Hi, this is a summary of chapter 1 for finance! If you're too lazy to check the book yourself, this is a good alternative :)
Hopefully, this will help you for studying for your exam.
Good luck!!
Test Bank for Corporate Finance, 5th Edition by Jonathan Berk, DeMarzo Chapter 1-31 A++
UPDATED Finance 1 for Business Summary
Test Bank For Corporate Finance The Core, 5th Edition by Jonathan Berk, Peter DeMarzo Chapter 1-19
All for this textbook (72)
Written for
Tilburg University (UVT)
International Business Administration
Finance 1 (30J107B6)
All documents for this subject (7)
Seller
Follow
abcd3
Reviews received
Content preview
Finance 1 - Summary
Chapter 1 - The corporation
1.1 - The four types of firms
Four major types of firms exist with corporate finance:
1. Sole proprietorships
2. Partnerships
3. Limited liability companies
4. Corporations
1. Sole proprietorships
• Business owned, run by one person, small, few employees
• Straightforward to set up
>> many new businesses use this organizational form
• No separation between firm and owner (firm has only one owner)
• Owner has unlimited personal liability for any of the firm’s debts
>> lender can require the owner to repay the loan from personal
assets
>> owner unable to repay loan => declare personal bankruptcy
• Life of sole proprietorships is limited to the life of the owner
+ difficult to transfer ownership of life a sole proprietorship
• Taxes: one time tax (since business and owner are the same)
>> profit of business = income of individual
=> individual has to pay income tax (only this tax paid by
profit of business)
2. Partnership
• Identical to sole proprietorship except it has MORE than one owner
• All partners liable for firm’s debts
>> lender can require any partner to repay all the firm’s debts
• Partnership ends on death or withdrawal of any single partner
>> unless there is an agreement that provides alternatives (e.g.
buyout)
• Taxes: one time tax (since business and owner are the same)
>> profit of business = income of individual
=> individual has to pay income tax (only this tax paid by
profit of business)
Limited partnership
• Two kinds of owners
1) General partners: same rights and privileges as partners in
(general) partnerships
+ personally liable for the firm’s debts obligations
2) Limited partners: have limited liability = liability is limited to their
investment
=> private property can’t be seized to pay off the firm’s debts
=> death or withdrawal of a limited partner doesn’t dissolve
the partnership
, => ownership is transferable
3. Limited liability companies
• Limited partnership without a general partner
• All owners have limited liability >> CAN run the business
• Hybrid of partnership and corporation
• Business responsible for company’s debts
• Survives for limited time (determined when it is registered)
• Taxes: one time tax (since business and owner are the same) =>
income tax
4. Corporation
• Legal entity separate from its owners
>> has legal powers individuals have (buying assets, borrow money
etc.)
>> responsible for its own obligations (owners not liable)
• Ownership easily transferred => corporation doesn’t ‘die’
Corporation formation
• Must be legally formed => files a charter (license) with the state it
wishes to incorporate in >> the state “charters” the corporation
formally giving its consent
• Costly to start
• Have minimum capital in corporation (some cases)
Corporation ownership
• No limit on the number of owners
• Ownership is divided into shares = stock
>> equity: collection of all the outstanding shares of a corporation
>> shareholder/stakeholders/equity holder: owner of a stock
=> are entitled to dividend payments: distribution of the profit
(percentage decided by the shareholders)
Corporation tax implications
• Double taxation
>> on the profit (net income or earnings) - paid by corporation
>> on the dividend - paid by the individual owner
• S Corporations: corporations that elect subchapter S tax treatment
>> the firm’s profits (and losses) are not subject to corporate taxes,
but
instead are allocated directly to shareholders based on their
ownership share
• C Corporations: corporations subject to corporate taxes
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller abcd3. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $3.77. You're not tied to anything after your purchase.
