AC57 STUDENTS

Intended for the Final Term examination

For the school year 2024-2025

CONTENT

I. Table of Specifications (TOS)

II. Key terms to remember

I. TABLE OF SPECIFICATIONS
Business Type Learning Objective on the Cognitive Number of Exam Type
three business types Level Items

I.Sole a. Identify the key

Proprietorship characteristics and
requirements.

b. Explain the normal

operations, processes Situational
and proper Application
management of the and some
II.Partnership respective business recalls on the
structure. basic terms
and concepts All Multiple
c. Differentiate the of the three 68 items.= 85% Choice
respective formation, business Question
processes, extent of structures
III.Corporation liability and manner of
dissolution for each
type of business.

d. Evaluate the
dissolution scenarios
in all structures.

Midterm Examination 12 items = 15%

TOTAL 80 items =
100%

II. BASIC TERMS TO REMEMBER RELATED TO THE THREE BUSINESS TYPE

 A. Key requirements in starting-up a business in a Sole Proprietorship, Partnership and
Corporation.

1. Sole Proprietorship

A sole proprietorship is the simplest form of business to establish. Here are the key requirements:

Legal Setup

1. Business Name Registration

o If operating under a name other than the owner's legal name, file for a Doing Business
As (DBA) or trade name.
2. Licenses and Permits
o Obtain any necessary local, state, or federal business licenses or permits depending on
the industry.
3. Tax Identification
o Use the owner’s Social Security Number (SSN) for taxes, or apply for an Employer
Identification Number (EIN) from the IRS if hiring employees.

Operational Requirements

4. Zoning Compliance
o Verify local zoning laws if running a business from a home or specific location.
5. Bank Account
o Open a business bank account to keep personal and business finances separate.
6. Insurance
o Consider liability insurance to protect personal assets, as there’s no separation between
personal and business liability.
7. Financial Records
o Maintain proper financial records to track income and expenses for tax purposes.

2. Partnership

A partnership involves two or more individuals sharing ownership of a business. The requirements vary
slightly based on the type of partnership (general or limited).

Legal Setup

1. Partnership Agreement (Highly Recommended)

o Draft a formal agreement specifying:
 Roles and responsibilities of each partner.
 Profit-sharing and loss-sharing ratios.
 Conflict resolution methods.
 Provisions for adding or removing partners.
2. Business Name Registration
 o Register the partnership name (or DBA) if it differs from the names of the partners.
3. Licenses and Permits
o Obtain any licenses or permits required by local, state, or federal authorities.
4. Tax Registration
o Apply for an EIN for the partnership to file taxes and handle payroll (if applicable).
5. Zoning Compliance
o Confirm the business location complies with local zoning laws.

Operational Requirements

6. Liability Planning (For Limited Partnerships)

o Ensure limited partners' roles are clearly defined to maintain limited liability status.
7. Bank Account
o Open a joint business bank account in the partnership's name.
8. Insurance
o Obtain partnership liability insurance to protect against claims.

3. Corporation

A corporation is a more formal business entity that requires more steps to establish.

Legal Setup

1. Choose a Business Name

o Ensure the name is unique and complies with state naming requirements (e.g., must
include “Inc.” or “Corp.”).
2. File Articles of Incorporation
o Submit this document to the state, which typically includes:
 Business name and address.
 Purpose of the corporation.
 Information about the directors, officers, and shareholders.
3. Create Corporate Bylaws (Highly Recommended)
o Draft internal rules for how the corporation will operate, including decision-making
processes and shareholder rights.
4. Obtain an EIN
o Apply for an EIN from the IRS to handle tax obligations and payroll.
5. Licenses and Permits
o Secure any necessary licenses based on industry and location.

Operational Requirements

6. Appoint Directors and Hold Initial Meetings

o Elect a board of directors to oversee major business decisions.
7. Issue Stock
 o Distribute shares to initial shareholders as proof of ownership.
8. Open a Corporate Bank Account
o Set up a bank account in the corporation’s name to manage finances separately from
personal accounts.
9. Comply with Annual Reporting
o File required state reports and maintain corporate minutes for meetings.
10. Obtain Insurance
o Consider liability insurance and workers’ compensation insurance.

B. The Common Concepts in creating Sole Proprietorship, Partnership and Corporation

Sole Proprietorship

1. Single Ownership
o Owned and operated by one individual.
2. Easy Formation and Dissolution
o Minimal legal formalities to start or end the business.
3. Full Control
o The owner has complete authority over decision-making.
4. Unlimited Liability
o The owner is personally responsible for all business debts and obligations.
5. No Separate Legal Entity
o The business and the owner are legally the same entity.
6. Profit Retention
o All profits belong to the owner.
7. Taxation
o Income is taxed as personal income of the owner, avoiding corporate taxes.
8. Limited Resources
o Capital is limited to the owner’s personal resources and borrowing capacity.
9. Non-Perpetual Existence
o The business ceases to exist upon the owner’s death or decision to close it.
10. Minimal Regulation
o Fewer compliance requirements compared to other business structures.

