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Questions and Answers
What are the three common forms of business ownership discussed in the content?
What is a sole proprietorship?
A business owned and usually operated by one person, where the business owner has unlimited liability for debts and losses.
In a sole proprietorship, the business owner has limited liability.
False
Unlimited liability in a sole proprietorship means that the business owner is personally responsible for all the ___.
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What is one of the advantages of a sole proprietorship?
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Match the following terms with their descriptions:
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Study Notes
Choosing a Form of Business
- Three main forms of business ownership: Sole Proprietorship, Partnership, and Corporation
- Each form has its own advantages and disadvantages
Sole Proprietorship
- A business owned and usually operated by one person
- Not a separate legal entity from the business owner
- Business owner has unlimited liability
- Simplest and most affordable way to start a business
- Most common way to start a business
Advantages of Sole Proprietorship
- Ease of start-up and closure
- Pride of ownership
- Retention of all profits
- Flexibility of being your own boss
Disadvantages of Sole Proprietorship
- Unlimited liability
- Lack of continuity
- Lack of money
- Limited management skills
- Difficulty in hiring employees
Unlimited Liability
- Business owner is personally responsible for all debts of the business
- Personal property, including savings and assets, can be seized to pay creditors
- A major factor that discourages entrepreneurs with substantial personal wealth from using the sole proprietor form of business organization
Lack of Continuity
- Legally, the sole proprietor is the business
- If the owner retires, is declared legally incompetent, or dies, the business essentially ceases to exist
- Business can suffer if the sole proprietor becomes ill and cannot work for an extended period
Lack of Money
- Banks and lenders are unwilling to lend large sums of money to sole proprietorships
- Limited ability to borrow money can prevent a sole proprietorship from growing
- A main reason that many business owners change from a sole proprietorship to a partnership or corporation
Limited Management Skills
- The sole proprietor is often the sole manager, salesperson, buyer, accountant, and janitor
- Business can suffer in areas where the owner is less knowledgeable
- Difficulty in hiring employees can exacerbate this problem
Beyond the Sole Proprietorship
- Forming a partnership and having more than one owner can reduce the disadvantages of a sole proprietorship
- The basic accounting equation for sole proprietorship is: Equity = Assets - Liabilities
Assets
- Current assets: assets that are converted to cash in less than a year
- Examples: cash, accounts receivable, inventory
- Non-current assets: all other assets that do not fit the definition of current assets
- Examples: property, plant, and equipment, long-term receivables, intangible assets
Liabilities
- Current liabilities: obligations that can be settled within 1 year
- Examples: accounts payable, accrued expenses
- Non-current liabilities: all other liabilities that do not fit the definition of current liabilities
- Examples: bonds payable
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Description
Learn about the three main forms of business ownership, their advantages and disadvantages, and choose the best fit for your business. Explore the characteristics of Sole Proprietorship, Partnership, and Corporation.
