Business Entity Types and Risks

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8 Questions

What type of firm typically has only one owner who receives all profits and losses?

Sole proprietorship

Which type of partnership involves multiple partners sharing profits and liabilities equally?

General partnership

What type of partnership has both general and limited partners?

Limited partnership

In which business structure are shareholders the owners and elect a board of directors to make decisions?

Corporation

What protects personal assets of owners despite being costlier to set up?

Corporations

Which entity allows income to flow directly to shareholders, bypassing corporate tax?

Real Estate Investment Trusts (REITs)

In which business structure can personal assets be at stake if the company is sued?

Sole proprietorship

Which type of partnership offers protection to partners not involved in misconduct?

Limited liability partnership

Study Notes

  • Sole proprietorship is a type of firm where there is usually only one owner who receives all profits and losses, with minimal paperwork and low cost to set up. However, the main risk is that personal assets can be at stake if the company is sued.
  • Partnerships come in three main types: general partnerships, limited partnerships, and limited liability partnerships. General partnerships involve multiple partners sharing profits and liabilities equally, with the risk of personal assets being at stake in case of a lawsuit. Limited partnerships have both general and limited partners, where limited partners have lower liability risks. Limited liability partnerships offer protection to partners not involved in misconduct.
  • Corporations are legal entities that can enter contracts, get loans, own assets, and declare bankruptcy. Shareholders own corporations, and they elect a board of directors to make decisions for the company. Dividends are payments to shareholders from the corporation's net income after taxes.
  • Corporations offer the least risk as they protect personal assets of owners, despite requiring more paperwork and being costlier to set up. Flow-through entities like Real Estate Investment Trusts (REITs) help avoid double taxation by allowing income to flow directly to shareholders, bypassing corporate tax.

Learn about different types of business entities such as sole proprietorships, partnerships, and corporations, along with their associated risks and benefits. Understand how each structure affects personal assets in case of lawsuits and the level of paperwork required for setting up.

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