Firm Legal Structures

Question 1

SOLE PROPRIETORSHIP / Description

Answer 1

Description:
• Simplest business type.
• Owned by an individual.
• The default business if no formal action is taken.
• Is NOT an independent entity from the individual.

Question 2

SOLE PROPRIETORSHIP / Advantages and Disasvantages

Answer 2

Advantages:
• Easy to setup.
• Gives total control to sole proprietor.
• The business expenses and losses are deducted from the gross income of the business.

Disadvantages:
• Owner is personally liable for all debts and losses; assets and property can be seized.
• Credit determined by personal credit.
• Difficult to sell the business.

Question 3

SOLE PROPRIETORSHIP / Taxes

Answer 3

Taxes:
• NO SEPARATE FEDERAL TAX RETURN is filed or separate tax is incurred.
• File Schedule C (Form 1040) - Profit and losses from Sole Proprietorship every business quarter.

Question 4

GENERAL PARTNERSHIP / Description

Answer 4

Description:
• 2 or more general partners are practicing together, sharing the management, profit, and risk.
• No formal legal steps are required.

Question 5

GENERAL PARTNERSHIP / Advantages and Disadvantages

Answer 5

Advantages:
• Partnership allows sharing of different skills.

Disadvantages:
• PARTNERS ARE PERSONALLY LIABLE FOR DEBTS AND LOSSES, INCLUDING ACTIONS OF OTHER PARTNERS.

Question 6

GENERAL PARTNERSHIP / Taxes

Answer 6

Taxes:
• Files federal return but DOES NOT INCUR TAXES.
• Flow-through entity: Income and losses pass to partners, taxed at individual rates.

Question 7

LIMITED PARTNERSHIP / Description

Answer 7

Description:
• At least 1 general parter and at least 1 limited partner.
• General partners invest in the business and are personally liable.
• Limited partners invest, receive portion of profits, and are only liable for their own investment.

Question 8

LIMITED PARTNERSHIP / Advantages and Disadvantages

Answer 8

Advantages:
• Partnership allows sharing of different skills.
• Differentiated partnership provides means to distribute power and risk.

Disadvantages:
• GENERAL PARTNERS ARE PERSONALLY LIABLE FOR DEBTS AND LOSSES, INCLUDING ACTIONS OF OTHER PARTNERS.

Question 9

LIMITED PARTNERSHIP / Taxes

Answer 9

Taxes:
• Files federal tax return but does not incur taxes.
• FLOW-THROUGH ENTITY: Income and losses pass to general partners, taxed at individual rates.