Sole Proprietorship - business owned by 1 person (72% of all firms in US) Advantages Easy to Form (local license agreements)

"You're the Boss" Potential Profits (no fixed wages) Disadvantages Unlimited Liability (2/3 businesses fail within 4 years of opening) Limited Capital (most $ put into business depends on size of savings + ability to borrow) Limited Life (harder to borrow $ may not exist in a few years)

Unlimited Life - easier to borrow $ for long periods of time Ease of Transfer - just need to find buyer/seller

Double Taxation corporate income taxes

Subchapter S (Internal Revenue Code) - allows owners of corps w/ 75 or fewer stockholders to be taxed as though they're sole proprietorships/partnerships (enjoy limited liability + more, but avoid double taxation) limited liability company (LLC) - owners = "members" + not personally liable for business debts + easier to form + no double taxation, but can sue/be sued, hold property in its name - disadvantages: limited life + transferability (no one can be member of LLC w/o consent of majority of membership) Government-Owned Corps: TVA, US Postal Service - 1980s+ = towards privatization (publicly run businesses into privately owned + operated) Not-for-Profit Corps: American Red Cross, Boy Scouts of America - most public-service, charitable, religious organizations (usu. exempt from income taxes) Cooperatives: co-ops - associations of individuals/organizations - band other to buy/sell more efficiently than as individuals: consumer coops, producer coops, coop apartment buildings - consumer cooperative - retail business owned by some/all of customers - producer cooperative - producers who buy supplies + equipment + marketing their products: Ocean Spray, Sunkist oranges - cooperative apartment building - capital stock owned by tenants (get many benefits normally associated w/ landlords: tax-deductions + reduced rents) Large Companies: have officers + board of directors to run businesses on behalf of shareholders - officers - selected by board of directors: pres, vps, secretary, treasurer - hire personnel + conduct w/e needed for functioning of firm - board of directors - elected by shareholders - set long-range goals for corp + keep shareholders informed of significant developments + prepares certain financial reports + conducts periodic elections for board seats, leaves day-to-day operations to officers: long-term financing + distribution of profits

Partnership - business organization owned by 2 partners (share responsibilities + profits) Advantages Additional Capital available capital increases by whatever additional partners bring into business "Two Heads > 1" share problems & responsibilities + additional talents Easy to Organize Disadvantages Limited Life - when 1 partner dies, another must be found

Disagreement - conflict makes the business suffer Difficult to Sell - hard to find replacement Limited Capital - amount of capital earned limited by wealth of partners, business's earning power, ability to borrow Unlimited Liability - each partner/group of partners held personally responsible for debts of business

Corporation - business organization licensed to operate by a state or federal government (given a charter), does business and gives out shares of stock (certificates representing ownership in a corporation) to shareholders/stockholders - separate from the people who own it: corps can enter contracts, sue/be sued, pay taxes ("artificial person") Advantages Limited Liability - most money shareholder can lose = what paid for stock (British = Limited/Ltd. + US = Incorporated/Inc.) Disadvantages Difficulty + Expense of Organizing - needs lawyers + complex process

large corp - control in hands of those able to select board of directors proxy - written authorization by shareholder giving another person the right to vote one's shares of stock @ shareholder's meeting reforms to eliminate corp abuse: > separate roles of chairperson (header of board of directors) + CEP (heads operations of company) > make easier for stockholder to choose/replace directors > ban business deals btw directors + corp > disclose how directors voted on important issues (executive pay)

