Chapter 13: Intro to Capital and Financial Markets
Business Ownership Options
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.
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.
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 ratiohow 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 paidNet Income
o This money becomes an immediate reso