Week 4 · Chapter

Chapter 4 — Choosing a Legal Form: Ownership, Franchising & Mergers

Introduction to Business Free sample edition

The module's primary reading · ~30–40 minutes · Objective 2 (explain how entrepreneurs turn an idea into a funded small business — a business-plan outline in the SBA's traditional format, an industry analysis with the five competitive forces, and a start-up funding plan — and compare the forms of business ownership, franchising, and mergers for that venture) · Read it first this week; the lecture, the slides, the tutorial, and the quiz all build on it.

In plain language

Every business has to pick a legal form, and that choice decides who owns it and whose savings are at risk if it fails. A sole proprietorship (a business with one owner who answers personally for its debts) is the easiest to start, while a corporation (a business the law treats as a person of its own) protects its owners' personal savings. A franchise (a deal to run an outlet under someone else's brand) is a way to start without building a brand from scratch. Companies also combine, and you can sort those deals into three types. By the end you can compare the forms for the coffee cart and say, in dollars, what its owner could lose under each one.

Why you already care about this

Picture three people you might know. One paints houses alone, with a used van and a ladder. Two friends run a weekend food stall at the night market. A cousin is thinking about paying a national tutoring brand for the right to open a learning center in town. Each of them made a legal choice, whether they noticed it or not.

That choice matters most on a bad day. If the van loan cannot be paid, does the bank stop at the business, or can it reach the painter's personal savings? If the food stall owes a supplier, who pays? If the tutoring center struggles, who owns the brand on the sign?

You will answer those questions for the coffee cart this week. In Week 3 the cart's plan created a 10,000-dollar equipment loan. This week asks who is on the hook for it.

By the end of this chapter you will be able to:

describe a sole proprietorship, a general partnership, and a corporation by who owns each, who is liable for its debts, how it ends, and how it raises money;
explain what a limited liability company is, and name the S corporation and the cooperative among the forms the IRS and the law recognize;
compare the forms for the coffee cart and compute the owner's worst-case personal exposure under each;
explain what a franchisor supplies, what a franchisee buys, and what the FTC's disclosure document covers;
sort a merger or acquisition as horizontal, vertical, or conglomerate.

Carry this line with you: the form decides whose savings back the debt — not the business's size.

Where we are

Already covered: Week 1, The Idea and Its Environment, defined a business and its stakeholders; Week 2, The Market It Sells Into: Economics for Business, placed the cart in its market; Week 3, From Idea to Plan: Entrepreneurship, Small Business & the Business Plan, built the cart's start-up list and funding plan.
This week: the legal forms of ownership, the limited liability company and the other forms, the cart's ownership-form comparison, franchising, and the types of mergers.
How they connect: the 20,000 dollars of the owner's money and the 10,000-dollar equipment loan from Week 3's funding plan are exactly what the legal form puts at risk.
Where we're going next: Week 5, What the Business Owes: Ethics & Social Responsibility, asks what a corporation is for, now that you know what a corporation and its stockholders are.

Week 3 is the week this chapter leans on most. The cart needs 30,000 dollars before it opens. The owner puts in 20,000 dollars of savings, and a 10,000-dollar equipment loan covers the rest. Hold those two numbers in your head; Section 5 uses both. Week 1 also matters here. A lender is one of the stakeholders you mapped, and this week shows how the legal form changes what a lender can collect.

1. Meet the sole proprietorship: one owner, no cap

Picture an illustrative house painter who works alone. The painter bought a used van with a loan, buys paint on credit from a supplier, and puts a business name on the van door. Nobody filed papers to create a company. The painter started painting, and the business began.

That simplest of starts has a name.

A sole proprietorship is a business owned by one person, easy to start, in which the owner answers personally for every business debt and the business ends with the owner.

The phrase "answers personally" has its own name.

Unlimited liability is an owner's duty to pay the business's debts out of personal assets, such as savings or a car, with no cap on the amount.

Worked example — the painter's bad season. The painter and every number here are illustrative.

The business owes 6,000 dollars on the van loan and 1,500 dollars to the paint supplier.
Total business debts: 6,000 + 1,500 = 7,500 dollars.
The business bank account holds 2,500 dollars.
The amount still unpaid: 7,500 − 2,500 = 5,000 dollars.
Because the painter is a sole proprietor, that 5,000 dollars can be collected from the painter's personal savings.

In words: when the business runs short, the lender and the supplier can reach past the business account into the painter's own savings for the last 5,000 dollars, a cost the painter carries personally even after the van is gone.

A sole proprietorship has real strengths. It costs little to start, the owner makes every decision, and the owner keeps every dollar of profit. Its weakness is the one the example showed: no wall stands between the business's debts and the owner's own money.

