Chapter 2: Choosing your Business Structure

Question 1

What is a sole proprietorship?

Answer 1

The simplest form of business structure, with one sole owner.

Question 2

What is the main pitfall of a sole proprietorship?

Answer 2

Exposes the owner to unlimited liability for business debts.

Question 3

Describe the existence/transfer of a sole proprietorship

Answer 3

Sole owner personally owns the assets of the company.
Upon transfer/sale:
* original owner sells the assets of business and closes business licenses.
* New owner obtains all licenses and accounts in their name

Question 4

What are the main advantages of a sole proprietorship?

Answer 4

1. Minimal legal restrictions
2. Simple ownership form
3. Low startup costs
4. sole ownership of profits
5. Freedom in decision making

Question 5

What are the main cons of a sole proprietorship?

Answer 5

1. Unlimited personal liability
2. Less available capital
3. Possible difficulty in obtaining long-term financing
4. Dissolution of the business in event of owner’s death

Question 6

What is a partnership?
* General description
* main types

Answer 6

• Business formation in which multiple entities carry on trade/business.
• Types: General and limited

Question 7

Describe the existence/startup of a partnership:

Answer 7

• Partnership formed by oral or written agreement.
• General partners co-own assets of business

Question 8

What is a limited partnership?

Answer 8

Partnership with at least one general partner and one limited partner.
* Limited partners have limited liability in the partnership

Question 9

What happens to a partnership if a general partner leaves or dies?

Answer 9

The partnership dissolves, and the assets must be sold or distributed. Creditors are paid first, followed by the partners.

Question 10

How should a partnership handle financial management?

Answer 10

Separate bank accounts and financial records to track profits/losses and the distributions of these amounts.

Question 11

Describe the liability of partners in a partnership

Answer 11

General partners:
* Personal and unlimited liability for all debts and actions undertake in name of business
* Each partner liable for actions of other partners (when they act in name of business)

Limited Partners:
* No personal liability for the business
* Liable only for the previously agreed upon investment/initial contribution

Question 12

What are the advantages of a general partnership?

Answer 12

• Ease of formation
• Direct profit rewards
• Larger management base than sole proprietorship

Question 13

What are the cons of a general partnership?

Answer 13

• Unlimited personal liability of general partners
• Multiple decision makers
• Limited life of the business
• Changes to partnership/agreement may be difficult
• Partnership dissolves in event of general partner’s death

Question 14

What does incorporation provide for a business, and how long does a corporation last?

Answer 14

• Incorporation gives a business a legal existence, allowing it to own assets and operate in its own name.
• A corporation lasts as long as stakeholders decide, and it continues to exist even if shareholders die.

Question 15

How should finances be handled by a corporation, and who owns the financial asets of a corporation?

Answer 15

• Corporation needs separate bank accounts and seperate business records
• The corporation, not the shareholders, owns money that shareholders contribute, al the asseets, and the earnings of business.

Question 16

Describe the liability shareholders have in a corporation

Answer 16

• Owners of corporation are not personally liable for the losses of the business.
• Generally speaking, the corporation is responsible for business debts.

Question 17

What are the advantages of a C-Corp?

Answer 17

• 1. Separate legal entity
• 2. Limited liability for stockholders
• 3. Unlimited life of the business
• 4. Availability of capital resources
• 5. Transfer of ownership through sale of stock

Question 18

What are the disadvantages of a C-Corp?

Answer 18

• Complex and expensive organization
• Limitations on corporate activities and decisions by the corporate charter
• Extensive regulation and record-keeping requirements
• Double taxation (corporate profits & dividends)

Question 19

What are the requirements for an S-Corp?

Answer 19

• Domestic corporation w/ 1 class of stock
• No more than 100 shareholders, who are citizens/legal residents of U.S.
• All shareholders must consent to S-Corp status
• Use of a permitted tax year
• Filing of IRS Form 2253

Question 20

What are the advantages of an S-Corp?

Answer 20

Avoid double taxation by passing earnings to shareholders.

Question 21

What are the advantages of a Limited Liability Company (LLC)?

Answer 21

• Limited disclosure of owners
• Limited documentation
• No advance IRS filings
• No pulic disclosure of finances
• Limited liability for managers and members
• Ability to delegate management to a non-member (non-owner)

Question 22

What is a joint venture?

Answer 22

Special business arrangement that exists when 2 or more companies join to undertake a specific project.