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Economics and Personal Finance- Module 1-160

Terms in this set (784)

An unincorporated business owned by a lone individual. The sole proprietor pays taxes on the business through his or her personal tax returns. 73% of all U.S. businesses are this.

Independence—the owner alone is responsible for all aspects of the business.
Efficiency in decision-making (no board of directors or stockholders involved).
Tax reporting to the IRS is relatively simple and inexpensive.
Minor children of the sole proprietor may be hired without paying payroll taxes, and, if the child earns $5000 or less, he or she pays no income taxes.
Healthcare reimbursement arrangements (HRAs), also known as IRC Section 105(b) plan, are available to the employees, spouses, and families of sole proprietors. This loophole in the tax laws allows an employer plan to reimburse employees for medical costs, including medical and dental insurance, deductibles, copayments, and other healthcare expenses.
If a home office is used, a portion of office expenses, property taxes, utilities, and vehicle expenses may be tax deductible.
The owner keeps all the profits.
The letters THE IHO could be the first letters of words representing benefits of sole proprietorships:

T Taxes
H Healthcare
E Efficiency
I Independence
HO Home office


The owner has limited ways to raise capital. Potential investors in the business cannot buy stock (there is no stock), making investment difficult to define and document.
The owner has unlimited liability and can lose personal assets along with business assets. If there are employees, their mistakes may create liabilities for the business. On the other hand, a small unincorporated business has more creditworthiness than an incorporated business of similar size since the owner's personal assets will be added to those of the company for the purposes of assessing credit. Lenders are aware, however, that business owners can shift assets back and forth between personal property and the sole proprietorship. Therefore, lenders may require the owner to guarantee the loan personally, which means he or she must put up personal property as loan collateral.
There is greater difficulty in attracting skilled employees to a smaller business. Potential employees usually prefer larger companies that tend to be more stable and may offer greater benefits.
A business owned jointly by two or more people.
Three types: General partnerships, limited partnerships and joint ventures.

Partnerships are relatively easy and inexpensive to form.
Owners share commitment, decision-making, profits, and responsibilities; however, each partner can contribute a unique set of skills and expertise to the success of the business.
The incentive of becoming a partnership may attract highly motivated and qualified employees.
The tax advantage of a partnership over a corporation is that the owners are taxed only once—on their personal tax returns.
As with sole proprietorships, business decisions can be made efficiently, without involving shareholders, officers, and directors.
Laws concerning partnerships vary among states; however, the Uniform Partnership Act has been adopted in every state except Louisiana, which means partnership laws are generally uniform across the country.
Acquisition of capital can be easier in a partnership than in a corporation since individuals often receive better loan terms. Banks perceive loans to individuals to be less risky since personal assets can be used to secure a loan. In addition, limited partnerships allow investors to avoid the personal liabilities of general partners.

Owners face unlimited liabilities, not only for their own actions but also for the actions of their partners.
There is no "chain of command" in decision-making, which creates the potential for conflicts among partners.
By law, a partnership is dissolved whenever any partner retires, resigns (known as withdrawing), or dies. However, this situation can be avoided by drawing up a partnership agreement that stipulates how a business can continue if a partner retires, withdraws, or dies.
According to the Uniform Partnership Act, the existence of a partnership is dependent upon the owners. Ownership (partnership) cannot be transferred unless all other owners agree.
According to the IRS, there are four characteristics that define a corporation: limited liability in terms of personal assets, continuity of life, centralization of management, and the ability to transfer ownership interests. If you wish to have more than two of these characteristics, you will have to incorporate your business and operate as a corporation.