Misconception check. Students often think a sole proprietor is protected because the business has its own name on the van or the sign. That is tempting, because a name makes the business feel like a separate thing. But a trade name does not create a separate legal person. In a sole proprietorship the owner and the business are one and the same in the eyes of the law, so the owner's savings stand behind every business debt. The cure is to ask who the law treats as owing the debt, not what name is painted on the door.

Memory hook: one owner, one wallet, no wall.

2. Add a partner: shared decisions, shared debts

Picture two illustrative friends who open a weekend food stall at a night market. One cooks; the other handles the money and the permits. They split the work, the decisions, and the profit. They also took out an 8,000-dollar loan for a grill and a tent.

When two or more people own a business together in its simplest form, they have a partnership.

A general partnership is a business owned by two or more general partners who share its management, its profits, and unlimited personal liability for its debts.

A general partner is an owner in a partnership who helps run the business and answers personally, with no cap, for all of its debts.

Because so much is shared, partners write down the rules before trouble starts.

A partnership agreement is a written contract among partners that sets out who puts in what, who decides what, how profits are shared, and what happens if a partner wants out.

Worked example — who owes the grill loan? The stall and its numbers are illustrative.

The stall closes, and nothing from the stall goes toward the 8,000-dollar loan.
Each friend is a general partner, so each carries unlimited personal liability.
Unlimited means no cap, so the loan is not split into 8,000 ÷ 2 = 4,000 dollars apiece by law; each partner's personal assets stand behind the whole 8,000 dollars.
How the two friends settle up with each other afterward is a question their partnership agreement should answer.

In words: a partner gains a co-owner to share the work and the money, but also gains a co-owner whose business decisions can create debts that reach the partner's own savings.

Misconception check. Students often think each partner owes only half of a business debt, since the partners split the profit in half. That is tempting, because "partner" sounds like "fifty-fifty". But in a general partnership each general partner carries the same unlimited liability, so a partner's exposure is not capped at a share. The split of profit is a deal between the partners; the liability is set by the form. The cure is to read "unlimited" as "no cap for anyone", then check the partnership agreement for how the partners settle up between themselves.

Pause and try this. Choose one: (a) name one thing you would want written into a partnership agreement before opening a business with a friend, and say why; or (b) name one reason someone might take on a partner anyway, despite the shared liability.

Memory hook: a partner shares the work and the whole debt.

3. Form a corporation: a legal person of its own

Picture an illustrative regional bakery that has grown to several stores. Its founders want to build a new kitchen, and they want neighbors and investors to help pay for it. They also want the bakery to keep going long after any one founder retires.

The form built for that job is the corporation.

A corporation is a business that the law treats as a legal person separate from its owners, so it can own property, owe debts, and continue after its owners change.

A corporation raises money by selling pieces of itself.

Stock is shares of ownership in a corporation, which the corporation can sell to raise money.
A stockholder is a person or organization that owns shares of stock in a corporation and is therefore one of its owners.

The separate legal person is what protects the stockholders.

Limited liability is protection that caps an owner's loss from a business's debts at what the owner put into the business, so personal assets beyond that are not at risk.

For a stockholder, the cap is what the stockholder paid for the shares. A corporation also has continuous life: it does not end when one owner sells shares, retires, or dies.

Worked example — one stockholder's worst case. The bakery, the investor, and every number are illustrative.

A neighbor pays 2,000 dollars for shares of the bakery corporation.
Years later the bakery fails, owing 90,000 dollars to its lenders and suppliers.
The 90,000 dollars is the corporation's debt, because the corporation is the legal person that borrowed it.
The neighbor's shares become worth nothing, so the neighbor loses the 2,000 dollars paid for them.
The lenders cannot collect the rest from the neighbor's savings: the neighbor's loss stops at 2,000 dollars.

In words: the stockholder's loss is capped at the 2,000 dollars paid for the shares, a real loss, but none of the bakery's 90,000 dollars of debt reaches the stockholder's own savings.

Misconception check. Students often read "limited liability" as "the owners cannot lose money". That is tempting, because "protection" sounds like a guarantee. But limited liability caps the loss; it does not erase it. The neighbor in the example lost the full 2,000 dollars paid for the shares. The cure is to read limited liability as "you can lose what you put in, and no more".

Caveat: this course describes the forms as general education. It does not tell any real owner which form to choose, and it does not cover any state's filing steps or fees.

Memory hook: a corporation is its own person, so its debts are its own.

4. Name the LLC and the other forms the IRS lists

Picture an illustrative group of family farms in one valley. Each farm grows the same grain. Selling alone, each farm is small; selling together, they can store, ship, and bargain as one. They form a business that all of them own and use.

That is one of the specialized forms. There are others, and the one this chapter starts with is the LLC.

