Chapter 5 Business Test

Sole proprietorship

Partnership

All of these are questions you should ask yourself in deciding which legal form of business ownership you should select.

business owned by only one person. The most common form of ownership, it accounts for about 72 percent of all U.S. businesses. It's the easiest and cheapest type of business to form: if you're using your own name as the name of your business, you just need a license to get started, and once you're in business, you're subject to few government regulations.

complete control over business, make all important decisions, and you're generally responsible for all day-to-day activities. In exchange for assuming all this responsibility, you get all the income earned by the business. Profits earned are taxed as personal income, so you don't have to pay any special federal and state income taxes.

supply all the different talents that may be necessary to make the business a success. And if you die, the business dissolves. You also have to rely on your own resources for financing: in effect, you are the business, and any money borrowed by the business is loaned to you personally. Even more important, the sole proprietor bears unlimited liability for any losses incurred by the business. if the company incurs a debt or suffers a catastrophe (say, getting sued for causing an injury to someone), the owner is personally liable. As a sole proprietor, you put your personal assets (your bank account, your car, maybe even your home) at risk for the sake of your business. You can lessen your risk with insurance, yet your liability exposure can still be substantial.

if the company incurs a debt or suffers a catastrophe (say, getting sued for causing an injury to someone), the owner is personally liable

It is the most common form of business ownership.

The owner is generally responsible for all day-to-day activities.

The sole proprietor bears unlimited personal liability for any losses incurred by the business.

business owned jointly by two or more people. About 10 percent of U.S. businesses are partnerships, and though the vast majority are small, some are quite large. Setting up a partnership is more complex than setting up a sole proprietorship, but it's still relatively easy and inexpensive. The cost varies according to size and complexity. It's possible to form a simple partnership without the help of a lawyer or an accountant, though it's usually a good idea to get professional advice

-Amount of cash and other contributions to be made by each partner -Division of partnership income (or loss) -Partner responsibilities—who does what -Conditions under which a partner can sell an interest in the company -Conditions for dissolving the partnership -Conditions for settling disputes

each partner is personally liable not only for his or her own actions but also for the actions of all the partners

which has two types of partners: a single general partner who runs the business and is responsible for its liabilities, and any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment.

because of unlimited liability. Individuals with substantial assets, for example, have a lot to lose if they get sued for a partnership obligation (and when people sue, they tend to start with the richest partner)

1) brings together a diverse group of talented individuals who share responsibility for running the business. 2) it makes financing easier: The business can draw on the financial resources of a number of individuals. The partners not only contribute funds to the business but can also use personal resources to secure bank loans. 3) continuity needn't be an issue because partners can agree legally to allow the partnership to survive if one or more partners die.

1) partners are subject to unlimited liability. 2) being a partner means that you have to share decision making, and many people aren't comfortable with that situation. Not surprisingly, partners often have differences of opinion on how to run a business, and disagreements can escalate to the point of actual conflict; in fact, they can even jeopardize the continuance of the business. 3) in addition to sharing ideas, partners also share profits. This arrangement can work as long as all partners feel that they're being rewarded according to their efforts and accomplishments, but that isn't always the case.

unlimited liability

Individuals with substantial assets who have a lot to lose if they get sued for a partnership obligation might shy away from joining a general partnership, but agree to join a limited partnership (as a limited partner).

About 30 percent of businesses in the United States are partnerships.

(sometimes called a regular or C-corporation) it's a legal entity that is entirely separate from the parties who own it. It can enter into binding contracts, buy and sell property, sue and be sued, be held responsible for its actions, and be taxed. account for 18 percent of all U.S. businesses but generate almost 82 percent of the revenues.

Corporations are owned by shareholders who invest money in the business by buying shares of stock. The portion of the corporation they own depends on the percentage of stock they hold.

The shareholders elect a board of directors, a group of people (primarily from outside the corporation) who are legally responsible for governing the corporation. The board oversees the major policies and decisions made by the corporation, sets goals and holds management accountable for achieving them, and hires and evaluates the top executive, generally called the CEO (chief executive officer). The board also approves the distribution of income to shareholders in the form of cash payments called dividends

distribution of income to shareholders in the form of cash payments

limited liability for shareholders, greater access to financial resources, specialized management, and continuity.

shareholders are exposed: they are not responsible for the obligations of the corporation, and they can lose no more than the amount that they have personally invested in the company.

An established corporation can borrow its own funds, but when a small business needs a loan, the bank usually requires that it be guaranteed by its owners.

corporations are generally able to attract more skilled and talented employees than are proprietorship's and partnerships.

Because the corporation has a legal life separate from the lives of its owners, it can (at least in theory) exist forever. Transferring ownership of a corporation is easy: shareholders simply sell their stock to others

restrict the transferability of their stock. The stock in these corporations is held by only a few individuals, who are not allowed to sell it to the general public.

Companies with no such restrictions on stock sales; stock is available for sale to the general public.

