1. Business Entities

Business Entities

Playlist: 25 Videos: 90 Minutes


Topic Material

Business Entities (Intro)

Why is studying business entities important?

Business Entities – Types and Characteristics

What are the major characteristics of a “sole proprietorship”?

What are the main characteristics of a “general partnership”?

What are the main characteristics of a “joint venture”?

What are the main characteristics of a “limited partnership”?

What are the main characteristics of a “limited liability partnership”?

What are the main characteristics of a “limited liability company”?

What are the main characteristics of a “corporation”?

What are the requirements to be a “S Corporation”?

More Depth on Business Entities

A Detailed Explanation of the Sole Proprietorship

A Detailed Explanation of the General Partnership

A Detailed Explanation of the Limited Liability Company

A Detailed Explanation of the Corporation

A Detailed Explanation of the Non-Profit Entity


Topics: Learning Material

Introduction to Business Entities
Business entities are an integral part of business practice and economic productivity. An effective business practitioner must understand the characteristics of the major types of business entities, as these attributes can dramatically affect the nature of the business’s relationships. This chapter will introduce the concept of the business entity, legal authority for business entities, and the justification for their legal recognition. It will then introduce the most common types of business entities and their notable characteristics. Examination of these characteristics will make obvious the effect of these attributes on stakeholders of the business entity. The characteristics of a business entity affect many other areas of business practices, such as accounting, management, and finance. For further written and video explanation, discussion and practice questions, see Business Entities (Intro)

What are “Business Entities”?
  • Legal organizations
  • Exist under state law
  • May be treated as a separate person.
  • A bundle of contracts - rights and duties of the owners and employees

For further written and video explanation, discussion and practice questions, see What are "Business Entities"?

What is it important to learn about Business Entities?
  • Legal entities have specific benefits for operations.
  • Ownership structure, organizational structure, potential liability, compensation methods, and tax laws

For further written and video explanation, discussion and practice questions, see Why is studying business entities important?

Closely-Held vs Publicly-Held Businesses
  • Closely-held Business
  • Publicly-held Business

For further written and video explanation, discussion and practice questions, see What is a "Closely-held" vs "Publicly-held Business"?

Main types of business entity?
  • Sole Proprietorships
  • General Partnerships
  • Limited Partnerships
  • Limited Liability Limited Partnership
  • Limited Liability Companies
  • Corporations

For further written and video explanation, discussion and practice questions, see What are the main types of business entity?

Primary characteristics of business entities
  • Creation & Maintenance
  • Continuity
  • Ownership & Control
  • Personal Liability
  • Compensation
  • Taxation

For further written and video explanation, discussion and practice questions, see What are the primary characteristics of business entities?

What is “Creation” of a business entity?
  • Default Entity Status
  • Filing for Entity Status

For further written and video explanation, discussion and practice questions, see What is "creation" of a business entity?

What is “Maintenance” of a business entity?
  • Filing documents, holding meetings, maintaining records, observing formalities, and reporting necessary information to regulators.
  • Federal, State, industry, and internal Requirements

For further written and video explanation, discussion and practice questions, see What is "maintenance" of a business entity?

What is “Continuity” of a business entity?
  • Effect on the business of a major change in the ownership and organization structure.
  • Can cause the business to dissolve.
  • Death or dissociation of an owner, transfer of ownership, divorce, bankruptcy, mental competency.

For further written and video explanation, discussion and practice questions, see What is "continuity" of a business entity?

What is the “Ownership Structure” of a business entity?
  • Internal organization of a business entity
  • Rights and duties of the individuals holding a legal or equitable interest in that business.

For further written and video explanation, discussion and practice questions, see What is the "ownership structure" of a business entity?

What is “Control” of a business entity?
  • Who has control over operations?
  • Authority to act on behalf of the business?
  • Issue of overlapping ownership in closely-held business entities.

For further written and video explanation, discussion and practice questions, see What is "control" of a business entity?

