FINA 3339 A

Assignment 1

Julian Raja Arockiaraj

1-6. The four forms of business organizations are:

Sole Proprietorships
Partnerships
Corporations
Limited Liability Companies (LLC) and Limited Liability Partnership (LLP)

There are advantages and disadvantages in each business organization, the important
advantages and disadvantages are listed below.
Sole Proprietorships: A business owned by one individual, business is not incorporated.
Advantages: 1) They are easily formed and are inexpensive, 2) they have very few
government regulations, 3) they pay income tax lower than corporations.
Disadvantages: 1) They have unlimited personal liability for the business debts, 2) the
life of the business is limited, 3) they have difficulties in obtaining large amount of
capital, which leads to small businesses.
Partnership: A business owned by two or more individual, they are not incorporated.
Advantages: 1) They are easily formed and are inexpensive, 2) Income is allocated on a
pro rata basis to the partners, hence they are taxed individually, 3) business is established
easily by a legal agreement between partners, and it is not expensive to start a
partnership.
Disadvantages: 1) like sole proprietorships partnerships are subjected to unlimited
liability for the business debts, 2) the life of the business is limited, 3) decision making
can be challenging since all the partners must agree on it.
Corporations: Is a legal entity created by the state which is separate and distinct from
its owners and managers.
Advantages: 1) they have very limited liability when compared to the other forms of the
organization, 2) the life of the business is long term since the business is a separate
entity, 3) raising capital for the business is very easy and the business can be operated on
a larger basis.
Disadvantages: the major disadvantage is that they are subject to double taxation i.e.
they pay corporation taxes and also pay taxes on the dividends given to the shareholders.
Limited Liability Companies (LLC) and Limited Liability Partnership (LLP):
These are the new type of organization which is a hybrid of partnership and corporation.
The difference between these two is that LLPs are used for professional firms in the
fields of accounting, law, and agriculture, whereas LLCs are used by other businesses
Advantages: 1) limited liability like the corporation, 2) the owners have voting rights
based on their investment in the business
Disadvantage: 1) difficult to operate large business, 2) compared to corporation the life
of the business is not as long the corporation.
1-7. Stockholders
goal.
making
taking restricted
inefficiency to

wealth maximization is considered long-term goal rather than short-term

Corporations, including its stockholders, flourish by the management
decisions which will produce them long-term earnings. Management
decisions will often pull alongside with the company. Which will result in

FINA 3339 A

Assignment 1

Julian Raja Arockiaraj

Compete against other firms. An example for this is the U.S auto industry, they have been
blamed of making fuel inefficient vehicles which would fetch them higher profits rather than
smaller fuel efficient vehicles. The Gas Guzzler Tax Provisions was included in the Energy
Tax Act of 1978, to discourage the production of fuel inefficient vehicles.

1-8. Stockholders use some motivational tools which will help them align their interest with the
mangers. Some of them are listed below.
1. They provide reasonable compensation packages to the manager, which will attract the
mangers and also retain them in the company
2. They can intervene directly with the managers, which gives them the power to fire a
manager who is not performing well.
3. If a firms stocks are undervalued, the corporate raiders will see it as bargain and will
attempt to capture the firm in a hostile manner, once successful the firms present executive
and mangers will be fired. So there is a threat of takeover.

References
Brigham, Eugene F., and Joel F. Houston. 2012. Fundamentals of Financial
Management Concise 7th edition.
n.d. United states Environmental Protection Agency.
http://www.epa.gov/fueleconomy/guzzler/.