A limited liability company is a business structure created under state law, often called an LLC, that gives its owners limited liability without being a corporation.

The IRS names the most common business forms as the sole proprietorship, the partnership, the corporation, and the S corporation, and it describes the LLC as a business structure allowed by state statute. Two more forms get names this week.

An S corporation is a corporation that the IRS lists as a separate common business form because of how it is treated for federal tax purposes.
A cooperative is a business owned and controlled by the members who use its services, such as family farms that market their crops together.

Worked example — sorting four businesses by form. All four businesses are illustrative.

The painter from Section 1 filed nothing and works alone: a sole proprietorship.
The two friends from Section 2 run the stall together with no other filing: a general partnership.
The bakery from Section 3 sells shares to neighbors and investors: a corporation.
The valley's farms jointly own the business that stores and sells their grain, and each farm uses it: a cooperative.

In words: you can sort most businesses by asking two questions in order: how many owners are there, and did the owners use the law to create a separate legal person?

Every form also has its own federal tax treatment. This course names that fact and stops there. How a particular business is taxed is a question for the IRS, which explains the forms on its business-structures pages, and for a tax professional, never for a classroom example.

Misconception check. Students often think an LLC is a kind of corporation, because both give owners limited liability. That is tempting, because the protection looks the same from the outside. But an LLC is its own business structure, created under state law, and the IRS lists it apart from the corporation. The cure is to remember that two forms can share one feature, limited liability, and still be different forms.

Memory hook: an LLC shares the shield, not the name.

5. Compare the forms for the coffee cart

Picture the cart's owner the week before opening, with the funding plan from Week 3 in hand. The owner's 20,000 dollars of savings and the 10,000-dollar equipment loan are lined up. One question is left: which form should carry them?

The owner compares three options. Two of the terms you need are new.

Personal exposure is the most an owner could lose personally if a business fails: the money the owner put in plus any business debt the owner must repay from personal assets.
A liability shield is the protection a separate legal entity, such as a corporation or an LLC, gives its owners' personal assets from the business's debts.

Here is the case's comparison on four rows.

The illustrative coffee cart's three ownership options compared on ownership, liability for the 10,000-dollar loan, ending, and raising money
Question	Sole proprietorship	Two-person partnership with a friend	Single-member LLC
Who owns it?	the owner alone	the owner and the friend, as general partners	the owner, as the LLC's one member
Who is liable for the 10,000-dollar loan if the cart fails?	the owner, personally, with no cap	both partners, personally, with no cap	the LLC; the owner's loss stops at the money put in
How does it end?	with the owner	as the partnership agreement and the partners decide	as state law and the LLC's own documents set out
How does it raise money?	the owner's savings and loans in the owner's name	both partners' money and loans	the owner's money, loans, and new members

Worked example — the owner's worst case under each form. The numbers are illustrative, constructed for this course and not real data.

Start-up money carried forward: owner's money 20,000 + equipment loan 10,000 = 30,000 dollars.
The worst case: the cart fails and nothing from the failed cart goes toward repaying the 10,000-dollar loan.
Sole proprietorship: the owner loses the 20,000 put in and still owes the 10,000 loan personally, so personal exposure = 20,000 + 10,000 = 30,000 dollars.
Two-person partnership with a friend: both general partners carry unlimited personal liability, so each partner answers personally for the whole 10,000 loan, not half of it.
Single-member LLC: the 10,000 loan is the LLC's debt, so the most the owner can lose is the 20,000 put in; personal exposure = 20,000 dollars.
The shield: 30,000 − 20,000 = 10,000 dollars of personal exposure removed, the amount of the equipment loan.

In words: as a sole proprietor the owner could lose 30,000 dollars, the savings plus the whole loan; as a single-member LLC the owner could lose the 20,000 put in but not the 10,000 loan, which is why the case chooses the LLC, and why limited liability still does not mean the owner cannot lose money.

Put the two exposures side by side: 30,000 dollars versus 20,000 dollars, so the sole proprietor has 10,000 dollars more at stake. The case chooses the LLC for its liability shield. That choice belongs to the illustrative case. It is not advice for any real owner.

Honesty note: the comparison rests on the case's own assumptions. If a lender asked the owner to promise the loan personally, the shield would not cover that promise, and the comparison would change. A real owner takes that kind of question to the lender and to a lawyer.

In practice (your tools). You can check the comparison in any free spreadsheet, such as Google Sheets. Type the owner's money in cell B2 and the loan in cell B3. In cell B4 type =B2+B3 for the start-up money. In cell B5 type =B2+B3 for the sole proprietor's exposure and in cell B6 type =B2 for the LLC owner's exposure. In cell B7 type =B5-B6; the result is the exposure the shield removes.