What is the “Personal Liability” of business owners?
  • Individuals are responsible for their own conduct.
  • Respondeat Superior - Tort
  • Vicarious Liability - Agency & Contract

For further written and video explanation, discussion and practice questions, see What is "personal liability" of owners of a business entity?

How are business owners “Compensated”?
  • Salary
  • Owner’s Draw - Profits to pass through the business directly to its owners.
  • Dividends

For further written and video explanation, discussion and practice questions, see What is "compensation" of business owners?

How are business owners taxed?
  • Federal and state income taxes
  • Percentage of their adjusted gross income (AGI) in a given tax year.
  • wages or other income, dividends, and investment interest, gains, dividends, rents, royalties, etc.
  • “itemizing deductions” or claiming a “standard deduction”.
  • Subsection C of the Internal Revenue Code ("C-Corps),

For an explanation of these concepts and further written and video explanation, discussion and practice questions, see What is income taxation of business owners?

What is “Sales & Use Tax”?
  • Sales tax - fixed percentage of the value of the good.
  • Use tax - Consumption of goods in one state but purchased from another state.

For further written and video explanation, discussion and practice questions, see What is Sales & Use tax?

What are “Payroll” and “Self-Employment” taxes?
  • Federal Insurance Contribution Act (FICA) - Social Security and Medicare taxes.
  • Employer and Employee withholding
  • Self-employment taxes

For further written and video explanation, discussion and practice questions, see What are payroll and self-employment taxes?

Major Characteristics of a “Sole Proprietorship”
  • Creation & Maintenance
  • Continuity
  • Ownership
  • Control
  • Personal Liability
  • Taxation

To learn more about these characteristics and for further written and video explanation, discussion and practice questions, see What are the major characteristics of a "sole proprietorship"?

Major Characteristics of a “General Partnership
  • Creation & Maintenance
  • Continuity
  • Ownership
  • Control
  • Personal Liability
  • Taxation

To learn more about these characteristics and for further written and video explanation, discussion and practice questions, see What are the main characteristics of a "general partnership"?

Major Characteristics of a “Joint Venture”
  • Similar to a Partnership
  • Limited purpose or a single project.
  • Does not arise by default - specific intent and agreement

For further written and video explanation, discussion and practice questions, see What are the main characteristics of a "joint venture"?

Major Characteristics of a “Limited Partnership”
  • Creation & Maintenance
  • Continuity
  • Ownership
  • Control
  • Personal Liability
  • Taxation

For further written and video explanation, discussion and practice questions, see What are the main characteristics of a "limited partnership"?

Major Characteristics of a Limited Liability Partnership
  • Creation & Maintenance
  • Continuity
  • Ownership
  • Control
  • Personal Liability
  • Taxation

For further written and video explanation, discussion and practice questions, see What are the main characteristics of a "limited liability partnership"?

Major Characteristics of a “Limited Liability Company” - LLC
  • Creation & Maintenance
  • Continuity
  • Ownership
  • Control
  • Personal Liability
  • Taxation

For further written and video explanation, discussion and practice questions, see What are the main characteristics of a "limited liability company"?

Major Characteristics of a “Corporation”
  • Creation & Maintenance
  • Continuity
  • Ownership
  • Control
  • Personal Liability
  • Taxation

For further written and video explanation, discussion and practice questions, see What are the main characteristics of a "corporation"?

Requirements to be an “S-Corporation”
  • Geography
  • Citizenship
  • Number of Shareholders
  • Eligible Shareholders
  • Ownership Classes
  • Tax Year
  • Shareholder Election

For further written and video explanation, discussion and practice questions, see What are the requirements to be a "S Corporation"?


Flashcard - Study Practice

Q1
Business entities are legal organizations that exist by virtue of ________ law.

Q2
The legal entity is essentially a _________ that provides for the rights and duties of the owners and employees of the business entity.

Q3
Each individual state passes its own substantive and procedural laws regarding business entities. True or False

Q4
The home state of a corporation may be the location where ____________.

