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Questions and Answers
What is a significant drawback of a proprietorship regarding liability?
What is a significant drawback of a proprietorship regarding liability?
How is the income from a proprietorship treated for tax purposes?
How is the income from a proprietorship treated for tax purposes?
What type of legal structure involves shared control and liabilities among multiple partners?
What type of legal structure involves shared control and liabilities among multiple partners?
When determining capital generation ability in a proprietorship, what factor is most restrictive?
When determining capital generation ability in a proprietorship, what factor is most restrictive?
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Which of the following correctly describes the liability in a general partnership?
Which of the following correctly describes the liability in a general partnership?
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In the example provided, if Partner C, with personal worth of $100,000, is unable to pay their share of a $1,000,000 loss, which statement is true regarding Partner A's liability?
In the example provided, if Partner C, with personal worth of $100,000, is unable to pay their share of a $1,000,000 loss, which statement is true regarding Partner A's liability?
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What term describes the structure where ownership is defined but liabilities are shared among the owners?
What term describes the structure where ownership is defined but liabilities are shared among the owners?
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What is one of the primary benefits of choosing a corporation over a partnership?
What is one of the primary benefits of choosing a corporation over a partnership?
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What is the primary basis for the division of ownership in a partnership?
What is the primary basis for the division of ownership in a partnership?
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Which of the following statements is true about limited partners?
Which of the following statements is true about limited partners?
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What is a key characteristic of a corporation?
What is a key characteristic of a corporation?
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What happens to a partnership upon the death of one of its partners?
What happens to a partnership upon the death of one of its partners?
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Which type of corporation allows its stock to be bought and sold freely?
Which type of corporation allows its stock to be bought and sold freely?
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What is one disadvantage of being incorporated?
What is one disadvantage of being incorporated?
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How is market value determined for a corporation's stock?
How is market value determined for a corporation's stock?
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What does the issuance of stock in a corporation establish?
What does the issuance of stock in a corporation establish?
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Study Notes
Legal Structure for Firms
- Legal Structure is how you organize the firm to handle the operations
- The two main perspectives for legal structure are legal and management
- Choosing the right legal structure is critical because it influences tax provisions, liability distribution, and capital raising ability
Types of Legal Structures
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Proprietorship: Simplest form, one individual owns, operates, and controls everything
- Firm's income is the owner's personal income
- Firm's losses are directly attributed to the owner
- Owner is taxed as an individual, no separate firm tax
- Liabilities are the owner's personal liabilities, covered by personal fortune
- Limited capital generation, tied to owner's assets
- Lifespan matches the owner's lifespan
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Partnership: Ownership shared by partners, defined in initial charter
- General Partners: Assets are personal assets of all partners, control is divided
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General Partners: Profit and losses are divided proportionally
- Liability is not limited, one partner could bear more if there’s a big loss
- Example with Partners A, B, and C and their personal fortunes, ownership shares, and potential liability in a $1,000,000 loss
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Limited Partners: Limited liability, no management control
- Share profit and losses proportionally to their investment
- Liability limited to their capital investment, similar to shareholders in a stock company
- Every partnership needs at least one general partner
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Corporations: Separate legal entity, created under state law
- Only the firm's assets are used for settling claims in bankruptcy or lawsuits
- Established by applying to the Secretary of State, who issues a charter and approves initial stock issuance
- Stock establishes ownership levels of initial shareholders
- Structure: Stockholders, Board of Directors, Officers
- Closely Held: All stock held by a small group
- Publicly Held: Stock can be bought and sold freely in the market
- Book Value: Net worth divided by the number of shares
- Market Value: What buyers are willing to pay for a share
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Joint Ventures: Two or more entities pool resources to achieve a specific goal, sharing profits and losses
- Often temporary, used for specific projects
- Common in construction, real estate, and technology ventures
Advantages and Disadvantages of Different Legal Structures
- Proprietorship: Simple to establish, easy to manage, flexible, owner keeps all profits, but unlimited liability, limited capital raising, difficult to sell
- Partnership: More capital and expertise, shared liability (unless limited partner), but potential for conflict, shared profits, individual partner's actions bind the whole
- Corporation: Limited liability, easy to raise capital, easier to transfer ownership, but more complex to form, higher taxes, regulated by state and federal government
- Joint Venture: Access to specialized resources, shared risks, greater potential for success, but potential for conflict, complex to manage, limited duration
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