Chapter 1

The Corporation

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Chapter Outline

1.1 The Four Types of Firms

1.2
Ownership Versus Control of Corporati
ons

1.3 The Stock Market

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1.1 The Four Types of Firms

• Sole Proprietorship (Doanh nghiệp tư nhân)

• Partnership (Công ty hợp danh)

• Limited Liability Company (Công ty trách

nhiệm hữu hạn)

• Corporation (Tập đoàn)

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1.1 The Four Types of Firms (cont'd)

• Sole Proprietorship
– Business is owned and run by one person
– Typically has few, if any, employees
– Advantages
• Easy to create

– Disadvantages
• Unlimited personal liability
• Limited life

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1.1 The Four Types of Firms (cont'd)

• Partnership
– Similar to a sole proprietorship, but with more
than one owner

– All partners are personally liable for all of the

firm’s debts. A lender can require any partner
to repay all of the firm’s outstanding debts.

– The partnership ends with the death or

withdrawal of any single partner.

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1.1 The Four Types of Firms (cont'd)

• Partnership
– Limited Partnership has two types of owners.
• General Partners
– Have the same rights and liability as partners in a
“regular” partnership
– Typically run the firm on a day-to-day basis

• Limited Partners
– Have limited liability and cannot lose more than their
initial investment
– Have no management authority and cannot legally be
involved in the managerial decision making for the
business

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1.1 The Four Types of Firms (cont'd)

• Limited Liability Company (LLC)

– All owners have limited liability but they can
also run the business.

– Relatively new business form in the U.S.

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1.1 The Four Types of Firms (cont'd)

• Corporation
– A legal entity separate from its owners
• Has many of the legal powers individuals have such
as the ability to enter into contracts, own assets, and
borrow money

• The corporation is solely responsible for its own

obligations. Its owners are not liable for any
obligation the corporation enters into.

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1.1 The Four Types of Firms (cont'd)

• Corporation
– Formation
• Corporations must be legally formed. The corporation
files a charter with the state it wishes to incorporate
in. The state then “charters” the corporation, formally
giving its consent to the incorporation.

• Due to its attractive legal environment for

corporations, Delaware is a popular choice for
incorporation.

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1.1 The Four Types of Firms (cont'd)

• Corporation
– Ownership
• Represented by shares of stock
• Owner of stock is called
– Shareholder
– Stockhoder
– Equity Holder
• Sum of all ownership value is called equity.
• There is no limit to the number of shareholders, and
thus the amount of funds a company can raise by
selling stock.
• Owner is entitled to dividend payments.

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1.1 The Four Types of Firms (cont'd)

• Corporation
– Tax Implications
• Double Taxation

– “S” Corporations
• Firm’s profits are not subject to corporate income tax,
but instead are allocated directly to the shareholders.

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Các loại hình Doanh nghiệp ở Việt
Nam

• Doanh nghiệp tư nhân

• Công ty trách nhiệm hữu hạn một thành viên

• Công ty trách nhiệm hữu hạn hai thành viên trở lên

• Công ty cổ phần

• Công ty hợp danh

• Doanh nghiệp nhà nước

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Doanh nghiệp tư nhân

• Doanh nghiệp tư nhân là doanh nghiệp do một cá nhân làm

chủ và tự chịu trách nhiệm bằng toàn bộ tài sản của mình
về mọi hoạt động của doanh nghiệp.

• Doanh nghiệp tư nhân không được phát hành bất kỳ loại

chứng khoán nào.

• Mỗi cá nhân chỉ được quyền thành lập một doanh nghiệp tư
nhân.

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Công ty trách nhiệm hữu hạn một
thành viên

• Công ty trách nhiệm hữu hạn một thành viên là doanh

nghiệp do một tổ chức hoặc một cá nhân làm chủ sở hữu;
chủ sở hữu công ty chịu trách nhiệm về các khoản nợ và
nghĩa vụ tài sản khác của công ty trong phạm vi số vốn
điều lệ của công ty.

• Không được quyền phát hành cổ phần.