Business Finance money = "lifeblood of business" - flow of funds let business firms to meet day-to-day obligations - need money to: 1) meet everyday expenses (payroll, rent, utilities) 2) replace/expand inventory (quantity of finished goods on hand + materials used in manufacture) 3) expand/grow through purchase of additional plant/equipment 4) meet interest payments on debt when revenue (income from g/s that firm sells) is not enough, needs to: 1) dips into savings 2) borrow money 3) sell more stock short-term financing (loans repaid in <1year) long-term financing (loans + other financial strategies 1year+) - mostly used for major renovations, new buildings, expensive equipment short-term financing: 1) trade credit - payment delay (when business suppliers give customers 30 - 60 days to pay for orders) 2) bank loans - when banks extend credit as promissory note (written promise to replay a loan + interest @ certain date)/line of credit (loan arrangement where bank allows business to borrow any sum, up to a specified limit, whenever needs money) 3) retailed earnings/undistributed profits - profit not distributed to owners of business - corps rely on this as major source for new funds (interest free)

long-term financing: 1) long-term loans - mostly used to buy machinery/equipment + expected to make periodic payments over loan life + pledge collateral (item of value that lender may take if borrower fucks up promised loan payments) 2) bonds (certificates issued in exchange for loan) long-term IOU - promise by corp/gov't to repay face value/principal (specified sum) @ end of # of years w/ annual interest corporate bonds - if corp = bankrupt (unable to pay debts), it pays off bondholders + creditors 1st, shareholders #2 -> safety of any security depends on company that issues it government bonds - people gov't bonds + gov't pays principal w/ interest later 3) equity financing - sale by corp of share of stock trying to raise $, least important source when counting total money stock exchanges/markets - where shares in nation's major corporations bought/sold - up/down mirrors how investors (home + abroad) view econ conditions common stocks (entitle owners to voice in selection of board of directors, share in profits of company whenever corp's board of directors decides to pay dividends) preferred stock - usu. no voting rights, but entitled to fixed dividend whenever the board of directors votes to pay it - common stockholders can't get dividends until preferred stockholders got theirs cumulative preferred - if corp fails to pay dividends during 1 year, must make up missed payments in following years to cum.pref-holders before common shareholders = part owners of business, bondholders = creditors How Corporate Stocks and Bonds are Sold to the Public when corp needs to sell stocks/bonds, it: 1) goes to an investment bank 2) investment bank underwrites issue (buys entire issue of some corp's stocks/bonds 3) sells securities to public @ price that will give profit 4) corp can use funds it gets from bank without any more thought if all stocks/bonds are sold local + state gov'ts also use investment banks to market bonds, but fed gov't sells through Fed Reserve securities markets fill need for organized markets where stocks/bonds may be sold - provide place where buyers/sellers can get together/instantly trade stocks/bonds

Security Markets: exist because investors wouldn't be willing to buy stocks/bonds if no easy way to sell them later + corps would find really costly to find investors interested in buying securities - also bc enable us to know the value of stocks, important to economy as a whole (transfer money) New York Stock Exchange American Stock Exchange NASDAQ (all headquartered in NYC) NYSE + AMEX = oldest NYSE - 1792 bc US gov't needed to repay Revolutionary War debts so 24 brokers + prominent business leaders agreed to trade securities on a common commission basis -> brokers in NY started trading gov't + private securities on behalf of clients -> "Curb Exchange," 1953 = AMEX } operate trading floors where s/b bought/sold through auction system: brokers (rep'ing buyers/sellers) call out bids, attempting to aquire/sell securities for clients @ favorable prices National Association of Securities Dealers Automated Quotation (1971) - newest + 2nd most active: NASDAQ reps exchange buy/sell orders through own computer network Brokerage Firms brokers buy/sell securities on behalf of clients + get a commission/fee for their work 1) customer places order for stock listed on exchange, broker relays order to brokerage firm's rep @ appropriate exchange 2) broker's rep meets w/ others trading same security (or if NASDAQ listing, sends order through wires) + buys according to customer's instructions price security bought/sold @ depends on supply of/demand for that security (demand up, price up; demand fall, price fall - few people sell, price up; lots people sell, oversupply push prices down) Why People Buy Stocks 1) dividends - each year, corp may distribute shareholders dividends (part of comp's profits) 2) capital growth - expect that in time, stocks will be worth more than what they paid for them stocks increase value: business performance, public expectation, public ~feelings~ <- investors speculators - quick profit (buy long/sell short)

