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Lecture 1 Finance & Investment
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Lecture 1 (theory needed for the exam)
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Lecture 1: CHP1: The corporations and Financial MarketsThe 4 types of firms
Sole proprietorship:
- Business is owned and run by one person only
- Has few, if any, employees
- Advantages: easy to set up
- Disadvantages: no separation btw the firm and the owner, unlimited personal liability, limited life
Partnership:
- Similar to a sole proprietorship, but with more than one owner
- All partners are personally liable for all the firm’s debts. A lender can require any partner to repay all the firm’s
outstanding debts
- The partnership ends with the death or withdrawal of any single partner
➔ Examples where the personal reputation is rly important: Law firms, group of doctors, accounting firms
2 types of owners:
• General partners: personally liable for the firm’s debt obligation, typically run the firm on a day-to-day basis
• Limited partners: have limited liability (max their investment so cannot loose more than what they invested),
transferable in case of death or withdrawal, have no management authority and no legal be involvement in
the managerial decision making for the business
➔ Examples: Private equity fund, venture capital funds
Limited liability companies:
—> a limited partnership without a general partner
- All owners have limited liability
- Unlike limited partners, the owner has the ability to engage in management
- The firm is seen as a separate legal entity
Corporation:
- A legal entity separates for its owner
- Has many of the legal power individuals have such as the ability to enter into contracts, own assets, and borrow
money
- The corporation is solely responsible for its own obligations. Its owners are not liable for any obligation the
corporation enters into
Formation:
• Corporations must be legally formed. The corporation files a charter with the state it wishes to incorporate in.
The state then “charters” the corporation, formally giving its consent to the incorporation.
• Due to its attractive legal environment for corporations, Delaware is a popular choice for incorporation
Ownership:
• Represented by shares of stock
• Owner of stock is called: shareholder, stockholder, equity holder
• Sum of all ownership value is called equity
• There is no limit to the number of shareholders and, thus, the amount of funds a company can raise by selling
stock
• Owner is entitled to dividend payments
Advantages in practice:
1. No limitation on who can own its stock! This allows free trade in the share of corporation
2. Corporations can raise capital bc they can sell ownership shares to anonymous outside investors
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