Business Formation: Sole Proprietorships
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Questions and Answers

What is a defining feature of a general partnership?

  • All owners share in operating the business and liability (correct)
  • One partner has complete control over the business
  • Taxed like a corporation
  • Limited liability for all partners

Which type of partnership resembles a corporation but is taxed like a partnership?

  • S Corporation
  • Limited partnership
  • General partnership
  • Master limited partnership (MLP) (correct)

What is a significant disadvantage of forming a partnership?

  • Unlimited liability for all debts (correct)
  • Easier termination of the business
  • Higher tax obligations than corporations
  • Less access to financial resources

What distinguishes an S Corporation from a regular C Corporation?

<p>It is taxed like a partnership (C)</p> Signup and view all the answers

What potential issue can arise from shared management in a partnership?

<p>Conflict and tension between partners (C)</p> Signup and view all the answers

In terms of decision-making, what question should you ask about a potential partner?

<p>Is this someone you can trust and share authority with? (C)</p> Signup and view all the answers

What is a common misconception about partnerships?

<p>They always lead to successful management (B)</p> Signup and view all the answers

Which statement is true regarding the division of profits in a partnership?

<p>Partners must agree on how profits are divided (B)</p> Signup and view all the answers

What is a key characteristic of a sole proprietorship?

<p>It is owned and managed by one person. (B)</p> Signup and view all the answers

Which of the following is an advantage of forming a corporation?

<p>Ability to act independently from owners. (C)</p> Signup and view all the answers

What is one major disadvantage of a sole proprietorship?

<p>Limited financial resources. (C)</p> Signup and view all the answers

In forming a partnership, what is a crucial question to consider?

<p>Do you share the same vision for the company’s future? (A)</p> Signup and view all the answers

What is a common misconception about the advantages of sole proprietorships?

<p>They are easy to end with no restrictions. (B)</p> Signup and view all the answers

Which of the following is NOT an advantage associated with starting a sole proprietorship?

<p>Overwhelming time commitment. (B)</p> Signup and view all the answers

What major risk is associated with sole proprietorships?

<p>Unlimited liability. (B)</p> Signup and view all the answers

What percentage of new businesses are reported to fail annually in the USA?

<p>90% (A)</p> Signup and view all the answers

What is one advantage of S corporations compared to conventional corporations?

<p>They avoid double taxation. (B)</p> Signup and view all the answers

Which of the following is a disadvantage of setting up a corporation?

<p>They may experience double taxation. (D)</p> Signup and view all the answers

What is a requirement for S corporations regarding shareholders?

<p>They must have no more than 100 shareholders. (C)</p> Signup and view all the answers

What is one reason S corporations are popular among business owners?

<p>They enable family members to be counted as one shareholder. (A)</p> Signup and view all the answers

What issue may arise from the separation of ownership and management in corporations?

<p>Conflict between stockholders and the board. (B)</p> Signup and view all the answers

What is a challenge faced by corporations that might hinder their success?

<p>The high costs of ongoing operations. (D)</p> Signup and view all the answers

Which characteristic does NOT apply to conventional corporations?

<p>They limit shareholders to family members. (D)</p> Signup and view all the answers

Which of the following statements is true regarding corporate structure?

<p>S corporations have only one class of stock outstanding. (D)</p> Signup and view all the answers

What is one of the primary advantages of a limited liability company (LLC)?

<p>Flexible taxation options (B)</p> Signup and view all the answers

Which of the following best describes a franchise agreement?

<p>A sale of rights to use a business idea (A)</p> Signup and view all the answers

What is a downside of forming an LLC?

<p>Limited lifespan (C)</p> Signup and view all the answers

What is one characteristic of a franchisor?

<p>They develop a product concept (B)</p> Signup and view all the answers

Which of the following is not a common advantage of franchises?

<p>Guaranteed profits (A)</p> Signup and view all the answers

What does the formation of an LLC allow regarding the distribution of profits and losses?

