What are the advantages and disadvantages of sole proprietorships?
2. Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
3. What are the three key elements of a general partnerships?
4. What are the main differences between general and limited partners?
5. What does unlimited liability mean?
6. What does limited liability mean?
7. What is a master limited partnership?
8. What are the advantages and disadvantages of partnerships?
9. What is the definition of corporation?
10. What are the advantages and disadvantages of corporations?
11. Why do people incorporate?
12. What are the advantages of S corporations?
13. What are the advantages of limited liability companies?
14. What is a merger?
15. What are leveraged buyouts, and what does it mean to take a company private?
16. What is a franchise?
17. What are the benefits and drawbacks of being a franchisee?
18. What is the role of a cooperative?
Liability, LLCs, and MLPs
5. Unlimited Liability: Means that business owners (sole proprietors and general partners) are personally responsible for all business debts and legal judgments. Creditors can seize the owners' personal assets (home, savings).
6. Limited Liability: Means that the owners (shareholders, limited partners, or LLC members) are only responsible for the business's debts up to the amount they invested. Their personal assets are protected.
7. Master Limited Partnership (MLP): A partnership that is publicly traded on an exchange. It combines the tax benefits of a partnership (pass-through taxation) with the liquidity of a publicly traded stock. They primarily operate in energy and infrastructure.
Corporations
9. Definition of Corporation: A corporation is a separate legal entity from its owners (shareholders). It is created by state filing and has many of the legal rights of an individual, such as the ability to enter contracts, own property, and be sued.
| Advantages ✅ | Disadvantages ❌ |
| Limited Liability: Shields shareholders' personal assets. | Double Taxation (C-Corp): The corporation pays taxes on its profits, and shareholders pay taxes again on dividends. |
| Easier to Raise Capital: Can sell stock to the public to attract large investment. | High Cost/Complexity: Expensive and time-consuming to set up, with extensive paperwork. |
| Perpetual Life: The business continues indefinitely regardless of ownership changes. | Extensive Government Regulation: Subject to strict federal and state oversight. |
Export to Sheets11. Why do people incorporate? People incorporate primarily for limited liability (protecting personal wealth) and the ability to raise large amounts of capital through issuing stock.
12. Advantages of S Corporations: An S corporation provides the benefit of limited liability while allowing business profits and losses to be passed directly through to the owners' personal income, thus avoiding double taxation.
13. Advantages of Limited Liability Companies (LLC): An LLC offers the key advantages of limited liability combined with tax flexibility (can choose to be taxed as a sole proprietorship, partnership, or corporation) and fewer restrictions than an S corporation.
Corporate Changes and Franchising
14. What is a merger? A merger occurs when two previously separate companies combine to form a new, single company.
15. Leveraged Buyouts and Taking a Company Private
Leveraged Buyout (LBO): The purchase of a company using a significant amount of borrowed money (debt) to finance the acquisition.
Taking a Company Private: Occurs when the shares of a publicly traded company are purchased by a small group of investors, leading the company to be delisted from stock exchanges to avoid public scrutiny and stringent reporting requirements.
16. What is a franchise? A franchise is a licensing agreement where a company (franchisor) sells the right to use its established business model, brand name, and products to a third party (franchisee) in exchange for fees and royalties.
Sample Answer
Three Key Elements of a General Partnership
Shared Profits and Losses: All partners agree to share in the economic outcomes.
Joint Ownership: Partners have a vested interest in the business's assets.
Right to Participate in Management: All partners have the authority to make business decisions.
| Advantages ✅ | Disadvantages ❌ |
| Ease of Start-up/Closure: Simplest and least expensive to start. | Unlimited Liability: The owner's personal assets are at risk for business debts. |
| Retention of Profit: The owner keeps all profits. | Limited Financial Resources: Funding is often limited to personal savings or bank loans. |
| Complete Control: The owner makes all decisions quickly. | Difficulty of Management: The owner must handle all business functions alone. |
| No Special Taxes: Business income is taxed only once as the owner's personal income. | Lack of Continuity: The business legally ends if the owner dies or leaves. |