buying long - buying the stock now, selling it later at higher price (but if price of security falls, will lose money when sell) - Enron went bankrupt 2001 + many stockholders :| bulls (believe price will rise) [bull market] selling short - bears sell stock "short" - sell stock that they don't own by borrowing it from their broker + when price falls, bears instruct brokers to buy back security @ lower price + pocket difference bears (believe price will fall) [bear market] brokers - act as intermediaries between bulls/bears + earn fees/commissions from each transaction (bull buying, have bear selling) margin - percentage that buyer has to put up in cash - made by Fed Reserve to prevent crashes (40-100%) buying on margin - when ppl buy stocks partly on credit corp bonds usually bought/sold through brokers - price determined by how much buyers willing to pay + how little sellers willing to accept price of bond influenced by: 1) its safety and 2) its rate of return (interest) - falls when public has doubts about ability of issuer to pay principal/interest, if rate of interest of bond is less than rate of interest prevailing in economy - interest paid on newly issued bonds reflects how safe investment is + current interest rates - junk bonds - highly risky investments offering extremely high rates of interest (issued by comps w/ heavy debt/financial problems) Specialized Markets - b/s commodities - requires specialized knowledge + not as public-friendly risk - greater the risk, lower value of bond secured bonds (mortgage bonds) - backed by specific property that passes to the bondholder if the issuer can't live up to obligations unsecured bonds (debenture bonds) - backed by good name of corp issuing them > bonds analyzed/classified by bondrating services according to how likely the issuers of bond are to repay principal @ maturity (Standard & Poor's Corporation + Moody's Investors Service) maturity - date @ which security is due to be redeemed bond values vary inversely with rise/fall of interest rates (cost of credit + expressed as percentage of face value that is payable annually): interest rates rise, bond prices fall; interest rates fall, bond prices rise > calculate how much a bond would sell @ various interest rates: divide dollar amount paid in interest by selected rate

Securities and Exchange Commission (SEC) - created 1934, act of Congress - to protect public against deception/fraud of selling securities doesn't say what is thinks of specific investment/recs to merit of a comp's securities opposed to another Caveat Emptor = "let the buyer beware" - given facts, individual investors should be allowed to judge for themselves whether the stocks/bonds of a given corporation is good investment SEC requires publicly owned corporations publish certain financial information about operations failure (false/misleading statements) punishable by fine/imprisonment/both <- up to individual investors to evaluate facts + decide for self if want to invest in company also established guidelines to prevent individuals/groups from profiting from certain practices ("insider trading" - when individuals w/ information about a company buy/sell securities before news is out) Financial Statements: Required Reading for Investors prospectus - operations of comp issuing new securities annual report - financial information about comp whose securities traded on exchange balance sheet - snapshot of firm's finances, summarizes assets, liabilities, net worth assets - anything owned by bns that has money value liabilities - debts/financial obligations of company (unpaid bills/salaries, borrowed money, mortgages) net worth/owner's equity - difference between what firm owns + what is owes: assets - liabilities = net worth -> accountants transpose (transfer) liabilities so their equation = assets = liabilities + net worth income statement/profit-and-loss statement summarizes financial activities of firm over period of time: summarizes items of a) income, b) expenses, 3) profit/loss = (income - expenses) Limitations of Financial Statements: 1) record of past events, not forecast of future 2) may not reflect changing value of $ from inflation/deflation 3) data may be based on opinion, not fact: "goodwill" total assets - if forced to liquidate (sell off assets + go out of bns), how much comp is worth

