Chapter 2: Choosing your Business Structure Flashcards
(22 cards)
What is a sole proprietorship?
The simplest form of business structure, with one sole owner.
What is the main pitfall of a sole proprietorship?
Exposes the owner to unlimited liability for business debts.
Describe the existence/transfer of a sole proprietorship
Sole owner personally owns the assets of the company.
Upon transfer/sale:
* original owner sells the assets of business and closes business licenses.
* New owner obtains all licenses and accounts in their name
What are the main advantages of a sole proprietorship?
- Minimal legal restrictions
- Simple ownership form
- Low startup costs
- sole ownership of profits
- Freedom in decision making
What are the main cons of a sole proprietorship?
- Unlimited personal liability
- Less available capital
- Possible difficulty in obtaining long-term financing
- Dissolution of the business in event of owner’s death
What is a partnership?
* General description
* main types
- Business formation in which multiple entities carry on trade/business.
- Types: General and limited
Describe the existence/startup of a partnership:
- Partnership formed by oral or written agreement.
- General partners co-own assets of business
What is a limited partnership?
Partnership with at least one general partner and one limited partner.
* Limited partners have limited liability in the partnership
What happens to a partnership if a general partner leaves or dies?
The partnership dissolves, and the assets must be sold or distributed. Creditors are paid first, followed by the partners.
How should a partnership handle financial management?
Separate bank accounts and financial records to track profits/losses and the distributions of these amounts.
Describe the liability of partners in a partnership
General partners:
* Personal and unlimited liability for all debts and actions undertake in name of business
* Each partner liable for actions of other partners (when they act in name of business)
Limited Partners:
* No personal liability for the business
* Liable only for the previously agreed upon investment/initial contribution
What are the advantages of a general partnership?
- Ease of formation
- Direct profit rewards
- Larger management base than sole proprietorship
What are the cons of a general partnership?
- Unlimited personal liability of general partners
- Multiple decision makers
- Limited life of the business
- Changes to partnership/agreement may be difficult
- Partnership dissolves in event of general partner’s death
What does incorporation provide for a business, and how long does a corporation last?
- Incorporation gives a business a legal existence, allowing it to own assets and operate in its own name.
- A corporation lasts as long as stakeholders decide, and it continues to exist even if shareholders die.
How should finances be handled by a corporation, and who owns the financial asets of a corporation?
- Corporation needs separate bank accounts and seperate business records
- The corporation, not the shareholders, owns money that shareholders contribute, al the asseets, and the earnings of business.
Describe the liability shareholders have in a corporation
- Owners of corporation are not personally liable for the losses of the business.
- Generally speaking, the corporation is responsible for business debts.
What are the advantages of a C-Corp?
- Separate legal entity
- Limited liability for stockholders
- Unlimited life of the business
- Availability of capital resources
- Transfer of ownership through sale of stock
What are the disadvantages of a C-Corp?
- Complex and expensive organization
- Limitations on corporate activities and decisions by the corporate charter
- Extensive regulation and record-keeping requirements
- Double taxation (corporate profits & dividends)
What are the requirements for an S-Corp?
- Domestic corporation w/ 1 class of stock
- No more than 100 shareholders, who are citizens/legal residents of U.S.
- All shareholders must consent to S-Corp status
- Use of a permitted tax year
- Filing of IRS Form 2253
What are the advantages of an S-Corp?
Avoid double taxation by passing earnings to shareholders.
What are the advantages of a Limited Liability Company (LLC)?
- Limited disclosure of owners
- Limited documentation
- No advance IRS filings
- No pulic disclosure of finances
- Limited liability for managers and members
- Ability to delegate management to a non-member (non-owner)
What is a joint venture?
Special business arrangement that exists when 2 or more companies join to undertake a specific project.