A4
the business is headquartered; where the business organizes and establishes a registered agent

Resource Video: https://thebusinessprofessor.com/what-are-business-entities/

Q5
Understanding business entity characteristics does NOT include one of the following:

A5
ownership structure; organizational structure; potential liability; compensation methods; tax laws applicable to the business entity

Resource Video: https://thebusinessprofessor.com/why-is-understanding-business-entities-important/

Q6
A ______________ is held by a smaller or more closely related group of individuals.

A6
closely-held business;. Publicly-held business

Resource Video: https://thebusinessprofessor.com/closely-held-vs-publicly-held-business/

Q7
A ____________ business is any business that is traded on a public exchange.

Q8
Which of the following is not a separate business entity from its owner?

Q9
Which of the following is not a major characteristic of a business entity?

Q10
A ______________ may arise simply by the parties undertaking some business activity with the intention of generating revenue or making a profit.

Q11
Some business entities require the filing of documents of organization in accordance with the procedural rules adopted by the state of organization. True or False

Q12
____________ of a business entity is summarized as the administrative steps associated with starting and carrying on business as a given entity form.

Q13
____________ entails the process of filing documents, holding meetings, maintaining records, observing formalities, and reporting necessary information to regulators.

Q14
_______________ concerns the effect on the business of a major change in the ownership and organization structure.

A14
Continuity of a business entity

Resource Video: https://thebusinessprofessor.com/continuity-of-business-entities/

Q15
_______________ concerns the stability and durability of the organization if or when an owner leaves the business.

A15
Continuity of a business entity

Resource Video: https://thebusinessprofessor.com/continuity-of-business-entities/

Q16
_______________ concerns the internal organization of a business entity and the rights and duties of the individuals holding a legal or equitable interest in that business.

A16
Ownership structure of a business entity

Resource Video: https://thebusinessprofessor.com/ownership-structure-of-business-entities/

Q17
_______________ concerns who has control over operations or authority to act on behalf of the business.

A17
Authority over a business entity

Resource Videos: https://thebusinessprofessor.com/what-is-control-of-a-business-entity/

Q18
Each business entity type has a default control structure and level of authority vested in owners and managers of the business. True or False

Q19
_________________ is the characteristic that limits the liability of business owners for debts of the business or the torts of agents of the business.

A19

Q20
_________________ protects business owners from being held personally liable for the debts (contracts) or tortious conduct of the business’s employees or other owners.

A20

Q21
The acceptable method of compensation of business owners depends upon the type of business entity and the role that the owner plays in the business. True or False

Q22
Depending on the type of business entity, owners generally receive compensation from the business entity in the form of:

A22
Salary, Pass-through of profits, Dividends

Resource Videos: https://thebusinessprofessor.com/compensation-within-business-entities/

Q23
Understanding basic taxation concepts as they apply to each entity type will give you sufficient background to understand the important tax considerations in a transaction by a given business entity, including _______________

A23
Individual taxation, and Business taxation

Resource Video: https://thebusinessprofessor.com/taxation-of-business-entities-explained/

Q24
_______________ is the amount that the merchant must charge to customers who purchase goods for use (rather than resale).

Q25
_______________ is assessed when goods are purchased for use or consumption and the applicable state sales tax is not paid on the item.

Q26
Employers and employees who receive any form of compensation as part of their employment are generally subject to ____________.

Q27
___________ were authorized under the Federal Insurance Contribution Act (FICA) and are made up of Social Security and Medicare taxes.

Q28
Employers must withhold _____________ from the compensation paid to employees, contribute a similar amount to that withheld from the employee’s compensation, and then deposit these funds with the Internal Revenue Service (IRS).

Q29
________________ apply to individuals who are self-employed or are owners of an entity taxed as a partnership.

Q30
In a __________________ there is no boundary between the individual entrepreneur and business entity. That is, the entrepreneur and the business activity are one in the same.

Q31
To create a sole proprietorship the individual entrepreneur simply has to carry on some activity with the intention of seeking a profit. True or False

Q32
The definition of a sole proprietorship has the following components:

A32
A commercial activity; An intent to earn a profit (or sustain a loss)

Resource Video: https://thebusinessprofessor.com/sole-proprietorships-explained/

Q33
If the entrepreneur stops carrying on the business activity, the sole proprietorship ceases to exist.

