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MA3.06 NOTES
A. Explain sole proprietorships.
1. Sole proprietorship: A business owned and operated by one person. Seventy percent of all
businesses in the United States are sole proprietorships. For example, Wanda is the owner of The
Village Store.
2. Advantages
a. Ease of startup.
b. Limited government regulations including taxes. Sole proprietorships are taxed less than other
forms of business ownership.
c. All profits go to the owner.
d. Freedom in making business decisions.
3. Disadvantages
a. Unlimited liability. The business owner is responsible for all business losses including the initial
investment and the ability of the owner to pay. This may include using their personal assets. For
example, Joanne invests $10,000 in her flower shop. In two years, her business debts exceed
$50,000. She is responsible for all debts incurred by her flower shop. If the business does not
have the money to pay these debts, she must use her personal finances.
b. The owner is solely responsible for all aspects of the business including skills and finances. For
example, Calvin is not comfortable with the accounting and record keeping for his store, so he
hired an accountant to help him with quarterly and end of year taxes.
c. Life of the business is limited to the life or interest of the owner.
B. Explain partnerships.
1. Partnership: A business owned and operated by two or more people. Less than 10% of all
businesses in the United States are partnerships. For example, Sean and Omar own and operate a
music store in a local mall.
2. Types of partnerships.
a. General partnership.
i. An agreement in which both partners share equally in the profit and/or loss of the business.
ii. Each partner is liable for all debts incurred by the business.
b. Limited partnership
i. Each limited partner is liable for any debts of the business up to the amount of his/her
investment.
ii. Limited partnerships must have at least one general partner who has unlimited liability.
3. Advantages
a. Relatively inexpensive to start.
b. Combined financial resources and knowledge.
c. Shared management responsibilities.
d. Increased potential for profits.
e. Shared responsibility for risk.
f. Taxed less than a corporation.
g. A change in ownership does not alter the continuity of the business. For example, if Sean wants
to sell his part of the music store, Omar has the option to buys Sean’s part, or find another
partner.
4. Disadvantages
a. Partners may disagree on business decisions.
b. The decision or action of one partner is legally binding for the other partner, including financial
decisions.
c. If one partner leaves or dies, the business must be reorganized as a new partnership.
C. Explain corporations.
1. Corporation: A business owned by stockholders. For example, Microsoft is owned by the thousands
of people who purchase stock in Microsoft.
2. A corporation is a legal entity that is chartered by the state in which the business is located.
3. Boards, directors, and officers manage the daily operations of a corporation.
4. The types of corporations include:
a. Private (closed) corporations do not offer shares of stock for sale to the general public.
b. Public (open) corporations offer shares of stock for sale to the general public.
5. Advantages
a. Delegation of specific management skills.
b. Limited liability for stockholders.
c. Easier to secure capital.
d. Stockholders can easily enter or leave the business by purchasing or selling stock.
6. Disadvantages
a. Government regulations.
b. Complex to start up and dissolve.
c. Double taxation. The corporation is taxed on their profits and once these profits are dispersed to
the stockholders through dividends, the stockholders are taxed as well.
d. Complex record keeping.
D. Explain limited liability companies (LLC).
1. LLC: A combination of a partnership and a corporation.
2. Advantages
a. Pass-through taxation. The earnings of the LLC are taxed only once. This is similar to taxation of
a partnership or sole proprietorship.
b. Limited liability. Owners are not individually responsible for the debts of the LLC.
c. Flexibility in structure and management of the business.
3. Disadvantages
a. Expense of start-up.
b. Extensive record keeping requirements.
c. If a member wants to leave the LLC or if he/she dies, it can result in dissolving the LLC.