Legal Structures

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Questions and Answers

What is a significant drawback of a proprietorship regarding liability?

Owner's personal assets are protected

Liabilities are shared among multiple owners

Limited ability to generate capital (correct)

Separate taxation for the firm

How is the income from a proprietorship treated for tax purposes?

Taxed separately from the owner's income

Taxed as personal income of the owner (correct)

Taxed as a corporation

Not taxed at all

What type of legal structure involves shared control and liabilities among multiple partners?

Partnership (correct)

Joint Venture

Proprietorship

Corporation

When determining capital generation ability in a proprietorship, what factor is most restrictive?

Personal assets of the owner Signup and view all the answers

Which of the following correctly describes the liability in a general partnership?

All partners share equal liability regardless of ownership percentage Signup and view all the answers

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?

Partner A must cover the entire amount that Partner C cannot pay Signup and view all the answers

What term describes the structure where ownership is defined but liabilities are shared among the owners?

General Partnership Signup and view all the answers

What is one of the primary benefits of choosing a corporation over a partnership?

Limited liability for owners Signup and view all the answers

What is the primary basis for the division of ownership in a partnership?

Capital assets and other contributions Signup and view all the answers

Which of the following statements is true about limited partners?

They share profits and losses proportionally Signup and view all the answers

What is a key characteristic of a corporation?

It is established by applying to the Secretary of State Signup and view all the answers

What happens to a partnership upon the death of one of its partners?

It automatically dissolves unless provisions are made Signup and view all the answers

Which type of corporation allows its stock to be bought and sold freely?

Publicly held corporation Signup and view all the answers

What is one disadvantage of being incorporated?

Double taxation on profits Signup and view all the answers

How is market value determined for a corporation's stock?

What buyers are willing to pay for it Signup and view all the answers

What does the issuance of stock in a corporation establish?

The levels of ownership among initial stockholders Signup and view all the answers

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

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
Partnership: Ownership shared by partners, defined in initial charter
- General Partners: Assets are personal assets of all partners, control is divided
- 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
- 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
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
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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