Unformatted text preview: rchase land, buildings, equipment, and
materials. To make these purchases, companies
can reinvest a portion of their earnings, but must
also raise additional funds externally, by some
combination of selling stock or borrowing from
banks and other creditors.
banks In a nutshell, these companies reduce costs by
having innovative production processes, they
create value for customers by providing highcreate
quality products and services, and they create
value for employees through training and fostering
an environment that allows employees to utilize all
of their skills and talents.
13 Most principles and concepts underlying financial
management apply across the three major forms of
Sole proprietorship: a business owned and controlled by
a single person.
Partnership: a business owned by two or more
Corporation: a legal entity separate and distinct from its
A sole proprietorship is an unincorporated business
owned by one individual. Going into business as a sole
proprietor is easy—one merely begins business
operations. However, even the smallest businesses
normally must be licensed by a governmental unit.
14 The proprietorship has three important advantages:
(1) It is easily and inexpensively formed,
(2) it is subject to few government regulations, and
(3) the business avoids corporate income taxes.
The proprietorship also has three important limitations:
(1) It is difficult for a proprietorship to obtain large sums of
(2) The proprietor has unlimited personal liability for the
business’s debts, which can result in losses that exceed the
money he or she has invested in the company; and
(3) The life of a business organized as a proprietorship is
limited to the life of the individual who created it. For these
three reasons, sole proprietorships are used primarily for smallthree
1 A partnership exists whenever two or more
persons associate to conduct a non-corporate
business. Partnerships may operate under different
degrees of formality, ranging from informal, oral
understandings to formal agreements
The major advantage of a partnership is its low cost
and ease of formation. The disadvantages are similar
to those associated with proprietorships: (1) unlimited
liability, (2) limited life of the organization, (3) difficulty
of transferring ownership, and (4) difficulty of raising
large amounts of capital. The tax treatment of a
partnership is similar to that for proprietorships, which
is often an advantage.
16 Regarding liability, the partners can potentially lose all
of their personal assets, even assets not invested in
the business, because under partnership law, each
partner is liable for the business’s debts.
Therefore, if any partner is unable to meet his or her
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