HFD 1 THE CORPORATION
*A partnership is identical to a sole proprietorship except it has more than one owner. The
following are key features of a partnership:
1. All partners are liable for the firm’s debt. That is, a lender can require any partner to
repay all the firm’s outstanding debts.
2. The partnership ends on the death or withdrawal of any single partner, although
partners can avoid liquidation if the partnership agreement provides for alternatives
such as a buyout of a deceased or withdrawn partner.
Some old and established businesses remain partnerships or sole proprietorships. Often
these firms are the types of businesses in which the owners’ personal reputations are the
basis
for the businesses. For example, law firms, groups of doctors, and accounting firms are often
organized as partnerships. For such enterprises, the partners’ personal liability increases the
confidence of the firm’s clients that the partners will strive to maintain their reputation.
A limited partnership is a partnership with two kinds of owners, general partners
and limited partners. General partners have the same rights and privileges as partners in
a (general) partnership—they are personally liable for the firm’s debt obligations. Limited
partners, however, have limited liability—that is, their liability is limited to their invest-
ment. Their private property cannot be seized to pay off the firm’s outstanding debts.
Furthermore, the death or withdrawal of a limited partner does not dissolve the
partnership,
and a limited partner’s interest is transferable. However, a limited partner has no manage-
ment authority and cannot legally be involved in the managerial decision making for the
business.
*an agency problem—when managers, despite being hired as the agents of shareholders,
put their own self-interest ahead of the interests of shareholders. Managers face the ethical
dilemma of whether to adhere to their responsibility to put the interests of shareholders
first, or to do what is in their own personal best interest.
*Because private companies have a limited set of shareholders and their shares are not
regularly traded, the value of their shares can be difficult to
determine. But many corporations are public companies, whose shares trade on organized
markets called a stock market (or stock exchange).
*When a corporation itself issues new shares of stock and sells them to investors, it does so
on the primary market. After this initial transaction between the corporation and inves-
tors, the shares continue to trade in a secondary market between investors without the
involvement of the corporation. For example, if you wish to buy 100 shares of Starbucks
Coffee, you would place an order on a stock exchange, where Starbucks trades under the
ticker symbol SBUX. You would buy your shares from someone who already held shares
of Starbucks, not from Starbucks itself. Because firms only occasionally issue new shares,
secondary market trading accounts for the vast majority of trading in the stock market.
*Market makers (known then on the NYSE as specialists) matched
buyers and sellers. They posted two prices for every stock in which they made a market:
the price at which they were willing to buy the stock (the bid price) and the price at which
they were willing to sell the stock (the ask price).
*A partnership is identical to a sole proprietorship except it has more than one owner. The
following are key features of a partnership:
1. All partners are liable for the firm’s debt. That is, a lender can require any partner to
repay all the firm’s outstanding debts.
2. The partnership ends on the death or withdrawal of any single partner, although
partners can avoid liquidation if the partnership agreement provides for alternatives
such as a buyout of a deceased or withdrawn partner.
Some old and established businesses remain partnerships or sole proprietorships. Often
these firms are the types of businesses in which the owners’ personal reputations are the
basis
for the businesses. For example, law firms, groups of doctors, and accounting firms are often
organized as partnerships. For such enterprises, the partners’ personal liability increases the
confidence of the firm’s clients that the partners will strive to maintain their reputation.
A limited partnership is a partnership with two kinds of owners, general partners
and limited partners. General partners have the same rights and privileges as partners in
a (general) partnership—they are personally liable for the firm’s debt obligations. Limited
partners, however, have limited liability—that is, their liability is limited to their invest-
ment. Their private property cannot be seized to pay off the firm’s outstanding debts.
Furthermore, the death or withdrawal of a limited partner does not dissolve the
partnership,
and a limited partner’s interest is transferable. However, a limited partner has no manage-
ment authority and cannot legally be involved in the managerial decision making for the
business.
*an agency problem—when managers, despite being hired as the agents of shareholders,
put their own self-interest ahead of the interests of shareholders. Managers face the ethical
dilemma of whether to adhere to their responsibility to put the interests of shareholders
first, or to do what is in their own personal best interest.
*Because private companies have a limited set of shareholders and their shares are not
regularly traded, the value of their shares can be difficult to
determine. But many corporations are public companies, whose shares trade on organized
markets called a stock market (or stock exchange).
*When a corporation itself issues new shares of stock and sells them to investors, it does so
on the primary market. After this initial transaction between the corporation and inves-
tors, the shares continue to trade in a secondary market between investors without the
involvement of the corporation. For example, if you wish to buy 100 shares of Starbucks
Coffee, you would place an order on a stock exchange, where Starbucks trades under the
ticker symbol SBUX. You would buy your shares from someone who already held shares
of Starbucks, not from Starbucks itself. Because firms only occasionally issue new shares,
secondary market trading accounts for the vast majority of trading in the stock market.
*Market makers (known then on the NYSE as specialists) matched
buyers and sellers. They posted two prices for every stock in which they made a market:
the price at which they were willing to buy the stock (the bid price) and the price at which
they were willing to sell the stock (the ask price).
