AC57-GBRI-STUDENTS
AC57-GBRI-STUDENTS
CONTENT
I. TABLE OF SPECIFICATIONS
Business Type Learning Objective on the Cognitive Number of Exam Type
three business types Level Items
d. Evaluate the
dissolution scenarios
in all structures.
TOTAL 80 items =
100%
1. Sole Proprietorship
A sole proprietorship is the simplest form of business to establish. Here are the key requirements:
Legal Setup
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
Operational Requirements
3. Corporation
A corporation is a more formal business entity that requires more steps to establish.
Legal Setup
Operational Requirements
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. Sole Proprietorship
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:
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.
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:
Key Features:
2. Partnership
Management Structure:
Processes:
Key Features:
3. Corporation
Management Structure:
Processes:
Key Features:
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.