ch5 - NCSU Department of Economics EC-202 PRINCIPLES OF...

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NCSU EC-202 PRINCIPLES OF MACROECONOMICS Department of Economics Spring 2008 CHAPTER 5 Firms, the Stock Market, and Corporate Governance 1. Types of Firms In the United States there are three legal types of firms. A sole proprietorship is a firm owned by a single individual and not organized as a corporation. A partnership is a firm owned by two or more persons and not organized as a corporation. Owners of sole proprietorships and partnerships have control of their day-to-day operations but are they subject to unlimited liability. There is no legal distinction between their personal assets and those of the firms they own. As a result, employees or suppliers have a legal right to sue if they are owed money by these firms, even if this requires the owners to sell their personal assets. A corporation i s legal form of business that provides the owners with limited liability. Limited liability is the legal provision that shields owners of a corporation from losing more than they have invested in the firm. The profits of corporations are taxed twice in the United States and corporations are more difficult to organize and run than sole proprietorships and partnerships. Despite these disadvantages, limited liability and the possibility of raising funds by issuing stock make corporations an attractive form of business. Note: Corporations are often described as “publicly owned.” Be sure not to confuse this phrase and believe this means “government owned.” 2. The Structure of Corporations and the Principal-Agent Problem Corporate governance is the way in which corporations are structured and the impact a corporation’s structure has on the firm’s behavior. Shareholders in a corporation elect a board of directors to represent their interests. The board of directors appoints a chief executive officer (CEO) to run day-to-day operations and may
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ch5 - NCSU Department of Economics EC-202 PRINCIPLES OF...

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