Legal Forms of Business Organization

1. Sole proprietorship is a business owned by one person and operated for his or her own
profit.
2. Partnership is a business owned by two or more people and operated for profit.
3. Corporation is an entity created by law.
Other Limited Liability Organizations
1. Limited partnership (I.P) - A partnership in which one or more partners have limited
liability as long as at least one partner (the general partner) has unlimited liability.
2. S corporation (S corp)- A tax-reporting entity that (under Subchapter S of the Internal
Revenue Code) allows certain corporations with 75 or fewer stockholders to choose to be
tased as partnerships.
3. Limited liability corporation (LLC) – permitted in most states.
4. Limited liability partnership (LI-PV – permitted in many states.
Firms that require funds from external sources can obtain them in three ways:
1. Financial institution
2. Financial markets
3. Private placements
Commercial banks are institutions that provide savers with a secure place to invest their funds
and that offer loans to individual and business borrowers.
Investment banks are institutions that assist companies in raising capital, advise firms on major
transactions such as mergers or financial restructurings, and engage in trading and market
making activities.
Glass-Steagall Act of 1933 created the federal deposit insurance program and separated the
activities of commercial and investment banks.
Shadow banking system - a group of institutions that engage in lending activities.
Financial markets - forums in which suppliers of funds and demanders of funds can transact
business directly.
Private placement - involves the sale of a new security directly to an investor or group of
investors.
Primary market is the financial market in which securities are initially issued.
Secondary markets are financial markets in which preowned securities.
Money market is created by a financial relationship between suppliers and demanders of
short-term funds.
Capital market is a market that enables suppliers and demanders of long-term funds.
Key capital market securities
1. Bonds are long-term debt instruments used by businesses and government to raise large
sums of money, generally from a diverse group of lenders.
2. Common stock are units of ownership interest or equity in a corporation.
3. Preferred stock is a special form of ownership that has features of both a bond and
common stock.
Broker markets are securities exchanges on which the two sides of a transaction.
Dealer markets markets in which the buyer and seller are not brought together directly.
Eurobond market corporations and governments typically issue bonds denominated in
dollars and sell them to investors located outside the United States.
Foreign bond market market for bonds issued by a foreign corporation or government.
International equity market – allows corporations to sell blocks of shares to investors in a
number of different countries simultaneously.
Efficient market - allocates funds to their most productive.
Securitization - process of pooling mortgages.
Mortgage-backed securities - represent claims on the cash flows generated by a pool of
mortgages.
Gramm-Leach-Bliley Act (1999) allows business combinations.
Securities Act of 1933 regulates the sale of securities via the primary market.
Securities Exchange Act of 1934 regulates the trading of securities such as stocks and bonds.
Marginal tax rate - represents the rate at which additional income is taxed.
Average tax rate is the firm’s taxes divided by taxable income.
Capital gain is the amount by which the sale price of an asset exceeds the asset’s purchase price.