Chapter 4 Notes

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22 Jun 2011
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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 costsHard to borrow money for start up
Tax losses can be offset against other incomeResources 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
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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.
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 dont 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
Ability to grow by adding talent + $$$ Unlimited liability
- Responsible for partners debt as well
Easier to borrow $$$ Lack of continuity
Simple to organize, few legal regulationsHard to transfer ownership
- Cant sell out without the partners
consent
Tax losses flow through partnersDealing with new and retiring partners
Taxes are taxed as individualsProvide no guidance in resolving conflicts
Corporation : A business that is separate legal entity that is liable for its own debts and
whose owners liability is limited to their investment
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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
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 firms shareholders and charged
with overseeing, and taking legal responsibility for, the corporations 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 corporations board of directors who are also full-time
employees of the corporation
Outside directors: Members of a corporations board of directors who are not employees of
the corp.
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