Chapter 4 Study Guide
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Chapter 4: Understanding Legal Forms of Business
ORGANIZING OPTIONS (FORMS OF BUSINESS OWNERSHIP)
The Sole Proprietorship
Sole Proprietorship: a business owned and operated by one person. Legally, if you set up a
business as a sole proprietorship, your business is considered to be an extension of yourself (and
not a separate legal entity).
Advantages: Freedom is the most important benefit of a sole proprietorship. Sole
proprietorships answer to no one but themselves since they don’t share ownership and it’s
easy to form. If you operate the business under your own name you don’t even need to
register your business name to go into business (you can just put a sign outside the door
and the business has officially started).
Disadvantages: a major drawback is unlimited liability (personal liability for all debts of
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
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Advantages: easier time borrowing funds from banks than sole proprietorships because
banks like to make loans to enterprises that are not dependant on one person. It’s simple
to organize much like a sole proprietorship, with few legal requirements. The partnership
agreement is strictly a private document; no laws require partners to file an agreement
with some government agency. Partnerships are not regarded as legal agencies however.
Disadvantages: If a partner incurs a debt, even if the other partners don’t know about it,
they are all liable if the offending partner can’t pay up. The lack of legal standing means
partners are taxed as individuals. When one partner dies or pulls out, a partnership is
dissolved even if the other partners agree to stay to continue the business.
General Partnership: a type of partnership in which all partners are jointly liable for the
obligations of the business
Advantages: The most striking advantage of a general partnership is the ability to grow by
adding talent and money.
Disadvantages: unlimited liability is the greatest drawback of a general partnership. By
law, each partnership must be held personally liable for all debts incurred in the name of
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