Financing and Business Organizations

Financing Any Enterprise

• Funds for financing businesses can be categorized as equity or debt capital.
• Equity capital is owned by investors who expect profit but have no obligation to be paid if there is no profit.
• Debt capital involves borrowed funds requiring interest and repayment on a specific date, regardless of profit.
• Working capital comprises funds needed for ongoing operations, including initial capital for startup and regular capital for ongoing operations.
• Initial working capital is necessary for the business to begin its operations before the income is generated, whilst regular working capital is needed for ongoing operations.

Types of Business Organizations

• The three principal business types are individual ownership, partnerships, and corporations.
• Individual ownership (sole proprietorship) is the simplest form, owned and operated by one person.
• Partnerships involve two or more individuals working together for profit, sharing profits and responsibilities.
• Corporations are separate legal entities, separate from the owners, allowing for raising capital and easier transfer of ownership.

Sole Proprietorship

• Advantages: easy to organize, the owner keeps all profits, flexible organization with no need for permission, and private affairs.
• Disadvantages: difficult to raise large capital, limited life of the business because it depends on the owner, difficult to obtain long-term loans.

Partnership

• Advantages: combining different talents, potentially more capital due to pooling resources, relatively easy to form compared to corporations, sharing in profits incentivizes partners, flexible & private affairs.
• Disadvantages: the amount of capital is restricted to the amount the partners contribute, difficult to obtain large amounts of capital, the business is limited to the partners' lifetime, potential for disagreements and dissolution.

Corporation

• Advantages: perpetual life, limited liability of owners, easier to raise capital due to its separate entity status, ease of transfer of ownership, and attracting top management.
• Disadvantages: complicated formation and administration, greater governmental control, potential exploitation of minority shareholders through those controlling the corporation, double taxation (corporate and personal).
• Corp's activities are limited to what is stated in its charter.

Common Stock

• Represents ownership of the corporation, with residual claim on assets.
• Stockholders have rights to call meetings, vote, and elect board members.
• They can also inspect books, obtain dividends, and participate in decisions about corporation dissolution.

Preferred Stock

• Similar rights to common stock, but enjoys preferences like guaranteed dividends and priority in assets distribution upon dissolution.

Bonds

• Represent corporate debt obligations, secured by assets, with provisions for maturity and repayment.
• Classified based on interest payment method (registered or coupon) and security (mortgage or collateral).
• Bondholders receive interest payments and the principal amount at maturity date.
• Corporations utilize various methods to repay bond debt.

This quiz explores essential concepts related to financing any enterprise, including equity and debt capital. It also covers different types of business organizations such as sole proprietorships, partnerships, and corporations. Test your knowledge on these fundamental business principles.