Economics – 11/14/11 What advantages are there to owning a business as an individual, as opposed to being a large corporation that issues shares of stock?

Business Firms Organizations that use resources to produce goods and services that are sold to consumers, other businesses, or the government.

Sole Proprietorship A business that is owned by one individual Makes all business decisions, receives all the profits and all the losses Legally responsible for the debts of the firm Examples -

Sole Proprietorships - Advantages Easy to form and dissolve (Permits) To dissolve you simply stop doing business All decision making power rests with you Only taxed once – Personal Income Taxes

Sole Proprietorships - Disadvantages Face Unlimited Liability – Personal assets may be used to pay off the debts of the business. Limited ability to raise funds How do they usually end?

Partnership A type of business that is owned by two or more co-owners. Share profits/losses Legally responsible for all debts Proprietorship with more than 1 owner What types of business firms?

Partnership - Advantages Specialization Only pay personal income taxes

Partnership - Disadvantages All general partners face unlimited liability (Why might this be a problem) Decision making (Complicated)

Corporation A corporation is a legal entity that can conduct business in its own name in the same way that an individual does, but is owned by its shareholders. Shareholders by shares of stock in a corporation

Corporations The Board of Directors determines corporate policies and goals. It decides products to buy/sell, what % of the earnings/profits goes to shareholders as dividends, and what % for expansion. Shareholders elect the members of the board usually at an annual meeting Shares/Votes

Board of Directors Often shareholders will compete to take control of a corporation Hostile takeover from an outside person

Corporations Advantages: Limited Liability – Shareholders cannot be sued for the corporation’s failure to pay its debts Legal Entity – Not dependant on the owners Issuing stock is a great way to raise cash. Helps to grow the business. Potential shareholders aren’t afraid to invest. Why?

Corporations - Disadvantages Double Taxation – Corporate taxes, then dividends are taxes as personal income. Corporations are more complicated to set up than either sole proprietorships or partnerships.

IPO Initial Public Offering: A company’s first offering of stock to the public Investment Bank: Firm that acts as an intermediary between the company that issues the stock and the public that wishes to buy the stock

Investments Banks Serve as underwriters of the corporation They provide the liquidity/cash, for the public wishing to buy shares of the corporation Often more than one will underwrite They receive a commission on the sells they share from the the corporation. Can get up to 7-8 %

Types of Stock Common Stock: Owners of common stock received dividends based on the company’s earnings. Have voting rights

Types of Stock Preferred Stock: Owners received a fixed dividend. Guaranteed earnings no matter what kind of profit the company is making (or not making) – Have no voting rights

Types of Stock Blue Chip Stocks: Safe investments in the ownership of a large, respected corporations that have been well established for many years. (Disney, Coke, AT&T to name a few) DJIA – All 30 stocks are blue chip stocks What characteristics does a blue chip stock also normally have?