Business Organization Basics and Sole Proprietorship

Vocabulary flashcards covering the fundamentals of business organizations, key business structures, evaluated factors, and the characteristics and liabilities of sole proprietorships.

Business Organization

The legal structure under which a business operates; it determines how a business is owned, managed, taxed, and held responsible for debts.

Five Main Business Structures

Sole proprietorship, general partnership, limited partnership, corporation, and LLC.

Four Major Factors Affected by Business Structure

Liability, control, taxes, and financing, which serve as the four categories to consider when comparing business structures.

Sole Proprietorship

A business owned by one individual without forming a separate corporation or LLC, where the owner generally controls operations and is personally liable for its debts.

Personal Liability (Sole Proprietorship)

A major disadvantage where the owner is personally responsible for business debts and obligations, placing personal assets at risk if debts cannot be paid.

Business Name or DBA

A name under which a business operates that does not create a separate liability-shielding entity.

General Partnership

A business structure owned by two or more individuals who share management responsibilities, profits, and financial liabilities according to their agreement and applicable law.

Key Risk of a General Partnership

Partners face personal liability for business obligations, meaning one partner's actions can expose the other partners to liability.

Limited Partnership (LP)

A business structure consisting of at least one general partner and at least one limited partner.

General Partners vs. Limited Partners

General partners manage business operations and bear greater personal liability, while limited partners generally enjoy limited liability and do not participate in daily management.

Corporate Ownership

Held by shareholders through shares of stock.

Corporate Management Structure

Directors oversee high-level affairs, while officers handle day-to-day operations.

Limited Liability

A legal protection where owners are generally not held personally responsible for entity debts, subject to exceptions.

Corporate Taxation Options

Taxed as a C corporation or, if eligible and properly elected, an S corporation.

Limited Liability Company (LLC)

A business structure owned by members.

Key Advantage of an LLC

Members generally receive protection from personal liability for company debts.

Pass-Through Taxation

A tax structure where business income passes directly to owners' individual tax returns rather than being taxed at the entity level.

Additional Bond Requirement for a California Contractor LLC

A $\$100,000$ LLC employee/worker bond, required in addition to the standard $\$25,000$ contractor bond.

LLC Employee/Worker Bond vs. Workers' Compensation Insurance

The bond does not replace workers' compensation insurance, as both serve distinct legal and financial purposes.

Automatic Transfer of a California Contractor License

Generally does not occur; a new business entity must apply for and obtain its own contractor license.

License Transfer with the Same Qualifier

Retaining the same qualifier does not transfer a sole-owner license to a corporation; a new license is still required.

RME (CSLB Licensing)

Responsible Managing Employee.

RMO (CSLB Licensing)

Responsible Managing Officer.

RMM (CSLB Licensing)

Responsible Managing Manager.

RMG (CSLB Licensing)

Responsible Managing Member.

Purpose of a Qualifying Individual

To meet CSLB requirements for qualifying the contractor license through the required experience and managerial role.

CSLB Entity Registration Requirement

A California corporation or LLC must maintain proper registration and good standing with the California Secretary of State.

Business Entity

A legally recognized form through which a business operates.

Personal Guarantee

A promise to be personally responsible for a debt if the business fails to pay.

Exceptions to Limited Liability

Personal guarantees and liability for one's own wrongful conduct, which can expose personal assets to risk.