FIN 345 1st Edition Lecture 6Outline of Current Lecture1. Chapter 6: Business Organizations and the Tax Environmenta. Adam Smith: The invisible hand and father of capitalismb. Maximizing the value of the stock maximizes the wealth of the stockholder; remains subject to government restraints2. Alternative forms of business organizationsa. Proprietorship: unincorporated business owned by one individuali. Advantages1. Easy and inexpensive to form2. Subject to few government regulations3. Taxed like an individualii. Disadvantages1. Proprietor has unlimited personal liability for business debts2. Life of proprietorship is limited to time the creator owns it3. Transferring ownership can be difficult4. Difficult for proprietorship to obtain large sums of capital (funds)b. Partnership: unincorporated business owned by two or more personsi. Advantages1. Easy and inexpensive to form2. Subject to few government regulations3. Taxed like an individualii. Disadvantages1. Partners have unlimited personal liability for business debts2. Life of partnership is limited to time the same group of partners owns it3. Transferring ownership can be difficult4. Difficult for partnership to obtain large sums of capital (funds); but better than for a proprietorshipc. Corporation: legal entity created by a statei. Advantages1. Separate and distinct from its owners2. Unlimited life3. Easy transferability of ownership; stock represents ownership4. Limited liability5. Easier for corporations than for proprietorships and partnershipsto raise money in the financial markets; can issue stocks and bondsThese 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.ii. Disadvantages1. Setting up and filing state and federal reports is complexa. Corporate charter is filed with the state providing information about the company and directorsb. Bylaws are for internal management and operating procedures2. Earnings are subject to double taxationiii. Why organize as a corporation?1. Value of the business will be maximizeda. Limited liability reduces risks borne by investorsb. Corporations can attract funds more easily than unincorporated businessesc. Corporate ownership can be transferred more easily then unincorporated businessesiv. Goals of the corporation1. Stockholder wealth maximizationa. Considers the risk and timing associated with expected cash flows to maximize the price of the firm’s common stock2. Managerial incentives to maximize shareholder wealth3. Social responsibility4. Stock price maximization and social welfared. Hybrid Businessesi. Limited Liability Company (LLC)1. Provides for limited liability for owners2. Taxed like a partnership3. Flexible ownership structuree. S Corporationi. 100 or fewer stockholdersii. Only one kind of stockiii. Can choose to be taxed like a