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growth really comes from interest or from other types of investment gain, and so we have
not spent much time discussing the details of these other sorts of possible investments. In
this chapter we will.
Money can be put to work by loaning it to someone else, but it can also be put to work by
buying something that we hope will provide a good return on the money invested. We could
buy a piece of real estate or gold coins in the hope that they will increase in value. One of the
main ways to put money to work, though, is by using it to start or buy part of a business. We
will begin this section by looking at money invested in the ownership of a business.
Businesses can legally be set up in a range of different ways. In a sole proprietorship
the business is owned entirely by one individual, the person who runs it. Many small busi-
nesses are set up in this way. For example, if Tom owns a snow plow and runs a business
plowing driveways in the winter, his business may well be a set up as a sole proprietorship.
A partnership is a business owned by two or more people, again typically the people who
actually run the business. If Lisa and Sunita work together preparing tax returns, their
business may be set up as a partnership.
There are other ways that a business can be structured though. You may be familiar with
such terms as limited partnership, limited liability company (LLC), and corporation. Each
type of structure has its advantages and disadvantages, and the choice of how to structure
a business requires weighing considerations such as taxes, exposure to risk and liability,
paperwork requirements, and other concerns.
One of the most commonly used structures for a business is a corporation. A corpora-
tion is a legal entity that can be thought of in many ways as an artificial legal person, able
to own property, enter into contracts, borrow money, and conduct business and financial
affairs just as an actual person could. To most people the word corporation suggests big
business, like Home Depot, Exxon Mobil, or General Electric. Those businesses are all cor-
porations, but small businesses like Tom’s snowplowing business, or Lisa and Sunita’s tax
service, could equally well be set up as corporations. Setting up a business as a corporation
is generally more complicated than a sole proprietorship or simple partnership, but it can
offer significant advantages to its owners. One of the biggest advantages of a corporation
is that it exists as a separate legal entity from its owners; if things go badly and business
is sued or suffers severe financial losses, generally its owners can not be held personally
responsible for those liabilities.
A sole proprietorship is owned by its sole proprietor, and a partnership is owned by its
partners, but who owns a corporation? The ownership of a corporation is divided up among
its stockholders. Each individual piece of this ownership is called a share of the company’s
stock. How much of the business each share of stock represents depends on how many
shares of stock the company has issued. A corporation can have any number of shares, so
it is impossible to know how large a percent of the ownership one share represents unless
you know the total. If you own one share of stock in a company with just 10 shares, then
you own 1/10 (or 10%) of the company. If the company has issued one billion shares, then
one share equates to owning 1/1,000,000,000 (or 0.0000001%) of the company.
When stock is first issued by a corporation, it may be issued with a par value. Loosely
speaking, a stock’s par value is a reflection of a portion of the money paid by the original
shareholders into the corporation. Par value used to be considered more important than it
usually is today, and in fact it is not unusual today for a stock to have no par value, or to
have a par value which is absurdly low compared to the realistic value of the stock.
Some companies also issue several different types of stock. As its name suggests,
common stock is the most common type, though preferred stock is another. While both
types of stock represent ownership of a piece of a corporation, the two types differ in
how their owners share in the company’s profits, who has first claim to the corporation’s
remaining assets in the event it goes into bankruptcy, and in their voting rights in the election
of the board of directors (the group of people who direct the corporation’s activities).
Except as noted, we will be discussing only common stocks in this text. Small businesses
seldom issue preferred stock, and even among very large corporations it is not unusual to
see little, it any, preferred stock issued.6.1 Stocks 251