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Chapter 13

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COMM 103
Gregory Libitz

Chapter 13: Intro to Capital and Financial Markets Business Ownership Options  Sole Proprietorship  Partnership  Corporation Five Factors Influencing what Type of Legal Structure to Use  Ease of Set-Up: To get the business up and running  eg.Gov regulations  Degree of Control: The degree of ownership/level of decision making authority you want to possess within the business.  Magnitude of Risk: The level of financial, legal, and operational liability the owners are willing to accept.  Financial Capacity: The financial resources that the owners have  will it be enough?  Required Skills: The degree of expertise required to run the business successfully. As a company continues in the future and grows, it may be necessary to review these factors and change the structure of the company as the needs of the company and its environment changes. Sole Proprietorship  Easiest way to start a business: generally nothing more than registering name  No real creation of a separate business entity: The person is the business, the business is the person  Therefore, the person has 100% control.  Unlimited liability Any business debts must be paid by the owner  Limited skill set  Limited to personal capacity to invest in company/bank loans  hard to raise capital. Partnerships  Two+ individuals  Less operational control for each individual partner  Partnership agreements (detailing expectations, how it will “work”, financial distributions, partners’ ownership percentage etc.) not necessary but recommended  Like SP, partnerships are not viewed as separate legal entities  Unlimited liability for all general partners o Joint and Several Liability: Each partner is liable for the debts of the partnership if others partners cannot pay.  Income/loss is distributed through the partnership (based on income ratios) and are reported on each individual partner’s income tax return.  Greater financial capacity compared to SP  still not easy to raise capital  Differentiated skill set  Possible for Limited Liability partnerships  One member must have unlimited liability o Limited partners have little control & are not actively involved in mgnt decisions Corporations  Separate legal entities  Limited liability for owners  Ownership of the business is clearly defined based on how many stocks you own  Harder to set up Corporate name availability, gov documents, separate tax return  A lot of government regulation  More costs associated with following them  Corporate governance: Board of Directors  Many owners can also give wide skill set  The ability to issue stocks allows corporations to raise capital easily  “Double Tax”  Corporate tax for earnings and then personal income tax for employees  Privately held: Stocks are not publicly sold  Publicly held: Shares publicly sold (IPO) through stock exchange/other mediums. Must provide the public with financial information  also more gov’t regulation Funding the Organization  Core responsibility for managers is to asses financial resource requirements o Need to review Capital Structure to make decisions on how to finance operations o Key component is the managing the debt/equity ratiohow much debt the organization has and is willing to have in financing its operations Sources of Funds  Funds Derived from Operations  Funds obtained via credit facilities (debt)  Funds obtained via equity financing Funds Derived from Operations  Current-Year Operating Profits: Excess dollars which org has generated and has at their disposal during the current period after expenses have been paidNet Income o This money becomes an immediate reso
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