Chapter 2

The Business, Tax,

and Financial
Environments

1 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 The Business
Environment
There are four basic forms of
business organization:
• Sole Proprietorships
• Partnerships (general and limited)
• Corporations
• Limited liability companies
2 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 The Business
Environment
Sole Proprietorship – A business
form for which there is one owner.
This single owner has unlimited
liability for all debts of the firm.
• Oldest form of business organization.
• Business income is accounted for on
your personal income tax form.
3 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 Summary for
Sole Proprietorship
Advantages Disadvantages
• Simplicity • Unlimited liability
• Low setup cost • Hard to raise
• Quick setup additional capital
• Single tax filing • Transfer of
on individual form ownership
difficulties

4 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 The Business
Environment
Partnership – A business form in
which two or more individuals
act as owners.

• Business income is accounted

for on each partner’
s personal
income tax form.

5 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 Types of Partnerships
General Partnership – all partners have
unlimited liability and are liable for all
obligations of the partnership.
Limited Partnership – limited partners
have liability limited to their capital
contribution (investors only). At least
one general partner is required and all
general partners have unlimited liability.
6 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 Summary for Partnership
Advantages Disadvantages
• Can be simple • Unlimited liability for
• Low setup cost, higher the general partner
than sole • Difficult to raise
proprietorship additional capital, but
• Relatively quick setup easier than sole
• Limited liability for proprietorship
limited partners • Transfer of ownership
difficulties
7 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 The Business
Environment
Corporation – A business form
legally separate from its owners.

• An artificial entity that can own

assets and incur liabilities.
• Business income is accounted for
on the income tax form of the
corporation.
8 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 Summary for Corporation
Advantages Disadvantages
• Limited liability • Double taxation
• Easy transfer of • More difficult to
ownership establish
• Unlimited life • More expensive
• Easier to raise large to set up and
quantities of capital maintain

9 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 The Business
Environment
Limited Liability Companies – A
business form that provides its owners
(called “members”) with corporate-
style limited personal liability and the
federal-tax treatment of a partnership.
• Business income is accounted for on
each “member’s”individual income tax
form.
10 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 Limited Liability
Company (LLC)
Generally, an LLC will possess only the
first two of the following four standard
corporation characteristics
• Limited liability
• Centralized management
• Unlimited life
• Transfer of ownership without other owners’
prior consent

11 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 Summary for LLC
Advantages Disadvantages
• Limited liability • Limited life
• Eliminates double (generally)
taxation • Transfer of
• No restriction on ownership
number or type of difficulties
owners (generally)
• Easier to raise
additional capital

12 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 Financial Environment
• Businesses interact continually with
the financial markets.
• Financial Markets are composed of all
institutions and procedures for
bringing buyers and sellers of financial
instruments together.
• The purpose of financial markets is to
efficiently allocate savings to ultimate
users.
13 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 Flow of Funds in the
Economy

INVESTMENT SECTOR

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS

SECONDARY MARKET

SAVINGS SECTOR

14 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
2.
 Flow of Funds in the
Economy

INVESTMENT SECTOR
INVESTMENT
SECTOR

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Businesses

SECONDARY MARKET Government

Households
SAVINGS SECTOR

15 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
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 Flow of Funds in the
Economy

INVESTMENT SECTOR
SAVINGS
SECTOR

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Households

SECONDARY MARKET Businesses

Government
SAVINGS SECTOR

16 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
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 Flow of Funds in the
Economy

INVESTMENT SECTOR
FINANCIAL
BROKERS

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Investment
Bankers
SECONDARY MARKET
Mortgage
Bankers
SAVINGS SECTOR

17 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
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 Flow of Funds in the
Economy

INVESTMENT SECTOR
FINANCIAL
INTERMEDIARIES

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Commercial Banks
Savings Institutions
SECONDARY MARKET Insurance Cos.
Pension Funds
Finance Companies
SAVINGS SECTOR
Mutual Funds

18 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
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 Flow of Funds in the
Economy

INVESTMENT SECTOR
SECONDARY
MARKET

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Security
Exchanges
SECONDARY MARKET
OTC
Market
SAVINGS SECTOR

19 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
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