Test 1 Flashcards
. Factors to Consider When Selecting a Type of Business Ownership
Tax Liability such as double taxation
- Liability: what you are held accountable for something
- Control: decision-making authority
Why is it important to know the advantages and disadvantages?
So you can see the pros and cons of your business goals and circumstances
Does the business structure impact varous factors such as taxation and liability?
Yes, affects how the business is taxed and the extent of liability for owners
Sole Proprietorship characteristics, pros and cons
- Characteristics:
- Single owner
- Easy and inexpensive to establish
- Owner has complete control
- Owner is personally liable for all business debts and obligations
- Advantages:
- Quick decision-making
- Complete control
- Simple tax preparation (income reported on personal tax return)
- Disadvantages:
- Unlimited personal liability
- Limited access to capital
- Business continuity depends on the owner
General Partnership
- Characteristics:
- Two or more owners share resources and responsibilities
- Each partner has equal management rights unless otherwise agreed
- Partners are personally liable for business debts and actions of other partners
- Advantages:
- Combined skills and resources
- Simple to establish
- Pass-through taxation
- Disadvantages:
- Unlimited personal liability
- Potential for conflicts among partners
- Joint liability for actions of other partners
Limited Partnership (LP)
- Characteristics:
- Consists of at least one general partner and one limited partner
- General partners manage the business and have unlimited liability
- Limited partners contribute capital and have liability limited to their investment
- Advantages:
- Ability to raise capital from limited partners
- Limited partners have limited liability
- Disadvantages:
- General partners bear unlimited liability
- Limited partners cannot participate in management without losing limited liability status
Limited Liability Partnership (LLP)
- Characteristics:
- Similar to a general partnership but with limited liability for all partners
- Common among professionals like lawyers and doctors
- Advantages:
- Limited liability protection
- Flexibility in management
- Pass-through taxation
- Disadvantages:
- Varies by state law
- Not all professions are eligible
Limited Liability Company (LLC)
- Characteristics:
- Hybrid structure combining features of corporations and partnerships
- Owners are called members
- Can be managed by members or appointed managers
- Advantages:
- Limited liability for members
- Pass-through taxation (unless electing to be taxed as a corporation)
- Flexible management structure
- Disadvantages:
- More complex to set up than sole proprietorships or partnerships
- Varies by state laws
Corporation (C Corporation)
- Characteristics:
- Separate legal entity from its owners (shareholders)
- Can issue unlimited shares of stock
- Managed by a board of directors elected by shareholders
- Advantages:
- Limited liability for shareholders
- Unlimited ability to raise capital through stock sales
- Can sell shares to the general public
- Perpetual existence
- Disadvantages:
- Double taxation (corporate profits and shareholder dividends are taxed)
- More regulatory requirements and formalities
S Corporation (S Corp)
- Characteristics:
- A special designation for corporations that meet specific IRS criteria
- Pass-through taxation (profits and losses are reported on shareholders’ personal tax returns)
- Limited to 100 shareholders who must be U.S. citizens or residents
- Advantages:
- Limited liability for shareholders
- Avoids double taxation
- Perpetual existence
- Disadvantages:
- Restrictions on the number and type of shareholders
- More IRS scrutiny and compliance requirements
Private Corporation
- Characteristics:
- Owned by a small group of individuals
- Does not sell shares to the general public
- Often experiences double taxation
- Advantages:
- Limited liability for shareholders
- Greater control over ownership and management
- Disadvantages:
- Limited access to capital compared to public corporations
- Double taxation on corporate profits and dividends
Hybrid business structures include
LLC and LLP
Business Format Franchise
you’ll operate your business using the principal trademark that belongs to the franchisor
Product Trade Name Franchise
LICENSING of a franchisee or dealer to sell or distribute a specific product using the franchisor’s trademark, trade name and logo
PIggyback franchise
2 franchises operating under one roof
ex. bakery in grocery store
Joint Venture
business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task
Licensing
permission granted by owner to use _________ for personal use
Merger
2 companies join to make one big one
Acquisition
one company PURCHASES another
Non profit organization
Organized for charitable purposes, profits are not for owners of employes
Multi-Level Marketing (MLM)
business where partners earn commissions from sales of their recruits
Pyramid Structure
illegal model focused of getting more employees and not selling products
Doing Business As (DBA)
- Definition: Registration required for operating a business under a name different from the owner’s legal name
- Purpose: To inform the public of the true owner behind a business name
Articles of Incorporation
- Definition: Legal document filed with the state to formally establish a corporation
- Contents: Includes business name, purpose, structure, and information about stock
Operating Agreement
- Definition: Internal document for LLCs outlining the management structure and operating procedures
- Contents:
- Names of members and managers
- Scope or purpose of the business
- Date of formation
- Profit and loss distribution
- Procedures for adding or removing members
Corparation
business created by individuals, stockholders, or shareholders, with the purpose of operating for profit.
- Advantages:
- Limited liability for shareholders
- Ability to raise capital through stock sales
- Disadvantages:
- Double taxation (for C Corps)
- More regulatory requirements
Stockholder/ Unit holder
An owner of shares in a corperation
Key manager
some responsible for management decisions in a company
