Advantages + Disadvantages of 3 types of business (Essay Question 2)

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sole proprietorship
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a business that is owned (and usually operated) by one person
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advantages of sole proprietorship
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-ease of start up** -tax advantages** -secrecy** -retention of all profits -flexibility
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ease of start up (sole proprietorship)
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simplest and cheapest way to start a business…requires no contracts, agreements, or other legal documents. Certain types of businesses may require a state or city license, but other than that, there are no special start-up fees, taxes, or minimum capital requirement
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tax advantages (sole proprietorship)
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sole proprietorship’s profits are taxed as personal income, so a sole proprietorship does not pay the special state and federal income taxes that corporations pay
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secrecy (sole proprietorship)
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sole proprietors are not required by federal or state governments to publicly reveal their business plans, profits, or other vital facts. Therefore, competitors cannot get their hands on this information
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disadvantages of sole proprietorship
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-unlimited liability** -lack of continuity** -limited management skills**
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unlimited liability (sole proprietorship)
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the business owner would be personally responsible for all debts of the business, therefore if sued, all of the owner’s personal property – including savings and other assets – can be seized (and sold if necessary) to pay creditors
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lack of continuity (sole proprietorship)
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legally, the sole proprietor is the business, so if he dies or is declared legally incompetent, the business ceases to exist
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limited management skills (sole proprietorship)
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since the sole proprietor is often the sole manager, in addition to facilitating many other business functions, it is unlikely that he/she will have expertise in all necessary fields, and many cannot afford to hire managers to handle these processes (buyers, accountants, salespersons, etc)
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partnership
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a voluntary association of two or more persons to act as co-owners of a business for profit
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advantages of partnerships
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-ease of start up** -availability of capital** -personal interest** -retention of profits -combined business skills and knowledge -possible tax advantages (same as sole proprietors)
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ease of start up (partnership)
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easy to form, legal requirements are often limited to registering the name of the business and purchasing any necessary licenses or permits
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availability of capital and credit (partnerships)
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partners can pool funds. Also, banks and suppliers may be more willing to extend credit or grant larger loans to a partnership over a sole proprietor
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personal interest (partnerships)
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general partners are very concerend with the operation of the firm, perhaps even more so than sole proprietors, since they are responsible for the actions of all other general partners, as well as their own
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disadvantages of partnerships
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-unlimited liability** -effects of management disagreements** -frozen investment** -lack of continuity
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unlimited liability (partnerships)
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each GENERAL partner has unlimited liability
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effects of management disagreements (partnerships)
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when partners begin to disagree about decisions, policies, or ethics, distrust may build and deteriorate, possibly to the point where it may become impossible to operate the business succesfully
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seven trigger points that can destroy a partnership
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-divorce -growth pains from rapid growth -partner bringing spouse/relative into business -partner wants to withdraw more money from business -sexual advance from one partner to another -serious medical problems -partner begins doing business on the side with the partnership’s customers
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frozen investment (partnerships)
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it is easy to invest money in a partnership, but sometimes hard to get it out ex: when remaining partners are unwilling to buy the share of the business that belongs to a partner who retires or wants to relocate
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corporation
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an artificial person created by law, with most of the legal rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts
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advantages of corporations
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-limited liability** -ease of transfer of ownership** -perpetual life** -ease of raising capital (selling stocks) -specialized management
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limited liability (corporations)
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with few exceptions, each owner’s financial liability is limited to the amount of money he/she has paid for the corporations stock
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ease of transfer of ownership (corporations)
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a phone call to a stockbroker is all that is required to put stock up for sale, ownership is transferred when the sale is made, and practically no restrictions apply to the sale and purchase of stock issued by an open corporation
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perpetual life (corporations)
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since it is essentially a legal \”person,\” a coropration exists independently of its owners and survives them, unless its charter otherwise specifies
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specialized management (corporations)
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typically, corporations are able to recruit more skilled, knowledgeable, and talented managers than proprietorships and partnership, because they pay bigger salaries and are large enough to offer considerable opportunity for advancement and benefits

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