Exam 2 Study Guide

(8 pages)
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Exam 2 Study Guide


Pages:
8
Type:
Study Guide
School:
University of Texas at Austin
Course:
Fin 320f - Foundations of Finance
Edition:
1

Unformatted text preview:

FIN 320F Foundations of Finance Section 2 Review Business Organization 1. There are three basic forms of business: a. Sole proprietorship i. Owned by one proprietor ii. Goals vary by owner iii. Pros: simple to create, few regulations, taxed like an individual (distributions cannot be taxed twice) iv. Cons: unlimited personal liability, hard to obtain capital, ownership is hard to transfer, the business dies with the owner b. Partnership i. Owned by two or more partners ii. Goals vary by owner iii. Pros: same as for sole proprietorships iv. Cons: same as for sole proprietorships (recognize that partners share unlimited liability) v. An LP is a special partnership: “general” partners control the firm, and assume unlimited liability; “limited” partners cannot control the firm, but their liability is limited to the amount of their investment c. Corporation i. A legal entity separate and distinct from its owners—which gives rise to potential agency issues. (Since the owner and manager are now separate people, the manager is supposed to act as an agent for the owner.) ii. Goal is to maximize long-term shareholder value (which requires attention to all stakeholder requirements). iii. Pros: unlimited life, easy transfer of ownership & access to capital, limited liability iv. Cons: earnings may be subject to double taxation, creating the business is not as simple as creating a sole proprietorship or partnership. v. An S-corp is like a regular corporation except that its income (whether or not distributed) is passed to owners (thus, not subject to double taxation); owners must be US citizens or resident aliens and number no more than 100. vi. An LLC’s owners needn’t be US citizens—can be institutions. Income passes to owners for taxation; liability is limited. Income Taxes 1. For an individual, gross income is a person’s salary before things like social security, insurance and income taxes are deducted. For a business, the gross amount is total sales revenue before things like COGS, operating expenses and interest expense are deducted. 2. Taxable income—that is, income minus expenses—is the number that is multiplied by the tax rate(s) to find the income tax expense. For an individual, the expenses include either the standard or itemized deductions, plus a certain amount (called a personal exemption) for each individual under the taxpayer’s care. For a business, the expenses are COGS, operating expenses and interest expense; thus, taxable income equals Earnings before Tax (EBT). a. The taxable income amount is the income referred to on a tax table. SourceDocument.docx Page 1 of 8 ©HToprac 2015-2022 FIN 320F Foundations of Finance Section 2 Review b. A tax deduction is anything that is subtracted from gross income to determine taxable income. For example, a 401(k) contribution is a tax deduction; a dependent child results in a tax deduction. A deduction shelters income from taxation. c. Taxable Income = Gross Income – Deductions – Exemptions. 3. Generally, the higher the level of income, the higher the rate of taxation. This is what is meant by a progressive system of taxation. ...


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