FIN 300 Chapter Notes - Chapter 1: Limited Liability, Sole Proprietorship, Limited Partnership

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greyporcupine303

28 Jun 2018

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FIN – Chapter 1 – Introduction to Corporate Finance

The financial manager must be concerned with three basic types of questions

Capital budgeting – the process of planning and managing a firm’s long term investments

Capital structure – the mixture of debt and equity maintained by a firm

Working Capital – a firm’s short term assets and liabilities (inventory and money owed)

How much cash and inventory should be kept on hand?

Should have sales on credit? What terms to offer?

How to obtain any needed short term financing?

Sole proprietorship – a business owned by a single individual (unlimited liability)

Partnership – a business formed by two or more individuals or entities

General partnership – share gains and losses, unlimited liability

Limited partnership – one general partner, one limited partner

Corporation – a business created as a distinct legal entity composed of one or more individuals

or entities

The financial manager in a corporation makes decisions for the stockholders of the firm

The goal of financial management is to maximize the current value per share of the existing

stock

Agency problem – the possibility of conflict of interest between the stockholders and

management of a firm

Agency costs – refers to the costs of the conflict of interest between stockholders and

management

Stakeholder – someone other than a stockholder or creditor who potentially has a claim on the

cash flows of the firm

In a primary market transaction, the corporation is the seller, and the transaction raises money

for the corporation

Public offerings – selling securities to the general public

Private placements – negotiated sale involving a specific buyer

A secondary market transaction involves one owner or creditor selling to another

Auction markets

Dealer markets – buy and sell for themselves at own risk

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Document Summary

Fin chapter 1 introduction to corporate finance. The financial manager must be concerned with three basic types of questions. Capital budgeting the process of planning and managing a firm"s long term investments. Capital structure the mixture of debt and equity maintained by a firm. Working capital a firm"s short term assets and liabilities (inventory and money owed) Sole proprietorship a business owned by a single individual (unlimited liability) Partnership a business formed by two or more individuals or entities. General partnership share gains and losses, unlimited liability. Limited partnership one general partner, one limited partner. Corporation a business created as a distinct legal entity composed of one or more individuals or entities. The financial manager in a corporation makes decisions for the stockholders of the firm. The goal of financial management is to maximize the current value per share of the existing stock. Agency problem the possibility of conflict of interest between the stockholders and management of a firm.

Related Questions

Title: Business Structure, Liability, and Partnership Agreement

Develop a hypothetical business you would consider starting with a friend or relative.

Imagine that the friend or relative has sufficient funds to start the business and that you will be doing most of the work (for example, if you were starting a mobile car wash business, you would be procuring the customers and washing the cars).

Imagine also that you will be performing all the bookkeeping functions for the business.

In a written report, prepare the following:

A report to your partner, containing a detailed description of the differences regarding liability with respect to a sole proprietorship, a general partnership, a limited partnership, and a corporation.

A completed partnership agreement, including the following elements ready for signatures using the partnership agreement included.

Example of Partnership Agreement

Detailed description of the business

Names of the partners

Address of the partnership and the partners

Roles of each of the partners as limited partners, being as complete and detailed as possible (you can also be as imaginative as you need to be with titles and responsibilities )

List of assets provided by each partner

Division of income

Division of partnership liabilities (debts)

Method by which the partnership may be dissolved, including what happens in the event of filing for bankruptcy

(NAME), and (NAME), the below signed hereby enter into this Partnership Agreement on behalf of themselves, their heirs, successors and assigns, and set forth following terms and conditions as constituting the Partnership Agreement in its entirety:

1. The partnership shall go by the following name: (NAME).
2. The partnership's principle place of business shall be (DESCRIBE).

3. The first day that the partnership shall begin business is: (DATE) and it will continue until the partners agree to terminate it or until forced to cease its operations by law.

4. The partnership's operations shall be primarily in the following field or area: (DESCRIBE)

5. The partnership shall be capitalized as follows: For each $ (AMOUNT) (dollars) each partner shall receive (#) shares with contribution being made as follows:

Partner A contributes $(AMOUNT) and shall receive (#) shares, the same being (#) % of the total shares available. Partner B contributes $(AMOUNT) and shall receive (#) shares, the same being (#) % of the total shares available. 6. Losses and gains on contributed capital and other property shall be assigned as follows: (DESCRIBE)

The IRS's general allocation rule shall apply, and gains and losses shall be allocated according to the % of total capital contributed by each partner as set out in paragraph 5 above.

7. Profits and losses shall be allocated according to the same percentage allocation set forth in paragraph #6 above. 8. Salary, if any, for the services rendered shall be determined by unanimous approval of the partners.

Project Partnership Agreement

PARTNERSHIP AGREEMENT

10. Each partner shall maintain both an individual drawing account and an individual capital account. Into the capital account shall be placed that partner's initial capitalization and any increases thereto. The drawing accounts shall be used for withdrawal of amounts, the size of which is limited to $(AMOUNT) on any one day.

11. Adequate accounting records shall be made and maintained. Any partner or his/her agent may review any and all accounting or other records at anytime.

