Test 6 Flashcards
Proprietorship
A business owned by one person
- The business’s income is taxed as personal income to the owner
- The owner has unlimited personal liability
- The owner is personally responsible for the business’s debt or any other obligations
Types of Businesses or Business Organizations
- Proprietorship
- Limited Partnership
- General Partnership
- Corporation
- S Corporation
- LLC
- Not-For-Profit Corporation
- Public/Government Owned Corporation
Limited Partnership
There is a general partner and a silent/limited partner
- The general partner has unlimited personal liability
- The limited partner’s liability is limited to the amount of money they have invested
- Business’s income is taxed as personal income to the owner
General Partnership
A business owned by two or more people
- Each owner has unlimited personal liability
- The business’s income is taxed as personal income to the owner
Corporation
A business that has a legal existence separate from it’s owners
- The Corporation itself pays income tax as it’s own personal income
- Stockholder’s liability is limited to the amount invested
Stockholders
Owners of a Corporation
Two Options Companies Have With Profit
- Invest in itself
2. Pay out dividends to stockholders
Dividends
Profit is divided among the owners
If you receive dividends you have to report it in your personal income tax
Capital Gains Tax
A tax on capital gains, the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price
S Corporation
Small business
How To Qualify as a S Corporation
- Have no more than 35 shareholders
LLC
Limited Liability Corporation
Limited Liability Corporation
Small Corporation with Limited Liability
Not-For-Profit Corporation
A business that does not seek to earn a profit
Public/Government Owned Corporation
A business created to provide services that private enterprise is unable or unwilling to offer
Franchise
A license to operate an individually owned business as if it were part of a large chain
Cooporatives/Co-op
An association of individuals or companies organized to perform business functions for its members
How Are Corporations Organized?
- Governing document
- Stockholders
- Bonds
- Board of Directors
Governing document includes what
- Charter
2. Bylaws
Charter
License issued by the state
Two Types of Stockholders
- Preferred Stockholders
2. Common Stockholders
Bylaws
Set of rules by which a corporation operates
Preferred Stockholders
They have preference over common stockholders with regard to dividends
They are paid first
Get paid a set rate
Common Stockholders
They are Residual claimants (receive the income that is left over after the Preferred Stockholders are paid)
Could get paid more or less
Potential to earn more
Bonds
Represent credit
Board of Directors
In a Corporation, members of the Board of Directors are chosen by the Shareholders and get paid
In a Non-Profit Corporation they are not elected
What are the Board of Directors responsibilities?
- They choose the President or CEO of the company
- Make decisions about expansion, development, and dividends
- Producing annual report (which is available to all shareholders)
Proxy
Written authorization allowing the Directors to vote shares as instructed
(at the Annual Shareholders Meeting when shareholders don’t show up)
What is a businesses responsibility to the to the consumers?
- Product Quality
- Product Packaging
- Product Labeling
- Consumer Safety (must warn consumers about potential problems)
- Environmental Sensitivity
Why is product packaging important?
- Protects the product
- Provides information about the product
- Enhances the appearance of the product
Why is product labeling important?
- It’s informational
2. Gives testing labels
What is the goal of a business?
Make money
What are a businesses major expenses?
- Wages and Salaries
- Research and Development
- Marketing
- Health Insurance
- Upgrading of Tools and Facilities
Where does the businesses money come from?
- Internal Funds
- External Funds
(Most of the money comes from borrowing)
Internal Funds
Funds that come from the sale of products and services
External Funds
Funds that come from borrowing, selling stock, and reducing expenses
Types of Borrowing
- Short Term Loan
2. Long Term Loan
Short Term Loan
Usually paid back in a year
Used to finance the everyday cost of doing business
Trade Credit
Where you charge purchases and pay for them at a later date
You can also borrow money from a bank
Commercial Paper
Can sell it to investers
Like a IOU or Bond
Pay it back with interest
Long Term Loans
Paid back in a year or more
Common Sources for Long Term Loans
- Retaining you earnings
2. Borrow the money (through mortgage or selling bonds)
Who regulates the Stock Market
The Federal Government
Securities and Exchange Commission (SEC)
Principle agency who regulates the stock market
Prospectus
A report that contains information about the company
Motto for investing and meaning
Caveat Emptor
Buyer beware
How is stock offered to the public for sale?
There is usually a Middleman (underwriter) who advances money to the corporation and then sell the companies stock to the public
Securities Exchanges
A market where brokers meet to buy and sell stocks and bonds
Over-the-Counter Market
Consists of brokerage firms from around the country that buy the securities of smaller unlisted firms and then sells them to the public
Two Types of Shareholders
- Investors
2. Speculators
Investors
They buy stock in order to share the profits for a long time
How do investors make money?
- Dividends
2. Capital Gains
Speculators
They buy and sell in order to make a fast profit
Two Types of Speculators
- Bulls
2. Bear
Bulls
They hope to profit by correctly predicting an increase in the value of the stock (“Buy-long”)
Bear
They hope to profit by correctly predicting a decrease in the value of a stock (“Sell-short”)
How do you determine the health of a business?
- Balance Sheet
2. Income Statement
Balance Sheet
Summarizes the corporations
- Assets
- Liability
- Net worth
Assets
Things that the company owns
Liability
Things the company owes
Net worth
The difference between liability and assets
Account Receivable
Sums owed to the company by customers
Inventories
Merchandise that the company owns
Accounts Payable
Money that the company owes to its suppliers
Notes Payable
Short term loans owed by the corporation
Mortgage
Long term loan
Net Worth (Under Balance Sheet)
Portion of a companies assets belonging to its owners after its obligations have been met
Income Statement can also be called what?
Profit and Law Statement
Income Statement
Shows how much money the corporation has made over a certain amount of time
Mutual Fund
A corporation that sells stock and uses the proceeds to invest or speculate in the Securities Market
How does a Mutual Fund work?
Lots of people put their money together to invest into lots of companies
Implicit Costs
Costs that don’t require an actual monetary payment
Explicit Costs
Costs that do require an actual monetary payment
Opportunity Costs
What a resource could have earned had it been employed in an alternative use
Fixed Costs
Costs that do not change as the level of production increases
Variable Costs
Costs that do change as the level of production increases
Total Costs
= Fixed Costs + Variable Costs per unit x Quantity
Marginal Costs
The addition to total cost resulting from the production and sale of one additional unit of output
Average Fixed Cost
= Fixed Cost/Quantity Produced
Average Variable Cost
= Total Variable Cost/# of units produced
Average Total Cost
= Average Fixed Cost + Average Variable Cost
