Three types of businesses:
Sole trader, Partnership, Company/ corporation
Sole Trader
One person who controls and manages a business. Is solely liable for debts.
Sole Trader advantages
- cheap and easy
- One person as all of the decision making
- income taxed once as personal income
Sole Trader disadvantages
- Small with limited growth
- limited funds (capital) available
- Owners personal assets can be used to repay firm debts
- difficult to transfer ownership. Would have to sell entire business (not just sell shares)
Limited Liability
If the company is in debt, you are NOT personally liable for the debt of the company. Your personal assets are not liable. Company debts are limited to the value of investment.
Unlimited Liability
The owners are personally liable for any business debts meaning they will lose their own personal assets to pay off debts. ( car or house ).
Partnership
There are two or more owners, legally join to control a business. Share profits and losses.
General Partnership
All partners have unlimited liability.
Limited Partnership
They have limited liability. Some partners can be owners but have no part in managing the business
Company
Several business owners and investors. Separate legal entities so owners have limited liability.
Agency Relationship
Relationship between shareholders and managers
Agency Problem
When a conflict of interest happens between managers and shareholders. e.g, managers classifying non-business expenses as business expenses such as a private lunch, or plane trip.
Agency Cost
A cost that arises due to an agency problem.
