The Business Environment

In the United States there are four basic forms of business organization: sole proprietorships (one owner), partnerships (general and limited), corporations, and limited liabiiity companies (LLCs). Sole proprietorships outnumber the others combined by over 2 to 1, but corporations rank first by far when measured by sales, assets, profits, and contribution to national income. As this section unfolds, you will discover some of the pluses and minuses of each alternative form of business organization.

The Tax Environment

Most business decisions are affected either directly or indirectly by taxes. Through their taxing power, federal, state, and local governments have a profound influence on the behavior of businesses and their owners. What might prove to be an outstanding business decision in the absence of taxes may prove to be very inferior with taxes (and sometimes, vice versa). In this section we introduce you to some of the fundamentals of ta-ration. A basic understanding of this material will be needed for later chapters when we consider specific financial decisions.

We begin with the corporate income tax. Then we briefly consider personal income taxes. We must be mindful that tax iaws frequently change.

The FinanciaI Environment

In varying degrees, all businesses operate within the financial system, which consists of a number of institutions and markets serving business firms, individuals, and governments. When a firm invests temporarily idle funds in marketable securities, it has direct contact with financial markets. More important, most firms use financial markets to help finance their investment in assets. In the final analysis, the market price of a company's securities is the test of whether the company is a success or a failure. While business firms compete with each other in the product markets, they must continually interact with the financial markets. Begause of the importance of this environment to the financial manager, as well as to the individual as a consumer of financial services, this section is devoted to exploring the financial system and the ever-changing environment in which capital is raised.