Sole Proprietorships

Test Question 1: When organizing a business there are various points to consider when dealing with the liability and tax consequences. Sole proprietorships are businesses owned and operated by one individual. If a person sets up a business as a sole proprietorship it is considered an extension of yourself. Therefore, as a sole proprietor, the business assumes personal responsible for all liabilities and debts the business incurs. Sole proprietors are not required to file for a state or city license to do business and they will file a regular 1040 or 2106 return (highest tax rate). However, in the event they are sued (ex: purple-headed lady crossing the street and their delivery guy hits her in a company van) they can lose everything because liability is high and they will be personally responsible for damages. A general partnership is much like a marriage arrangement; two or more people form a company and the owners are “jointly and severally” liable for debts and any legal actions the company may face individually. Limited partners are liable only to the extent of their original investment and the general partner will assume the majority of risk. Therefore, as a general or limited partner, the business assumes personal responsible for all liabilities and debts the business incurs. They will file a regular 1040 or 2106 return (highest tax rate). In the event they are sued (ex: purple-headed lady crossing the street and their delivery guy hits her in a company van) the business can lose everything because liability is high and they will be jointly responsible for damages. The third type of business in a corporation, which are owned by its shareholders. Because the corporation is a separate entity from its owners, shareholders have no legal liability for its debts. There are two different types of corporations. Sub chapter S enables a business to enjoy the benefits of incorporation but be taxed as if it were a partnership. Limited Liability Corporation (LLC) owners have limited personal liability for the debts and actions of the LLC. Each business will file a corporate return (lowest tax rate if any at all). In the event the corporation is sued (ex: purple-headed lady crossing the street and their delivery guy hits her in a company van) the corporation will absorb the cost. Though stockholders hold ownership, they have limited liability--that is, they can only lose what they invest and they are not personally responsible for damages. Of all of these business options the corporate business is most desirable because of its low liability and tax consequence.

Test Question 4: A Consumer is a person who purchases, imports property or services for personal or non-business use. In other words, the buyer does not use the goods commercially. Goods are considered personal property (ex: groceries, drugs, auto, pets, etc…) and services are the performance of a helpful professional task for another (ex: Doctors, Dentist, auto and home repairs, etc…) Consumers have an absolute right to fair treatment when purchasing goods/services. Federal, State and Local Consumer laws were made to protect buyers from illegal business practices. According to the FTC, advertising is unfair if 1. It causes injury that a consumer could not reasonably avoid; and 2. It is not outweighed by the benefit to the consumer. False/fraudulent advertising is deliberately misleading a potential client about a good/service or in general by reporting misrepresenting information in advertising. An example of misleading advertising would be bait and switch which is advertising a product at one price, usually a bargain price, while actually having little or nothing in stock and offering to sell the customer a similar product at a higher price. Consumers have the right to fair pricing. Price fixing is an agreement made by competing businesses to avoid competitive pricing. This, along with Loss leader (bait and switch) and price misrepresentation are illegal. Consumers have the right to refuse unordered goods. They have the right to cancel contracts that they feel are not satisfactory and plain language in contracts