FINAN 450 Lecture Notes - Lecture 2: Limited Liability Company, Sole Proprietorship, Double Taxation

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The 3 main forms of business organizations: sole proprietorship business ran by only 1 person. E(cid:395)uity capital li(cid:373)ited to ow(cid:374)e(cid:396)"s pe(cid:396)so(cid:374)al wealth. Difficult to sell ownership interest: partnership 2 or more people. 2 or more owners = more capital available relatively easy to start income taxed once as personal income. Partnership dissolves when one partner dies or wishes to sell: corporation a legal (cid:862)pe(cid:396)so(cid:374)(cid:863) disti(cid:374)ct f(cid:396)o(cid:373) ow(cid:374)e(cid:396)s a(cid:374)d a (cid:396)esident of a state. S-corp no double taxation due to irs regulations. Separation of ownership and management (agency problem) Sarbanes-oxley act (sarbox, 2002: driven by corporate scandals. Intended to strengthen protection against accounting fraud and financial malpractice: compliance very costly. The agency problem the conflict of interest between principal and agent: principal hires an agent to represent its interest, stockholders (principals) hire managers (agents) to run a company. Ex: work the web: the internet provides a wealth of info about individual companies, finance. yahoo. com.

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