AFM273 Chapter Notes - Chapter 1: Ask Price, Bid Price, Corporate Raid

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Sept 8 Lecture 1 1
C1: Forms of Business Organization
1.1 The Three Types of Firms
1. Sole proprietorship: owned and run by 1 person
Key Characteristics
1. Easy and inexpensive to set up
the most common type of business in the economy, but relatively small in terms of
revenues, profits, and employees
2. No separation between the firm and the owner
Business income taxed as personal income
If there are other investors, they cannot hold an ownership stake in the firm (limits ability
of the owner to raise money for the business)
3. Owner has unlimited personal liability for business debts
4. Life of business is limited to the life of its owner
difficult to transfer ownership
2. Partnership: similar to sole proprietorship except more than one owner
Key Characteristics
1. Income is taxed at the personal level
2. All partners have unlimited personal liability
Applies to the firm's debt: a lender can require ANY partner to repay ALL the firm's
outstanding debts
3. Ends on the death/withdrawal of any single partner, unless partnership agreement
specifies otherwise
4. Fairly easy to establish
Note: some businesses remain as sole proprietorships or partnerships, typically in cases where the
reputation of the owners (and their personal liability) is important to the success of the business
Ex. law and accounting firms because a partner's personal liability increases the confidence of the
firm's clients that the partners will strive to maintain their reputation
Types of Partnerships
Limited partnership
Partnership with 2 kinds of owners: general partners and limited partners
1. General Partner (MUST be at least one general partner)
Have the same rights and privileges as partners in a general
partnership (personally liable for the firm's debt obligations)
Control how all the capital is invested
Actively participate in running the business
2. Limited partners
Have limited liability to their investment
o Loss cannot exceed investment in the business
Can transfer their interest in the business
No management authority and cannot legally be involved in the
managerial decision making for the business
Limited Liability
Partnership LLP
Can be used in legal and accounting professions
Similar to general partnership: partners can be active in the
management of the firm, have a degree of unlimited liability
Limitation on a partner's liability takes effect only in cases related to
actions of negligence of other partners or those supervised by other
partners
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