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For example most growing companies must purchase land

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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 In having innovative production processes, they create value for customers by providing highcreate quality products and services, and they create quality value for employees through training and fostering an environment that allows employees to utilize all of their skills and talents. of 13 13 Most principles and concepts underlying financial Most management apply across the three major forms of business organization: business Sole proprietorship: a business owned and controlled by Sole a single person. single Partnership: a business owned by two or more Partnership: individuals. individuals. Corporation: a legal entity separate and distinct from its Corporation: owners. owners 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. normally 14 14 14 The proprietorship has three important advantages: The (1) It is easily and inexpensively formed, (1) (2) it is subject to few government regulations, and (2) (3) the business avoids corporate income taxes. The proprietorship also has three important limitations: The (1) It is difficult for a proprietorship to obtain large sums of (1) capital; (2) The proprietor has unlimited personal liability for the (2) 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 (3) limited to the life of the individual who created it. For these three reasons, sole proprietorships are used primarily for smallthree business operations. business 15 5 15 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 understandings The major advantage of a partnership is its low cost The 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. is 16 16 16 Regarding liability, the partners can potentially lose all Regarding 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 Therefore, p...
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