Sole Proprietorship

Question 1

principals

Answer 1

owners of a business entity

Question 2

What factors do you consider when choosing a business entity?

Answer 2

(1) formation
(2) liability
(3) capitalization
(4) taxation of income
(5) management/operation

Question 3

Sole Proprietorship

Answer 3

an one person entity; debts and liabilities are personal debts of the principal

Question 4

True/False: You can’t change the business entity of your company once you choose one.

Answer 4

False
(The choice of an entity can change and evolve when necessary)

Question 5

Which business entity is the easiest to maintain?

Answer 5

Sole Proprietorship

Question 6

the disadvantages of Sole Proprietorships

Answer 6

(1) lack of protection of principal’s personal assets for unpaid debts and liabilities of the business
(2) all debts and liabilities are personal debts and liabilities of the principal too

Question 7

the limitations of capitalization

Answer 7

(1) cannot sell ownership
(2) can capitalize through the principal’s personal resources or finance through debt

Question 8

financing through debt options

Answer 8

Private Loan: money loaned by a private source whereby the debtor agrees to pay back the loan over a certain period of time at a certain rate
Commercial Loan: money loaned by a commercial source whereby the debtor agrees to pay back the loan over a certain period of time at a certain rate (not negotiable; short period of 5-10 years)

Question 9

How can a business get a favorable interest rate?

Answer 9

through collateral

Question 10

collateral

Answer 10

assets a borrower has pledged to secure a loan

Question 11

line of credit

Answer 11

a form of commercial loan that allows the borrower to draw against a predetermined credit limit, as needed, instead of receiving the full loan amount at one time; secured by collateral

Question 12

True/False: The principal is subject to report business income and expenses on their own individual tax return.

Answer 12

True

Question 13

True/False: The principal of a sole proprietorship pays taxes on the business income based on their own individual tax rate.

Answer 13

True

Question 14

the advantages of Sole Proprietorships

Answer 14

(1) can have as many employees and locations as desired
(2) the proprietor has sole discretion and authority to bind the business or make any business decisions
(3) there are no committees and no required agreements

Question 15

How is a Sole Proprietorship terminated?

Answer 15

by an express act of the principal or by an operation of law (death, bankruptcy, etc.)

Question 16

Can a proprietor sell assets of their business to another party?

Answer 16

yes

Question 17

Can a proprietor’s ownership be passed to heirs through a gift or estate?

Answer 17

no

Question 18

franchise

Answer 18

a method of conducting business that centers on a contractual relationship than a business entity and when an existing entity wishes to reach a broader market without overhead costs

Question 19

franchise (pt. 2)

Answer 19

a federal arrangement of a continuing commercial relationship

Question 20

What is included in a franchise agreement?

Answer 20

(1) the term
(2) franchise fees, payment terms, and ongoing investment
(3) territory rights
(4) commitments for training, management support, and advertising
(5) commitment to follow operating protocol
(6) royalties and fees to be paid
(7) termination/cancellation policies

Question 21

Federal Trade Commission

Answer 21

a government agency that oversees regulation of franchisors
they ensure full disclosure of all information relating to a franchise company prior to a franchisee investment; they heavily focus on disclosure of the financial condition of a franchise, success rates, etc.; a lengthy, complex, and attorney seeking process

Question 22

Lewis v. Moore

Answer 22

Appellant = Lewis
Appellee = Moore
State Court of Appeals

Court reasoning…
- Moore didn’t breach her duty of good faith and fair dealing in forming Sandcliffs Media
- the contract was unwise and should have been better phrased between the parties