2. 3. Indicate whether the following statement best describes a corporation, a s
ID: 1207823 • Letter: 2
Question
2. 3. Indicate whether the following statement best describes a corporation, a sole proprietorship, or a partnership.
a. Liability is limited to the amount invested.
b. Unlimited personal liability.
c. Unlimited liability for oneself and one’s partner’s actions.
d. Ability to share work and risks of ownership without issuing shares.
e. Direct control by the owner.
f. Most difficult to organize.
g. Greater ability to secure funds from outside investors.
h. Accounts for largest sales receipts in the United States.
i. The most common form of business.
Explanation / Answer
Different types of organizations are observed in United States. Among them, sole proprietorship (one owner), partnership and corporation (owned by common stock holders )
a. Liability is limited to the amount Invested: This statement, best describes a corporation. It is formed by selling stocks to pulic. Any person can buy a certain number of common stock and becomes its owner. His liability to the others is restricted to the extent of face value of common stock held.
b. Ulimited personal liability: It is most appropriate for a sole proprietorship concern. In this form of business only one person is the owner. So he has to bear entire liability. Also he will enjoy fentire profit earned from the business. His risk is unlimited. In partnership form all partners jointly undertake such liability.
c. Unlimited liaility for oneself and partners actions: It best describes the nature of liability of partnership firm. Any action taken by a partner or his copartner can incur liability. Both of them are liable to satisfy it. X a partner cannot escape his responsibility by saying that the liability has caused from the action of second partner and so he is not responsible. Here all partners are jointly and separately liable for the actions of the partnership.
d. Ability to share work and risk of owership without issuing share; It is best applicable for partnership. Here two or more partners through agreement (written or oral) can share work responsibility or owership. No issue of share is required.
e. Direct control by Owner: In sole proprietorship only one person is owning the entire business. So he has to decide on his own how to work and control the business activities. In partership it is shared by partners. In corporation shareholders representative Board act on behalf of others to control the activities.
f. Most difficult to Organize: Corporate form is most difficult to organize. It has to comply with all the formalities laid down in the relevant acts. It takes lots of time and moey. It is necessary as it is run by public money. So the safety of their investment is required for the betterment of the society.
g. Greater ability to secure fund from outside investors: In sole proprietorship and partnership number of owners is restricted. But in corporation it can be any figure. So it is possible to collect any amount required for investment through issue of required number of common stocks. Thus it best describes a corporation.
h. Accounts for largest sales receipt in Uited States: It is also applicable for Corporation. Any business rerquiring large investments require corporate form. So it is quite natural that largest sales receipt of the country must come from this form as maximum investment is channelized through it.
i. Common form: Sole proprietorship or partnership are most commo form of business as they are easy to form, requires minimum time and control by federal. Corporation is difficult and time consuming and involves lot of money.
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