The sole proprietor has unlimited liability his or

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Unformatted text preview: all business decisions. The sole proprietor has unlimited liability; his or her total wealth, not merely the amount originally invested, can be taken to satisfy creditors. The key strengths and weaknesses of sole proprietorships are summarized in Table 1.1. Partnerships partnership A business owned by two or more people and operated for profit. articles of partnership The written contract used to formally establish a business partnership. corporation An artificial being created by law (often called a “legal entity”). Hint For many small corporations, as well as small proprietorships and partnerships, there is no access to financial markets. In addition, whenever the owners take out a loan, they usually must personally cosign the loan. A partnership consists of two or more owners doing business together for profit. Partnerships account for about 10 percent of all businesses, and they are typically larger than sole proprietorships. Finance, insurance, and real estate firms are the most common types of partnership. Public accounting and stock brokerage partnerships often have large numbers of partners. Most partnerships are established by a written contract known as articles of partnership. In a general (or regular) partnership, all partners have unlimited liability, and each partner is legally liable for all of the debts of the partnership. Strengths and weaknesses of partnerships are summarized in Table 1.1. Corporations A corporation is an artificial being created by law. Often called a “legal entity,” a corporation has the powers of an individual in that it can sue and be sued, make and be party to contracts, and acquire property in its own name. Although only about 15 percent of all businesses are incorporated, the corporation is the dominant form of business organization in terms of receipts and profits. It accounts for nearly 90 percent of business receipts and 80 percent of net profits. Although 6 PART 1 TABLE 1.1 Introduction to Managerial Finance Strengths and Weaknesses of the Common Legal Forms of Business Organization Sole proprietorship Partnership Corporation Strengths • Owner receives all profits (and sustains all losses) • Low organizational costs • Income included and taxed on proprietor’s personal tax return • Independence • Secrecy • Ease of dissolution • Can raise more funds than sole proprietorships • Borrowing power enhanced by more owners • More available brain power and managerial skill • Income i...
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