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Chapter 21: Q. 5 (page 465)

Write a brief explanation of the differences among a sole proprietorship, a partnership, and a corporation. In addition, list one advantage and one disadvantage of a proprietorship, a partnership, and a corporation.

Short Answer

Expert verified

A sole proprietorship is one person's business. Two or more people operate a partnership.

The stockholders run a corporation.

Corporations are not exempt from paying taxes. Corporate owners may be subject to limited liability. This is not something a sole proprietor or partner can accomplish.

Step by step solution

01

Introduction

A single-person business is known as a sole proprietorship. A partnership is a firm in which two or more persons own and operate it.

A corporation is a legal entity owned and governed by shareholders who share in the earnings of the company.

02

Explanation

For solo proprietors and partnerships, there are some tax benefits. Corporations are not exempt from paying taxes. Corporate owners may be subject to limited liability. This is not something a sole proprietor or partner can accomplish.

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Most popular questions from this chapter

Explain the basic differences between a share of stock and a bond.

Take a look at Figure 21-2. Explain why the figure implies that if the amount of accounting profit were to shrink to zero while the normal rate of return on investment remained unchanged, economic profit necessarily would become negative.

Consider Figure 21-2. Explain why the figure indicates that if the normal rate of return on investment were to remain unchanged while accounting profit increased, economic profit also would increase.

Suppose that you are tryang to dectoe whether to spend \(1,000 on stocks issued by WildWeb or on bonds issued by the same company. There is a 50 percent chance that the value of the stock will rise to S2,200 at the end of the year and a 50 percent chance that the stock will be worthless at the end of the year. The bonds promise an interest rate of 20 percent per year, and it is certain that the bonds and interest will be repaid at the end of the year.

a. Assuming that your time horizon is exactly one year, will you choose the stocks or the bonds?

b. By how much is your expected end-of-year wealth reduced if you make the wrong choice?

c. Suppose the odds of success improve for WildWebi Now there is a 60 percent chance that the value of the stock will be \)2,200 at year's end and only a 40 percent chance that it will be worthless, Should you now choose the stocks or the bonds?

d. By how much did your expected end-of-year wealth rise as a result of the improved outlook for WidWeb?

Identify the main sources of corporate funds and differentiate between stocks and bonds.
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