Econ Test #2

Common Business Organizational Structures

1. Sole Proprietorship

Definition: A business owned and operated by one person, where there is no legal distinction between the owner and the business.

Formation Requirements:

• No formal legal requirements

• May need local business licenses or permits

• Can use owner's social security number or obtain an EIN

• May need to register a "doing business as" (DBA) name

Advantages:

• Simplest and least expensive to form and operate

• Complete control over business decisions and operations

• All profits flow directly to the owner

• Simple tax filing (Schedule C with personal tax return)

• Easy to change business direction or close down

• No corporate formalities or special meetings required

Disadvantages:

• Unlimited personal liability (personal assets at risk)

• Limited access to capital (can't sell stock)

• Difficult to get bank loans without personal guarantees

• Business ends if owner dies/retires/becomes incapacitated

• Self-employment tax on all earnings

• May be harder to build business credibility

Best For: Small, low-risk businesses with single owners, such as consultants, freelancers, small retail shops, and service providers.

2. Partnership

Definition: A business owned by two or more people who share management responsibilities and financial obligations.

Types:

• General Partnership (GP): All partners share management and liability

• Limited Partnership (LP): Has both general and limited partners

• Limited Liability Partnership (LLP): Partners have liability protection

Formation Requirements:

• Partnership agreement recommended (though not always required)

• State registration for LP and LLP

• Federal EIN required

• Business licenses and permits as needed

Advantages:

• Relatively easy and inexpensive to form

• Shared financial and managerial resources

• Pass-through taxation (partners report share on personal returns)

• More capital raising potential than sole proprietorship

• Complementary skills and shared workload

• Limited partners can invest without management role (in LP)

Disadvantages:

• Unlimited personal liability for general partners

• Joint and several liability (each partner liable for other partners' actions)

• Potential conflicts between partners

• More complex tax filing than sole proprietorship

• Need for clear partnership agreement to prevent disputes

• May dissolve upon death/departure of a partner

Best For: Professional services (law firms, medical practices), family businesses, real estate investments.

3. Corporation

Definition: A legal entity separate from its owners (shareholders), offering the strongest protection from personal liability.

Types:

• C-Corporation: Standard corporation, separately taxed entity

• S-Corporation: Pass-through taxation, limited to 100 shareholders

• B-Corporation: For-profit entity with social benefit mission

Formation Requirements:

• File Articles of Incorporation with state

• Create corporate bylaws

• Hold organizational meetings

• Issue stock certificates

• Maintain corporate records and minutes

• Federal EIN required

Advantages:

• Limited liability protection for all owners

• Easier to raise capital through stock sales

• Perpetual existence independent of owners

• Enhanced credibility with customers and vendors

• Tax advantages for certain benefits (health insurance, etc.)

• Easier transfer of ownership

Disadvantages:

• Complex and expensive to form and maintain

• Double taxation for C-corps (corporate and dividend)

• Extensive record-keeping requirements

• Regular board meetings and minutes required

• More regulatory oversight

• Higher formation and operational costs

Best For: High-growth startups, businesses needing significant capital, companies planning to go public.

4. Limited Liability Company (LLC)

Definition: A hybrid structure combining corporation-like liability protection with partnership-like flexibility and tax benefits.

Formation Requirements:

• File Articles of Organization with state

• Create Operating Agreement

• Federal EIN required

• State registration and licenses

Advantages:

• Limited liability protection for all members

• Flexible management structure

• Choice of tax treatment (partnership or corporation)

• Less formal requirements than corporations

• Can be owned by individuals, corporations, or other LLCs

• No limit on number of members

Disadvantages:

• More complex to form than sole proprietorship

• Self-employment tax for members

• State-specific regulations and requirements

• More expensive to form than partnership

• Some states charge LLC fees based on revenue

• May need to dissolve/reform if membership changes

Best For: Small to medium-sized businesses wanting liability protection with tax flexibility, real estate investments, professional services.

Key Considerations When Choosing a Business Structure:

1. Liability Protection Needs

2. Tax Implications

3. Formation and Maintenance Costs

4. Management Flexibility Requirements

5. Capital Needs

6. Growth Plans

7. Industry Requirements

8. State-Specific Regulations

Inflation

-          A general sustained upward movement of prices for goods and services in an economy

o   Disinflation = decrease in the inflation rate

o   Deflation = decrease in the overall price level of goods and services

-          Cost Push Inflation

Cost of production increases à businesses raise prices to maintain profits

-          Demand Pull Inflation

o   Demand for goods / services exceed supply

Problems

-          Unintended redistribution of purchasing power

-          Blurred price signals

-          Difficulties in long-term planning

Effects of Inflation

1.      Consumers

a.      Able to buy less stuff with the same amount of money

2.      Savers

a.      Erodes their savings

3.      Borrowers

a.      Benefit, have to pay back less value for the same amount of money

4.      Lenders

a.      Lose money to borrowers

Wages

-          Cost of living adjustments (COLAs) rise every year with inflation

o   “skimpflation”

Measuring Inflation

-          Consumer Price Index (CPI) = average change in price over time for a fixed basket of goods / services

-          Personal Consumption Expenditures Index (PCE) = tracks changes in prices of goods / services consumed by households

-          Core Inflation = Excludes certain items that are highly volatile / subject to external shocks

o   Ex. Food prices, energy prices

-          Controlling Inflation

o   Fiscal Policy = the taxing and spending plan of the government

o   Monetary Policy = Federal Reserve’s plan to maintain price levels and encourage employment

Gross Domestic Product

-          Total market value of all final goods and services produced within the US in a year

o   GDP measured by demand

1.      Consumption

a.      The goods / services people buy

                                                                                                   i.      2/3 total GDP

2.      Investment

a.      Business spending on land, buildings, equipment

                                                                                                   i.      Investments in unsold inventory

1.      Purchases of homes by consumers

3.      Government spending

a.      Federal, state, and local spending to provide goods / services

                                                                                                   i.      Schools, roads, national defense

4.      Net exports of goods / services

a.      Exports – imports

                                                                                                   i.      Value of exports – value of imports into US

The Sum of Final Expenditures

GDP = C + I + G + NX

o   GDP measured by production

1.      Durable goods

a.      Goods that last at least 3 years

2.      Non-durable goods

a.      Goods that last less than 3 years

3.      Services

a.      Largest part

                                                                                                   i.      Digital services

4.      Structures

a.      Homes, office buildings, shopping malls

5.      Change in inventories

a.      Goods produced but not yet sold

-          NOT included in GDP

o   Government transfer payments

o   Caring for own children

o   Volunteer work

o   Illegal activities

o   Sale of used goods

GDP as a measure of well-being

-          GDP per capita

o    

-          Standard of Living