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Business Firms
Why do Business Firms Exist?
• Business firms exist when people working together can produce more than the sum of individuals working alone can produce.
• Key Terms: Business Firm, shirking, monitor, residual claimant
Types of Business Firms
• Sole Proprietorships- Single Owner
• Partnerships-Two or more who own a certain stake in business
• Corporations-Owned by Stockholders
SOLE PROPRIETORSHIPADVANTAGES
• Easy to form and to close.
• All decision-making power resides with sole proprietorship.
• Profit of the firm is taxed once.
SOLE PROPRITORSHIPDISADVANTAGES
• Unlimited liability-owner responsible for all debts incurred by the business
• Limited ability to raise funds
• Ends with retirement or death
PARTNERSHIPSADVANTAGES
• Specialization can be utilized
• Profit is to the partners and only personal income tax is applied (taxed once)
PARTNERSHIPSDISADVANTAGES
• Partners liability is unlimited
• Decision making can be complicated
CORPORATIONSADVANTAGES
• Owners (stockholders) have no liability for debts incurred by the corporation
• Continue to exist even if one or more owners sell their shares or die
• Able to raise large sums of capital
CORPORATIONSDISADVANTAGES
• Subject to double taxation
• Complicated to set up