<p>Profits and losses can be distributed flexibly (D)</p> Signup and view all the answers

What is one major disadvantage of a franchise?

<p>High initial costs (D)</p> Signup and view all the answers

What distinguishes a merger from other forms of business arrangements?

<p>It is a combination of two companies into one (C)</p> Signup and view all the answers

Flashcards

Sole Proprietorship

A business owned and usually managed by one person.

Partnership

A legal form of business with two or more owners.

Corporation

A legal entity with authority to act and have liability apart from its owners.

Advantages of Sole Proprietorship

Ease of starting and ending the business, being your own boss, retaining company profits, pride of ownership, no special taxes.

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Disadvantages of Sole Proprietorship

Difficult to save enough money to start and keep it going, high costs, limited life span, less financial resources and growth, unlimited liability, overwhelming time commitment, few fringe benefits.

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Advantages of Partnership

Shared workload and responsibilities, combined expertise, potential for greater financial resources, increased growth opportunities.

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Disadvantages of Partnership

Potential for disagreements and conflicts, shared profits, shared liability, potential for loss of control.

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Questions to Consider Before a Partnership

  1. Shared goals? 2. Shared vision for the company's future? 3. Partner's skills? 4. Skills complement your own? 5. Can you trust your partner?
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General Partnership

All partners actively participate in managing the business and are fully responsible for its debts.

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Limited Partnership

A partnership with general partners who manage and bear full liability, and limited partners who contribute financially with limited liability and involvement.

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Master Limited Partnership (MLP)

A partnership that looks like a corporation (traded on stock exchange), but has tax advantages similar to a partnership, avoiding corporate income tax.

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Advantages of an S Corporation

Offers limited liability protection, the flexibility of a corporation, and tax benefits similar to partnerships.

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What is a corporation?

A corporation is a legal entity separate from its owners, with its own rights and responsibilities.

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What are the advantages of a corporation?

Corporations enjoy benefits like perpetual life, ease of ownership change, and separation of ownership from management.

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What are some disadvantages of corporations?

Corporations can be expensive to set up and maintain, involve extensive paperwork, and face double taxation.

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What is an S corporation?

An S corporation avoids double taxation by treating profits as personal income for its shareholders.

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What are some requirements for an S corporation?

To be an S corporation, a company must have no more than 100 shareholders, have shareholders that are individuals or estates, and have only one class of stock.

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How does an S corporation work?

An S corporation allows profits to be passed through to shareholders' individual income taxes, avoiding the corporate income tax.

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What is the difference between a traditional corporation and an S corporation?

A traditional corporation pays corporate income tax on profits before distributing them to shareholders. An S corporation passes profits directly to shareholders for individual income tax, avoiding the corporate tax.

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Why might a business choose to be an S corporation?

Businesses choose S corporation status to avoid double taxation, making it more attractive for small businesses or those with a limited number of shareholders.

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What is a Limited Liability Company (LLC)?

A business structure that combines the limited liability of a corporation with the tax advantages of a partnership. It's like an S corporation, but without stringent eligibility requirements.

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What are the advantages of an LLC?

LLCs protect personal assets, offer flexible tax options, enable flexible ownership rules, simplify profit and loss distribution, and provide operational flexibility.

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What are the disadvantages of an LLC?

LLCs can have non-transferable ownership, limited lifespan, fewer incentives compared to corporations, and may require more paperwork than sole proprietorships.

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What is a franchise?

An agreement where someone sells the rights to use a business name and sell their product or service to others.

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Who are the Franchisor and Franchisee?

The franchisor is the company that develops the business model, while the franchisee pays for the right to use it.

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What are the advantages of a franchise?

Franchises offer management and marketing support, personal ownership, a nationally recognized name, financial assistance, and a lower failure rate.

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What are the disadvantages of a franchise?

Franchises can have high start-up costs, require sharing profits with the franchisor, involve management regulations, and limit control over the business.

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What is a merger?

One company acquires the assets and liabilities of another company.

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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.

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