Week 1
Chapter 1
Chapter 29 studeersnel
Chapter 2
Week 2
Chapter 3
Week 3
Chapter 4
Chapter 7
Week 4
Chapter 8
Chapter 10
Week 6
Chapter 12
Chapter 1: The Corporation of Financial Markets
The Four Types of Firms
❖ Sole Proprietorships
➢ Business owned and run by one person
➢ Most common type of firm in the world but they don’t account for much sales revenue in
the economy
➢ CHARACTERISTICS
■ Straightforward and easy to set up
■ No separation between firm and owner
■ The owner has unlimited liability for any of the firm’s debts
● That is if the firm defaults on any debt payment - the lender will require
the owner to pay back the loan from personal assets
■ Life of the SP is limited to the life of the owner
❖ Partnerships
➢ Identical to a SP just has more than one owner
➢ CHARACTERISTICS
■ All partners are liable for the firm’s debt (lender can require any partner to repay
all the firm’s outstanding debts)
, ■ The partnership ends at the death/withdrawa of any single partner - but partners
can avoid liquidation if the partnership agreement provides for alternatives such
as a buyout of a deceased/withdrawn partner
■ ex) law firms, groups of doctors, and accounting forms are often organized as
partnerships → better if partner’s personal liability increases the confidence of
the firm’s clients that the partners will strive to maintain their reputation
➢ Limited partnership: partnership with two kinds of owners - general partners in (general)
partnership - they are personally liable for the firm’s debt obligations and limited partners
- who have limited liability (their liability is limited to their investment)
■ death/withdrawal of a limited partner doesn’t dissolve the partnership
■ A limited partner however also has no management authority! And can not legally
be involved in the managerial decision making for business
● ex) private equity funds and venture capital funds → industries
dominated by limited partnerships (p.35)
❖ Limited Liability Companies (LLC)
➢ Limited partnership without a general partner, so all the owners have limited liability - but
unlike limited partners they can also run the business
❖ Corporations
➢ It is a legally defined, artificial being (a judicial person or legal entity), separate from its
owners
➢ Has many of the legal powers that people have → as such it can enter into contracts,
acquire assets, incur obligations, and enjoys protection under the U.S Constitution against
seizure of its properity
➢ Owners of a corporation are not liable for any obligations the corporation enters into
➢ FORMATION
■ Must be legally formed, so the state must give consent
■ More costly
■ Need for a corporate charter that specificies the initial rules that governs how the
corporation is run
➢ OWNERSHIP
■ No limit on the # of owners
■ Most corporations have many owners and each owner owns a small fraction
■ The entire ownership stake of a cooperation is divided into shares known as stock
■ The collection of all the outstanding shares of a corporation is known as the
equity of a corporation
■ An owner of a share of stocks in the corporation is known as a shareholder,
stockholder, or equity holder -
■ owners are entitled to dividend payments (proporitional to the stock they own)
● Payments made at the discretion of the corporation to its equity holders
■ No limitation on who can own stocks
❖ Tax Implications for Corporate Entities
➢ The different types of organizational forms are taxed in different ways
➢ Coopertiosn are separate legal entities hence they get taxed separate from its owners tax
obligations
➢ Shareowners of a corporation pay taxes twice
, ■ First the corporation pays tax on its profits - and then when the remaining profits
are distributed to the shareholders - the shareholders pay their own personal
income tax on this income
■ This is referred to as double taxation
■ Taxation of corporate earning problem
■
S corporations:
➢ The corporate organizational structure is the only organizational structure subject to
double taxation
➢ Exceptions for “s” corporations - here the firm’s profits and losses are not subject to
corporate taxes but instead are allocated directly to shareholders based on their ownership
share
➢ The shareholders then must include these profits as income on their individual tax returns
- and then pay taxes on that
➢ Very difficult to get “S” corporation taxes
Advantages corporation:
- Unlimited life
- Easy transfer of ownership
- Limited liability
- Ease of raising capital
Disadvantages:
- Double taxation.
