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Ch. 6 study guide


Department
Management
Course Code
MGM102H5
Professor
Cant Remember

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Ch. 6
-3 major forms of business ownership are (1) sole proprietorship, (2) partnerships, and (3)
corporations.
(1) A sole proprietorship is a business that is owned and is usually managed by one
person
(2) a partnership is when two or more people agree to become co-owners of a
business, the organization is called a partnership
(3)A corporation is a legal entity with authority to act and have liability separate
from its owners
-Liability: For a business, it includes the responsibility to pay all normal debts and to pay
because of a court order or law, for performance under a contract, or payment of damages,
to a person or property in an accident.
-Sole Proprietorship:
AdvantagesDisadvantages
Ease of starting and ending the business. All
you have to do to start a sole proprietorship
is buy or lease the needed equipment (e.g., a
saw, a word processor, a tractor, a lawn
mower) and put up some announcements
saying you are in business. It is just as easy
to get out of business; you simply stop. There
is no one to consult or to disagree with about
such decisions. You may have to get a permit
or licence from the local government, but
often that is no problem.
Unlimited liability—the risk of personal
losses. When you work for others, it is their
problem if the business is not profitable.
When you own your own business, you and
the business are considered one. You have
unlimited liability; that is, any debts or
damages incurred by the business are your
debts and you must pay them, even if it
means selling your home, your car, or
whatever else you own. This is a serious
risk, and one that requires not only thought
but also discussion with a lawyer, an
insurance agent, an accountant, and others.
Being your own boss. As noted earlier, this is
one of the most common reasons cited for
starting a sole proprietorship. Working for
others simply does not have the same
excitement as working for yourselfat least,
thats the way sole proprietors feel. You may
make mistakes, but they are your mistakes
—and so are the many small victories
encountered each day.
Limited financial resources. Funds available
to the business are limited to the funds that
the one (sole) owner can gather. Since there
are serious limits to how much money one
person can raise, partnerships and
corporations have a greater probability of
obtaining the needed financial backing to
start a business and keep it going.
Pride of ownership. People who own and
manage their own businesses are rightfully
proud of their work. They deserve all the
Management difficulties. All businesses need
management; that is, someone must keep
inventory records, accounting records, tax
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credit for taking the risks and providing
needed productsrecords, and so forth. Many people who are
skilled at selling things or providing a
service are not so skilled at keeping records.
Sole proprietors often find it difficult to
attract good, qualified employees to help run
the business because they cannot compete
with the salary and benefits offered by
larger companies.
Leaving a legacy. Business owners have
something to leave behind for future
generations
Time commitment. Though sole proprietors
may say they set their own hours, its hard to
own a business, manage it, train people, and
have time for anything else in life. This is
true of any business, but a sole proprietor
has no one with whom to share the burden.
The owner often must spend long hours
working. The owner of a store, for example,
may put in 12 hours a day, at least six days a
week—almost twice the hours worked by a
non-supervisory employee in a large
company. Imagine how this time
commitment affects the sole proprietors
family life.
Retention of company profit. Other than the
joy of being your own boss, there is nothing
like the pleasure of knowing that you can
earn as much as possible and not have to
share that money with anyone else (except
the government, in taxes).
Few fringe benefits. If you are your own boss,
you lose the fringe benefits that often come
from working for others. You have no paid
health insurance, no paid disability
insurance, no sick leave, and no vacation
pay. These and other benefits may add up to
approximately 30 percent of a workers
income
No special taxes. All profits of a sole
proprietorship are taxed as the personal
income of the owner, and the owner pays the
normal income tax on that money. Another
tax advantage for sole proprietors is that
they can claim any business losses against
other earned \ income. These losses would
decrease the personal taxes they would need
to pay.
Limited growth. Expansion is often slow
since a sole proprietorship relies on its
owner for most of its creativity, business
know-how, and funding
Limited lifespan. If the sole proprietor dies,
is incapacitated, or retires, the business no
longer exists (unless it is sold or taken over
by the sole
proprietors heirs).
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