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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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Why do business firms exist
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
Types of Business Firms

  • Sole Proprietorships- Single Owner

  • Partnerships-Two or more who own a certain stake in business

  • Corporations-Owned by Stockholders


Sole proprietorship advantages
SOLE PROPRIETORSHIPADVANTAGES

  • Easy to form and to close.

  • All decision-making power resides with sole proprietorship.

  • Profit of the firm is taxed once.


Sole propritorship disadvantages
SOLE PROPRITORSHIPDISADVANTAGES

  • Unlimited liability-owner responsible for all debts incurred by the business

  • Limited ability to raise funds

  • Ends with retirement or death


Partnerships advantages
PARTNERSHIPSADVANTAGES

  • Specialization can be utilized

  • Profit is to the partners and only personal income tax is applied (taxed once)


Partnerships disadvantages
PARTNERSHIPSDISADVANTAGES

  • Partners liability is unlimited

  • Decision making can be complicated


Corporations advantages
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


Corporations disadvantages
CORPORATIONSDISADVANTAGES

  • Subject to double taxation

  • Complicated to set up


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