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III.
SOLE PROPRIETORSHIPS.
A. ADVANTAGES OF SOLE PROPRIETORSHIPS.
1.
EASE OF STARTING AND ENDING THE BUSINESS. All you need is a
permit from the local government.
2.
BEING YOUR OWN BOSS. Working for yourself is exciting.
3.
PRIDE OF OWNERSHIP. Sole proprietors have taken the risk and deserve
the credit.
4.
LEAVING A LEGACY behind for future generations.
5.
RETENTION OF COMPANY PROFITS. You don=t have to share profits with
anyone.
6.
NO SPECIAL TAXES. Profits of the business are taxed as the personal
income of the owner.
B. DISADVANTAGES OF SOLE PROPRIETORSHIPS.
1.
UNLIMITED LIABILITY is the responsibility of business owners for all of the
debts of the business.
2.
LIMITED FINANCIAL RESOURCES. Funds available are limited to the
funds that the sole owner can gather.
3.
MANAGEMENT DIFFICULTIES. Many owners are not skilled at record
keeping.
4.
OVERWHELMING TIME COMMITMENT. The owner has no one with whom
to share the burden.
5.
FEW FRINGE BENEFITS. Fringe benefits can add up to 30% of a worker=s
income.
6.
LIMITED GROWTH.
7.
LIMITED LIFE SPAN. If the sole proprietor dies or leaves, the business
ends.
PARTNERSHIPS.
LEARNING GOAL 2
Describe the differences between general and limited partnerships, and compare
the advantages and disadvantages of partnerships.
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A.
B.
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3.
CORPORATIONS.
LEARNING GOAL 3
Compare the advantages and disadvantages of corporations, and summarize the
differences between C corporations, S corporations, and limited liability companies.
A. A CONVENTIONAL (C) CORPORATION is a state-chartered legal entity with
authority to act and have LIABILITY SEPARATE FROM ITS OWNERS.
1.
The corporation=s owners (stockholders) are not liable for the debts of the
corporation beyond the money they invest.
2.
A corporation also enables many people to share in the ownership of a
business without working there.
B. ADVANTAGES OF CORPORATIONS.
1.
LIMITED LIABILITY.
a.
Limited liability is probably the most significant advantage of
corporations.
b.
Limited liability means that the owners of a business are responsible
for losses only up to the amount they invest.
2.
MORE MONEY FOR INVESTMENT.
a.
To raise money, a corporation sells OWNERSHIP (STOCK) to anyone
interested.
b.
Corporations may also find it easier to obtain loans.
c.
Corporations can also raise money from investors through issuing
bonds.
3.
SIZE.
a.
Corporations have the ability to raise large amounts of money.
b.
They can also hire experts in all areas of operation.
c.
They can buy other corporations in other fields to diversity their risk.
d.
Corporations have the size and resources to take advantage of
opportunities anywhere in the world.
4.
PERPETUAL LIFE: The death of one or more owners does not terminate
the corporation.
5.
EASE OF OWNERSHIP CHANGE. Selling stock changes ownership.
6.
EASE OF DRAWING TALENTED EMPLOYEES. Corporations can offer
benefits such as stock options.
7.
SEPARATION OF OWNERSHIP FROM MANAGEMENT. Corporations can
raise money from investors without getting them involved in management.
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C.
D.
E.
DISADVANTAGES OF CORPORATIONS.
1.
EXTENSIVE PAPERWORK.
a.
A corporation must prove all its expenses and deductions are
legitimate.
b.
A corporation must keep detailed records.
2.
DOUBLE TAXATION.
a.
Corporate income is taxed twice.
b.
The CORPORATION PAYS TAX on income before it can distribute any
to stockholders.
c.
The STOCKHOLDERS PAY TAX on the income they receive from the
corporation.
d.
States often tax corporations more harshly than other enterprises.
3.
TWO TAX RETURNS: A corporate owner must file both a corporate tax
return and an individual tax return.
4.
SIZE: Large corporations sometimes become inflexible and too tied down in
red tape.
5.
DIFFICULTY OF TERMINATION.
6.
POSSIBLE CONFLICT WITH STOCKHOLDERS AND BOARD OF
DIRECTORS. Since the board chooses the company=s officers, an
entrepreneur can be forced out of the very company he or she founded.
7.
INITIAL COST.
a.
Incorporation may cost thousands of dollars and involve expensive
lawyers and accountants.
b.
There are less expensive ways of incorporating in certain states.
8.
Many businesspeople feel the hassles of incorporation outweigh the
advantages.
INDIVIDUALS CAN INCORPORATE.
1.
By incorporating, individuals such as doctors and lawyers can save on taxes
and receive other benefits of incorporation.
2.
Small corporations do not share all the same advantages and disadvantages
of large corporations.
3.
It is usually wise to consult a lawyer when incorporating.
4.
The average time needed to incorporate is approximately 30 days.
S CORPORATIONS.
1.
An S CORPORATION is a unique government creation that looks like a
corporation but is taxed like sole proprietorships and partnerships.
a.
S corporations have shareholders, directors, and employees, but the
profits are taxed as the personal income of the shareholders.
b.
They also have the benefit of limited liability.
2.
S CORPORATIONS MUST:
a.
Have no more than 75 shareholders.
b.
Have shareholders who are individuals or estates and are citizens or
permanent residents of the U.S.
c.
Have only one class of outstanding stock.
d.
Not have more than 25% of income derived from passive sources
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V.
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5.
VI.
VII.
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a.
C.
D.
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E.
F.
H.
VIII.
COOPERATIVES.
LEARNING GOAL 6
Explain the role of cooperatives.
A. A COOPERATIVE is a business owned and controlled by the people
who use itproducers, consumers, or workers with similar needs who pool their
resources for mutual gain.
1.
There are 47,000 cooperatives in the U.S.
2.
Members democratically control these businesses by electing a board of
directors that hires professional management.
B. Some cooperatives are formed to give members MORE ECONOMIC POWER
than they would have as individuals (i.e. farm cooperatives.)
1.
The FARM COOPERATIVE started with farmers joining together to get
better prices for their food products.
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2.
The organizations expanded so that farm cooperatives now buy and sell
other products needed on the farm.
3.
In spite of debt and mergers, cooperatives are still a major force in
agriculture today.
IX.
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