Business entities are an integral part of business practice and economic productivity. An effective business practitioner must understand the characteristics of the major types of business entities, as these attributes can dramatically affect the nature of the business's relationships. Before beginning to conduct business, one should always weigh the benefits and burdens of the different types of business entities and make a conscious decision about which type of entity to form to conduct one's business.
Depending on the type of business, the people involved, and the goals of the business, some entities may be more appropriate than others for a particular business. To make the decision about the appropriate type of entity to form, one should consider factors including the following:
· creation and maintenance—the effort associated with forming and maintaining the entity
· continuity—the continuity or stability of the organization upon given occurrences
· ownership and control—the ownership rights and control of those involved with the business
· personal liability—the potential for personal liability of those involved with the business
· compensation—the compensation and division of profits among business owners
· taxation—the taxation of the organization's earnings and its distributions of profits to the owners
Weighing these and related factors, which vary in consequence depending on the entity, informs the choice of the type of business entity best suited to one's business. Examination of these characteristics will make obvious the effect of these attributes on stakeholders of the business entity. The decision of which entity is right for a particular business impacts many facets of a business's operation, including accounting, management, and finance.
CHECK YOUR KNOWLEDGE:
Question 1
Which of the following business entities imposes unlimited liability on all of the owners?
limited partnership
general partnership
limited liability partnership
S corporation
Incorrect. In a limited partnership, there are two types of owners: the general partner and the limited partner. Although the general partner has unlimited liability, the limited partner has limited liability.
Correct. The general partnership imposes unlimited liability upon the owners (partners). This means that the personal assets of the owners are at risk for the liabilities of the owners, including the torts and contracts entered into within the scope of the partnership, by each partner himself and other partners.
Incorrect. All owners (partners) in a limited liability partnership have limited liability.
Incorrect. An S corporation provides all owners (shareholders) with limited liability.
Question 2
Which of the following is a characteristic of a sole proprietorship?
A sole proprietorship is subject to double taxation.
A sole proprietorship has perpetual life, beyond that of the owner.
A sole proprietorship is formed simply by someone carrying on an activity seeking a profit.
A sole proprietorship provides limited liability to its owner.
Incorrect. A sole proprietorship is subject to pass-through taxation, and is not double taxed like a C corporation is.
Correct. A sole proprietorship is easily formed, without formal registration with the state, simply by someone carrying on an activity seeking a profit.
Incorrect. The unlimited liability attributed to a sole proprietor is one of the greatest disadvantages of the sole proprietorship.
Incorrect. A sole proprietorship is limited to the life of the owner. Although business assets and client lists can be transferred, the sole proprietorship cannot be.
Question 3
What are the owners of a limited liability company (LLC) called?
stakeholders
partners
shareholders
members
Incorrect. "Stakeholder" is a term originating in management and ethical theory, which generally refers to anyone who is affected by or can affect an organization. Although this definition is broad enough to include the owners of an LLC, it is not limited to it, but also includes employees, customers, distributors, and others.
Incorrect. The owners of all forms of partnerships, including general partnerships, limited partnerships, and limited liability partnerships are all referred to as partners.
Incorrect. The owners of for-profit corporations, including C corporations and S corporations, are referred to as shareholders.
Correct. They often act very much like partners in a partnership, but because an LLC is not a partnership, the owners are called members.
Question 4
Which of the following is the greatest disadvantage of a C corporation?
The C corporation is subject to double taxation.
The C corporation allows for limited liability.
The C corporation requires a board of directors.
The C corporation provides a means of seeking investment through issuing equity and debt securities.
Correct. The C corporation is taxed on its earnings and then the shareholders are taxed on the dividends. This is the greatest disadvantage of a C corporation, because the double taxation can be costly.
Incorrect. A C corporation does allow for limited liability, but this is an advantage of a C corporation, not a disadvantage.
Incorrect. A C corporation does require a board of directors, but this is typically perceived an advantage rather than a disadvantage, because management is done by a group of minds, as opposed to a single mind. Some do, however, perceive a board as a disadvantage because often the owners must give up some control over management to the board.
Incorrect. A C corporation does provide a means of seeking investment through issuing equity and debt securities, but this is an advantage of a C corporation, not a disadvantage.
Question 5
Which entity allows for the owners to elect whether they manage the business or they appoint managers?
limited partnership
limited liability company
general partnership
C corporation
Incorrect. The general partners in a limited partnership must manage the partnership. The limited partners are prohibited from managing.
Correct. The owners of a limited liability company may elect to be manager-managed or member-managed.
NoJudgement
LearningTopic_LegalFormsofBusiness.docx
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