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BUS101 Study Guide

Unit 2: Entrepreneurship and Legal Forms of Business

2a. Discuss the legal forms of businesses, including sole proprietorships, partnerships, corporations, limited-liability corporations, and subchapter S corporations

  • What are some advantages and disadvantages of each legal form of business?
  • What are the various legal forms of businesses?
  • Why is it important to evaluate the legal form of business before starting one?

Most businesses in the United States are small businesses (with fewer than 500 employees). When entrepreneurs create a business, they must choose the appropriate legal form. Many options are available, and each legal entity has advantages and disadvantages.

Legal entities of business include a sole proprietorship (one business owner, such as in many small businesses), a partnership (with two or more people sharing ownership), a corporation (a larger single entity that has legal protections), a limited liability company (LLC) (this limits the personal liability that the owners have), and S corporation (a type of corporation that avoids double taxation).

While most businesses maintain the same form and organization throughout their existence, some companies change their legal form of ownership (such as from sole proprietor to corporation) or merge with (or acquire) other businesses. Understanding the benefits and drawbacks of each business entity is important for any business owner.

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2b. Discuss the potential of a business to be profitable when considering the legal form of business, tax rates, and break-even analysis

  • What is one advantage of owning a limited liability company LLC?
  • Which form of business ownership gives owners the most protection for their personal property?
  • How does a break-even analysis account for fixed and variable costs?

In addition to the four major forms of business ownership, the US Internal Revenue Service has designated some additional types of businesses, such as limited liability companies (LLCs), S corporations, and nonprofit organizations.

Taxes collected by local, state, and federal government entities benefit society in ways we often fail to recognize and frequently take for granted. For example, businesses benefit from government spending when the highways, rail systems, and seaports they build allow companies to get the goods they manufacture to their customers. Local governments are responsible for creating an education system to educate their future employees. Customers are more likely to buy products they know have been inspected for quality.

For many companies, taxes are simply a cost of doing business. However, taxes can be expensive and controversial when business owners feel their tax dollars are not being spent efficiently. Tax rates are the percentage a company is taxed at.

An organization must also consider its liabilities, which are debts or some type of financial responsibility. Unless it has an outside funding agency, most businesses must make a profit to survive. They need to generate enough revenue to cover their expenses. A business manager needs to calculate how much product they need to sell to cover their expenses or conduct a break-even analysis, a financial calculation determining the point at which total revenue equals total costs, with neither profit nor loss. The equation is: break-even point = fixed costs / average selling price - variable costs.

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2c. Evaluate the appropriateness of the different legal forms of business for various business contexts

  • What is the purpose of a business plan?
  • What section of the business plan is most important to a loan officer for a bank?
  • What section of the business plan is most important to a potential investor?

Once an entrepreneur has chosen an appropriate legal form for their new business, they typically create a business plan to help them choose the best structure and organization. A typical business plan includes the following sections:

  • an executive summary
  • a description of the proposed business
  • an industry analysis
  • a mission statement
  • the business' core values
  • a management plan
  • a discussion of goods or services
  • a discussion of the production process
  • a marketing plan (how the business will promote goods or services to the consumer)
  • an outline of global issues
  • a financial plan, and
  • possible appendices.

A market analysis (a comprehensive assessment of market size, trends, competitors, and potential customers to determine business viability) will also need to be conducted, which may include an analysis of the market now and in the future. While the business plan is an excellent tool for internal planning, business owners can also use it to communicate with external stakeholders, such as a potential investor (an individual or entity that provides capital with the expectation of future financial returns), who may review the plan to see if the owner has put enough thought into all aspects of the business.

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2d. Analyze the impact of small businesses on the economy

  • How do small businesses impact the economy?
  • How do small businesses impact consumers?
  • How do small businesses affect business and product innovation?
  • What are some advantages and disadvantages of owning and operating a franchise business?

Business managers use various economic indicators to predict future economic growth. For example, small businesses are vital to the unemployment rate since they employ so many workers. Roughly 46% of the private sector includes small businesses in the United States.

Franchises offer business managers the opportunity to create a small business without having to incur as much risk as they might have to when creating a company that is unsupported by an outside corporate entity.

Small businesses must also calculate their net profit, which is all earnings after considering expenses. Profitability is another consideration for small businesses; it is the profit they yield after all expenses have been calculated.

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Unit 2 Vocabulary

This vocabulary list includes terms you will need to know to successfully complete the final exam.