chapter 1 Flashcards
sole proprietorship
a business owned and run by one person. there is no separation between the firm and the owner. the owner has unlimited personal liability for any of the firm’s debts and the life of a sole proprietorship is limited to the life of the owner.
partnership
is identical to a sole proprietorship, except it has more than one owner. all partners are liable for the firm’s debt and the partnership ends on the death or withdrawal of a partner.
limited partnership
a partnership with two kinds of owners; general partners and limited partner.
general partners
have the same rights and privileges as partners in a partnership. they are personally liable for the firm’s debt obligations.
limited partners
have limited liability. meaning that their liability is limited to their investment.
limited liability company (LLC)
a limited partnership without a general partner. so, all owners have limited liability, but unlike limited partners they can also run the business.
corporation
a legally defined, artificial being, separate from its owners. It has many legal powers, eg. entering into contracts, acquiring assets, and incurring obligations. It has protection against seizure of its property. The owners are not liable for any obligations of the corporation. the entire ownership stake of a corporation is divided into shares known as stocks.
equity of the corporation
the collection of all the outstanding shares of a corporation.
shareholder/stockholder/ equity holder
an owner of a share of stock in the corporation who is entitled to dividend payments. they are called ‘owners’ but do not have full ownership rights, only some economic and voting rights.
dividend payments
payments made at the discretion of the corporation to its equity holders. shareholders usually receive a share of the dividend payments that is proportional to the amount of stock they own.
double taxation
corporation’s profits are subject to taxation separate from its owners’ tax obligations. first, the corporation pays tax on its profits. then, the remaining profits are distributed to shareholders who pay personal income tax on this income.
‘S’ corporations
when the firm’s profits are not subject to corporate taxes but are allocated directly to shareholders based on their ownership share.
‘C’ corporations
corporations subject to corporate taxes. double taxation occurs.
board of directors
a group of people who have the ultimate decision-making authority in the corporation.
chief executive officer (CEO)
charged with running the corporation by instituting the rules and policies set by the board of directors.
chief financial officer (CFO)
the most senior financial manager who often reports directly to the CEO.
investment decisions
the most important task. Costs and benefits of investments and projects are weighed. These decisions shape what the firm does and how it adds value for its owners. ‘what assets to purchase/investments to make?’
financing decisions
means deciding how to pay for the investments. A corporation can raise more money by selling more shares of stock (equity) or borrowing the money (debt). ‘how to fund investments? what is the optimal capital structure?’
cash management
ensuring the firm has enough cash to meet its day-to-day obligations, also known as managing working capital. It can mean the difference between success and failure.
agency problem
the agency problem arises because a corporation is run by a management team, separate from its owners which gives rise to conflict of interest. it arises when managers put their own self-interest ahead of the interest of shareholders.
corporate charter
specifies the initial rules that govern how the corporation is run.
hostile takeover
when an individual or organisation acts as a corporate raider and purchases a large fraction of the stock and acquires enough votes to replace the board of directors and the CEO. it creates a “market for corporate control” and disciplines bad managers and motivates boards of directors to make difficult decisions.
liquidation
involves the business shutting down and selling off its assets. It is usually best for debt holders to run the firm in the most profitable way possible.
corporate bankruptcy
best thought of as a change in ownership of the corporation and not necessarily as a failure of the underlying business.