Formsof business organization

Entrepreneurshave a choice of three forms of business organizations, and theyinclude

Soleproprietorship heightens an entity owned by one person who in manycases is responsible for the daily activities of the entity. Theassets of the entity are the property of the sole proprietor togetherwith the profits generated. Moreover, they assume completeresponsibility for the liabilities or debts and losses incurred bythe enterprise. A significant advantage for a sole proprietorship isthat it files taxes as an individual while its major con is theaspect of unlimited liability.

Partnershipheightens an enterprise owned by two or more people. It is guided bya partnership agreement that outlines how they share the gains orlosses accrued. (Titman, Keown &amp Martin, 2015).&nbsp. There aredifferent types of partnership, and they include:

  1. General partnership encompasses a deal where the management, liability, and the loss or profits are shared by the partners that form the business.

  2. The limited partnership encompasses a partnership where the partners have a limited liability that is to the extent of their investment.

  3. Joint venture describes a partnership that is limited by period or a project.

Corporationsencompass an enterprise recognized as a legal person that is distinctand separate from the owners. This form of business enjoys therights, duties, and privileges of an actual person.


Thegoals of a firm from the shareholder and stakeholder approach


Thegoals of an enterprise under the shareholder`s approach accentuatethe maximization of the profits and wealth. Maximization of profitsis a short-term approach and is articulated by the amount of moneymade by the entity. The concept on the maximization of profits isexpressed by high dividends payment. Wealth maximization, on theother hand, is a long-term concern, and it is described by the valueof the company. The concern on wealth maximization is expressed onthe value of the stock.


Thegoal of the entity under the stakeholder perspective is emphasized byresponsibility (Brigham &amp Houston, 2012). The goal advocates thatthe organization should ensure that the satisfaction should measureits success that stakeholders derive from the enterprise. Theemphasis on this stakeholder approach is that the concern of theorganization is on being socially responsible and it is adequatelyaccomplished by pursuing joint interests’ hence high level of trustby all parties in the enterprise.


Thelink played by security market to businesses and investors

Securitymarkets permit enterprises and individuals to trade in securitiesissued by corporations. The businesses raise funds in the securitymarkets through the sale of debt or equity to the public, and thisactivity takes place in a primary market (Melicher &amp Norton,2013). The funds raised are utilized by the issuing firm to expandits activities whether in the acquisition of new facilities, upgradeof the current facilities or introduction of new products andservices to its inventory. The investors, on the other hand, earninterest on the debt issued or dividends from equity. They alsorealize capital gain when they sell the debt or equity in secondarymarkets.


Discussionon how incentive to the management causes agency problem

Agencyproblem describes a situation where interests of two-party are inconflict and as such one party acts against what the other partyexpected. In a corporation, the manager acts as an agent for theshareholder who is the principle, and they are supposed to makedecisions that maximize the wealth of the shareholder. Incentives tothe management may create an agency problem where the compensation isgreater than the benefits the management provide to the enterprise(Arnold, 2014). The perspective also arises where the incentives arehigher than what other managers in similar position earn in samelevel enterprises. The shareholders deem the scenarios as expensivecosts that conflict on wealth maximization.


Fiveprinciples underlying study of finance

Financeheightens the management of money that has been invested in assetsand hence the expectation us that they pay a fair return. Theprinciples underlying the study of finance include

  1. Cash flow is a key aspect in finance. The principle heightens that the accounting profits and the cash flows from the enterprise are not equal. (Gitman &amp Zutter, 2012).&nbsp The entity may report accounting profits but fail to generate cash flows which drive the value of the business.

  2. Money has time value. The principle accentuates that the amount received today is worth more than the amount received in the future.

  3. Risk should be compensated by reward. The principle articulates that additional risk from an investment should derive a higher reward.

  4. The market prices are always right. The principle accentuates in a market that is efficient, the price of assets traded at any time reflect all the information that is available.

  5. Agency problems are caused by a conflict of interest. The principle heightens that the agency problem is brought about by the separation of ownership and the daily running of the activities of the entity. The perspective heightens that the decisions made by the management may be inconsistent with the goal of maximizing the wealth of the shareholders.


Titman,S., Keown, A. J., &amp Martin, J. D. (2015).&nbspFinancialmanagement: Principles and applications.Pearson.

Brigham,E. F., &amp Houston, J. F. (2012).&nbspFundamentalsof financial management.Cengage Learning.

Arnold,G. (2014).&nbspCorporatefinancial management.Pearson Higher Ed.

Melicher,R. W., &amp Norton, E. A. (2013).&nbspIntroductionto finance: markets, investments, and financial management.Wiley Global Education.

Gitman,L. J., &amp Zutter, C. J. (2012).&nbspPrinciplesof managerial finance.Prentice Hall.