Explain main three types of business organization in a market.Differentiate them from one another.Discuss the advantages and disadvantages of bonds and shares issuance to a corporation.

Explain main three types of business organization in a market.Differentiate them from one another.Discuss the advantages and disadvantages of bonds and shares issuance to a corporation.
Explain main three types of business organization in a market.Differentiate them from one another.
Discuss the advantages and disadvantages of bonds and shares issuance to a corporation.

Explain main three types of business organization in a market.Differentiate them from one another.Discuss the advantages and disadvantages of bonds and shares issuance to a corporation.
Three types of business organization:
A. Sole Proprietorship: A firm owned by a single individual.
Advantages
1. Firm is easy to set up.
2. Decision making is simple,owner has total control.
3. Income is taxed only once-as personal income.
Disadvatages
1. Owner has unlimited personal liability for obligations of the firm.
2. Difficulty of raising financial capital for the firm.
B. Partnership: A firm owned and operated by more than one person.
1. Limited liability of owners for the obligation of the firm.
2. Access to large blocks of financial capital by selling stocks and bonds.
3. Firm can hire professional management and replace personnel when necessary.
4. Firms has potentially and legal eternal life-owners may come and go or die
Advantages
1. Firm is easy to set up.
2. Access to more financial capital then proprietorship.
3. Some specialization is possible; more management skills available.
4. Income is taxed only once.
Disadvantages
1. Disagreement among partners creates decision making problems.
2. Unlimited liability for partners.
3. Legal complications when a partner dies or leaves.
C. Corporation: A firm owned by those who buy shares/stock and whose liability is limited to the amount of their investment.
Advantages
1. Limited liability of owners for the obligation of the firm.
2. Access to large blocks of financial capital by selling stocks and bonds.
3. Firm can hire professional management and replace personnel when necessary.
4. Firms has potentially and legal eternal life-owners may come and go or die
Disadvantages
1. Double taxation of income once on the profits of the corporation and then on profit received as income.
2. Possibility of conflicting goals of management and owners.
3. Owners have very little say in management decisions.
4. Costly and complicated to establish and run to meet legal obligations.
Advantages and disadvantages of bonds and shares issuance to a corporation.
Bonds - Advantages:
1. No dilution of control and ownership for existing shareholders.
2. Interest is tax deductible.
3. Cheaper than equity finance.
[Fixed coupon interest to investors, and lower cost is expected in return.]
4. Higher financial leverage, increase earnings per $ invested for shareholders.
Bonds - Disadvantages:
1. Commited cash outflows for interest payment until maturity.
2. The fund is not permanent, redemption takes place at maturity date.
3. The financial risk increases as financial gearing increases.
Shares - Advantages:
1. No commited cash outflows required. No financial burden.
2. Permanent funding.
3. Do not increase the financial gearing.
4. Suitable for raise a large sum of money, through a public issue via the stock exchange.
Shares - Disadvantage:
1. Dilution of ownership and control for existing shareholders.
2. Dividend is not tax deductible. No tax savings.
3. It is more costly than bonds issue.
[Generally, shareholders expects higher returns due to higher risks. Dividend payment is not guaranteed. Shareholders are at the bottom of the credit hierarchy. Capital gain is uncertain.]