15 - Types of Ownerships

Question 1

Sole Proprietorship

Answer 1

a buisness owned by one person who is legally responsible for all its debts and legal oblications

often are small stores, restaurants, and service buisnesses

Question 2

Partnerships

Answer 2

a buisness owned by two or more people

often formed by doctors, lawyers, dentists, accountants, and small retail and service buisness

Question 3

Corporation

Answer 3

a form of buisness ownership that is a separate legal entity

Question 4

Advantages of Sole Proprietorship

Answer 4

• pride of ownership
• simplified ecision making
• ease of formation and dissolution
• all net income goes to owner
• freedom of action
• personal satisfaction
• possible tax savings
• privacy

Question 5

Disadvantages of Sole Proprietorship

Answer 5

• unlimited personal liability
• limited capital
• limted talent pool
• heavy personal responsibilties
• lack of continuity

Question 6

Advantages of Partnerships

Answer 6

• ease of formation
• additional sources of investment capital
• broader management base
• lower startup cost
• shared work and responsibiltes

Question 7

Disadvantages of Partnerships

Answer 7

• potential conflict between partners
• lack of continuity (eg. if one dies, must dissolve to settle estate)
• unlimited liability
• divided authority
• diffifculty finding suitable partners
• mutual agency (one partner makes a decision for both partners and may do so without consulting other partner(s))

Question 8

Advantages of Corporations

Answer 8

• limited liability
• continuous buisness existence
• specialized management
• transferrable ownership
• separate legal entity
• easier access to capital
• possible tax advantage

Question 9

Disadvantages of Corporations

Answer 9

• most expensive form to organize
• extensive record keeping required
• more legal requirements; closely regulated
• double taxation of dividends
• decision-making process can be complicated

Question 10

Types of Partnerships

Answer 10

1. Limted
2. General

Question 11

Unlimited Liability

Answer 11

owner(s) is personally responsible for the debts and legal obligations of the buisness

owners can lose personal property (eg. personal house) to pay off debts of their buisness

Question 12

Limited Liability

Question 13

Types of Corporations

Question 14

Shareholder

Answer 14

an owner of shares in a corporation

Question 15

Limited Partnership

Answer 15

partnership with 2 types of partners:
1. limted - assumes no personal liability except for their investment
2. general - assumes unlimited liability, manages limited partners

• avoids the disadvantage of unlimted personal liability
• limited partners invest in the buisness but have little to no part in running it

Question 16

General Partnership

Answer 16

partnerships where all partners have unlimited liability

Question 17

Partnership Agreement

Answer 17

an agreement which outlines:
* rights and responsibilities of each party
* the amount of capital or assets to be contributed by each partner
* how profits and losses are to be shared
* how and when the partnership will be dissolved

Question 18

How is Income Tax Paid for…

Sole Proprietorships

Answer 18

owners include net income of the buisness into their personal net income;
–> income tax is paid via owner’s total income tax

• beneficial when net income of both is low
• if combined net income too high, you may want to switch to corporate form ownership

Question 19

How is Income Tax Paid for…

Partnerships

Answer 19

partners include their respective shares into personal net income
–> income tax is paid for via partners’ individual income taxes

income tax is not calculated based on net income of buisness

Question 20

Each partner has their own ________ and ________ Account.

Answer 20

Drawings, Capital

Question 21

Partner’s salaries must be recorded in the _ _ _ _ _ _.

Answer 21

Drawings Account

Question 22

Why can’t partner’s salaries be recorded in the Salaries Expense Accounts?

Answer 22

• recording in expense will lower the net income of buisness
• lower net income = lower income tax
  business can then obtain
• will obtain free fringe benefits illegally??

Question 23

What are the differences when closing the books for partnerships?

Answer 23

• when closing and transfering income summary, separate the income according to partnership agreement for dividing net income and loss
• drawings accounts must be closed to their respective capital accounts (compound entry)

see pg. 744 for example if needed

Question 24

Board of Directors

Answer 24

a group of persons, elected by shareholders, who are responsible for the operation of the corporation

Question 25

Private Coporation

Answer 25

a coporation whose shares & bonds are: * not publicly traded * held by a small number of shareholders (<= 50)

Question 26

Public Corporation

Answer 26

a corporation which *sells* shares and bonds* to the public* and can have an *unlimited* number of *shareholders*

Question 27

Shares

Answer 27

representation of ownership in a corporation

Question 28

Types of Shares

Answer 28

* Common Shares * Preferred Shares