ECON 1051 1nd Edition Lecture 21 Outline of Last Lecture I. EXAM REVIEW: Short Essay QuestionsOutline of Current Lecture I. Types of FirmsII. Public v. Private III. The Structure of Corporations and the Principal-Agent ProblemIV. How Firms Raise Funds (Using Internal Finance)Current LectureI. Types of Firms a. Sole proprietorship i. A firm owned by a single individual and not organized as a corporation ii. Unlimited liability – no legal distinction between the personal assets of the owners of the firm and the assets of the firm1. Asset – anything of value owned by a person or a firm iii. Advantages1. Control by owner2. No layers of management b. Partnership i. A firm owned jointly by two or more persons and not organized as a corporation ii. Unlimited liability iii. Advantages1. Ability to share work/risksc. Corporation i. A legal form of business that provides owners with protection from losing more than their investment should the business fail ii. Treated as an individual in the eyes of the government1. General incorporation laws allow firms to be organized as corporationsiii. Limited liability – the legal provision that shields owners of a corporation from losing more than they have invested in the firm iv. Advantaged These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.1. Greater ability to raise funds2. Limited liability v. Disadvantages 1. Costly2. Double taxation II. Public v. Privatea. Public firms i. Firms that sell stock that is traded in financial marketsb. Private firms i. Do not sell stock publically ii. Facebook remained private until 2011 – didn’t have to use federal regulations that apply to public firms1. Some economists and policymakers argue that result was less III. The Structure of Corporations and the Principal-Agent Problema. Corporate Governance i. The way in which a corporation is structured and the effect that structure has on the corporation’s behavior 1. Shareholders are the owners of a corporations stock whose interests are represented by a board of directors who appoints a CEO to run the day-to-day operations of the corporation and sometimes other members of top management such as the chief financial officer 2. Members of the board are either inside or outside directors, depending on their management role in the firmb. Separation of ownership from controli. A situation in a corporation in which the top management, rather than shareholders, control day-to-day operations c. Principal-agent problemi. A problem causes by an agent pursuing his own interest rather than the interests of the principal who hired him IV. How Firms Raise Funds (Using Internal Finance)a. Reinvest the profits back into your firmi. Retained earnings1. Profits that are reinvested in a firm rather than taken out of a firm and paid to the firm’s owners b. Recruiting additional owners to invest in the firmi. Increases the firm’s financial capital or selling (offering) equity ii. This can also be done by selling stock c. Borrow money i. Also known as leveraging or selling (offering debt) ii. This can also do this by selling bonds or taking out a
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