Corporate managers don't necessarily own stock, and shareholders don't necessarily work for the company. This situation can be troublesome if the goals of the two groups differ significantly, corporations are costly to set up. subject to levels of regulation and governmental oversight that can place a burden on small businesses. Finally, corporations are subject to what's generally called "double taxation." Corporations are taxed by the federal and state governments on their earnings. When these earnings are distributed as dividends, the shareholders pay taxes on these dividends. Corporate profits are thus taxed twice—the corporation pays the taxes the first time and the shareholders pay the taxes the second time.

limited liability for shareholders

to raise funds to build a $2 million plant

The chief executive officer (CEO) of the corporation elects the board of directors - a group of people primarily from outside the company who are legally responsible for governing the corporation.

The most attractive feature of a corporation is limited liability, which means that the shareholders (owners) cannot be held personally liable for the debts and obligations of the corporation. Shareholders cannot lose any more than the amount they have invested in the company.

the least attractive feature of a corporation is "double taxation." Double taxation occurs when the same earnings are taxed twice by the government.

The most attractive feature is that there is no "double taxation" with proprietorships and partnerships. Proprietorships and partnerships do not pay taxes on profits at the business level. The only taxes paid are at the personal level—this occurs when proprietors and partners pay taxes on their share of their company's income.

unlimited liability. This feature holds a business owner personally liable for all debts of his or her company. If you're a sole proprietorship and the debts of your business exceed its assets, creditors can seize your personal assets to cover the proprietorship's outstanding business debt.

Each partner is personally liable not only for his or her own actions but also for the actions of all the partners. If, through mismanagement by one of your partners, the partnership is forced into bankruptcy, the creditors can go after you for all outstanding debts of the partnership.

These hybrid organizational forms provide business owners with limited liability (the attractive feature of corporations) and no "double taxation" (the attractive feature of sole proprietorships and partnerships).

1)The company has no more than 100 shareholders 2)All shareholders are individuals, estates, or certain nonprofits or trusts 3)All shareholders are U.S. citizens and permanent residents of the U.S. 4)The business is not a bank or insurance company 5)All shareholders concur with the decision to form an S-corporation

no flexibility in the way profits were divided among the owners, profits must be allocated based on percentage ownership, the owners had to follow a number of formal procedures, such as electing a board of directors and holding annual meetings. Finally, they were subjected to heavy record keeping requirements.

1)Has fewer ownership restrictions. It can have as many members as it wants—it is not restricted to a maximum of 100 shareholders. 2)Its members don't have to be U.S. residents or citizens. 3)Profits do not have to be allocated to owners based on percentage ownership. Members can distribute profits in any way they want. 4)Is easier to operate because it doesn't have as many rules and restrictions as does an S-corporation. It doesn't have to elect a board of directors, hold annual meetings, or contend with a heavy recordkeeping burden.

1)Personally guarantees a business debt or bank loan that the company fails to pay 2)Fails to pay employment taxes to the government that were withheld from workers' wages 3)Engages in fraudulent or illegal behavior that harms the company or someone else 4)Does not treat the company as a separate legal entity, for example, uses company assets for personal uses

It is a legal agreement made between an individual and a bank that says, "If my company does not repay this loan, I will." It is the same thing as co-signing a loan.

only way a business can get a loan. Bankers understand the concept of limited liability. They know that if the company goes out of business (and the loan is not guaranteed), the bank is stuck with an unpaid loan because the LLC members are not personally liability for the debts of the company. Consequently, banks are reluctant to give loans to companies (particularly those just starting up) unless the loans are guaranteed by an owner.

business owned and controlled by those who use its services. Individuals and firms who belong to the cooperative join together to market products, purchase supplies, and provide services for its members. If run correctly, cooperatives increase profits for its producer-members and lower costs for its consumer-members. Cooperatives are common in the agricultural community.

an organization formed to serve some public purpose rather than for financial gain. As long as the organization's activity is for charitable, religious, educational, scientific, or literary purposes, it should be exempt from paying income taxes. Additionally, individuals and other organizations that contribute to the not-for-profit corporation can take a tax deduction for those contributions.

There are more than 1.5 million not-for-profit organizations in the United States.

Profits have to be divided evenly among its members.

No "double" taxation

service organization

Limited liability

the combined company is more valuable than the sum of the two separate companies. This rationale is attractive to companies facing competitive pressures. To grab a bigger share of the market and improve profitability, companies will want to become more cost efficient by combining with other companies.

occurs when two companies combine to form a new company.

the purchase of one company by another with no new company being formed.

1)Gain Complementary Products 2)Attain New Markets or Distribution Channels 3)Realize More Efficient Economies of Scale 4)Hostile Takeover

an act of assuming control that's resisted by the targeted company's management and its board of directors.

stockholder buyout

The acquisition of Ben & Jerry's by Unilever allowed Unilever to enter the ice cream market in the United States.

acquisition