Chapter 1 Flashcards
(24 cards)
Sole Proprietorship
A business owned and run by one person. They are usually small with very few employees.
Sole Proprietorship characteristics
They are straightforward to start up.
No separation btwn the firm and owner, the firm can only have one owner, no investors.
Owner has unlimited personal liability for the firm’s debts.
Life of a sole proprietorship lasts as long as the owner, hard to transfer to someone else.
Partnership
A business owned and run by more than one owner.
Partnership characteristics
ALL partners are liable for the firm’s debt.
The partnership ends in the event of the death or withdrawal of any single partner.
Partners can avoid liquidation if provisions are set in the partnership agreement (buyout as an example).
Limited Partnership
A partnership with two kinds of owners, general partners and limited partners.
General partners are liable for the firms liabilities, whereas Limited partners are only liable for their investment
Limited Liability Company (LLC)
A limited partnership with NO general partners, BUT the limited partners ARE allowed to run the business. LLC’s have a hard time getting loans
Corporation
Essentially its own separate entity or artificial being. Solely responsible for its own assets/liabilities and has very similar rights of a standard human.
Stock
the ownership of equity of a corporation divided into shares
Equity
Collection of all the outstanding shares of a corporation
Shareholder
An owner of a share of stock or equity in a corporation
Dividend Payments
Payments made at the discretion of the corporation to its equity holders
S corporations
Those corporations that elect subchapter S tax treatment and are exempted by the IRS’s tax code from double taxation
C corporations
Subject to double taxation
Roles of the Financial Manager
- Make investment decisions
- Make financing decisions
- Manage short-term cash needs
Goal of the Financial Manager
to maximize the wealth of the owners, the stockholders
Board of directors
a group of people who have the ultimate decision-making authority in the corporation
CEO
charged with running the corporation by instituting the rules and policies set by the board of directors
agency problem
when managers, despite being hired as the agents of shareholders, put their own self interest ahead of the interests of those shareholders
Hostile takeover
an individual or organization (sometimes called a corporate raider) can purchase a large fraction of the company’s stock and in doing so get enough votes to replace the board of directors and CEO
Primary market
refers to a corporation issuing new shares of stock and selling them to investors
Secondary market
the trade of stocks without direct involvement of the corporation
Listing Standards
outlines of the requirements a company must meet to be traded on the exchange
Financial Institutions
entities that provide financial services, such as taking deposits, managing investments, brokering financial transactions, or making loans
Financial Cycles
1) People save and invest their money
2) That money, through loans and stocks, flows to companies who use it to fund growth through new products, generating profits and wages
3) the money then flows back to the savers and investors