Personal Financial Planning financial resources - money/assets that can be converted into money financial plan - take into consideration of the present, future, and the road to get there short-term goals - <1year long-term goals - 1+years compound interest - interest earned on original deposit cash flow - actual income/expenditures (to keep track of $ coming in/how is spent) budget - financial plan that summarizes anticipated income/expenditures over a period of time: 1) current monthly income, 2) current monthly expenses, 3) financial summary current monthly income: gross pay (total before deductions are taken), take-home pay = gross may deductions current monthly expenses: fixed expenses - those that do not vary from month to month (carfare, rent, loan payments), variable expenses - those that do change (food, trips, entertainment) financial summary: total anticipated income - total planned expenses -> surplus budget - when spending is less than income. deficit budget - expenses greater than income (have to be made up by savings/borrowing) trade-off costs: cost is opportunity lost when one choice is made over another Consumer Spending and the Economy circular flow: $ constantly passed back and forth among public/business firms/levels of government. consumer spending (C), business firm investments (I), government spending (G) consumer spending: trillions of dollars, 2/3+ of GDP (C + I + G) -> if consumers spend less, bns firms produce less, need fewer workers; consumers spend more, production/employment will increase savings/investing up to people/bns choice: after-tax income (income after paying taxes) - propensity to consume - tendency to spend income - propensity to save - tendency to save portion of income 5 factors that determine how much consumers spend/save: 1) income - how much available $. a) sources of income - work, investments, pension, SSI b) disposable family income - how much family has after paying personal taxes (Ernst Engel's Law: as family

income increases, percentage of income spent on food decreases; percentage spent operating household unchanged, percentage in other categories + savings increases) 2) wealth - anything that has value (stocks, bonds, real estate, savings) -> percentage of family income saved decreases as wealth increases 3) interest rates - higher rates, more costly to borrow + discourage consumer spending + encourage saving; lower rates, cheaper to borrow 4) future expectations - good future feelings, spend; not so good, save 5) government policies - tax increases discourage spending; tax reductions stimulate spending. withholding welfare = less spending Decision to Save + Invest: > prepare for unexpected: emergencies, layoffs, etc -> soften financial burden > finance costly purchases: cars, vacations, computers > additional income: earns a return when set aside in saving accounts/investments > retirement > hedge against inflation: real value of assets/income decreases w/ time as purchasing power of dollar declines market risk - value of investment low when want to sell; greater market risk, higher potential return real estate - land/buildings; people expect that value will rise faster than rate of inflation Evaluating Ways to Save/Invest some forms of savings more secure than others > US bonds secure as fed gov't, band deposits up to $100k insured by Federal Deposit Insurance Corporation (so that when bank fails, depositors won't lose money) yield - percentage rate of return (varies from one savings/investment instrument to another) -> rate of interest one earns @ bank depends on kind of account, when opened, which bank liquidity - ease a savings vechile can be converted into cash Savings Accounts - easy access to funds, relatively low rates of interest -> NOW accounts = checking accounts pay low interest Certificate of Deposit - CD - time deposit that depositor agrees to keep in bank for specified time; offers higher rates of return than savings accounts

bonds - long-term obligations issued by governments/private corporations <- bond issuer pays principal, but also periodic payments of interest; exempt from certain taxes US Savings Bonds - contract showing money has been loaned to Treasury of US -> gov't-guaranteed bonds = safe/liquid investment: Series EE savings bond easy for small investors (can be purchased for $25 from local banks) -> interest still; must be held for a certain time before redeemable original maturity of Series EE depends on guaranteed minimum rate of interest @ time of purchase ups: safety, absence of fees for purchasing/redeeming bonds, exempt from state/local taxes, guarantees principal + interest Common Stocks - invest portion of savings in stocks of publicly held corporation; can lead to capital gain but has risk; reduce risk by diversifying investment Mutual Funds - corporation that uses proceeds from sale of stock to purchase securities of other corps 1) Money Market Funds 2) Equity Funds 3) Bond Funds 4) Balanced Funds IRAs + 401(K) plans - individual retirement accounts ~ set up by individuals with earned income; 401(k) plan ~ pension plan run by employer for employees that allows an individual employee to contribute regularly a portion of his/her paycheck into special savings/investment accounts sometimes, income tax on part of salary/accumulating interest is deferred (delayed) until money is withdrawn from retirement accounts