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Công ty trách nhiệm hữu hạn hai
thành viên trở lên

• Thành viên có thể là tổ chức, cá nhân; số lượng thành viên

không vượt quá 50. Thành viên chịu trách nhiệm về các
khoản nợ và nghĩa vụ tài sản khác của doanh nghiệp trong
phạm vi số vốn cam kết góp vào doanh nghiệp.

• Phần vốn góp của thành viên chỉ được chuyển nhượng theo
quy định tại Luật doanh nghiệp 2014.

• Công ty trách nhiệm hữu hạn không được quyền phát hành
cổ phần.

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Công ty cổ phần
• Vốn điều lệ được chia thành nhiều phần bằng nhau gọi là cổ phần.

• Cổ đông có thể là tổ chức, cá nhân; số lượng cổ đông tối thiểu là

ba và không hạn chế số lượng tối đa.

• Cổ đông chỉ chịu trách nhiệm về các khoản nợ và nghĩa vụ tài sản
khác của doanh nghiệp trong phạm vi số vốn đã góp vào doanh
nghiệp.

• Cổ đông có quyền tự do chuyển nhượng cổ phần của mình cho

người khác.

• Công ty cổ phần có quyền phát hành chứng khoán các loại để huy
động vốn.

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Công ty hợp danh
• Phải có ít nhất hai thành viên là chủ sở hữu chung của công ty,
cùng nhau kinh doanh dưới một tên chung (thành viên hợp
danh); ngoài các thành viên hợp danh có thể có thành viên góp
vốn.

• Thành viên hợp danh phải là cá nhân, chịu trách nhiệm bằng
toàn bộ tài sản của mình về các nghĩa vụ của công ty. Thành
viên góp vốn chỉ chịu trách nhiệm về các khoản nợ của công ty
trong phạm vi số vốn đã góp vào công ty.

• Công ty hợp danh không được phát hành bất kỳ loại chứng
khoán nào.

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Doanh nghiệp nhà nước
• Doanh nghiệp nhà nước là doanh nghiệp do Nhà nước nắm giữ
100% vốn điều lệ.

• Doanh nghiệp nhà nước có tư cách pháp nhân do nhà nước

giao cho vốn kinh doanh và tự chịu trách nhiệm về quản lý sản
xuất chịu trách nhiệm về kinh tế và chịu bù đắp hay hưởng lợi
nhuận với mức vốn được cấp đó. Tức là nhà nước không còn
bao cấp như trước đây mà các doanh nghiệp phải tự bù đắp
những chi phí, tự trang trải mọi nguồn vốn đồng thời làm tròn
nghĩa vụ với nhà nước xã hội như các doanh nghiệp khác.

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Textbook Example 1.1

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Textbook Example 1.1 (cont'd)

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Alternative Example 1.1a

• Problem
– You are a shareholder in a C corporation.
– The corporation earns $4 per share before
taxes.
– Once it has paid taxes it will distribute the rest
of its earnings to you as a dividend.
– The corporate tax rate is 34% and the personal
tax rate on dividend income is 15%.
– How much is left for you after all taxes are
paid?

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Alternative Example 1.1a

• Solution
– First, the corporation pays taxes. It earned $4 per share,
but must pay 0.34 × $4 = $1.36 to the government in
corporate taxes.
– That leaves $2.64 to distribute. However, you must pay
0.15 × $2.64 = $0.396 in income taxes on this amount,
leaving $2.64 – $0.396 = $2.244 per share after all
taxes are paid.
– As a shareholder you only end up with $2.244 of the
original $4 in earnings. The remaining $1.36 + $0.396 =
$1.756 is paid as taxes.
– Thus, your total effective tax rate is $1.756 ÷ $4 =
43.9%.

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Textbook Example 1.2

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Textbook Example 1.2 (cont'd)

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Alternative Example 1.2a

• Problem
– The corporation earns $4 per share before
taxes. Assuming the corporation in that
example has elected subchapter S treatment
and your tax rate on non-dividend income is
39%.

