The Business, Tax, and Financial Environments The Business, Tax, and Financial Environments
The Business, Tax, and Financial Environments The Business, Tax, and Financial Environments
The Business, Tax, and Financial Environments The Business, Tax, and Financial Environments
The
The Business,
Business, Tax,
Tax,
and
and Financial
Financial
Environments
Environments
I
1
The Business, Tax, and
Financial Environments
2
The Business
Environment
There are four basic forms of
business organization:
Sole Proprietorships
Partnerships (general and limited)
Corporations
Limited liability companies
3
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
the owner’s personal income tax form.
form
4
Summary for
Sole Proprietorship
Advantages Disadvantages
Simplicity Unlimited liability
Low setup cost Hard to raise
additional capital
Quick setup
Transfer of
Single tax filing
on individual form ownership
difficulties
5
The Business
Environment
Partnership -- A business form in
which two or more individuals
act as owners.
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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.
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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
proprietorship
Limited liability for
limited partners
Transfer of ownership
difficulties
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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.
corporation
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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
maintain
quantities of capital
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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.
form
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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
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Summary for LLC
Advantages Disadvantages
Limited liability Limited life
Eliminates double (generally)
taxation Transfer of
No restriction on ownership
number or type of difficulties
(generally)
owners
Easier to raise
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additional capital
TAX RATE NON SALARIES
INDIVIDUAL AND ASSOCIATIONS
S. No TAXABLE INCOME RATE OF TAX
1. UP TO RS 400000 0%
2. RS 400001 TO 500000 7% ON AMOUNT
EXCEEDING 400000
3. RS 500000 TO 750000 RS 7000 + 10% AMOUNT
EXCEEDING 750000
4 RS 750000 to 1500000 32000 plus 15% AMOUNT
EXCEEDING 750000
5. RS. 1500001 TO 2500000 RS 144500 + 20% AMOUNT
EXCEEDING 1500000
6. RS. 2500001 TO 4000000 RS 344500 + 25% AMOUNT
EXCEEDING 2500000
7. RS. 4000001TO 6000000 RS 719500 + 30% AMOUNT
EXCEEDING 2500000
8. Amount exceeding 6000000 RS 131900 + 35% AMOUNT
EXCEEDING 6000000
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TAX RATE FOR
SALARIED INDIVIDUALS
S. NO TAXABLE INCOME RATE OF TAX
1 UP TO RS 400000 0%
INVESTMENT SECTOR
INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
SECONDARY MARKET
SAVINGS SECTOR
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Flow of Funds
in the Economy
INVESTMENT
SECTOR INVESTMENT
SECTOR
INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Businesses
Households
SAVINGS SECTOR
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Flow of Funds
in the Economy
INVESTMENT
SECTOR SAVINGS
SECTOR
INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Households
Government
SAVINGS SECTOR
20
Flow of Funds
in the Economy
INVESTMENT
SECTOR FINANCIAL
BROKERS
INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Investment
Bankers
SECONDARY MARKET
Mortgage
Bankers
SAVINGS SECTOR
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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
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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
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Allocation of Funds
Funds will flow to economic units that are
willing to provide the greatest expected
return (holding risk constant).
In a rational world, the highest expected
returns will be offered only by those
economic units with the most promising
investment opportunities.
Result: Savings tend to be allocated to the
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most efficient uses.
Risk-Expected
Return Profile
Speculative Common Stocks
EXPECTED RETURN (%)
RISK
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What Influences Security
Expected Returns?
Default Risk is the failure to meet
the terms of a contract.
Marketability is the ability to sell
a significant volume of securities
in a short period of time in the
secondary market without
significant price concession.
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Ratings by Investment
Agencies on Default Risk
MOODY’S INV SERVICE STANDARD & POOR’S
Aaa Best Quality AAA Highest Grade
Aa High Quality AA High Grade
A Upper Med Grade A Higher Med Grade
Baa Medium Grade BBB Medium Grade
Ba Possess Speculative BB Speculative
Elements
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Term Structure of
Interest Rates
Upward Sloping Yield Curve
0 2 4 6 8 10
(Usual)
YIELD (%)