Chapter 2

Question 1

Three types of businesses:

Answer 1

Sole trader, Partnership, Company/ corporation

Question 2

Sole Trader

Answer 2

One person who controls and manages a business. Is solely liable for debts.

Question 3

Sole Trader advantages

Answer 3

• cheap and easy
• One person as all of the decision making
• income taxed once as personal income

Question 4

Sole Trader disadvantages

Answer 4

• Small with limited growth
• limited funds (capital) available
• Owners personal assets can be used to repay firm debts
• difficult to transfer ownership. Would have to sell entire business (not just sell shares)

Question 5

Limited Liability

Answer 5

If the company is in debt, you are NOT personally liable for the debt of the company. Your personal assets are not liable. Company debts are limited to the value of investment.

Question 6

Unlimited Liability

Answer 6

The owners are personally liable for any business debts meaning they will lose their own personal assets to pay off debts. ( car or house ).

Question 7

Partnership

Answer 7

There are two or more owners, legally join to control a business. Share profits and losses.

Question 8

General Partnership

Answer 8

All partners have unlimited liability.

Question 9

Limited Partnership

Answer 9

They have limited liability. Some partners can be owners but have no part in managing the business

Question 10

Company

Answer 10

Several business owners and investors. Separate legal entities so owners have limited liability.

Question 11

Agency Relationship

Answer 11

Relationship between shareholders and managers

Question 12

Agency Problem

Answer 12

When a conflict of interest happens between managers and shareholders. e.g, managers classifying non-business expenses as business expenses such as a private lunch, or plane trip.

Question 13

Agency Cost

Answer 13

A cost that arises due to an agency problem.