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Introduction to Business
Chapter 4: Forms of Business Ownership
4.1 Going It Alone: Sole Proprietorship
The advantages of sole proprietorships include ease and low cost of formation, the owner’s
rights to all profits, the owner’s control of the business, relative freedom from government
regulation, absence of special taxes, and ease of dissolution. Disadvantages include owner’s
unlimited liability for debts and personal absorption of all losses, difficulty in raising capital,
limited managerial expertise, difficulty in finding qualified employees, large personal time
commitment, and unstable business life.
4.1 Review Questions
1. What is sole proprietorship?
2. What are the advantages of sole proprietorship, and which of these advantages might
seem the most appealing to a business owner? Why?
3. What are the disadvantages of sole proprietorship, and which of these disadvantages
might be the most worrisome and why?
4. Of sole proprietorships, partnerships, and corporations, which are the most numerous?
Which make the most profits and sales?
4.2 Partnerships: Sharing the Load
The advantages of partnerships include ease of formation, availability of capital, diversity of
managerial skills and expertise, flexibility to respond to changing business conditions, no special
taxes, and relative freedom from government control. Disadvantages include unlimited liability
for general partners, potential for conflict between partners, sharing of profits, and difficulty
exiting or dissolving the partnership. Partnerships can be formed as either general or limited
partnerships. In a general partnership, the operations of the business are controlled by one or
more general partners with unlimited liability. The partners co-own the assets and share the
profits. Each partner is individually liable for all debts and contracts of the partnership. In a
limited partnership, the limited partners are financial partners whose liability is limited to their
investment; they do not participate in the firm’s operations.
4.2 Review Questions
1. Define the following terms:
a. Partnership
b. General Partnership
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c. Limited Partnership
2. How do parties agree to a joint enterprise?
3. Why is it recommended to have a written agreement?
4. What is the difference between a limited partnership, a limited liability partnership (LLP)
and a limited liability limited partnership (LLLP)?
5. How do a general and limited partnership differ?
6. Why are partnerships appealing to some business owners?
7. What types of questions might a person ask when picking a partner?
8. Why is it important for prospective business owners to carefully consider who they form
a partnership with?
a. Before forming a partnership, what disadvantages must a prospective business
owner consider?
b. Which of the disadvantages might be the most worrisome and why?
4.3 Corporations: Limiting Your Liability
A corporation is a legal entity chartered by a state. Its organizational structure includes
stockholders who own the corporation, a board of directors elected by the stockholders to
govern the firm, and officers who carry out the goals and policies set by the board. Stockholders
can sell or transfer their shares at any time and are entitled to receive profits in the form of
dividends. Advantages of corporations include limited liability, ease of transferring ownership,
unlimited life tax deductions, and the ability to attract financing. Disadvantages include double
taxation of profits, the cost and complexity of formation, and government restrictions.
Articles of Incorporation
Articles of incorporation are prepared on a form authorized or supplied by the state of
incorporation. Although they may vary slightly from state to state, all articles of incorporation
include the following key items:
Name of corporation
Company’s goals
Types of stock and number of shares of each type to issue
Life of the corporation (usually “perpetual,” meaning with no time limit)
Minimum investment by owners
Methods for transferring shares of stock
Address of the corporate office
Names and addresses of the first board of directors
4.3 Review Questions
1. Define the following terms:
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
Introduction to Business
Chapter 4: Forms of Business Ownership
4.1 Going It Alone: Sole Proprietorship
The advantages of sole proprietorships include ease and low cost of formation, the owner’s
rights to all profits, the owner’s control of the business, relative freedom from government
regulation, absence of special taxes, and ease of dissolution. Disadvantages include owner’s
unlimited liability for debts and personal absorption of all losses, difficulty in raising capital,
limited managerial expertise, difficulty in finding qualified employees, large personal time
commitment, and unstable business life.
4.1 Review Questions
1. What is sole proprietorship?
2. What are the advantages of sole proprietorship, and which of these advantages might
seem the most appealing to a business owner? Why?
3. What are the disadvantages of sole proprietorship, and which of these disadvantages
might be the most worrisome and why?
4. Of sole proprietorships, partnerships, and corporations, which are the most numerous?
Which make the most profits and sales?
4.2 Partnerships: Sharing the Load
The advantages of partnerships include ease of formation, availability of capital, diversity of
managerial skills and expertise, flexibility to respond to changing business conditions, no special
taxes, and relative freedom from government control. Disadvantages include unlimited liability
for general partners, potential for conflict between partners, sharing of profits, and difficulty
exiting or dissolving the partnership. Partnerships can be formed as either general or limited
partnerships. In a general partnership, the operations of the business are controlled by one or
more general partners with unlimited liability. The partners co-own the assets and share the
profits. Each partner is individually liable for all debts and contracts of the partnership. In a
limited partnership, the limited partners are financial partners whose liability is limited to their
investment; they do not participate in the firm’s operations.
4.2 Review Questions
1. Define the following terms:
a. Partnership
b. General Partnership
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
, 2
c. Limited Partnership
2. How do parties agree to a joint enterprise?
3. Why is it recommended to have a written agreement?
4. What is the difference between a limited partnership, a limited liability partnership (LLP)
and a limited liability limited partnership (LLLP)?
5. How do a general and limited partnership differ?
6. Why are partnerships appealing to some business owners?
7. What types of questions might a person ask when picking a partner?
8. Why is it important for prospective business owners to carefully consider who they form
a partnership with?
a. Before forming a partnership, what disadvantages must a prospective business
owner consider?
b. Which of the disadvantages might be the most worrisome and why?
4.3 Corporations: Limiting Your Liability
A corporation is a legal entity chartered by a state. Its organizational structure includes
stockholders who own the corporation, a board of directors elected by the stockholders to
govern the firm, and officers who carry out the goals and policies set by the board. Stockholders
can sell or transfer their shares at any time and are entitled to receive profits in the form of
dividends. Advantages of corporations include limited liability, ease of transferring ownership,
unlimited life tax deductions, and the ability to attract financing. Disadvantages include double
taxation of profits, the cost and complexity of formation, and government restrictions.
Articles of Incorporation
Articles of incorporation are prepared on a form authorized or supplied by the state of
incorporation. Although they may vary slightly from state to state, all articles of incorporation
include the following key items:
Name of corporation
Company’s goals
Types of stock and number of shares of each type to issue
Life of the corporation (usually “perpetual,” meaning with no time limit)
Minimum investment by owners
Methods for transferring shares of stock
Address of the corporate office
Names and addresses of the first board of directors
4.3 Review Questions
1. Define the following terms:
For more free, peer-reviewed, openly licensed resources visit OpenStax.org.
