Business Finance
THE BUSINESS, TAX & FINANCIAL ENVIRONMENT
The Business Environment
► Sole Proprietorship
► Partnership
► Corporations
► Limited Liability Companies
The Business Environment
► Sole Proprietorship
A sole proprietorship is a business owned by one person
who is known as the proprietor. If the business prospers,
the owner receives all of the profits. If the business does
poorly, the owner is responsible for its losses. This is
called unlimited liability.
1. Oldest form of business organization
2. Business Income is accounted for on the owners personal
income tax form.
The Business Environment
Sole Proprietorship
Advantages Disadvantages
Easy to formation Unlimited Liability
Easy Management Limited Capital
Independence Lack of Expert Management
Lack of stability
Low Setup Cost
Easy to Windup
The Business Environment
► Partnership
Partnership is the relation between persons who have agreed
to share profits of a business. A partnership is an
arrangement in which parties agree to co-operate to
advance their mutual interests.
Business Income is accounted for an each partner personal
income tax form.
The Business Environment
► Types of Partnership
1. General partnership
2. Limited partnership
General Partnership: A general partner has the authority to act and making
decision for all partners. Partners generally share profits or losses as per the
agreement made between them.
Limited Partnership: A limited partnership includes more general partners and one
or more limited partners. The general partners arrange and run the business while
the limited partners are the investors only. A limited partner has limited liability
for loss of business and liable only up to the amount of capital invested.
The Business Environment
Partnership
Advantages Disadvantages
Easy to formation Unlimited Liability
More Capital Delay in Decision Making
Joint Efforts Lack of Mutual Trust
Limitation of Capital
Collective Decisions
Transfer of ownership difficulties
Sharing of Risk
The Business Environment
► Corporation
1. A business form legally separate from its owners.
2. An artificial entity that can own assets & incur liabilities.
3. Business Income is accounted for on the income tax from
the corporation.
The Business Environment
Corporation
Advantages Disadvantages
Limited Liability Double taxation
Easy Transfer of ownership More difficult to establish
Unlimited Life
Easier to Raise Capital
The Business Environment
► Types of Corporation:
Private Companies:
Single Member Company (Pvt ltd.)
Multimember Private (Pvt ltd.)
Public Companies:
Unlisted Company
Listed Company
The Business Environment
► Limited Liability Company:
A business form that provides a hybrid form of partnership
and corporations, its owners (member) with corporate
style limited personal liability and tax treatment of
partnership.
The Financial Environment
► Financial Markets are composed of all
institutions and procedures for bringing buyer and
sellers of financial assets / instruments together.
Types of Assets:
Real Assets: Building, Plant, Machinery, Equipment & Inventory.
Financial Assets: Bonds, Shares
Types of Market
There are two types of market
Money Markets
In which short term securities are traded e.g, Treasury Bills,
Certificate of Deposits, Banker Acceptance(Postdated
Cheque)
Capital Markets
In which long term securities are traded e.g, Treasury Notes,
Corporate Bonds, Common Shares , Preferred Share
Types of Market
Primary Market
Newly Issued securities are traded for the first time e.g,
Initial Public Offerings, Employees Stock Option
Secondary Market
Existing securities are traded e.g, Stock Exhanges like LSE,
KSE etc
Financial Intermediaries
A financial intermediary is an entity that acts as the middleman
between two parties in a financial transaction, such as a
commercial bank, investment bank, mutual fund, or pension fund.
Financial Intermediaries
There are two types of Financial Institutions
1.Banking Institutions
2.Non Banking Financial Institutions
Banking Institutions: They are governed by STATE BANK, and come under Banking Regulations
Ordinance 1962
a) COMMERCIAL BANKS: are established with a objective to create saving habit among the people ,
provide banking services like accepting deposits and lending money.
b) INVESTMENT BANKS: Investment banks help companies and governments and their agencies to raise
money by issuing and selling securities in the primary market. They assist public and private corporations in
raising funds in the capital markets (both equity and debt), as well as in providing strategic advisory services
for mergers, acquisitions and other types of financial transactions.
Financial Intermediaries
c) SAVING BANKS A savings bank is a financial institution whose primary
purpose is accepting savings deposits. It may also perform some other functions.
d) ISLAMIC BANKS Islamic banking refers to a system of banking or banking
activity that is consistent with Islamic law (Sharia) principles and guided by
Islamic economics. In particular, Islamic law prohibits usury, the collection and
payment of interest, also commonly called riba in Islamic discourse.
e) SPECIALIZED BANKS SME Bank Promote the business. Positive impact
on Financial environment. Financing of projects. Tell revenue generation
schemes to entrepreneurs.
Financial Intermediaries
2. Non-Banking Financial Institutions:
These are institutions which do not have full license or is not supervised by a
National or International Banking Regulatory Agency. They facilitate bank
related financial services such as Provident and Pension Fund
►Small Saving Organization
►State Life Insurance
►Mutual Funds
►Investment Trust etc.
Financial Intermediaries
INSURANCES COMPANIES Insurance companies may be classified as
1.Life
insurance companies, which sell life insurance, annuities and pensions
products.
2.Non-life or general insurance companies, which sell other types of insurance.
MUTUAL FUND An investment which is comprised of a pool of funds
collected from many investors for the purpose of investing in securities such as
stocks, bonds, money market securities and similar assets. A mutual fund's
portfolio is structured and maintained to match the investment objectives stated
in its prospectus.
