1. What are the four major types of firm in the U.S, how are they defined, and what are the key differences between them?
I understand from the course text that within the context of corporate finance the four types of firms in the U.S. are sole proprietorship, limited liability companies, partnerships and corporations (Berk & DeMarzo, 2011). These four firms are fundamentally different in their makeup and operations. To begin with a corporation is a legally defined artificial being with legal powers such as the ability to enter into contracts, acquire assets and incur obligations amongst others. I believe that corporations are one of the most recognizable business structures today as their ...view middle of the document...
Within a corporation, it is structured more complex than the other firm types discussed above where the corporation is required to comply with more regulations and tax requirements than the other structures. Some of the advantages of organizing the firm as a corporation are that within a corporation there is no limitation on ownership of the stock shares and the corporation can rise the capital very easily compared to other firm structures. Another consideration in favor of a corporation is that it provides an anonymous trading system.
In conclusion, as one can expect there are advantages and disadvantages to each of the structures and the decision for organizing a firm would have to be made on a case by case basis for whichever layout works best for the scenario at hand. It has been my experience that at the onset of a business, one of the toughest and most important decision to be made is the type of legal organization that is selected as this decision can affect how much is paid in taxes, the level and quantity of paperwork required and the personal liability faced.
2. How can corporate bankruptcy be viewed as a change in firm ownership? Describe why a corporation would want to file for bankruptcy as well as the benefits and drawbacks of such a decision.
The very layout of a corporation is different from other structures, where it has a separate identity from the owners of the company, where many owners can participate as shareholders of a corporation, indicating to me that corporations are entities which handle the responsibilities of the firm and can be taxed and can be held legally liable for its actions. This shows that through setting a firm up as a corporation, the individual owners are generally not personally liable for the debts of the corporation. This is commonly referred to as the corporate shield since it serves to protect the personal assets of the owners.
According to an article on www.businessnewsdaily.com, bankruptcy is a legal process by which either businesses or individuals can publically declare that they are unable to pay their debts and bills, to be used as a means of recovering from this debt (Brooks, 2013). In other words, bankruptcy laws serve to help corporations get a fresh financial start through the liquidation of their assets to either negotiate a repayment plan or pay off their debts. At the instance that a corporation files for bankruptcy, a court order is instilled that prohibits debt collectors from trying to independently recover what is owed to them for the duration of the bankruptcy process, allowing the firm to prioritize their asset liquidation or to negotiate terms of re-payment that would be in the benefit of the corporation to stay afloat.
To better explain the pros and cons of a corporation declaring bankruptcy, I believe it is important to understand the corporation’s structure. This firm type has a formal structure which consists of shareholders, directors, officers and employees,...