NCSU MIE 305 Exam 2 (Chapters 4, 6, 7)
What are the main "default" forms of business organization recognized at common law? -
ANS-Sole Proprietorships and General Partnerships
Sole Proprietorship - ANS-A business owned by one person who receives all the profits from the
business and takes all the risks.
Easiest to start
Pass-through taxation
Advantages of Sole Proprietorship - ANS-Proprietor owns the entire business and has a right to
receive all profits
Easier and less costly to start; allows flexibility
No meeting requirements, no filing requirements from the state
Disadvantages of Sole Proprietorship - ANS-The owner is personally liable for all losses or
liabilities incurred by the business enterprise.
Most likely form of business to be audited by IRS (5x more!)
Lacks continuity on the death of proprietor; can't convey the business, per se
General Partnership - ANS-A partnership in which all owners share in operating the business
and in assuming liability for the business's debts.
Partnership agreement may be oral or written down
New partners requires agreement from all partners
Advantages of General Partnership - ANS-May be at will (usually) or fixed term
Offers pass-through taxation to partners on profits
Like sole proprietorships, easy to start- no registration/filings usually necessary!
Equal voice among partners in management and profit-sharing (unless unequal are in part.
agreement)
Disadvantages of General Partnership - ANS-no limited liability for partners; joint & several
liability
Profits are always income to partners, even if re-invested in the business
Traditional common law rules (codified in Uniform Partnership Act, 1914), require partnership to
go through dissolution and winding up
What is a franchise operation or interest? - ANS-a business owner (franchisor) licensing to a
third party (franchisee) the right to operate a business unit or provide goods and/or services
using the franchisor's business name and system
, Differences between sole proprietorships and general partnerships - ANS-A sole proprietorship
has one owner, while a partnership has two or more owners
Forms of franchise operation or interest - ANS-Chain Operations
Distributorship
Local Manufacturer/Processor
Chain Operations - ANS-Franchises that use the franchisor's trade name and branding at their
premises, and on all or most of their business supplies.
The franchisee is also required by contract to use standardized methods of production, sales
and operating procedures developed by the franchisor.
Often, the franchisee is also required to purchase its business supplies from the franchisor, as in
the case of many fast food restaurants
Distributorship - ANS-A franchise where the franchisee becomes a point of sale or distribution
for the franchisor's products, usually being given a specific territory to cover in representing the
franchisor in that region.
Local Manufacturer/Processor - ANS-a franchise which is not designed to be a point of sale or
engage in direct retail activities, but which makes the franchisor's product according to specific
requirements or a specific recipe and then takes responsibility for wholesale distribution in a
certain territory for the franchisor's products
Similarities between sole proprietorships and general partnerships - ANS-Sole proprietorships
and partnerships are both easy and inexpensive to set up. These type of businesses are not
separate legal entities. This means that these businesses don't file their own tax returns, and
everything owned by the businesses are still owned by the owners personally
How do you start (and end) a general partnership? - ANS-Create a general partnership
agreement (not required)
File a dissolution form
What are the presumptions about ownership interests and liability interests at common law in
the absence of a more detailed partnership agreement? - ANS-Profits, losses, and liabilities are
equal
What is a partnership agreement? - ANS-Legal document that clearly defines how the work,
responsibilities, rewards, and liabilities of a partnership will be shared by the partners.
Why should a partnership agreement be written? - ANS-to protect the owner's investment in the
company, govern how the company will be managed, clearly define the rights and obligations of
the partners, and determine the rules of engagement should a disagreement arise among the
parties
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