Advantages and disadvantages of particular enterprises

Question 1

Sole proprietorships

Answer 1

Individually owned businesses that have no separate legal status apart from their owner (mom and pop shops)

Question 2

Sole proprietorships advantages

Answer 2

• Control – no separation
• Simplicity – the lack of a separate legal structure means that the proprietorship is easy to operate and more flexible than other forms of business associations
• Expenses – the proprietorship will encounter less expense in its operations than required for other business enterprises
• Taxes – pass-through entity

Question 3

Sole proprietorships disadvantages

Answer 3

• Unlimited liability – subject to unlimited liability which means personal assets can be reached
• Management – usually dependent on the management of the owner (death or disability often results in the loss of the business)
• Transferability – ownership cannot readily be sold

Question 4

Partnerships

Answer 4

An association of 2 or more persons carrying on a business for profit as co-owners. All partners are agents of the business.

Question 5

Partnerships advantages

Answer 5

• Control – no separation
• Simplicity – has a separate legal structure, but the partners may agree to conduct their business in almost any manner they wish
• Expenses – less expensive than a corporation
• Taxes – an information return is required, but income and expenses are passed directly through to the owners

Question 6

Partnerships disadvantages

Answer 6

• Unlimited liability – partners are subject to unlimited liability; subject to joint and several liability
• Transferability – a partner cannot sell her ownership interest in a partnership without approval by the other partners

Question 7

Limited Partnerships

Answer 7

This entity has a general partner that operates the business (the only agent of the business) and one or more limited partners that contribute investment capital but do not participate in management

Question 8

Limited Partnerships advantages

Answer 8

• Limited liability – the liability of the limited partners is limited to the amount of their investment, thereby protecting their other assets. The general partner remains subject to unlimited liability

 o	If a limited partner participates in management, then he may lose his limited liability

 o	If you want limited liability, you have to file with the Secretary of State

• Separation of ownership and control – limited partners may invest capital in an enterprise without becoming involved in management
• Expenses – simplicity in management is still available since the business may be structured freely under the limited partnership agreement

Question 9

Limited Partnerships disadvantages

Answer 9

• Unlimited liability – the general partner is subject to unlimited liability
• Transferability – a limited partner cannot usually readily sell his ownership interest in a partnership unless it is registered under (or exempt from) the federal securities laws with all their attending expenses and liabilities

Question 10

Limited liability companies (LLC)

Answer 10

An incorporated partnership that allows members to actively participate in management or to be passive if they wish

Question 11

LLC advantages

Answer 11

• Limited liability – to the amount of their investment
• Separation of ownership and control
• Expenses – simplicity in management is still available since the business may be structured freely under the operating agreement
• Taxes – pass-through entity

Question 12

LLC disadvantages

Answer 12

• Transferability – ownership interest may be transferred but that transfer may be restricted by the terms of the operating agreement

Question 13

Limited Liability Partnership (LLP)

Answer 13

Another form of incorporated partnerships (particularly popular with law firms)

Question 14

LLP advantages

Answer 14

• Limited liability – liability limited to the amount of the investment

 o	Law firms, however, a partner is subject to unlimited liability for his own acts. The partner is protected from personal liability for the acts of other partners, but their partnership interest may be seized by creditors of the partnership

• Expenses – may structure their operations in a manner they deem fit under their partnership agreement
• Taxes – pass-through entity

Question 15

LLP disadvantages

Answer 15

• Transferability – not easily transferable

Question 16

Corporations

Answer 16

Businesses that have a separate legal status apart from their owners

Question 17

Corporations advantages

Answer 17

• Limited liability – the liability of investors (stockholders) in a corporation is limited to the amount of their investment. This encourages risk taking that is necessary for society to advance
• Separation of management and control – stockholders may invest capital without becoming involved in management. The board of directors call the shots.
• Transferability – stock holdings may be transferable
• Perpetual life – unlike the proprietorship or the partnership, the corporation continues in existence until dissolved (death has no affect)

Question 18

Corporations disadvantages

Answer 18

• Double taxation – the corporation is separately taxed for any profits it may receive. The shareholders of the corporation are then taxed again if the remaining income is distributed to them
• Management – managers of a corporation may manage for their own interest, rather than seeking to maximize shareholder wealth
• Expenses – the corporation will encounter more expenses