuity of business
All partners are
personally liable
for all of the firm's debt. Lender can require any partner to repay all of the firm's outstanding debts
Partnership ends with death/ withdrawal of any single partner
Advantages
Limited protection of owners' personal assets more sources of equity & expertise
Disadvantages
Hard to dissolve, shared control & profit
Limited Liability Company
General Partners
Have same right & liability as partners
Run the firm on day-to-day basis
Limited Partners
Have liability limited to their investment
Have no management authority & can't legally involved in the managerial decision making(business)
Limited partner's interest is transferable
All owners have limited liability but can also run the business
Can
private/public
Sole Proprietorship
Business owned by a
single individual, unlimited liability, limited access to capital,lack of continuity, constraints of various skills
Advantages
Easy to create & exit
Disadvantages
Unlimited personal liability
Limited life (firm close once owner die)
Difficult to transfer ownership
Corporation
Legal entity separate from its owners
Has many legal power as individual have ability to enter into contract, own assets, borrow money
Solely responsible for its own obligation. Its owners are not liable for any obligation the corporation enters into
An entity that legally function separately & apart from its owner, limited liability, good access of capital/skills, separation of management & ownership, ownership is dictated by the shareholding & transferable
Advantages
Protects personal assets, no shareholder liability for business, greater access to sources of funds
Disadvantages
Formation
Corporation must be legally formed
Ownership
Represented by shares of stock
Owner of stock
shareholder
stockholder
Equity Holder
Sum of all ownership value - equity
No limit of no of shareholders, amount of funds a company can raise by selling stock
Owner - entitled to dividend payment
Legal forms of business organisation
Comparison of organization forms
Organisation requirements & costs
Liability of owners
Continuity of business
Transferability of ownership
Management control
Ease of capital raising
Income taxes
Ownership vs Control of Corporations
Corporate Management Team
In firm, ownership & direct control are separate
Board of Directors
Choose by shareholders
Have final decision-making authority
CEO
represent day-to-day decision making to CEO
Financial Manager
responsible for
Investment decision
Financing decision
Cash Management/ Dividend decision
Goal of the firm
Shareholders will agree that they are better off if management makes decisions that maximizes value of shares
Maximization of shareholders wealth/ firm value
CEO Performance (If perform poorly)
Shareholders can express their dissatisfaction by selling their shares. This selling pressure will drive the stock price down
Shareholders could pressure the board to change a new CEO
Hostile takeover
Low stock price may entice a Corporate Raider to buy enough stock so they have enough control to replace current management. The stock price will rise after the new management team "fixes" the company
Corporate Bankruptcy
Debt holders vs equity holders
Reorganization
Liquidation