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Key Terms Define sole proprietorship, proprietorship, unlimited liability, inventory, limited life, partnership, limited liability, bankruptcy, corporation, charter, stock, stockholder, shareholder, dividend, bond, principal, interest, double taxation.
The Correct Answer and Explanation is:
Here are the definitions and explanations for the terms:
- Sole Proprietorship: A business owned and operated by a single individual, where the owner assumes all responsibility for the business’s debts and obligations.
- Proprietorship: Another term for a sole proprietorship, emphasizing that the business is owned by an individual.
- Unlimited Liability: The personal responsibility of a business owner for all the debts of the business. In a sole proprietorship, the owner’s personal assets can be used to settle business debts.
- Inventory: The goods and materials a business holds for the purpose of resale or production. It is a key part of a company’s assets and affects the valuation of the business.
- Limited Life: A term referring to the fact that a business’s existence depends on the life of its owner(s). For example, a sole proprietorship ends if the owner dies or retires.
- Partnership: A business structure in which two or more individuals share ownership, responsibility, and profits. There may be different levels of liability depending on the type of partnership.
- Limited Liability: A feature of certain business structures, such as corporations and limited liability companies (LLCs), where the owners’ personal assets are protected from the company’s debts and obligations.
- Bankruptcy: A legal process in which a business or individual declares the inability to pay its debts, and an orderly liquidation or restructuring of the business is arranged through the courts.
- Corporation: A legal entity separate from its owners (shareholders). It has the ability to own property, enter contracts, and be held liable for its actions. Shareholders’ personal assets are typically protected from business liabilities.
- Charter: The official document granted by a government that establishes the corporation’s legal existence. It outlines the corporation’s structure, rights, and responsibilities.
- Stock: A type of security that represents ownership in a corporation. When you own stock, you essentially own a portion of the company.
- Stockholder/Shareholder: A person or entity that owns stock in a corporation. They have ownership rights, including voting on major company decisions.
- Dividend: A portion of a corporation’s profits paid to its shareholders, usually in the form of cash or additional stock.
- Bond: A debt security where the issuer (corporation or government) borrows funds from bondholders for a set period. The issuer pays interest and repays the principal amount at maturity.
- Principal: The original sum of money borrowed in a loan or invested in a bond, excluding interest. It is the amount on which interest is calculated.
- Interest: The cost of borrowing money, typically expressed as a percentage of the principal amount.
- Double Taxation: A disadvantage of the corporate structure where the corporation’s profits are taxed at the corporate level, and then shareholders are taxed again on dividends they receive.
These terms define essential concepts in business law, finance, and organization structures. Limited liability and bankruptcy protections make corporations attractive, but the downside of double taxation can be a burden. The diversity of business forms—such as sole proprietorships, partnerships, and corporations—allows entrepreneurs to choose a structure that best suits their financial, operational, and risk preferences.
