BUSN Ch. 5 Business Formation Flashcards
Chapter 5, Business Formation: Choosing the Form That Fits
What are the three basic forms of business ownership?
Sole proprietorship
Partnership
Corporation
What describes a sole proprietorship?
It is a business that is owned, and usually managed, by a single person.
What describes a partnership?
It is an arrangement where two or more people act as co-owners of a business.
What describes a corporation?
It is a legal entity created by filing a document, known as “articles of incorporation.” It is considered distinct from its owners, who have limited liability.
What are some advantages of a sole proprietorship?
Simple and least expensive form to establish.
Single owner can do whatever they wish with the business.
The sole owner retains all profits, only taxed once, because the business’s profits are considered the owner’s income.
What are some disadvantages of a sole proprietorship?
Owner has unlimited liability for the business’s debts.
Owner may work long hours and assume heavy responsibilities.
Have difficulty raising funds for expansion.
Business dissolves when the owner dies. The business is considered an ‘extension’ of the owner.
What are some advantages of a partnership?
Pooled resources of the owners, shared workload.
Earnings are taxed as income of owners, no separate tax.
What are some disadvantages of a partnership?
Each owner has unlimited liability for the debts of the company.
Disagreements among owners complicate decision making.
The death or withdrawal of a partner can create instability in the management and financing of the company.
What are some advantages of a corporation?
All shareholders (owners) have limited liability.
Can raise capital by issuing bonds or shares of stock.
Unlimited life and easy transfer of ownership.
Access/Ability to take advantage to professional management.
What are some disadvantages of a corporation?
Complexity and expense involved in the corporation’s formation.
Any profits distributed to shareholders are taxed twice, once as income to corporation and then again as income to the shareholders.
More extensive govt regulation.
List three additional corporate forms.
Cooperative.
Not-for-profit corporation.
Crown corporation.
What is a cooperative?
They are member-owned and each member has equal ownership. Profits are distributed to members based on how much they use the co-op, not on how many shares they hold.
What is a not-for-profit corporation?
They have social rather than profit goals. They do not have shareholders and cannot pay dividends. Earnings are not taxed.
What is a crown corporation?
They are government-owned enterprises that provide services to Canadians in sectors where private industry cannot.
What is a franchise?
It is a licensing arrangement under which the franchisor allows another, the franchisee to use its name, trademark, patents, copyrights, business methods, etc.
