Forms of Business Ownership
Chapter 7
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• Sole Proprietorship: business firm with one owner and
accounts for nearly 75% of all the nation’s business firms.
• Advantages: pg 129-130
• 1. Freedom to enter and exit the market easily
• 2. Freedom from outside control
• 3. Freedom to retain information
• 4.Freedom from paying excessive taxes
• 5. Freedom from being an employee
Sole Proprietorship
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Disadvantages of Sole Proprietorship: pg 130-131
1. Unlimited Personal Liability
2. Limited Management and Employee Skills
3. Limited Life
4. Limited Availability of Money
Sole Proprietorship
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• General Partnership: business enterprise with two or more
persons as the owners.
• Least popular form of business ownership, less than 10% of all
businesses are partnerships.
• Laws of most states do not require a written contract between
the partners of the company (however, it is recommended)
• Advantages:
• 1. Greater Management Skills
• 2. Greater retention of competent employees
• 3. Greater sources of financing
• 4. Ease of formation and freedom to manage
General Partnership
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Disadvantages of a General Partnership:
1. Unlimited Personal Liability
2. Uncertain Life
3. Conflict between Partners
General Partnership
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• Limited Partnership: there is at least one general
partner, with unlimited financial liability, and at least one
limited partner, whose investment limits the amount of
his personal financial liability: in other words, the most
money he could lose is the amount he has invested in the
company.
• Scripture and Partnerships: 2 Corinthians 6:14 “Be ye
not unequally yoked together with unbelievers”
• Surety: the act of becoming security or pledging to
undertake another’s debt. Prov. 11:15, Prov. 17:18, Prov.
22:26-27 (Cosigning a loan).
Limited Partnership
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• Corporation: the owners legally declare that the business
is its own organization, independent and separate from
the owners.
• The government recognizes the right of the corporation to
buy, sell, enter into contracts, own property, sue, and be
sued, just like any legal person.
• Dartmouth College v. Woodward (1803) pg 135:
definition of corporation by the Supreme Court
Incorporation
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• Private Corporations: private citizens are the owners of
these companies. Examples, ExxonMobil, Disney, Cocaand Cola, General Electric. Most have many owners but
some have only a few.
• Public Corporation: the general public owns and the
government manages the operations. Examples,
Tennessee Valley Authority (TVA), and Amtrak.
• Ownership of a Corporation: a person becomes an
owner of part of a corporation by buying shares of its
stock.
Types of Corporations
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Advantages of Corporations: pg 137-138
1. Limited Personal Financial Liability of Stockholders
2. Experienced Management and Specialized Employees
3.Continuous Life
4. Ease in Raising Financial Capital
Corporations
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Disadvantages of Corporations: pg 138-140
1. Higher Taxes
2. Greater Governmental Regulation
3. Lack of Secrecy
4. Impersonality
5. Rigidity
Limited Liability Company (LLC): has the benefits of
partnership as well as a corporation. The owners of the LLC
are not liable for the acts and debts of the LLC, but as in a
partnership avoids the double taxation of company earnings.
Pg 139
Corporations
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Chapter 8: The Stock Market
8A Stock: Isaiah 33:6 and Haggai 1:6
Stock: if you own stock you own shares, or a portion of a corporation.
Types of Stock:
Common Stock: the most prevalent type of stock that companies offer and
represents true ownership of the firm. If a company has 100 total shares
outstanding and you own 10 shares then you own 10% of the company.
• Stockholders can be called on to vote on the electing of board managers,
hiring/firing of managers, and expanding into a new market.
• Dividends: a distribution of a portion of the companies profit.
• Preferred Stock: have claim to the company’s assets before the common
shareholders if business losses force the corporation to close down but the usually
do not have the right to vote on matters of importance to the business. Preferred
stock is more like debt than ownership, dividends the firm pays to its preferred
shareholders are fixed, like the interest on a loan.
The Stock Market Chp 8
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• Selling Stock:
• Initial Public Offering (IPO): pg 149. if the owners of a corporation
need to raise money for business purposes, they may have to sell
shares of stock. To do this, they must register their business with a
stock market, such as the NYSE, and arrange for the sale of a certain
amount of stock through the exchange. The corporation’s “first” sale
of stock
• Buying Stock:
• Individuals purchase stock primarily for one of two reasons: to make
a profit (buy low and sell high) or to receive dividend payments.
• Stock Trading 101: stockbroker, commission, floor traders, and
“tape”. Pg. 148
• The Tape: the electronic message board that indicates stock
prices
Stock
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• Early Market Development
• Stock Exchanges: originally merchants traded stocks at these locations
(also called bourses). They first appeared in Great Britain and North
Holland prior to 1700. NYSE started in 1792 and today there are
exchanges in L.A., Boston, Cincinnati, and Chicago as well as in many
major cities of the world.
• Examples of Markets
• New York Stock Exchange (NYSE): and NASDAQ (National
Association of Securities Dealers Automated Quotations). The NASDAQ
is the largest exchange which does not have a trading floor, it posts its
price info on an electronic network and dealers who are registered to
work with the network perform trades. AMEX (American Stock
Exchange). Japan’s Nikkei index, the London Stock Exchange (FTSE),
France (CAC40) and the Hong Kong Stock Exchange.
Stock Markets 8B
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• Stock index: to help identify stock trends in specific industries, stock
exchanges and other independent companies group together certain
industrial categories and report the behavior of prices within these
categories.
• Dow Jones Industrial Average: Charles Dow (1896) founder of the
Wall Street Journal developed this stock index. This index consists of the
prices of thirty (30) stocks, most of which are traded on the NYSE and
economists consider to be the leaders of industrial production in the US
(Ex/ IBM, GE, and AT&T)
• Standard and Poor’s 500 (S&P 500): it includes 500 stocks and
includes businesses that provide services.
• The NYSE indices include a composite index (covering all of the stocks
listed on the exchange), a financial index, a utilities index, a
transportation and an energy index. The NASDAQ also includes a
composite index.
Stock Indices
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The Importance of the Stock Markets
Mutual Funds: privately managed stock portfolios with nearly 54 million households and 91
million individual investors own mutual funds.
Stock Market Crash of 1929 led to the Great Depression and was caused by a speculative
bubble (speculation).
Speculation: those who actively buy and sell stocks for the purpose of taking advantage of
short-term price changes (closer to gambling than investing).
Speculative Bubble: This occurs when stock prices rise in an industry or across an entire
market simply because of expectations and they rise in excess of the corporations’ true
value.
The real SEC: Securities and Exchange Commission: Congress created this organization
for two main reasons: 1. to require companies to fully disclose their financial status
(quarterly earnings report for companies listed on the exchange) and 2. to regulate the
activities of stock exchanges and brokers in the best interest of the investor. www.sec.gov. It
was created after the Great Depression.
Mutual Funds: Privately managed stock portfolios
The “FIRST” stock exchange in the U.S. was located in Philadelphia (1790)
The Market and the
Economy 8C
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