C corporations can raise capital by selling shares of the business to prospective shareholders in exchange for money, property, or both. The initial sale of stock is often done when the business "goes public" through an initial public offering, known as an IPO. To justify the expense of setting up and registering a corporation, the business should have enough income or potential income to reap the benefits of a large entity. Such benefits could include the following: 1) capital to make large-scale investments; 2) qualifying for bank loans and lines of credit; and 3) achieving economies of scale through large purchases.
Limited liability. Corporations have limited liability, in that individual employees (including management) or shareholders are not personally liable for the actions or indebtedness of the corporation.
Corporate tax treatment. Corporations usually pay lower taxes, and only on the profits of the corporation. In addition, these taxes are completely separate from the taxes paid by individual owners of the corporation. Individuals would, however, pay personal taxes on bonuses, salaries, and dividends received from the corporation.
Not only is partial ownership attractive to employees, it also motivates employees to make the company successful. Another attraction—though not necessarily unique to C corporations—is employee benefits, such as health insurance and retirement plans, which are tax-deductible expenses for the corporation while adding to the employees' compensation.
The corporation has a "perpetual existence," compared with employees or shareholders who may leave the corporation.


Corporations are double-taxed; profits are taxed at the corporate level and again when distributed to shareholders as dividends.
Corporations are more expensive to establish and operate.
Complex regulations consume many resources in terms of business accounting, environmental regulations, taxation, employer-employee relations, etc.
The corporation is accountable to stockholders. Annual meetings are required, and major changes in the corporate structure or dividend policies require stockholder approval by vote.
A creditor can file a petition of involuntary bankruptcy against a debtor only under Chapter 7 or Chapter 11 of the Bankruptcy Code. The exceptions are if the individual is a farmer, a family farm, or a corporation that is not a commercial corporation.

Creditors must meet certain requirements. One requirement is that the debtor must have 12 or more creditors who are owed money and, through at least 3 of these 12 creditors owed, have a total debt over $13,475. At least 3 creditors typically file a petition; the more creditors that file a petition, the likelier the creditors will receive their owed money. However, if a debtor has fewer than 12 creditors who are owed money, and has a total debt over $13,475, then just 1 creditor can file a petition. Single creditor petitions are very rare because they are risky and do not usually result in the creditor receiving money.

Once the petition is filed, a debtor has 20 days to respond. He or she can dispute the claim, and the creditor(s) must prove the debtor consistently does not pay bills on time.

The court decides what comes next. If the court dismisses the petition, the case will not proceed, and the creditor may be forced to pay the debtor's court and legal fees. If the creditor's petition is accepted, the court enters an order of relief, and the case proceeds under Chapter 7 or Chapter 11 bankruptcy.

There is a period of time called the "gap period," which begins when the creditor files the petition and the court makes its decision. During this gap, the debtor can operate a business but cannot sell business assets, unless it is a necessary and usual part of normal business operations. Creditors might even have to offer credit to the debtor during this gap period.

The debtor does have a chance to rehabilitate his or her business during this gap period. This would benefit all involved—the debtor gets the business back on its feet and is able to repay creditors.
What is the health insurance provided through Social Security for people 65 years of age and older?

Medicare is health insurance for those 65 years or older, or, for those who have a permanent disability. There are three main components to the benefits.

Part A covers inpatient hospital care and some follow-up care. No extra payments are required. A person is eligible to apply for Part A at 64 years and 8 months, even if that person is not planning to retire.2
Part B covers physician's services, some hospital costs (that are not covered by Part A), as well as medical supplies necessary to treat deseases or conditions. Part B is optional and a monthly premium is charged for this plan.
Part C allows a person who is covered by both Part A and Part B
to choose a health care provider from which to receive these
medical services.
Part D is prescription drug coverage. There is an optional extra charge for this, too.

Social Security Disability Insurance (SSDI)
This disability program is for workers (and certain family members) who paid into the Social Security system for a certain amount of time, making them eligible for benefits. These benefits include a monthly check and the use of Medicaid.

Supplemental Security Income (SSI)
SSI came into being in the 1970s. It is a program for people who have limited financial resources. Recipients must be at least 65 years old or have a disability (such as blindness). The benefits include a monthly check and health insurance. Very specific health and income guidelines restrict eligibility. This benefit is based on financial need; it does not matter whether the person has paid into the Social Security system.3