Fundamentals of Corporate Finance
Corporate finance
3. What long-term investments should you take on
2. Where will you get the long-term financing to pay for your investment?
3. How will you manage your everyday financial activities, such as collecting from customers and paying
suppliers?
Financial Management Decisions
capital budgeting, capital structure, working capital management
Capital budgeting
What long-term investments or projects should the business take on?
Capital structure
How should we pay for our assets?
• Should we use debt or equity
Working capital management
How do we manage the day-to-day finances of the firm?
Three different legal forms of business organisation exist
1. Sole proprietorship
2. Partnership
3. Corporation
Sole Proprietorship
A business owned by one person
Someone who is just starting out and deciding if entrepreneurship is the right course
Someone who isn't too concerned about liability and separating themselves from the business
Sole Proprietorship Advantages
,Simplest type of business to start
The least regulated form of organisation
The owner keeps all the profits
Sole Proprietorship Disadvantages
The owner has unlimited liability for business debts
All business income is taxed as personal income
The life of a sole proprietorship is limited to the owner's life span
The amount of equity that can be raised is limited to the amount of the proprietor's personal wealth
Ownership may be difficult to transfer
A partnership
a business organisation owned by two or more persons who agree on a specific division of
responsibilities and profits
Who Should Form a Partnership?
A general partnership is the ideal business ownership type for:
2 people going into business together who want to keep things simple
Business partners who aren't concerned about liability or keeping themselves separate from the
business
Advantages of a partnership
same as sole Proprietorship
Disadvantages of a partnership
Unlimited liability for business debts on the part of the owners
Limited life of the business
Difficulty of transferring ownership
Downsides of Sole proprietorship
Business owners and partnerships are not separate entities
If someone sues, they are suing the owner or owners personally, and their personal assets are at risk
, LLC (Limited Liability Company)
A limited liability company, or LLC, puts some separation between you and your business by removing
personal liability
Advantages of an LLC
If you're sued or can't pay business debts, your personal assets may be protected
offers complete or limited personal liability protection
An LLC has significantly less paperwork and formalities than a corporation.
Who Should Form an LLC?
Someone who likes the security of separating their personal and business assets
Someone who prefers minimal formalities and paperwork
Entrepreneurs who anticipate a loss in the 1st year or 2 and want to report this loss on their personal tax
return
Corporation
Legal structure, separates business owner from business
it can sue and be sued, responsible for corporate tax income
Difference of Corporation and LLC
in a corporation, company profits and losses are not passed along to the business owners.
The corporation is a separate taxpaying entity and pays taxes on its profits.
Advantages of a corporation
Ownership can be readily transferred
Life of corporation is unlimited
Limited liability for stockholders
disadvanatges of a corporation
Double taxation, meaning corporate profits are taxed twice,
first at the corporate level when they are earned and again at the personal level when they are paid out
The Purpose of the Firm 1
Corporate finance
3. What long-term investments should you take on
2. Where will you get the long-term financing to pay for your investment?
3. How will you manage your everyday financial activities, such as collecting from customers and paying
suppliers?
Financial Management Decisions
capital budgeting, capital structure, working capital management
Capital budgeting
What long-term investments or projects should the business take on?
Capital structure
How should we pay for our assets?
• Should we use debt or equity
Working capital management
How do we manage the day-to-day finances of the firm?
Three different legal forms of business organisation exist
1. Sole proprietorship
2. Partnership
3. Corporation
Sole Proprietorship
A business owned by one person
Someone who is just starting out and deciding if entrepreneurship is the right course
Someone who isn't too concerned about liability and separating themselves from the business
Sole Proprietorship Advantages
,Simplest type of business to start
The least regulated form of organisation
The owner keeps all the profits
Sole Proprietorship Disadvantages
The owner has unlimited liability for business debts
All business income is taxed as personal income
The life of a sole proprietorship is limited to the owner's life span
The amount of equity that can be raised is limited to the amount of the proprietor's personal wealth
Ownership may be difficult to transfer
A partnership
a business organisation owned by two or more persons who agree on a specific division of
responsibilities and profits
Who Should Form a Partnership?
A general partnership is the ideal business ownership type for:
2 people going into business together who want to keep things simple
Business partners who aren't concerned about liability or keeping themselves separate from the
business
Advantages of a partnership
same as sole Proprietorship
Disadvantages of a partnership
Unlimited liability for business debts on the part of the owners
Limited life of the business
Difficulty of transferring ownership
Downsides of Sole proprietorship
Business owners and partnerships are not separate entities
If someone sues, they are suing the owner or owners personally, and their personal assets are at risk
, LLC (Limited Liability Company)
A limited liability company, or LLC, puts some separation between you and your business by removing
personal liability
Advantages of an LLC
If you're sued or can't pay business debts, your personal assets may be protected
offers complete or limited personal liability protection
An LLC has significantly less paperwork and formalities than a corporation.
Who Should Form an LLC?
Someone who likes the security of separating their personal and business assets
Someone who prefers minimal formalities and paperwork
Entrepreneurs who anticipate a loss in the 1st year or 2 and want to report this loss on their personal tax
return
Corporation
Legal structure, separates business owner from business
it can sue and be sued, responsible for corporate tax income
Difference of Corporation and LLC
in a corporation, company profits and losses are not passed along to the business owners.
The corporation is a separate taxpaying entity and pays taxes on its profits.
Advantages of a corporation
Ownership can be readily transferred
Life of corporation is unlimited
Limited liability for stockholders
disadvanatges of a corporation
Double taxation, meaning corporate profits are taxed twice,
first at the corporate level when they are earned and again at the personal level when they are paid out
The Purpose of the Firm 1
