Ch. 16 Legal Guidelines and Business Considerations Flashcards
1
Q
Typically, what structures do for-profit businesses operate under?
A
- Sole Proprietorship (majority)
- Partnership
- Corporation
2
Q
What is a sole proprietorship?
A
- Business owned and operated by one person
- Does not require any formal paperwork and minimal ongoing paperwork is necessary (comparatively) to sustain the business
- Profits of business belong to owner, but financial losses and liabilities are also the sole responsibility of the owner
- Does not have a corporate veil (can wreck business and personal finances)
3
Q
What is a corporate veil?
A
- Shields the actions of the business from the personal responsibility of the owner, even if the owner conducts business under a different company name
4
Q
What is a partnership?
A
- 2 or more people who agree to operate a business and share profits and losses
5
Q
What is a general partnership?
A
- Joining of 2 or more individuals to own and operate a business
6
Q
What is an implied partnership?
A
- Individuals act as partners (such as by sharing a company checking account or jointly signing for a business loan)
7
Q
What is a limited partner?
A
- An individual who retains no legal liability beyond his or her initial investment and does not have any formal input regarding partnership operations
8
Q
What does flow-through taxation refer to?
A
- Financial profits and losses flow from the business directly to the investors. The business does not pay any taxes; rather, business profits are taxed on the investors’ individual tax return and losses can be utilized by the investors to offset other personal liability
9
Q
What is a corporation?
A
- A legal entity, independent of its owners and regulated by state laws; any number of people may own a corporation through shares issued by the business
10
Q
What does the corporate veil protect investors from?
A
- Personal liability
11
Q
What are the main corporation types?
A
- Subchapter S-corporations
- Limited liability companies (LLCs)
- Limited Liability partnerships (LLPs)
- Franchise operations
12
Q
What is a subchapter S-corporartion?
A
- A corporation that does not pay any income taxes. Instead, the corporation’s income or losses are divided among and passed through to its share holders
13
Q
What are some pros and cons of S-corps?
A
Pros
- Profits flow through the business to the shareholders and are taxed as ordinary income
- Shareholders are shielded from personal liability (beyond their investments)
Cons
- Must be based in the US and can only have up to 100 total investors
- Can only issue one form of stock, meaning that every share must have the same voting rights and divided allotments
- Extensive paperwork
14
Q
What is a C-Corporation?
A
- A corporation that is designed to operate in multiple countries and with various types of investors
15
Q
What is the difference between an employee and an independent contractor?
A
- Employees “regularly” work for their employer
- Independent contractors typically are hired on a short-term basis to perform a specific or series of tasks