Chapter 14 - Chapter 14: Business Forms and Arrangements...

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Chapter 14: Business Forms and Arrangements Forms of Business Organization Choosing how to own a business is a critical decision b/c it determines in large part who: is financially liable for the business shares in business profits and other assets makes and is accountable for management decisions The Sole Proprietorship This is the oldest form of business organization and the one most often used by small business Particular popular for the home-based enterprise Financial Liability Any obligation of the business is the owner’s personal obligation Bank: if the owner decides to borrow start-up capital, it is them who promise to repay the loan, not the business. This is b/c a sole proprietorship is not legally capable of borrowing money on its own If the owner cannot repay the loan, the bank will take the appropriate legal steps to recover as much of the loan as possible All of the owner’s business and personal assets are subject to the debts of the business Breach of contract: if the company supplies defective computers to a customer, the owner is in breach of the contract since the company cannot enter into a contract Therefore, the owner is the one that will be sued, and their assets who are at risk Sole proprietor has unlimited liability – regardless of what the owner has invested in the business, their personal assets may be seized to pay the outstanding debts of the business Profit sharing All the profits after taxes accrue to the sole proprietor alone Decision Making The sole proprietor has no partners and no board of directors to report to and can make decisions very quickly and independently Therefore, they have the freedom to do exactly as they please concerning all aspects of the business, even if it means deciding to discontinue business activities altogether If the owner dies, the business is terminated proprietorship has limited life span
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However, it is difficult for one person to be good at everything; yet the owner is responsible for every aspect of the business, from buying and selling to financing and advertising Another serious consideration is that the owner’s absence through illness or incapacity can adversely affect the business b/c so much of the enterprise revolves around this one individual Sources of Capital A major difficulty of “going it alone” is that sole proprietor has limited access to capital Since they have no business partners they are limited to their own assets and whatever credit they can draw on, which is usually less than what would be available if there were more than one owner Taxation b/c a sole proprietorship is not a legal entity separate from the owner, there are no formal or specialized tax rules governing it profits and losses are simply reported on the owner’s personal tax return this may be a good or bad thing depending on the taxpayer’s circumstances, incl. whether the owner’s marginal tax rate is higher or lower than the applicable
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Chapter 14 - Chapter 14: Business Forms and Arrangements...

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