8 PART 1 Introduction to Managerial Finance
TABLE 1.2 Other Limited Liability OrganizationsOrganization DescriptionLimited partnership (LP) A partnership in which one or more partners have limited liability as long as at least one
partner (the general partner) has unlimited liability. The limited partnerscannot take an
active role in the firm’s management; they are passive investors.
S corporation (S corp) A tax-reporting entity that (under Subchapter S of the Internal Revenue Code)
allows certain corporations with 75 or fewer stockholders to choose to be taxed as
partnerships. Its stockholders receive the organizational benefits of a corporation and
the tax advantages of a partnership. But S corps lose certain tax advantages related to
pension plans.
Limited liability corporation (LLC) Permitted in most states, the LLC gives its owners, like those of S corps, limited liability
and taxation as a partnership. But unlike an S corp, the LLC can own more than 80%
of another corporation, and corporations, partnerships, or non-U.S. residents can own
LLC shares. LLCs work well for corporate joint ventures or projects developed through
a subsidiary.
Limited liability partnership (LLP)a A partnership permitted in many states; governing statutes vary by state. All LLP
partners have limited liability. They are liable for their own acts of malpractice, not for
those of other partners. The LLP is taxed as a partnership. LLPs are frequently used by
legal and accounting professionals.
aIn recent years this organizational form has begun to replace professional corporationsor associations—corporations formed by groups of
professionals such as attorneys and accountants that provide limited liability except for that related to malpractice—because of the tax advantages
it offers.limited partnership (LP)
S corporation (S corp)
limited liability corporation (LLC)
limited liability partnership (LLP)
See Table 1.2.
Other Limited Liability Organizations
A number of other organizational forms provide owners with limited liability.
The most popular are limited partnerships (LPs), S corporations (S corps), limited
liability corporations (LLCs),and limited liability partnerships (LLPs).Each rep-
resents a specialized form or blending of the characteristics of the organizational
forms described before. What they have in common is that their owners enjoy
limited liability, and they typically have fewer than 100 owners. Each of these
limited liability organizations is briefly described in Table 1.2.The Study of Managerial Finance
An understanding of the theories, concepts, techniques, and practices presented
throughout this text will fully acquaint you with the financial manager’s activities
and decisions. Because most business decisions are measured in financial terms,
the financial manager plays a key role in the operation of the firm. People in all
areas of responsibility—accounting, information systems, management, market-
ing, operations, and so forth—need a basic understanding of the managerial
finance function.
All managers in the firm, regardless of their job descriptions, work with finan-
cial personnel to justify laborpower requirements, negotiate operating budgets,
deal with financial performance appraisals, and sell proposals at least partly on the
basis of their financial merits. Clearly, those managers who understand the finan-