Fin Management - m1

FINANCIAL
MANAGEMENT
SAMUEL BARBO, JR.

FORMS OF
BUSINESS
ORGANIZATION
THE ORGANIZATION OF THE
BUSINESS FIRM
⮚The business firm is an entity designed to organize
raw materials, labor and machines with the goal of
producing goods and/or services.
⮚Firms:
1. Purchase productive resources from households and
other firms,
BUSINESS FIRM
⮚Firms:
2. Transform them into a different commodity,
and
3. Sell the transformed product or service to
customers.
BUSINESS FIRM
⮚For business firms engaged in retail or trading,
transforming purchased goods into a different
commodity does not necessarily takes place.
⮚Society relies on business firms to organize resources
and transform them into products. In market
economies, firms choose their own price, output level,
and methods of production.
BUSINESS FIRM
⮚Business firms can be organized in one of three
ways:
1. Proprietorship
2. Partnership
3. corporation
LEGAL FORMS OF BUSINESS
ORGANIZATION
1. PROPRIETORSHIP
⮚ A sole proprietorship is a business owned by a single
person who has complete control over the business
decisions.
⮚ This individual owns all the firm’s assets and is
responsible for all its liabilities.
ORGANIZATION
1. PROPRIETORSHIP
⮚From a legal point of view, the owner of a
proprietorship is not separable from the business
and is personally liable for all debts of the
business.
ORGANIZATION
1. PROPRIETORSHIP
⮚ From an accounting prospective, however, the
business is an entity separate from the owner.
Therefore, the financial statements of the business
present only those assets and liabilities pertaining to
the business.
ORGANIZATION
1. PROPRIETORSHIP
❑Advantages
1. Ease of entry and exit
⮚ a sole proprietorship requires no formal charter
and is inexpensive to form and dissolve.
ORGANIZATION
1. PROPRIETORSHIP
❑Advantages
2. Full ownership and control
⮚ the owner has full control, reaps all profits and
bears all losses.
ORGANIZATION
1. PROPRIETORSHIP
❑ Advantages
3. Tax savings
⮚ The entire income generated by the proprietorship
passes directly to the owner. (Tax rate is less than the
corporation)
ORGANIZATION
1. PROPRIETORSHIP
❑Advantages
4. Few government regulations
⮚A sole proprietorship has the greatest freedom as
compared with any form of business organization.
ORGANIZATION
1. PROPRIETORSHIP
❑ Disadvantages
1. Unlimited liability
⮚ The owner is personally liable or responsible for any
and all business debts. Thus, the owner personal
assets can be claimed by the creditors if the firm
defaults on its obligations.
ORGANIZATION
1. PROPRIETORSHIP
❑Disadvantages
2. Limitations in raising capital
⮚Fund-raising ability is limited. Resources may be
limited to the assets of the owner and growth
depend on his or her ability to borrow money.
ORGANIZATION
1. PROPRIETORSHIP
❑Disadvantages
3. Lack of continuity
⮚Upon death or retirement of the owner, the
proprietorship cease to exist.
ORGANIZATION
1. PROPRIETORSHIP
❑ Is ideal if
1. The anticipated risk is minimum and adequately
covered by insurance.
2. The owner is either unable or unwilling to maintain
the necessary organizational documents and tax
returns of more complicated business.
3. The business does not require extensive borrowing.
ORGANIZATION
2. PARTNERSHIP
⮚ A partnership is a legal arrangement in which two or
more persons agree to contribute capital or services to
the business and divide the profits or losses that may
be derived therefrom.
⮚ Partnership may operate under varying degrees of
formality.
ORGANIZATION
2. PARTNERSHIP
⮚A formal partnership may be established using a
written contract known as the partnership
agreement which is filed with the Securities and
Exchange Commission.
ORGANIZATION
2. PARTNERSHIP
❑Classifications:
1. General Partnership
⮚ Is one in which each partner has unlimited liability for the
debts incurred by the business.
⮚ General partners usually manage the firms and may enter
into contractual obligations on the firm’s behalf.
⮚ Profits and asset ownership may be divided in anyway
agreed upon by the partners.
ORGANIZATION
2. PARTNERSHIP
❑Classifications:
2. Limited Partnership
⮚ Is one containing one or more general partners and one or
