Economics – 11/14/11
• What advantages are there to owning a
business as an individual, as opposed to being
a large corporation that issues shares of
stock?
Business Firms
• Organizations that use resources to produce
goods and services that are sold to
consumers, other businesses, or the
government.
Sole Proprietorship
• A business that is owned
by one individual
• Makes all business
decisions, receives all the
profits and all the losses
• Legally responsible for the
debts of the firm
• Examples -
Sole Proprietorships - Advantages
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Easy to form and dissolve (Permits)
To dissolve you simply stop doing business
All decision making power rests with you
Only taxed once – Personal Income Taxes
Sole Proprietorships - Disadvantages
• Face Unlimited Liability – Personal assets may
be used to pay off the debts of the business.
• Limited ability to raise funds
• How do they usually end?
Partnership
• A type of business that is owned by two or
more co-owners.
• Share profits/losses
• Legally responsible for all debts
• Proprietorship with more than 1 owner
• What types of business firms?
Partnership - Advantages
• Specialization
• Only pay personal income taxes
Partnership - Disadvantages
• All general partners face unlimited liability
(Why might this be a problem)
• Decision making (Complicated)
Corporation
• A corporation is a legal entity that can conduct
business in its own name in the same way that
an individual does, but is owned by its
shareholders.
• Shareholders by shares of stock in a
corporation
Corporations
• The Board of Directors determines corporate
policies and goals.
• It decides products to buy/sell, what % of the
earnings/profits goes to shareholders as
dividends, and what % for expansion.
• Shareholders elect the members of the board
usually at an annual meeting
• Shares/Votes
Board of Directors
• Often shareholders will
compete to take control
of a corporation
• Hostile takeover from
an outside person
Corporations
• Advantages:
• Limited Liability – Shareholders cannot be
sued for the corporation’s failure to pay its
debts
• Legal Entity – Not dependant on the owners
• Issuing stock is a great way to raise cash.
Helps to grow the business. Potential
shareholders aren’t afraid to invest. Why?
Corporations - Disadvantages
• Double Taxation – Corporate taxes, then
dividends are taxes as personal income.
• Corporations are more complicated to set up
than either sole proprietorships or
partnerships.
IPO
• Initial Public Offering: A company’s first
offering of stock to the public
• Investment Bank: Firm that acts as an
intermediary between the company that
issues the stock and the public that wishes to
buy the stock
Investments Banks
• Serve as underwriters of the corporation
• They provide the liquidity/cash, for the public
wishing to buy shares of the corporation
• Often more than one will underwrite
• They receive a commission on the sells they
share from the the corporation. Can get up to
7-8 %
Types of Stock
• Common Stock: Owners of common stock
received dividends based on the company’s
earnings. Have voting rights
Types of Stock
• Preferred Stock: Owners received a fixed
dividend. Guaranteed earnings no matter
what kind of profit the company is making (or
not making) – Have no voting rights
Types of Stock
• Blue Chip Stocks: Safe investments in the
ownership of a large, respected corporations
that have been well established for many
years. (Disney, Coke, AT&T to name a few)
• DJIA – All 30 stocks are blue chip stocks
• What characteristics does a blue chip stock
also normally have?