Business Principles Exam 2.docx - Sole Proprietorship A...

 Sole Proprietorship -- A business owned, and
usually managed, by one person. 72%
 Partnership -- Two or more people legally
agree to become co-owners of a business. 8%
 Corporation -- A legal entity with authority to
act and have liability apart from its owners.
20%
 Unlimited Liability -- Any debts or damages
incurred by the business are your debts, even if
it means selling your home, car or anything
else.
o Limited financial resources
o Management difficulties
o Overwhelming time commitment
o Few fringe benefits
o Limited growth
o Limited life span
 General Partnership -- All owners share in
operating the business and in assuming liability
for the business’s debts.
 Limited Partnership -- A partnership with
one or more general partners and one or more
limited partners.
 General Partner -- An owner (partner) who
has unlimited liability and is active in managing
the firm.
 Limited Partner -- An owner who invests
money in the business, but enjoys limited
liability.
 Limited Liability means that liability for the
debts of the business is limited to the amount
the limited partner puts into the company;
personal assets are not at risk.
 Master Limited Partnership -- A partnership
that looks much like a corporation, but is taxed
like a partnership and thus avoids the
corporate income tax. (One example of a
master limited partnership is Kinder Morgan
Energy Partners which is engaged in energy
storage and operates 75,000 miles of
pipelines.)
 Limited Liability Partnership -- Limits
partners’ risk of losing their personal assets to
the outcomes of only their own acts and
omissions and those of people under their
supervision.
 Advantages of Partnerships
o More financial resources
o Shared management and
pooled/complementary skills and
knowledge
o Longer survival
o No special taxes
 Disadvantages of Partnerships
o Unlimited liability
o Division of profits
o Disagreements among partners
o Difficult to terminate
 Elements of a partnership agreement
o Capital contributions
o Responsibilities of each partner
o Decision-making process
o Shares of profits or losses
o Departure of partners
o Addition of partners
 Conventional (C) Corporation -- A state-
chartered legal entity with authority to act and
have liability separate from its owners (its
stockholders).
 Advantages of Corporations
o Limited liability
o Ability to raise more money for
investment
o Size
o Perpetual life
o Ease of ownership change
o Ease of attracting talented employees
o Separation of ownership from
management
 Disadvantages of Corporations
o Initial cost
o Extensive paperwork
o Double taxation
o Two tax returns
o Size
o Difficulty of termination
o Possible conflict with stockholders and
board of directors
 S Corporation -- A unique government
creation that looks like a corporation, but is
taxed like sole proprietorships and
partnerships.