Financial Concepts 1 Lesson Objectives Identify and describe

Financial Concepts 1

Lesson Objectives • Identify and describe all parts of the business life cycle • Describe the concept of capital and discuss how businesses raise capital and why they need it • Compare and contrast different forms of business ownership 2

Key Vocabulary Terms • Bond • Business Life Cycle • Buyout • Capital • Cessation of operation • Corporation • Debt • Entrepreneur • Fixed income security • Intangible • Intellectual Property • Interest • Liability • Limited Liability Company • Liquidation 3

Key Vocabulary • Marketplace • Market share • Partnership • Principal • Prototype • Sole Proprietorship • Stock • Strategy • Tangible • Valuation • Venture Capital Firm 4

Introduction to ECPak • You are in a very special position. As advanced finance students, you have been asked for help by Eduardo Cisneros, entrepreneur of ECPak Company. In fact, he has written a memo to you explaining the specifics of his request. 5

Introduction to ECPak • Download- Reading: Memo from Eduardo Cisneros • What kinds of things do you think you need to know in order to help out Eduardo and his company? • Write your answers on the board after you collaborate with your group. 6

Business Life Cycle 7

Your life cycle • Where would you place yourself on the diagram? Where were you when you were born? Where are your grandparents? 8

Business life Cycle Predict what happens to business in each part of the cycle. Name one company that you think is in each part of the cycle. 9

Business Life Cycle Start-up Growth Maturity Decline Cessatio n 10

Business Life Cycle • Download- Reading: Business Life Cycle • Correct any incorrect predictions about the Business Life Cycle 11

Business Life Cycle of ECPak • Download- Reading: ECPak • Label each section of the article with the stage of the business cycle it describes • Be able to defend your predictions with facts and conclusions from the reading 12

Business Life Cycle • What is the name of one company that you admire? • Predict what stage the company is at in the business life cycle. • Give one reason to support your prediction. 13

Lesson Objectives • Identify and describe all parts of the business life cycle • Describe the concept of capital and discuss how businesses raise capital and why they need it • Compare and contrast different forms of business ownership 14

Introduction to Capital • Define- Capital (in finance terms) • Download- Anticipation Guide: An Introduction to Capital • Download- Reading: An Introduction to Capital • While reading please complete the anticipation guide 15

Lesson Objectives • Identify and describe all parts of the business life cycle • Describe the concept of capital and discuss how businesses raise capital and why they need it • Compare and contrast different forms of business ownership 16

Forms of Business Ownership • • Sole proprietorship Partnership Corporation Limited liability company • List defining characteristics of each in a table for reference 17

AOF Applied Finance Unit 1, Lesson 2 Legal Forms of Business Ownership Copyright © 2007– 2012 National Academy Foundation. All rights reserved.

Sole proprietorship: Going it alone Characteristics: • Typical size: very small • A single individual owns and operates the business • The sole proprietor is the owner of a sole proprietorship • The sole proprietorship can hire employees, but the owner cannot be an employee • Typical examples are small shopkeepers, artists, craftspeople, carpenters, consultants, and writers A potter is likely to be a sole proprietor. 19

Sole proprietorship advantages and disadvantages Advantages: • Simple and inexpensive to create and operate • Least regulated of all business forms • All profits are reported on the owner’s personal income tax return Disadvantages: • The owner is personally responsible for all actions of the business • The owner is personally liable for all business debts 20

General partnership: Sharing the responsibility Characteristics: • Typical size: from two individuals to a large firm with many partners • The partners run the business but may not be employees of it • There is slightly more regulation than for a sole proprietorship • The owners sign a written partnership agreement about how to run the business What options might someone have if he no longer wanted to work with his partners? 21

General partnership advantages and disadvantages Advantages: • Simple and inexpensive to create and operate • All profits are taxed as personal income to the partners Would you become business partners with a friend? What qualities would you want your partner to have? Disadvantages: • All partners are responsible for any actions taken in the name of the business by all other partners • All business debts are the personal responsibility of the partners 22

Corporation: Putting up a wall Characteristics: • Typical size: ranges from one or two stockholders to millions of them • The corporation can hire employees, which may include the owners • In the eyes of the law, a Forming a corporation is like corporation is treated like putting up a wall between an individual: the business and its owners’ • It can own property personal assets. • It can be sued Why would the law give • It must file a tax corporations some of the return same rights as individuals? 23

Corporation advantages and disadvantages Advantages: • Corporation owners are not responsible for the actions taken by the business • Debts are not the responsibility of the owners (limited liability) • The business can sell shares (stock) in the business to the public in order to raise capital Disadvantages: • Legally complex to start and operate • One of the two most regulated business forms (the limited liability company is the other) • Profits are taxed twice— once as corporation income and again as investor income 24

Limited liability company (LLC): Bridging the gap Characteristics: • Typical size: small to midsized businesses • LLCs combine some aspects of a partnership and some aspects of a corporation • Like a corporation, an LLC is treated as an individual for purposes of ownership and legal standing, but it is not taxed at the higher corporates 25

LLC advantages and disadvantages Advantages: • LLC partners have more flexibility to allocate profits and losses • Debts are not the responsibility of the partners (limited liability) • An LLC can choose to be taxed as the property of the owners (like a partnership) or an individual (like a corporation) Disadvantages: • Like a corporation, an LLC is governed by complex laws • The owners of an LLC normally can’t be employees • When a partner dies, the LLC is dissolved 26

Responding to changing conditions • Whichever legal form you choose at the start of your business, it doesn’t have to be permanent • This possibility should be part of your long-range business planning and strategy What conditions might raise the risk of personal liability? 27

Forms of Business Ownership • What type of ownership does ECPak Company fall under? • Why? 28

Business Ownership • If you were to start a business, what type of ownership would you choose and why? • Sole Proprietorship or • Partnership or • Corporations 29

Business Ownership • Why would you like your business to be organized in this fashion? • Download- Worksheet: Pros and Cons of the Forms of Business Ownership 30

Business Ownership • Research and evaluate a specific form of business ownership and then write a summary that addresses its specific advantages and disadvantages 31

Lesson Objectives • Identify and describe all parts of the business life cycle • Describe the concept of capital and discuss how businesses raise capital and why they need it • Compare and contrast different forms of business ownership 32

Lesson Take Away’s • The business life cycle reminds me of… • Capital refers to… • One thing I realized about business ownership is… 33

Cross-Curricular Integration • Language Arts: Research memo writing as a genre. • Research a particular format of a memo and understand its purpose • Next, pretend that you are a manager of a large corporation and you need to write a memo to your employees about a specific policy change. • Draft a memo explaining the situation and what action is needed to correct it. 34