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MGTA01H3 (583)
Chapter 4

Chapter 4 Notes

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Department
Management (MGT)
Course
MGTA01H3
Professor
Chris Bovaird
Semester
Fall

Description
Chapter 4 Notes: Understanding Legal Forms of Business Organization ORGANIZING OPTIONS • Sole Proprietorship • Partnership • Corporation • Cooperative Sole Proprietorship: A business owned and operated by one person • An extension of the owner (not a separate entity) Advantages Disadvantages Freedom (complete control) Unlimited Liability: Personal liability for all debts of the business Easy to form Lack of continuity - If owner dies, so does the business No registration costs Hard to borrow money for start up Tax losses can be offset against other income Resources depend on the proprietor Partnership: A form of organization established when two or more persons agree to combine their financial, managerial, and technical abilities for the purpose of operating a business for profit 2 types of partnerships: general partnerships and limited partnerships General partnerships: A type of partnership in which all partners are jointly liable for the obligations of the business • All partners share the profits and have a say in the business. • Partners are also personally liable for all debts of the business Limited partnerships: A type of partnership with at least one general partner (who has unlimited liability) and one or more limited partners. The limited partners cannot participate in the day-to-day management of the business or they risk the loss of their limited liability status. Page | 1 • Allow investors some protection • 2 kinds of partners: general and limited partners  General partners: partners who are actively involved in managing the firm and have unlimited liability  Limited partners: partners who don’t participate actively in the business and whose liability is limited to the amount they invested in the partnership. • Written agreement - avoid trouble regarding the partnership Advantages Disadvantages Unlimited liability Ability to grow by adding talent + $$$ - Responsible for partners’ debt as well Easier to borrow $$$ Lack of continuity Hard to transfer ownership Simple to organize, few legal regulations - Can’t sell out without the partner’s consent Tax losses flow through partners Dealing with new and retiring partners Taxes are taxed as individuals Provide no guidance in resolving conflicts Corporation: A business that is separate legal entity that is liable for its own debts and whose owner’s liability is limited to their investment • Legal status as a separate entity • Property rights and obligation • Indefinite lifespan • May sue and be sued • Buy, hold, and sell properties • Shareholders have limited liability Page | 2 Owners (aka equity holders) of the Corporation: • Own a share in the corporations • Do not own the assets of the corporation • Has limited liability Shareholders: People who own shares in a corporation Board of directors: A group of individuals elected by a firm’s shareholders and charged with overseeing, and taking legal responsibility for, the corporation’s action. • Governing body of a corporation • Ensure the corporation is running in the interest of the shareholders • Sets policy on paying dividends, financing spending etc Inside directors: Members of the corporation’s board of directors who are also full-time employees of the corporation Outside directors: Members of a corporation’s board of directors who are not employees of the corp. • Ex/ attorneys, accountants, executives from other firms Corporate officers: top managers hired by the board to run the corporation on a daily basis • President – responsible for internal management • Vice- presidents – oversee the functional like marketing or operations Chief Executive Officer (CEO): The person responsible for the firm’s overall performance Page | 3 Types of Corporations: Public and Private Corporation • Public Corporation (Widely - Held / Offering Corporation): A business whose shares are widely held and available for sale to the general public • Private Corporation (Closely - Held /Non- Offering Corporation): A businesses whose shares are held by a small group of individuals and is not usually available for s
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