Page 437 - Business Principles and Management

Unit 5

money each owner has in the business and to
spread the financial risk among the owners.
When a sole proprietorship is reorganized into
a partnership, a formal partnership agreement must
be created that identifies the financial contributions
Financial managers, business executives, institu- of each partner and how business profits will be
tional and individual investors, and govern- shared. As with the sole proprietor, a new business
ment policy makers need to keep up-to-date partner will need to use personal finances to pro-
on national and international financial data. vide the required equity capital. Those resources
Investment opportunities, interest rates, can be personal savings, income from the sale of
exchange rates for foreign currencies, and the assets, or personal loans and mortgages. And just
strength of various financial institutions are as in the sole proprietorship, the money invested by
important factors in making financial decisions. each partner as well as any other personal assets
The Federal Reserve Board is a government that were not invested are at risk if the business
organization made up of economists and other fails. If the assets of one partner are not adequate
financial experts. The Board is responsible for to cover the debts of a business, assets from other
running the central bank system in the United partners can be taken.
States and setting monetary policy. It collects When a sole proprietorship expands ownership
and reports a variety of financial data. Point by forming a partnership, the owner gives up individ-
your browser to www.thomsonedu.com/ ual control over management and decision-making.
school/bpmxtra. Review the types of financial If Eva Diaz decides to expand her Video Shoppe by
information available from the Federal Reserve forming a partnership, she will share ownership and
Board site. Select one link for consumer finan- management with her new partners.
cial information and one for business financial
information. Study the information and describe
how each type of information would be useful CORPORATIONS
to business executives making decisions about The third way to raise equity capital is by forming
whether to increase the amount of capital in a corporation and bringing in additional owners
their businesses. through the sale of stock. The use of a corporate
structure for a small business may be an effective
www.thomsonedu.com/school/bpmxtra way to raise equity capital because the amount of
money that an individual needs to invest is usually
much smaller than if a partnership is formed. Also,
stockholders are not involved in the day-to-day
management of the business. Therefore the person who was the original owner
may be able to continue as the primary manager of the business.
Investors in corporations are protected financially; they can lose the money
they have invested only if the business fails. This might be viewed as an advan-
tage to Eva Diaz because she will be a stockholder based on her investment in
the business, and any losses will be limited to that amount. Currently, as a sole
proprietor, all of the money she has invested in the business and all her personal
assets are at risk in the event the business fails.
Stockholders who invest in a business expect that the business will use their
investment effectively and that they will make money. Stockholders earn money
on their investments through dividends paid from profits earned by the business or
through the sale of their stock at a profit. Depending on whether a corporation
is organized as a public corporation or a close corporation, stockholders have
more or less flexibility in the sale of stock and input into the direction of the
business. If Eva Diaz decides she wants to expand the number of video stores very
rapidly, she may need to choose to reorganize as a corporation. If the prospects
for her business are good, she may be able to attract a number of investors who
will purchase stock, giving her the needed capital.
There are advantages and disadvantages to each form of ownership in terms
of the amount of equity capital that can be raised, the risk to the owners, and

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