Partnership

1. Shared Ownership
o Owned and managed by two or more individuals.
2. Partnership Agreement
o Recommended to define roles, profit-sharing, and dispute resolution mechanisms.
3. Profit and Loss Sharing
o Partners share profits and losses according to the agreed ratio or equally by default.
4. Unlimited Liability (General Partnership)
o All partners are personally liable for the business's debts.
5. Limited Liability (Limited Partnership)
o Limited partners are liable only up to the extent of their investment.
 6. Joint Management
o Decisions are made collectively unless otherwise specified in the agreement.
7. Pass-Through Taxation
o Profits are taxed as personal income of the partners, avoiding double taxation.
8. No Separate Legal Entity
o The business is not legally distinct from its owners (except in some LLPs).
9. Increased Resources
o Combined resources of all partners lead to better financial and operational capabilities.
10. Non-Perpetual Existence
o Dissolves upon the withdrawal, death, or insolvency of a partner unless otherwise agreed.

Corporation

1. Separate Legal Entity

o Legally distinct from its owners, it can own assets, incur liabilities, and sue or be sued.
2. Limited Liability
o Shareholders are only liable for the amount they have invested.
3. Ownership Through Shares
o Ownership is divided into transferable shares of stock.
4. Perpetual Existence
o Continues to exist regardless of changes in ownership or management.
5. Formal Structure
o Requires a board of directors, officers, and shareholders to govern and operate.
6. Capital Raising
o Ability to raise large amounts of capital through the sale of shares or issuance of bonds.
7. Double Taxation (C Corporation)
o Profits are taxed at the corporate level, and dividends are taxed at the shareholder level.
8. Ease of Transferability
o Ownership shares can be easily sold or transferred.
9. Strict Regulations
o Subject to more government oversight, reporting, and compliance requirements.
10. Enhanced Credibility
o Often perceived as more professional and reliable by investors and clients.

C. DISSOLUTIONS OF THE THREE TYPES OF BUSINESS

1. Sole Proprietorship

Since a sole proprietorship is owned by one individual, its dissolution is straightforward

Modes of Dissolution:
 1. Voluntary Dissolution
o The owner decides to close the business for personal or professional reasons (e.g.,
retirement, financial issues, or shifting focus).
o Requires settling debts, closing accounts, and canceling licenses/permits.
2. Involuntary Dissolution
o Forced by external factors such as:
 Bankruptcy.
 Court orders due to illegal operations.
 Non-compliance with tax or licensing requirements.
3. Upon Death or Incapacity of the Owner
o The business ceases to exist when the owner dies or is permanently incapacitated, as
there is no separate legal entity.

2. Partnership

Dissolution of a partnership can occur voluntarily or involuntarily, often depending on the partnership
agreement.

Modes of Dissolution:

1. Voluntary Dissolution (Mutual Agreement)

o Partners mutually decide to end the partnership, often outlined in the partnership
agreement.
o Requires:
 Settling debts and obligations.
 Distributing remaining assets among partners.
2. Expiration or Fulfillment of Purpose
o If the partnership was formed for a specific purpose or duration, it dissolves automatically
once that purpose is fulfilled or the term ends.
3. Withdrawal of a Partner
o A partner exits voluntarily, retires, or sells their share, which may lead to dissolution unless
the agreement specifies continuity.
4. Admission of New Partners
o Adding new partners may trigger the legal dissolution of the old partnership and the
creation of a new one.
5. Involuntary Dissolution
o Caused by:
 Bankruptcy of the partnership or individual partners.
 Death or incapacity of a partner (for general partnerships, unless otherwise
agreed).
 Court orders due to disputes or illegal activities.
6. By Operation of Law
o Events like the business becoming illegal due to changes in the law or regulatory non-
compliance.
3. Corporation

Corporations are separate legal entities, so their dissolution process is more complex and often involves
regulatory oversight.

Modes of Dissolution:

1. Voluntary Dissolution
o Initiated by shareholders or the board of directors:
 Board Resolution: The board proposes dissolution, and shareholders approve it
through a formal vote.
 Articles of Dissolution: Filed with the state to formalize the process.
o The corporation must:
 Settle debts and liabilities.
 Distribute remaining assets to shareholders.
 Cancel licenses, permits, and tax accounts.
2. Involuntary Dissolution (Administrative)
o The state dissolves the corporation due to:
 Non-compliance with annual reporting requirements.
 Failure to pay taxes.
 Non-renewal of licenses.
3. Judicial Dissolution
o A court orders the corporation’s dissolution due to:
 Shareholder disputes (e.g., deadlock in closely held corporations).
 Fraudulent activities or abuse of corporate power.
 Insolvency or failure to meet financial obligations.
4. Merger or Acquisition
o The corporation ceases to exist as a separate entity due to being absorbed into another
corporation or merging with another entity.
5. Bankruptcy
o The corporation files for bankruptcy (e.g., Chapter 7 in the U.S.), leading to liquidation of
assets and cessation of operations.
6. Expiration of Corporate Charter
o If the corporation was set up for a specific term or project, it dissolves when the term
expires or the project concludes.