12. The partners designate the following as the Partnership's business and checking accounts into which all the funds of the Partnership shall be placed and maintained: (DESCRIBE)

13. Accounting records and books shall be kept on a (select one) 1. cash basis 2. accrual basis and the fiscal year shall begin on the (#) day of (MONTH) and shall end (#) day of (MONTH).

14. At the close of the fiscal year, there shall be an annual audit conducted by the following accounting firm: (DESCRIBE)

15. The partnership shall dissolve upon the retirement, death, or incapacity of any partner unless the remaining partner elects the option of buying out that partner's share. (DESCRIBE THE DETAILS)

16. Upon termination or dissolution of the Partnership, the Partnership will be promptly liquidated, with all debts being paid first, prior to any distribution of the remaining funds. Distribution shall be made according to the percentage of ownership as set out in paragraph #5 above.

17. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

Project Partnership Agreement

9. Control and management of the partnership shall be split equally amongst the partners.

So agreed, this (#) day of (MONTH), 20 .

________________________ (NAME) ________________________ (NAME)

Review - make sure the following items are included in this agreement!

Detailed description of the business

Names of the partners

Address of the partnership and the partners

Roles of each of the partnersâbe as complete and detailed as possible

List of assets provided by each partner

Division of income

Division of partnership liabilities (debts)

Method by which the partnership may be dissolved

Which of the following individuals have unlimited liability based on their ownership interest?

I. general partner

II. sole proprietor

III. stockholder

IV. limited partner

A. II only

B. I and II only

C. II and IV only

D. I, II, and III only

E. I, II, and IV only

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A company paid $1,300 in dividends and $920 in interest this past year. The common stock paid-in capital account increased by $1,200 and retained earnings decreased by $310. What is the net income for the year?

A. -$210

B. $990

C. $1,610

D. $1,910

E. $2,190

------------------------------------------------------------------

The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the:

A. cash flow from operations.

B. capital expenditures.

C. net working capital.

D. free cash flow.

E. additions to net working capital.

---------------------------------------------------

A company had the following working capital account values. What effect did the change in net working capital have on the firm's cash flows for the year?

	Beginning of Year		End of Year
Cash		$179	$164
Accounts receivable		415	480
Inventory		987	923
Accounts payable		562	649

A. net use of cash of $73

B. net use of cash of $88

C. net source of cash of $86

D. net source of cash of $101

E. net source of cash of $135

mauvemarten471

NEED 10 PAPER

You are the manager of Acme Fireworks. The company started in the ownerï¿½s garage two years ago and now has 15 employees that you manage. The company started as a sole proprietor, and the owner has never changed the entity. The company makes and sells fireworks. The owner has informed you that the company has received inquiries from several large retailers about the companyï¿½s ability to fill large orders on a regular basis. The owner told the retailers that the company could fill such orders, and a price per unit was agreed upon. No other details were discussed. The owner is anticipating that new employees will need to be hired but is worried that if the large orders do not continue, the company will not have the funds to pay the new employees. The owner is now considering changing the business entity but does not know what entity to form or how to form it.

The owner has asked you to do the following:

Explain potential personal liability for injuries to consumers caused by the product.
Analyze whether the owner formed a contract with the retailers applying the five elements as discussed from Week Two to the hypothetical facts.
Analyze how different employment types could be used with application of hypothetical facts.
Recommend a new business entity. Provide a rationale to support your recommendation

For each task, be sure to analyze the relevant law, apply the facts to the law, and make a conclusion. OUTLINE BELOW

Introduction

Provide a brief overview of the content contained within the proposal.
Thesis: Transition from the current sole proprietorship to a Limited Liability Company (LLC) is the most seamless and logical progression based on the projected business model.

Assessed Product Risk and Personal Liability

Discuss the inherent risks associated with firework manufacturing and shipping.
Note the variations/correlations in personal and business liabilities due to perceived negligence resulting in consumer/employee injury.
Potential liabilities resulting from defective merchandise.
Contract Viability
Review the five elements of a contract from the information provided.
1. Offer
2. Acceptance
3. Consideration
4. Legality
5. Capacity
Provide recommendation of contract viability/probability

Recruiting and Compensation

Employment Types
1. Full-time
2. Part-time
3. Casual
4. Daily/weekly hire
5. Probationary
Determine the best option to increase productivity while minimizing prolonged or unexpected expenses
Business Entity
Discuss the different business entities available
1. Sole Proprietor
2. Partnership
3. Corporation
4. Limited Liability Company
Compare and contrast benefits of an LLC v. other archetypes
Conclusion
Review all previously discussed information and develop a coherent vision
Discuss aforementioned vision as it relates to thesis statement
CHAPTER 5: Understanding and Choosing a Legal Structure. (2012). Women's Small Business Start-Up Kit (9781413317220), 149-186.
Pakroo, P. H. (2014). CHAPTER 1: Choosing a Legal Structure. Small Business Start-Up Kit, 7-28.

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FIN 300 Chapter Notes - Chapter 1: Limited Liability, Sole Proprietorship, Limited Partnership

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