- Cost of set up and report filing
, Ownership versus control of corporations
❖ The corporate Management Team
➢ Shareholders of a corporation exercise their control by electing a board of directors - a
group of people who have the ultimate decision making authority in the corporation
➢ Each share of a stock gives a shareholder one vote in the election of the board of directors
→ so investors with the most shares = most influence (can choose the # of ppl)
➢ Board of Directors = makes the rules on how the corporation should be run, policies and
monitores the performance
➢ The CEO (chief executive officer)
■ charged with running the cooperation by instituting policies set by the board of
directors
➢ The separation of powers within powers within corporations between the board of directors
and the CEO isn’t always distinct - sometimes CEO may even be on the board
➢ CFO often reports to the CEO and is the most senior financial manager
❖ The Financial Manager (responsible for 3 tasks)
➢ Investment decisions
■ Must weigh the costs & benefits of all the investment projects
■ Shape what the firm does and whether it adds value for its owners
➢ Financing decisions
■ After investment decisions are made the CFO decides how to pay for them
■ More money needs to be raised - via stocks selling (equity) or by borrowing money
(debt)
➢ Cash management
■ Needs to ensure enough cash is on hand
■ Difference between failure and success
❖ The goal of the firm
➢ Should be determined by the firm’s owners
➢ Depends on the type of corporation - for large # of stakeholders goals often align to
increase value of share s
❖ The Firm and Society
➢ As long as the shareholders are better off and nobody else is words off by the decisions -
increasing the value of equity is good for society
➢ Problems occur when increasing the value of equity come at a cost of others
■ ex) pollutes the environment in the process
❖ Ethics and Incentives within Corporation
Chapter 1
Chapter 29 studeersnel
Chapter 2
Week 2
Chapter 3
Week 3
Chapter 4
Chapter 7
Week 4
Chapter 8
Chapter 10
Week 6
Chapter 12
Chapter 1: The Corporation of Financial Markets
The Four Types of Firms
❖ Sole Proprietorships
➢ Business owned and run by one person
➢ Most common type of firm in the world but they don’t account for much sales revenue in
the economy
➢ CHARACTERISTICS
■ Straightforward and easy to set up
■ No separation between firm and owner
■ The owner has unlimited liability for any of the firm’s debts
● That is if the firm defaults on any debt payment - the lender will require
the owner to pay back the loan from personal assets
■ Life of the SP is limited to the life of the owner
❖ Partnerships
➢ Identical to a SP just has more than one owner
➢ CHARACTERISTICS
■ All partners are liable for the firm’s debt (lender can require any partner to repay
all the firm’s outstanding debts)
, ■ The partnership ends at the death/withdrawa of any single partner - but partners
can avoid liquidation if the partnership agreement provides for alternatives such
as a buyout of a deceased/withdrawn partner
■ ex) law firms, groups of doctors, and accounting forms are often organized as
partnerships → better if partner’s personal liability increases the confidence of
the firm’s clients that the partners will strive to maintain their reputation
➢ Limited partnership: partnership with two kinds of owners - general partners in (general)
partnership - they are personally liable for the firm’s debt obligations and limited partners
- who have limited liability (their liability is limited to their investment)
■ death/withdrawal of a limited partner doesn’t dissolve the partnership
■ A limited partner however also has no management authority! And can not legally
be involved in the managerial decision making for business
● ex) private equity funds and venture capital funds → industries
dominated by limited partnerships (p.35)
❖ Limited Liability Companies (LLC)
➢ Limited partnership without a general partner, so all the owners have limited liability - but
unlike limited partners they can also run the business
❖ Corporations
➢ It is a legally defined, artificial being (a judicial person or legal entity), separate from its
owners
➢ Has many of the legal powers that people have → as such it can enter into contracts,
acquire assets, incur obligations, and enjoys protection under the U.S Constitution against
seizure of its properity
➢ Owners of a corporation are not liable for any obligations the corporation enters into
➢ FORMATION
■ Must be legally formed, so the state must give consent
■ More costly
■ Need for a corporate charter that specificies the initial rules that governs how the
corporation is run
➢ OWNERSHIP
■ No limit on the # of owners
■ Most corporations have many owners and each owner owns a small fraction
■ The entire ownership stake of a cooperation is divided into shares known as stock
■ The collection of all the outstanding shares of a corporation is known as the
equity of a corporation
■ An owner of a share of stocks in the corporation is known as a shareholder,
stockholder, or equity holder -
■ owners are entitled to dividend payments (proporitional to the stock they own)
● Payments made at the discretion of the corporation to its equity holders
■ No limitation on who can own stocks
❖ Tax Implications for Corporate Entities
➢ The different types of organizational forms are taxed in different ways
➢ Coopertiosn are separate legal entities hence they get taxed separate from its owners tax
obligations
➢ Shareowners of a corporation pay taxes twice
, ■ First the corporation pays tax on its profits - and then when the remaining profits
are distributed to the shareholders - the shareholders pay their own personal
income tax on this income
■ This is referred to as double taxation
■ Taxation of corporate earning problem
■
S corporations:
➢ The corporate organizational structure is the only organizational structure subject to
double taxation
➢ Exceptions for “s” corporations - here the firm’s profits and losses are not subject to
corporate taxes but instead are allocated directly to shareholders based on their ownership
share
➢ The shareholders then must include these profits as income on their individual tax returns
- and then pay taxes on that
➢ Very difficult to get “S” corporation taxes
Advantages corporation:
- Unlimited life
- Easy transfer of ownership
- Limited liability
- Ease of raising capital
Disadvantages:
- Double taxation.
- Cost of set up and report filing
, Ownership versus control of corporations
❖ The corporate Management Team
➢ Shareholders of a corporation exercise their control by electing a board of directors - a
group of people who have the ultimate decision making authority in the corporation
➢ Each share of a stock gives a shareholder one vote in the election of the board of directors
→ so investors with the most shares = most influence (can choose the # of ppl)
➢ Board of Directors = makes the rules on how the corporation should be run, policies and
monitores the performance
➢ The CEO (chief executive officer)
■ charged with running the cooperation by instituting policies set by the board of
directors
➢ The separation of powers within powers within corporations between the board of directors
and the CEO isn’t always distinct - sometimes CEO may even be on the board
➢ CFO often reports to the CEO and is the most senior financial manager
❖ The Financial Manager (responsible for 3 tasks)
➢ Investment decisions
■ Must weigh the costs & benefits of all the investment projects
■ Shape what the firm does and whether it adds value for its owners
➢ Financing decisions
■ After investment decisions are made the CFO decides how to pay for them
■ More money needs to be raised - via stocks selling (equity) or by borrowing money
(debt)
➢ Cash management
■ Needs to ensure enough cash is on hand
■ Difference between failure and success
❖ The goal of the firm
➢ Should be determined by the firm’s owners
➢ Depends on the type of corporation - for large # of stakeholders goals often align to
increase value of share s
❖ The Firm and Society
➢ As long as the shareholders are better off and nobody else is words off by the decisions -
increasing the value of equity is good for society
➢ Problems occur when increasing the value of equity come at a cost of others
■ ex) pollutes the environment in the process
❖ Ethics and Incentives within Corporation