7. Comparison on Modes of Dissolution

Business Type Voluntary Involuntary Legal Formalities

a. Sole Proprietorship Owner decision Bankruptcy, death, or Minimal (settle debts,
incapacity close)
 b. Partnership Mutual agreement, Partner withdrawal, Moderate (partnership
purpose fulfilled bankruptcy, death agreement governs)
c. Corporation Shareholder Non-compliance, court High (state filings, asset
resolution, mergers order, insolvency liquidation)

Key Differences

1. Liability:
o Sole proprietorship: Owner is fully liable.
o Partnership: Liability depends on the partnership type (general or limited).
o Corporation: Shareholders have limited liability.
2. Taxation:
o Sole proprietorship and partnership income are taxed once as personal income.
o Corporations may face double taxation unless structured as an S Corporation.
3. Complexity:
o Sole proprietorship is the easiest to set up and manage.
o Partnerships require agreements and coordination between owners.
o Corporations involve strict regulations, filing requirements, and compliance.
4. Control:
o Sole proprietors have full control.
o Partnerships require collaboration.
o Corporations are managed by a board of directors and officers.

1. Sole Proprietorship

Management Structure:

 Owner-Centric: The sole proprietor manages and controls all aspects of the business.
 No Formal Hierarchy: There is no separation between ownership and management.
 Decision-Making: The owner has full authority to make all decisions.

Processes:

 Simplified Operations: Minimal regulatory requirements and direct oversight of day-to-

day activities.
 Flexible Processes: The owner can adapt processes quickly without consulting others.
 Limited Delegation: Employees, if any, operate under the direct supervision of the
owner.

Key Features:

 Easy to start and dissolve.

 Management is straightforward but limited by the owner's expertise and resources.

2. Partnership
Management Structure:

 Shared Management: Typically managed by the partners.

o In general partnerships, all partners may participate in management unless
agreed otherwise.
o In limited partnerships, general partners manage the business while limited
partners are passive investors.
 Authority Defined by Agreement: A partnership agreement usually specifies roles,
responsibilities, and decision-making authority.

Processes:

 Collaborative Decision-Making: Requires consensus or majority agreement among

partners for major decisions.
 Dispute Resolution: Often outlined in the partnership agreement.
 Profit and Loss Sharing: Based on the partnership agreement or equally by default.

Key Features:

 Greater management flexibility than a corporation.

 Risk of disagreements if partners don’t align on management decisions.

3. Corporation

Management Structure:

 Hierarchical Structure: Separation of ownership (shareholders) and management.

o Shareholders elect a Board of Directors to oversee the company.
o The Board appoints officers (e.g., CEO, CFO) to manage daily operations.
 Specialized Roles: Defined leadership and management responsibilities.

Processes:

 Formal Decision-Making: Governance guided by bylaws and corporate laws.

o Major decisions (e.g., mergers) require shareholder approval.
o Day-to-day operations are handled by officers and managers.
 Accountability: Regular reporting to shareholders and adherence to regulatory
requirements.
 Delegation: Authority is delegated to professional managers and employees.

Key Features:

 Efficient for large-scale operations with specialized management teams.

 Management decisions may be slower due to formal processes and approvals.
Comparison Table

Aspect Sole Proprietorship Partnership Corporation

Two or more
Ownership Single individual Shareholders
individuals
Management Shared among partners Board of Directors and
Full control by owner
Control or by agreement appointed officers
Collaborative or as per Formal, involving board and
Decision-Making Quick and unilateral
agreement officers
Owner accountable for Partners are collectively Officers accountable to
Accountability
all decisions accountable board/shareholders
Moderate (requires High (governed by bylaws
Formalities Minimal
agreement) and regulations)
Delegation of Moderate, based on Extensive, with professional
Limited
Authority trust among partners managers
Limited by owner’s Moderate, depends on High, supported by
Scalability
resources partner contributions professional management

Things to ponder with:

 Sole proprietorship is best for simplicity and individual control but lacks scalability.
 Partnerships provide collaborative management but require strong agreements to avoid
disputes.
 Corporations excel in handling complex and large-scale operations due to a structured
and professional management system.

…………………………………………….ENJOY STUDYING CLASS………………………………………