more limited partners.
⮚ The personal liability of a general partner for the firm’s debt
is unlimited while the personal liability if limited partners is
limited to their investment.
⮚ Limited partners cannot be active in management.
ORGANIZATION
2. PARTNERSHIP
❑Advantages
1. Ease of formation
⮚Forming a partnership may require relatively little
effort and low start-up costs.
ORGANIZATION
2. PARTNERSHIP
❑Advantages
2. Additional source of capital
⮚A partnership has the financial resources of
several individuals.
ORGANIZATION
2. PARTNERSHIP
❑Advantages
3. Management base
⮚A partnership has a broader management base or
expertise than a sole proprietorship.
ORGANIZATION
2. PARTNERSHIP
❑Advantages
4. Tax implication
⮚A partnership like a proprietorship does not pay any
income taxes.
⮚Each partners reports his or her portion whether
distributed or not on personal income tax
ORGANIZATION
2. PARTNERSHIP
❑Disadvantages
1. Unlimited liability
⮚General partnership have unlimited liability for the
debts and obligations of the business.
ORGANIZATION
2. PARTNERSHIP
❑Disadvantages
2. Lack of continuity
⮚A partnership may be dissolve upon withdrawal or
death of a general partner, depending on the
provisions of the partnership.
ORGANIZATION
2. PARTNERSHIP
❑Disadvantages
3. Difficulty of transferring ownership
⮚It is difficult for a partner to liquidate or transfer
ownership.
⮚It varies with conditions set forth in the partnership
agreement.
ORGANIZATION
2. PARTNERSHIP
❑Disadvantages
4. Limitations in raising capital
⮚A partnership may have problems raising large
amounts of capital because many sources of funds
are available only to corporations.
ORGANIZATION
3. CORPORATION
⮚Is an artificial being created by law and is a legal
entity separate and distinct from its owner.
⮚This legal entity may owns, borrow money and
engage in other business entity without directly
involving the owners.
ORGANIZATION
3. CORPORATION
⮚In corporations, owners are called shareholders or
stockholders and do not directly manage the firm.
⮚Instead they select managers designated by the
Board of Directors (BOD) to run the firm for them.
⮚The BOD is authorized to act in the corporation’s
behalf.
ORGANIZATION
3. CORPORATION
❑The incorporators files the Article of Incorporation
and other requirements with the Securities and
Exchange Commission.
❑After the corporation legally formed, it will then issue
its capital stock.
ORGANIZATION
3. CORPORATION
❑Ownership of this stock is evidenced by a stock
certificate.
❑Corporate by laws are set of rules that govern the
internal management of the company as established
by the BOD and approved by the stockholders.
ORGANIZATION
3. PARTNERSHIP
❑Advantages
1. Limited liability
⮚Shareholders are liable only to the extent of their
investment in the company.
ORGANIZATION
3. PARTNERSHIP
❑Advantages
2. unlimited life
⮚Corporation continued to exist even after death of the
owners.
ORGANIZATION
3. PARTNERSHIP
❑Advantages
3. Ease of transferring ownership
⮚Shareholders can easily sell their ownership interest
in most corporation by selling their stock without
affecting the legal form of business organization.
ORGANIZATION
3. PARTNERSHIP
❑Advantages
4. Ability to raise capital
⮚Corporations can raise capital through the sale of
securities such as bonds to investors who are lending
money to the corporations and equity securities such
as common stock to inventors who are the owners.
ORGANIZATION
3. PARTNERSHIP
❑Disadvantages
1. Time and cost of formation
⮚Registration of public companies with SEC may be
time consuming and costly.
ORGANIZATION
3. PARTNERSHIP
❑Disadvantages
2. Regulations
⮚Corporations are subject to greater government
regulations than other forms of business organizations.
⮚Shareholders cannot just withdrew their assets from
the business.
ORGANIZATION
3. PARTNERSHIP
❑Disadvantages
3. Taxes
⮚Corporations pay taxes on income they earned. The
complexity of the subject of taxation demands the
advice of a qualified tax accountant.
THANK YOU AND
GOD BLESS.

Fin Management - m1

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FINANCIAL

SAMUEL BARBO, JR.

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