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Alternative Example 1.2a

• Solution
– In this case, the corporation pays no taxes.
– It earned $4 per share.
– Whether or not the corporation chooses to
distribute or retain this cash, you must pay
0.39 × $4 = $1.56 in income taxes

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1.2 Ownership versus Control
of Corporations
• Corporate Management Team
– In a corporation, ownership and direct control
are typically separate.
– Board of Directors
• Elected by shareholders
• Have ultimate decision-making authority

– Chief Executive Officer (CEO)

• Board typically delegates day-to-day decision making
to CEO.

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Figure 1.2 Organizational Chart of a
Typical Corporation

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1.2 Ownership versus Control
of Corporations (cont'd)
• Financial Manager
– Responsible for:
• Investment Decisions
• Financing Decisions
• Cash Management

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1.2 Ownership versus Control
of Corporations (cont'd)
• Goal of the Firm
– Shareholders will agree that they are better off
if management makes decisions that
maximizes the value of their shares.

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1.2 Ownership versus Control
of Corporations (cont'd)
• Ethics and Incentives within Corporations
– Agency Problems
• Managers may act in their own interest rather than in
the best interest of the shareholders.

• One potential solution is to tie management’s

compensation to firm performance.

• How should performance be measured?

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1.2 Ownership versus Control
of Corporations (cont'd)
• CEO Performance
– If a CEO is performing poorly, shareholders can
express their dissatisfaction by selling their
shares. This selling pressure will drive the stock
price down.

– Hostile Takeover
• Low stock prices may entice a Corporate Raider to
buy enough stock so they have enough control to
replace current management. The stock price will rise
after the new management team “fixes” the
company.

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1.2 Ownership versus Control
of Corporations (cont'd)
• Corporate Bankruptcy
– Reorganization

– Liquidation

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1.3 The Stock Market

• The stock market provides liquidity

to shareholders.
– Liquidity
• The ability to easily sell an asset for close to the price
you can currently buy it for

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1.3 The Stock Market (cont'd)

• Public Company
– Stock is traded by the public on a stock
exchange.

• Private Company
– Stock may be traded privately.

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1.3 The Stock Market (cont'd)

• Primary Markets
– When a corporation itself issues new shares of
stock and sells them to investors, they do so on
the primary market.

• Secondary Markets
– After the initial transaction in the primary
market, the shares continue to trade in a
secondary market between investors.

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1.3 The Stock Market (cont'd)

• Largest Stock Markets

– New York Stock Exchange (NYSE)
• Market Makers/Specialists
– Each stock has only one market maker

– NASDAQ
• Does not meet in a physical location
• May have many market makers for a single stock

– Bid Price versus Ask Price

• Bid-Ask Spread
– Transaction cost

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Figure 1.3 Worldwide Stock Markets
Ranked by Two Common Measures

Source: www.world-exchanges.org

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 In-class test Chapter 1

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Alternative Example 1.1b

• Problem
– You are a shareholder in a C corporation.
– The corporation earns $7.50 per share before
taxes.
– Once it has paid taxes, it will distribute the rest
of its earnings to you as a dividend.
– The corporate tax rate is 35% and the personal
tax rate on dividend income is 20%.
– How much is left for you after all taxes are
paid?

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Alternative Example 1.1b

• Solution
– First, the corporation pays taxes. It earned $7.50 per
share, but must pay 0.35 × $7.50 = $2.70 to the
government in corporate taxes.
– That leaves $4.80 to distribute. However, you must pay
0.20 × $4.80 = $0.96 in income taxes on this amount,
leaving $4.80 – $0.96 = $3.84 per share after all taxes
are paid.
– As a shareholder you only end up with $3.84 of the
original $7.50 in earnings. The remaining $2.70 + $0.96
= $3.66 is paid as taxes.
– Thus, your total effective tax rate is $3.66 ÷ $7.50 =
48.8%.

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Alternative Example 1.2b

• Problem
– Rework Alternative Example 1.1 assuming the
corporation in that example has elected
subchapter S treatment and your tax rate on
non-dividend income is 36%.

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Alternative Example 1.2b

• Solution
– In this case, the corporation pays no taxes.
– It earned $7.50 per share.
– Whether or not the corporation chooses to
distribute or retain this cash, you must pay
0.36 × $7.50 = $2.70 in income taxes, which is
substantially lower than the $3.66 you paid in
Alternative Example 1.1b.

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