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Business Firms

Business Firms. Why do Business Firms Exist?. Business firms exist when people working together can produce more than the sum of individuals working alone can produce. Key Terms: Business Firm, shirking, monitor, residual claimant. Types of Business Firms. Sole Proprietorships- Single Owner

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Business Firms

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  1. Business Firms

  2. Why do Business Firms Exist? • Business firms exist when people working together can produce more than the sum of individuals working alone can produce. • Key Terms: Business Firm, shirking, monitor, residual claimant

  3. Types of Business Firms • Sole Proprietorships- Single Owner • Partnerships-Two or more who own a certain stake in business • Corporations-Owned by Stockholders

  4. SOLE PROPRIETORSHIPADVANTAGES • Easy to form and to close. • All decision-making power resides with sole proprietorship. • Profit of the firm is taxed once.

  5. SOLE PROPRITORSHIPDISADVANTAGES • Unlimited liability-owner responsible for all debts incurred by the business • Limited ability to raise funds • Ends with retirement or death

  6. PARTNERSHIPSADVANTAGES • Specialization can be utilized • Profit is to the partners and only personal income tax is applied (taxed once)

  7. PARTNERSHIPSDISADVANTAGES • Partners liability is unlimited • Decision making can be complicated

  8. CORPORATIONSADVANTAGES • Owners (stockholders) have no liability for debts incurred by the corporation • Continue to exist even if one or more owners sell their shares or die • Able to raise large sums of capital

  9. CORPORATIONSDISADVANTAGES • Subject to double taxation • Complicated to set up

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