Chapter Six

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Chapter Six
Business Formation: Choosing the Form that Fits

Review Questions

1. Describe the basic features that distinguish the four basic forms of business ownership: sole proprietorships, general partnerships, C corporations, and limited liability companies.
Sole Proprietorship – the business is owned by a single individual
Partnership – two or more people serve as co-owners of the business
Corporation – the business is a separate legal entity
Limited Liability Company – a hybrid with characteristics of both a corporation and partnership
2. Why do many entrepreneurs initially set up their businesses as sole proprietorships? Why do many successful entrepreneurs eventually decide to convert their sole proprietorship to some other form of ownership such as a corporation or LLC?
It’s the easiest and least expensive form of business to set up and allows the single owner to reap all of the profits; sole proprietorships have major limitations, can only have one owner, risk associated with unlimited liability, and its difficult to manage a business on your own

3. How do limited partnerships and limited liability partnerships differ from general partnerships and from each other?

4. A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). The GPs are, in all major respects, in the same legal position as partners in a conventional firm, i.e. they have management control, share the profits of the firm in predefined proportions, and have joint and several liability for the debts of the partnership. As in a general partnership, the GPs have apparent authority as agents of the firm to bind all the other partners in contracts with third parties. Like shareholders in a corporation, the LPs have limited liability, i.e. they are only liable on debts incurred by the firm to the extent of their registered investment, and they have no management

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