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Forms of Business OwnershipChapter 7

2Sole Proprietorship

• Sole Proprietorship: business firm with one owner and accounts for nearly 75% of all the nation’s business firms.

• Advantages: pg 129-130• 1. Freedom to enter and exit the market easily• 2. Freedom from outside control• 3. Freedom to retain information• 4.Freedom from paying excessive taxes• 5. Freedom from being an employee

3Sole Proprietorship

• Disadvantages of Sole Proprietorship: pg 130-131• 1. Unlimited Personal Liability• 2. Limited Management and Employee Skills• 3. Limited Life • 4. Limited Availability of Money

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General Partnership

• General Partnership: business enterprise with two or more persons as the owners.

• Least popular form of business ownership, less than 10% of all businesses are partnerships.

• Laws of most states do not require a written contract between the partners of the company (however, it is recommended)

• Advantages: • 1. Greater Management Skills • 2. Greater retention of competent employees• 3. Greater sources of financing• 4. Ease of formation and freedom to manage

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General Partnership

• Disadvantages of a General Partnership: • 1. Unlimited Personal Liability• 2. Uncertain Life• 3. Conflict between Partners

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Limited Partnership

• Limited Partnership: there is at least one general partner, with unlimited financial liability, and at least one limited partner, whose investment limits the amount of his personal financial liability: in other words, the most money he could lose is the amount he has invested in the company.

• Scripture and Partnerships: 2 Corinthians 6:14 “Be ye not unequally yoked together with unbelievers”

• Surety: the act of becoming security or pledging to undertake another’s debt. Prov. 11:15, Prov. 17:18, Prov. 22:26-27 (Cosigning a loan).

7Incorporation

• Corporation: the owners legally declare that the business is its own organization, independent and separate from the owners.

• The government recognizes the right of the corporation to buy, sell, enter into contracts, own property, sue, and be sued, just like any legal person.

• Dartmouth College v. Woodward (1803) pg 135: definition of corporation by the Supreme Court

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Types of Corporations

• Private Corporations: private citizens are the owners of these companies. Examples, ExxonMobil, Disney, Coca-and Cola, General Electric. Most have many owners but some have only a few.

• Public Corporation: the general public owns and the government manages the operations. Examples, Tennessee Valley Authority (TVA), and Amtrak.

• Ownership of a Corporation: a person becomes an owner of part of a corporation by buying shares of its stock.

9Corporations

• Advantages of Corporations: pg 137-138• 1. Limited Personal Financial Liability of Stockholders• 2. Experienced Management and Specialized Employees• 3.Continuous Life• 4. Ease in Raising Financial Capital

10Corporations

• Disadvantages of Corporations: pg 138-140 • 1. Higher Taxes• 2. Greater Governmental Regulation• 3. Lack of Secrecy• 4. Impersonality• 5. Rigidity• Limited Liability Company (LLC): has the benefits of

partnership as well as a corporation. The owners of the LLC are not liable for the acts and debts of the LLC, but as in a partnership avoids the double taxation of company earnings. Pg 139

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The Stock Market Chp 8

• Chapter 8: The Stock Market• 8A Stock: Isaiah 33:6 and Haggai 1:6• Stock: if you own stock you own shares, or a portion of a corporation. • Types of Stock: • Common Stock: the most prevalent type of stock that companies offer and represents

true ownership of the firm. If a company has 100 total shares outstanding and you own 10 shares then you own 10% of the company.

• Stockholders can be called on to vote on the electing of board managers, hiring/firing of managers, and expanding into a new market.

• Dividends: a distribution of a portion of the companies profit. • Preferred Stock: have claim to the company’s assets before the common shareholders

if business losses force the corporation to close down but the usually do not have the right to vote on matters of importance to the business. Preferred stock is more like debt than ownership, dividends the firm pays to its preferred shareholders are fixed, like the interest on a loan.

12Stock

• Selling Stock: • Initial Public Offering (IPO): pg 149. if the owners of a corporation

need to raise money for business purposes, they may have to sell shares of stock. To do this, they must register their business with a stock market, such as the NYSE, and arrange for the sale of a certain amount of stock through the exchange. The corporation’s “first” sale of stock

• Buying Stock: • Individuals purchase stock primarily for one of two reasons: to make a

profit (buy low and sell high) or to receive dividend payments. • Stock Trading 101: stockbroker, commission, floor traders, and

“tape”. Pg. 148 • The Tape: the electronic message board that indicates stock prices

13Stock Markets 8B

• Early Market Development• Stock Exchanges: originally merchants traded stocks at these locations (also

called bourses). They first appeared in Great Britain and North Holland prior to 1700. NYSE started in 1792 and today there are exchanges in L.A., Boston, Cincinnati, and Chicago as well as in many major cities of the world.

• Examples of Markets• New York Stock Exchange (NYSE): and NASDAQ (National Association of

Securities Dealers Automated Quotations). The NASDAQ is the largest exchange which does not have a trading floor, it posts its price info on an electronic network and dealers who are registered to work with the network perform trades. AMEX (American Stock Exchange). Japan’s Nikkei index, the London Stock Exchange (FTSE), France (CAC40) and the Hong Kong Stock Exchange.

14Stock Indices

• Stock index: to help identify stock trends in specific industries, stock exchanges and other independent companies group together certain industrial categories and report the behavior of prices within these categories.

• Dow Jones Industrial Average: Charles Dow (1896) founder of the Wall Street Journal developed this stock index. This index consists of the prices of thirty (30) stocks, most of which are traded on the NYSE and economists consider to be the leaders of industrial production in the US (Ex/ IBM, GE, and AT&T)

• Standard and Poor’s 500 (S&P 500): it includes 500 stocks and includes businesses that provide services.

• The NYSE indices include a composite index (covering all of the stocks listed on the exchange), a financial index, a utilities index, a transportation and an energy index. The NASDAQ also includes a composite index.

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The Market and the Economy 8C

• The Importance of the Stock Markets• Mutual Funds: privately managed stock portfolios with nearly 54 million households and 91

million individual investors own mutual funds.• Stock Market Crash of 1929 led to the Great Depression and was caused by a speculative

bubble (speculation). • Speculation: those who actively buy and sell stocks for the purpose of taking advantage of

short-term price changes (closer to gambling than investing). • Speculative Bubble: This occurs when stock prices rise in an industry or across an entire

market simply because of expectations and they rise in excess of the corporations’ true value.• The real SEC: Securities and Exchange Commission: Congress created this organization for

two main reasons: 1. to require companies to fully disclose their financial status (quarterly earnings report for companies listed on the exchange) and 2. to regulate the activities of stock exchanges and brokers in the best interest of the investor. www.sec.gov. It was created after the Great Depression.

• Mutual Funds: Privately managed stock portfolios• The “FIRST” stock exchange in the U.S. was located in Philadelphia (1790)