Q34
Ownership in the sole proprietorship cannot be transferred because the business activity is unique to the individual. True or False

Q35
A sole proprietorship can have more than one owner. True or False

A35
False - the would make it a general partnership

Resource Video: https://thebusinessprofessor.com/sole-proprietorships-explained/

Q36
The sole proprietor exercises complete control over the business entity - even if the sole proprietorship has managers. True or False

Q37
The sole proprietor is NOT liable for any obligations or torts arising pursuant to the business activity. True or False

Q38
Profits or losses from the sole proprietorship pass through to the business owner and are recorded on the sole proprietors income tax return. True or False

Q39
A ________________ is an agreement between two or more persons to share a common interest in a commercial endeavor and to share its profits and losses.

Q40
A partnership can arise by default (without filing with the Government) from the actions or activities of the partners, without the partners realizing a partnership exists. True or False

Q41
Under the doctrine of __________________, a court may deem a relationship to be a partnership when the requisite elements are not present. This situation arises when third parties rely upon an individual representing himself as a partner or consents to another representing himself as a partner.

A41

Q42
A ______________ is the governing document for any type of partnership. These documents are not mandatory, but it is advisable for any partnership to have an agreement governing the partnership relationship.

Q43
A general partnership has no formal maintenance requirements. True or False

Q44
A(n) ___________ partnership has no stated date. It will continue until the partners dissolve the business.

Q45
In a(n) ___________ the partners can designate a time period for the general partnership, after which the partnership dissolves.

Q46
Any partner in a partnership may dissociate at any time. True or False

Q47
Which of the following activities generally does NOT give rise to dissolution of the partnership:

A47
The business becomes unprofitable

Resource Video: https://thebusinessprofessor.com/general-partnership-explained/

Q48
By default, partners are entitled to equal ownership rights, share equally in profits or losses, unless ________.

A48
The parties specifically agree to some other allocation of profits and losses.

Resource Video: https://thebusinessprofessor.com/general-partnership-explained/

Q49
Partners have decision-making authority with regard to the governance and strategy of the partnership, as well as authority to act on behalf of the partnership as a general agent. True or False

Q50
A general partnership provides the business owners any form of personal liability protection. True or False

Q51
General partners are compensated by receiving a draw of partnership funds (generally profits). This is known as the partner’s ______________.

Q52
General partnerships are pass-through tax entities, meaning that are _________.

Q53
_____________ operate similarly to general partnerships, but they are specifically formed for a limited purpose or a single project.

Q54
A limited partnership must be filed with ________ to come into existence.

Q55
Generally, the _____________ receive an ownership interest in exchange for providing capital (either funds or physical resources) to the limited partnership; while the _____________ generally receives an ownership interest for either capital or labor provided to the limited partnership.

A55
Limited Partner, General Partner

Resource Document: https://thebusinessprofessor.com/limited-partnership-explained/

Q56
_______________ in the limited partnership control and have authority to act on behalf of the partnership.

Q57
A ___________ cannot exercise control over any activity or anyone carrying out a business activity.

Q58
A limited partner that exceeds this limited authority may lose her limited partner status and be deemed a ___________.

Q59
The limited partner is personally liable for the debts and torts of the business. True or False

Q60
The profits and losses of the limited partnership pass through to the owners and are reported on the owners’ _________.

A60
personal income tax statements

Resource Document: https://thebusinessprofessor.com/limited-partnership-explained/

Q61
A ________________ has characteristics similar to a general partnership (GP), but has limited liability protections similar to that of a limited liability company (LLC).

Q62
To form a limited liability partnership, a partner must file an application with _________.

Q63
Each partner in an LLP has the authority to control and act on behalf of the LLP. True or False

Q64
Each partner receives personal liability protection with regard to the actions of other partners, employees, or other agents of the LLP. True or False

Q65
Each limited liability partner receives a draw of partnership profits, the amount of which is either based upon ____________.

