For example if she bought fifty shares of stock in

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: e amount he or she has invested (in the firm). Section 1 About Business Firms 163 07 (154-185) EMC Chap 07 11/17/05 5:14 PM Page 164 lose only her investment and nothing more. For example, if she bought fifty shares of stock in the corporation at a price of $10 each, her investment is $500. She may never see this $500 again, but she will lose no more. 2. Corporations continue to exist even if one or more owners sell their shares or die. The corporation itself is a legal entity. Its existence does not depend on the existence of its owners. 3. Corporations are usually able to raise large sums of money by selling stock. Because of limited liability, people are more willing to invest in a corporation than in other business forms. The price of a share of stock may be small, so many more people can afford an investment. Furthermore, they can invest as much or as little as they want; for example, a person may buy either 10 or 1,000 shares of stock in a corporation. In addition, because corporations can sell bonds and issue stock, they have ways of raising money that do not exist for proprietorships or partnerships. (We look at bonds and stocks in more detail later in the chapter.) EXH I BIT 7-1 Disadvantages of Corporations The disadvantages of corporations include the following: 1. Corporations are subject to double taxation. Suppose XYZ Corporation earns $3 million profit this year. This profit is subject to the corporate income tax. If the corporate income tax rate is 25 percent, then $750,000 is paid in taxes, and $2.25 million remains for dividends and other uses. Dividends are shares of the corporation’s profits distributed to stockholders. Suppose that half of the $2.25 million profit after taxes is distributed to stockholders as dividends. This distribution is considered income for the stockholders and is taxed at personal income tax rates. In short, the $3 million profit was subject to both the corporate income tax and the personal income tax—two taxes, or double taxation. Contrast this situation with the profit earned by a proprietorship, which is subject to only one tax, the personal income tax. Exhibit 7-1 shows after-tax profits per dollar of sales for corporations (that manufacture goods). U.S. Manufacturers U.S. Manufacturers‘ After-Tax Profits per Dollar of Sales Sales 8 7 66 6.6 Cents Cents 6 6.4 5 46 4.6 4 36 3.6 3 2 1.4 1.2 0 7.1 7.4 7.2 7.1 5 .0 4.0 3.1 26 2.6 1 66 6.6 0.7 2001 2002 2003 2004 2005 Per Per $1 of Sales 1st qtr 2nd qtr 3rd qtr 4th qtr Source: U.S. Census Bureau What was the change in manufacturers’ after-tax profits from the first quarter of 2002 to the first quarter of 2005? 164 Chapter 7 Business Operations 07 (154-185) EMC Chap 07 EXH I BIT 11/17/05 7-2 Type of Type of business business firm 5:14 PM Page 165 Advantages and Disadvantages Advantages and Disadvantages of Different Types of of Business Firms Business Firms Examples Examples Advantages Advantages Disadvantages Disadvantages Sole Sole proprietorship proprietorship • Local barbershop barber...
View Full Document

This document was uploaded on 01/16/2014.

Ask a homework question - tutors are online