UGBA 3.1 - Spring 2011 Module 3 Accounting & Finance...

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David Robinson © D. Robinson, 2010 Spring 2011 Module 3 Lecture 1: Forms of Business How Firms Raise Capital
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Accounting Finance Managerial Financial Auditing How investors use their money How firms raise money Three financial statements Forms of business Income St. Balance Sheet St. Cash Flows
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How Firms Raise Money Forms of Business How firms raise capital Bank loans Common stock (shares) Corporate bonds
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Forms of Business Most big businesses—but not all —are “Public Corporations”
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An Introduction to “Forms of Business” Key concepts: 1. Control 2. Liability For debts For “tortuous acts” 3. Ability to raise capital for the firm 4. Taxes 5. Taking profits from the enterprise See p. 46 -51 in Ebert 8/e
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Sole Proprietorship: Advantages Easy to start up “Fictitious Name Registration” (CA) “d/b/a” (“doing business as” in other states) Complete control Pay taxes on your income tax
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Sole Proprietorship Disadvantages Hard to get funding Unlimited liability Difficult to sell (in whole or part)
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Partnership: Advantages Pooling of talents Additional financial resources Fairly easy to start up Profits are taxed on the partners individual income taxes (no taxes paid at the Partnership level)
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Partnership Disadvantages Share the profits Need to reach consensus It may be very hard to sell your interest in the firm, if you want to leave Termination/inheritance problems Liability, in general . .. Individual liability
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Some partnerships have two types of Partner: General partners Have unlimited liability … but get to call the shots Limited partners … make a “silent” investment in return for liability limited to what they put in
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Don’t worry about these two forms: [They are hybrids of partnerships and corporations that are useful in only special circumstances.] If you are planning a small business, despite what your friends tell you , there are almost no advantages to being an LLC Why? If you are just starting out and incorporate no bank will give you a loan
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Definition “Corporation” A business entity that acts as a “legal person” That is, it can make contracts, have debts, be sued, and even be found criminally liable The liability is “incorporated” = does not reach to the investors • [Remember, Adam Smith didn’t think corporations would work] Two forms: Private (shares not for sale on the exchange) Public (shares are listed on one or more of the exchanges)
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UGBA 3.1 - Spring 2011 Module 3 Accounting & Finance...

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