Question

The market structure has 4 main categories of firms - please specify their typical conditions and provide examples for each. (3/4th of a page long)

Answer 1

The 4 main categories of firms are:

Sole Proprietorship – It is a firm with a single owner. The formation of this type of firm is simple as compared to other types. The business income is considered as the owner’s income and taxed in the same manner. The drawback is regarding the unlimited liability of the owner. In case of a lawsuit the owner has to pay for the business liabilities with his/her own personal assets.

Partnerships – It is a legal entity formation with two or more owners. The owners mutually decide regarding the initial investments and the profit and loss sharing ratio in the firm. The liability is usually limited except in a general partnership where the liability is unlimited. The profit earned is distributed among the owners and considered as their individual income.

Corporations – It is considered as a separate legal entity on formation. The owners have their individual status and the profits earned are retained by the corporation itself. Funds are raised from private or public investors through capital markets. Formation of a corporation is time consuming, complicated and expensive.

Limited Liability Companies - They do not have any legal status under federal law, but state law allows them to provide their owners with significant limited liability. They can also choose how to be treated for the purposes of filing their income tax returns. Specifically, LLC members can choose to have their businesses treated as an S-corporation or as a partnership. Single member LLCs can choose to be treated as a sole proprietor for income tax purposes.