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Chapter 4

BUSINESS CUSTOM 2/E VOL. 1 Chapter 4 Readings (very detailed and helpful)

Management (MGT)
Course Code
Chris Bovaird

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Chapter 4: Understanding legal forms of business organization
The sole proprietorship:
A business owned and operated by one person
Advantages of sole proprietorship:
Freedom since there is no sharing of ownership
Easy to form
Tax benefits (tax cuts from income made from personal sources rather than the business)
Disadvantages of a sole proprietorship:
Unlimited liability: personal liability for all debts of the business
oIf biz fails to generate enough cash, bill must be paid out of owner’s pocket
Lack of continuity: a sole proprietorship legally dissolves when owner dies
Biz depends on the resources of one person who managerial and financial limitations may
constrain biz
oHard to borrow money to start-up or expand
The Partnership:
A form of organization established when two or more persons agree to combine their
financial, managerial, and technical abilities for the purpose of operation a business for profit
Two types of partnership:
oGeneral partnership: a type of partnership in which all partners are jointly liable for the
obligations of the business…all partners share in the profits of the business and have a say in
managing the business
oLimited partnership: 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 loss of their limited liability status
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General partner: partners who are actively involved in managing the firm and
have unlimited liability
Limited partner: partners who dont participate actively in the business and
whose liability is limited to the amount they invested in the partnership
Advantages of a partnership:
Ability to grow by adding talent and money
Somewhat easy to borrow funds
Invite new partners to join by investing money
Simple to organize, with few legal requirements
oWritten agreement is useful later to avoid trouble
Disadvantages of a partnership:
Unlimited liability
Lack of continuity (when one partner dies or pulls out, a partnership dissolves legally,
even if the other partners agree to stay to continue the biz)
Difficulty of transferring ownership
Little or no guidance in resolving conflict b/w the partners (i.e. suppose on partner wants
to expand the biz fast and the other wants it to grow slowly, it may be difficult for them to decide
what to do)
The Corporation:
Corporation: a business that is a separate legal entity that is liable for its own debts and
whose owners’ liability is limited to their investment
Shareholders: persons who own shares in a corporation…real owners of the corporation
Board of directors: a group of individuals elected by a firms shareholders and charged
with overseeing, and taking legal responsibility for, the corporations actions…the board chooses
the president and other officers of the business and delegates the power to run the day-to-day
activities of the business to those officers
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