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Questions and Answers
What is a defining feature of a general partnership?
What is a defining feature of a general partnership?
Which type of partnership resembles a corporation but is taxed like a partnership?
Which type of partnership resembles a corporation but is taxed like a partnership?
What is a significant disadvantage of forming a partnership?
What is a significant disadvantage of forming a partnership?
What distinguishes an S Corporation from a regular C Corporation?
What distinguishes an S Corporation from a regular C Corporation?
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What potential issue can arise from shared management in a partnership?
What potential issue can arise from shared management in a partnership?
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In terms of decision-making, what question should you ask about a potential partner?
In terms of decision-making, what question should you ask about a potential partner?
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What is a common misconception about partnerships?
What is a common misconception about partnerships?
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Which statement is true regarding the division of profits in a partnership?
Which statement is true regarding the division of profits in a partnership?
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What is a key characteristic of a sole proprietorship?
What is a key characteristic of a sole proprietorship?
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Which of the following is an advantage of forming a corporation?
Which of the following is an advantage of forming a corporation?
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What is one major disadvantage of a sole proprietorship?
What is one major disadvantage of a sole proprietorship?
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In forming a partnership, what is a crucial question to consider?
In forming a partnership, what is a crucial question to consider?
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What is a common misconception about the advantages of sole proprietorships?
What is a common misconception about the advantages of sole proprietorships?
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Which of the following is NOT an advantage associated with starting a sole proprietorship?
Which of the following is NOT an advantage associated with starting a sole proprietorship?
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What major risk is associated with sole proprietorships?
What major risk is associated with sole proprietorships?
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What percentage of new businesses are reported to fail annually in the USA?
What percentage of new businesses are reported to fail annually in the USA?
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What is one advantage of S corporations compared to conventional corporations?
What is one advantage of S corporations compared to conventional corporations?
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Which of the following is a disadvantage of setting up a corporation?
Which of the following is a disadvantage of setting up a corporation?
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What is a requirement for S corporations regarding shareholders?
What is a requirement for S corporations regarding shareholders?
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What is one reason S corporations are popular among business owners?
What is one reason S corporations are popular among business owners?
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What issue may arise from the separation of ownership and management in corporations?
What issue may arise from the separation of ownership and management in corporations?
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What is a challenge faced by corporations that might hinder their success?
What is a challenge faced by corporations that might hinder their success?
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Which characteristic does NOT apply to conventional corporations?
Which characteristic does NOT apply to conventional corporations?
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Which of the following statements is true regarding corporate structure?
Which of the following statements is true regarding corporate structure?
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What is one of the primary advantages of a limited liability company (LLC)?
What is one of the primary advantages of a limited liability company (LLC)?
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Which of the following best describes a franchise agreement?
Which of the following best describes a franchise agreement?
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What is a downside of forming an LLC?
What is a downside of forming an LLC?
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What is one characteristic of a franchisor?
What is one characteristic of a franchisor?
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Which of the following is not a common advantage of franchises?
Which of the following is not a common advantage of franchises?
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What does the formation of an LLC allow regarding the distribution of profits and losses?
What does the formation of an LLC allow regarding the distribution of profits and losses?
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What is one major disadvantage of a franchise?
What is one major disadvantage of a franchise?
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What distinguishes a merger from other forms of business arrangements?
What distinguishes a merger from other forms of business arrangements?
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Study Notes
Business Formation
- All business owners must decide on the best business structure for them.
- Each form of ownership has advantages and disadvantages.
- Starting a business as a sole proprietorship, partnership, corporation or franchisor are options.
- Examples of business forms are sole proprietorships, partnerships, corporations, LLCs and franchises.
Sole Proprietorships
- A sole proprietorship is a business owned and managed by one person.
- It's the easiest form of business to start.
- The owner keeps all the profits but has unlimited liability.
- The business ends when the owner dies or sells the business.
Advantages of Sole Proprietorships
- Easy to start and end
- Owner keeps all the profits
- No special taxes.
- Easy to be your own boss.
- Pride of ownership, leaving a legacy
Disadvantages of Sole Proprietorships
- Unlimited liability (personal assets at risk).
- Limited financial resources
- Limited life span
- Overwhelming time commitment
- The difficulties of saving enough money to start and keep going
- Costs of supplies, insurance, advertising, rent, and so on may be excessive
- Limited growth abilities.
Partnerships
- A legal structure for a business involving two or more owners.
- Requires a written or oral agreement.
- May require registering with the state
- The responsibilities and liabilities of each partner are commonly outlined in a legally binding partnership agreement.
Advantages of Partnerships
- More financial resources
- Longer survival
- Shared management (skills)
- No special taxes
- Easier operations
Disadvantages of Partnerships
- Division of profits
- Unlimited liability
- Disagreement among partners
- Difficult to terminate
- Conflicts with relatives, friends, and spouses are possible.
Corporations
- A legal entity separate from its owners (shareholders)
- Limited liability for shareholders
- Corporations are categorized as 'C' corp and 'S' corp depending on their tax structure
- A C corporation pays taxes as a separate entity.
Advantages of Corporations
- Perpetual life
- Ease of ownership change
- Separation of ownership from management
- Ease of drawing talented employees
Disadvantages of Corporations
- Extensive paperwork
- Double taxation
- Relatively hard to end.
- Possible conflicts with shareholders and the board
- Often difficult to start/keep going due to costs for supplies, insurance, advertising etc.
- Large corporations can become too inflexible
S Corporations
- A unique form, that looks like a corporation, is taxed like a limited liability company or partnership.
- These are similar to regular (C) corporations but they avoid double taxation.
LLCs
- A relatively new type of business structure
- Limited liability for the owners
- Owners can choose to be taxed as partnerships (pass-through taxation) or corporations.
- More flexibility in how the business operates..
- Advantages: Limited liability, choice of taxation, flexible ownership rules, flexible profit distribution. Disadvantages; ownership isn't easily transferable, limited life span, fewer incentives and bureaucracy.
Franchises
- A business arrangement where one party (the franchisor) grants rights to another (the franchisee) to use their business name and operate under their system.
- Advantages: Management and marketing assistance, nationally recognized name, financial advice and assistance, lower failure rate.
- Disadvantages: Large start-up costs, shared profit, management regulation.
Mergers
- A transaction where one company legally combines all its assets and liabilities with another company.
- Types: Vertical, Horizontal, Conglomerate
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Description
Explore the nuances of starting a business as a sole proprietorship. This quiz delves into the advantages and disadvantages of this business structure, helping owners understand the pros and cons of unlimited liability and operating as a single entity. It's essential for aspiring entrepreneurs to grasp these concepts for making informed decisions.
