AFM273 Chapter Notes - Chapter 1: Takeover, Primary Market, Bid Price

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Chapter 1:
The three types of firms are sole proprietorship, partnership, and corporation
Sole Proprietorship is owned and run by one person
oAdvantages: easy to create
oDisadvantages: unlimited liability, no separation b/w the firm and the owner,
limited life, difficult to transfer ownership
More than one owner owns partnership. There are two types of partnership
oGeneral Partners – have the same rights and liabilities as partners and run the
firm on a day-to-day basis
oLimited Partners – have limited liability, cannot lose more than their initial
investment, death or withdrawal of partner does not dissolve partnership, interest
in business is transferable, no management authority and cannot legally be
involved in managerial decision making for the business (can only give money)
oLimited Liability Partnerships (LLP) – exist in legal and accounting professions,
owners have limited liability but can also run the business, similar to general
partnership in that partners can manage the firm and have a degree of unlimited
Corporation is a legal entity separate from its owners
oHas the ability to enter into contracts, own assets, and borrow money
oCorporation is responsible for its own obligations, owners are not liable
oCorporation is formed when it files a charter with the state wishes to incorporate
in. The state “charters” the corporation, formally giving its consent to the
oOwnership are represented by shares, owners are called shareholder,
stockholder, or equity holder
oSum of all ownership value is called equity
oShareholders pay tax twice, corporation pays tax for their income and
shareholders pay their own personal income tax on this income
Canadian Income Trusts flow through entities where all income produced by business flow to
investors and no earnings are retained within in the business. The CRA exempts the businesses
from double taxation
In corporation, rather than the owners, the board of directors and CEO directly control the
Corporate Management Team
Board of Directors – elected by shareholders, have authority in decision making
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