Examination Describe Different Types of Businesses

Examination II

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Institutional Affiliation:

Chapter 04

Question 1

Part I: Describe Different Types of Businesses

Sole proprietorship

A sole proprietorship is a type of business entity where an individual is the owner of the business. The individual runs the business on their own and is responsible for any debts and liabilities that the business may incur.

Partnership

A partnership is a form of business where two or more entities own the business jointly. The parties can either be individuals or companies because a company is recognized as legal person by law. The partners share the responsibilities of the business as well as the profits.

Corporation

A corporation is a business organization or entity that is formed by several individuals, but it is separate from those individuals. A corporation is run by a board of directors.

S-Corporation

This is a type of corporation that meets some tax requirements under the Internal Revenue Code. The S-corporation must have less than a 100 shareholders but it is taxed as a partnership.

Limited Liability Companies

An LLC has both the characteristics of a corporation and a partnership or a sole proprietorship. The owners of the LLC do not have personal responsibility of the liabilities or debts of the business entity.

Part II: Chart of Key Terms for each Business Type

Business Type Advantage Disadvantage

Sole Proprietorship Double taxation-only taxed once at personal level.

Start-up costs- low.

Transfer of ownership-simple because it involves one person. Unlimited Liability-owners are personally responsible for debts.

Ability to raise capital and credit-limited.

Continuity- limited because operations can be affected and halted by a disaster.

Partnership Ability to raise capital and credit-several partners can easily raise capital

Double Taxation-taxed only once

Start up costs- depends on the size of the entity Unlimited Liability-partners share responsibility and debts.

Continuity-can be limited if it is a small size

Transfer of ownership-can be challenging because of partners

Corporation Unlimited liability-owners are not personally liable.

Ability to raise capital and credit- very high because it is created by many people

Continuity-more certain because it is a large entity

Double taxation-taxed at corporation and personal levels.

Start-up costs-high because it is large

Transfer of ownership- difficult because of many owners

S-Corporation Unlimited liability-partners not personally liable

Ability to raise capital and credit-high because of 100 shareholders or less

Start-up costs-many shareholders contribute to costs.

Continuity- more certain

Double Taxation-taxes at corporation and personal level.

Transfer of ownership-many partners involved

Limited Liability Companies Unlimited Liability- partners not personally liable for debts

Ability to raise capital and credit-high

Continuity-is high is the company is large.

Double taxation-at company and individual levels.

Start-up costs-depend on size of the entity

Transfer of ownership-difficult because of many partners

Part III: Define Key Terms

unlimited liability

This applies to general partnerships as well as sole proprietorships. Here, the owners of the business can be held personally liable for any debts or responsibilities of their company.

ability to raise capital and credit

This refers to extent to which an entity can access funds for capital, or get loans from lenders such as banks. Funds from capital can be raised through sale of shares or equity.

double taxation

This refers to a situation where income from the same source is taxed twice, for example when a corporation earns profits it is taxed, and also when it transfers profits to shareholders the shareholders are again taxed on the same income.

start up costs

These are all the one-time expenses incurred in setting up a business. They include registration fees, advertising, and employee training among others.

continuity

This is the ability of the business enterprise to maintain its operations especially during and after a disruption or disaster affecting business operations.

transfer of ownership

This refers to moving property from one entity to another, and it can be done in several ways including selling a company.

Question 2

Part I: Why is it important to have a partnership agreement?

Some of the reasons to have a partnership agreement include:

a clear definition of the rights and responsibilities of partners

ways to handle conflicts that may arise between them (Hillman 2005)

outline the rules of managing the company and

Protect the investments that the owner and other investors have made in the company.

Part II: Make a listing of what should be included in the legal written Partnership Agreement document.

Percentage of ownership

When setting up a business entity, each partner makes some contributions and this should be clearly written down in the partnership agreement to avoid future disagreements.

Division of Losses and Profits

Most of the time partners share profits and losses based on the percentage of ownership, while other times they are shared equally regardless of a partner’s stake in the company (Neville 2013). A clear explanation of this will help avoid any conflicts in future of the business.

Authority

Partners have the authority to bind the company or business entity to some contracts such as debts. The partnership agreement should clearly define the authority that every partner has to do this because it can expose the company to a high level of risk.

Resolving disputes and Decision Making

Conflicts and disputes are an inevitable part of any partnership, and the partners must outline how they will handle any conflicts that will arise in the course of their partnership. This is usually done through a mediation clause which allows the partners to solve issues without resorting to a court process. Making decisions will also become an issue, and partners establish processes such as voting to create balance in power.

Length of the partnership

Some partnerships are created to last for an unspecified period of time, while others will end after a while or after achieving a set goal. The legal agreement should include this information.

Withdrawal and Death

When a partner dies or decides to leave, there must be provisions such as sales agreements to allow them sell their stake in the company.

Question 3

Explain why a small business owner can be an entrepreneur even though some say they are completely different.

Many people use the words small business owner and entrepreneur interchangeably, but there are several characteristics that distinguish the two. A person can be a small business owner as well as an entrepreneur, and a person can also be a small business owner but not an entrepreneur. To better understand the two terms, it is imperative to understand some of the characteristics of an entrepreneur. Entrepreneurs do what they love because they are passionate about it. They may run a small business or a billion-dollar company but it is not about the money for them (Marks 2012). Some small business owners set up their businesses purely for financial motivations but have no passion for it, and this means they are not entrepreneurs.

Entrepreneurs are always on the look-out to create and utilize innovations and new ways of doing things, while small business owners may not care about this. Entrepreneurs can divide their focus on many different projects or move from one project to another. Small business owners on the other hand tend to concentrate all their efforts on one thing. Additionally, entrepreneurs look for capital from different investors while small business owners use mostly their own capital and credit to fund their ventures (Storey 2016). Entrepreneurs love to take risks even if it means they might lose everything, while small business owners keep a close eye on their finances and avoid taking any significant risks. From this, a small business owner may also be an entrepreneur, while in other cases they are not.

References

Hillman, R. W. (2005). The Bargain in the Firm: Partnership Law, Corporate Law, and Private Ordering Within Closely-Held Business Associations. U. Ill. L. Rev., 171.

Marks, G. (2012, June 6) “The Difference Between An Entrepreneur And A Small Business Owner.” Retrieved from https://www.forbes.com/sites/quickerbettertech/2012/06/06/the-difference-between-an-entrepreneur-and-a-small-business-owner/#6167db416635Neville, A. (2013, June 7) “Five Clauses Every Partnership Needs”. Retrieved from https://www.forbes.com/sites/amandaneville/2013/06/07/five-clauses-every-partnership-agreement-needs/#78736fd375cdStorey, D. J. (2016). Understanding the small business sector. Routledge.