A65
the partner’s percentage of ownership or on a special allocation to that partner.

Resource Video: https://thebusinessprofessor.com/what-are-the-characteristics-of-a-limited-liability-partnership/

Q66
In a limited liability partnership, profits and losses pass through to the partner based upon ___________.

A66
her share of the ownership or in accordance with the LLP agreement

Resource Video: https://thebusinessprofessor.com/what-are-the-characteristics-of-a-limited-liability-partnership/

Q67
A _________________ is created by filing articles of organization with the state secretary of state’s office.

Q68
Owners of an LLC are known as _____________.

Q69
An LLC has numerous mandatory governance and maintenance requirements, such as the require the LLC to have meetings or make reports to its owners. True or False

Q70
A _____________ controls the governance and internal operations of the LLC, such as holding meetings, voting rights, keeping of records, etc.

Q71
An LLC is a separate entity from its owners that continues until there is __________.

A71
an act of dissolution by the owners

Resource Video: https://thebusinessprofessor.com/limited-liability-companies-explained/

Q72
In a _____________ LLC, each member has authority to manage and act on behalf of the LLC.

Q73
In a _____________ LLC, the members do not have the authority to control or act on behalf of the business.

Q74
The LLC entity provides limited personal liability protection for its members from the debts and torts of the business entity. True or False

Q75
Members of an LLC may choose for the LLC to be taxed as __________?

A75
a corporation or as a partnership

Resource Video: https://thebusinessprofessor.com/limited-liability-companies-explained/

Q76
The structure of a ______________ consists of the relationship between owners (shareholders), high-level decision makers (directors), and operational managers (executives).

Q77
Corporations arise by filing _________ with a state government.

A77
articles of incorporation

Resource Video: https://thebusinessprofessor.com/c-corporations-explained/

Q78
The state issues a charter upon the application of individuals known as _____________.

Q79
Once the corporate charter is issued, the incorporator must take actions to ____________.

A79
form the board of directors

Resource Video: https://thebusinessprofessor.com/c-corporations-explained/

Q80
The ___________ establish the ownership structure of the corporation and the primary rights of shareholders.

A80
articles of incorporation

Resource Video: https://thebusinessprofessor.com/c-corporations-explained/

Q81
The ____________ control the internal governance of the corporation.

Q82
Corporations require a considerable amount of maintenance and the amount of formality associated with corporate maintenance increases with the size of the business. True or False

Q83
Dissociation by shareholders, directors, or officers of a corporation is grounds for dissolution. True or False

Q84
___________ corporations are held by a small group of shareholders.

Q85
__________ corporate shares are traded on exchanges (or in over-the-counter transactions) and are often very widely held.

Q86
Common shareholders (and sometimes preferred shareholders) have the following types of authority.

A86
vote to elect the board of directors; approve any major corporate actions

Resource Video: https://thebusinessprofessor.com/c-corporations-explained/

Q87
_____________ make high-level and strategic management decisions for the corporation.

Q88
Shareholders have limited personal liability for the debt obligations and torts of the corporation. True or False

Q89
Directors and officers may be subject to shareholder lawsuit, known as ______________ for any actions (or approval of actions) that damage the corporation.

A89
Derivative shareholder actions

Resource Video: https://thebusinessprofessor.com/c-corporations-explained/

Q90
Shareholders who are not employees of a corporation receive compensation in the form of ______________.

Q91
Corporations are taxed as _____________.

A91
Either as a pass-through entity, or it is subject to double taxation

Resource Video: https://thebusinessprofessor.com/c-corporations-explained/

Q92
A corporations taxed pursuant to _________ of the Internal Revenue pay taxes on its profits.

Q93
Pass-through taxation of a corporation is achieved pursuant to ___________ of the IRC.

Q94
Which of the following is NOT require to qualify for S-Corporation status?

A94
The corporation must be registered in every state

Resource Video: https://thebusinessprofessor.com/what-are-requirements-for-an-s-corporation/


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