Misconception check. Students often think the partnership option is the safest, because a friend shares the risk. That is tempting, because two people feel stronger than one. But a general partner carries unlimited liability, so the friend's presence does not cap the owner's exposure; it adds a second person whose decisions can create debts. The cure is to compare the forms on liability first and on company second.

Pause and try this. Choose one: (a) name one stakeholder from Week 1, other than the owner, who is affected by the cart's choice of form, and say how; or (b) argue for the sole proprietorship as strongly as you can in two sentences, using one of its strengths from Section 1.

Memory hook: 30,000 at risk without the shield, 20,000 with it.

6. Weigh a franchise: buying into someone else's brand

Picture an illustrative cousin who wants to open a tutoring center. Starting from scratch means inventing a name, a lesson plan, a way to schedule sessions, and a way to train tutors. A national tutoring brand offers all of that, for a price. An illustrative fitness studio brand makes the same kind of offer to people who want to run a gym.

That arrangement is franchising, the alternative to starting from scratch.

A franchise is an arrangement in which a business owner pays for the right to run an outlet under another company's brand and system in a defined territory.
A franchisor is the company that owns a brand and supplies its name, operating system, training, and ongoing support to franchisees.
A franchisee is the owner who pays fees for the right to run an outlet under a franchisor's brand in a territory, following a franchise agreement, without owning the brand.

Because a franchisee pays before knowing how the outlet will do, federal law requires the franchisor to share information first.

The Franchise Rule is the Federal Trade Commission rule that requires a franchisor to give a prospective franchisee a disclosure document before the sale.
A disclosure document is the document the FTC's Franchise Rule requires a franchisor to give a prospective franchisee, covering 23 specified items of information.

Worked example — who supplies what in the tutoring franchise. The tutoring brand and the cousin are illustrative.

Roles in an illustrative tutoring franchise: what the franchisor and the franchisee each supply or receive
Part of the deal	The franchisor (the tutoring brand)	The franchisee (the cousin)
The brand and its name	owns them	uses them, never owns them
The operating system and lesson plans	supplies them	follows them, under the franchise agreement
Training and ongoing support	supplies them	receives them
Money	receives fees	pays fees for the right to run the outlet
The territory	grants it	runs the one outlet in it
Information before the sale	must give the disclosure document, with its 23 items	reads it before signing

The cousin gets a known name, a tested system, and training on day one.
The cousin gives up control: the brand's rules decide much of how the center runs.
The cousin pays fees for the right, and still owns no part of the brand.

In words: a franchisee buys a running start and a set of rules, not the brand itself, so the trade is less building from scratch in exchange for less control and ongoing fees.

A franchisee still runs a business, and that business still needs a legal form. The cousin's tutoring center could itself be a sole proprietorship or an LLC, so everything in Sections 1 to 5 still applies.

Misconception check. Students often think a franchisee owns the brand, because the franchisee's outlet carries the brand's name and the franchisee paid for it. That is tempting, because paying usually means owning. But the fee buys the right to use the brand in one territory under the franchise agreement; the franchisor keeps the brand. The cure is to ask who could take the name off the sign: the franchisor, not the franchisee.

Pause and try this. Choose one: (a) say whether you would rather start a tutoring center from scratch or as a franchisee, and give one reason from the table; or (b) name one question you would want the franchisor's disclosure document to answer before you sign, and say why.

Memory hook: a franchisee rents the brand; the franchisor keeps it.

7. Sort mergers and acquisitions by type

Picture three headlines about illustrative companies. Two bike-shop chains in one region join together. A bakery chain buys the flour mill that supplies it. A fitness-studio company buys a pet-food maker. All three are combinations, but they are not the same kind.

Start with the two words for combining.

A merger is a deal in which two companies combine to form a single company.
An acquisition is a deal in which one company buys another company, which then belongs to the buyer.

Then sort the combination by how the two companies relate.

A horizontal merger is a combination of two companies that sell the same kind of product at the same stage, usually rivals in one industry.
A vertical merger is a combination of two companies at different stages of making and selling one product, such as a buyer and one of its suppliers.
A conglomerate merger is a combination of two companies in unrelated lines of business, such as a fitness-studio company and a pet-food maker.

Worked example — sorting the three headlines. All three combinations are illustrative.

Two bike-shop chains: same product, same stage, rivals in one industry, so horizontal.
A bakery chain and its flour mill: the mill makes an input, the bakery sells the finished bread, so they sit at different stages of one product, which makes it vertical.
A fitness-studio company and a pet-food maker: no shared product and no supplier link, so conglomerate.

In words: the type depends on how the two companies relate before the deal, rivals, supplier and buyer, or strangers, not on how big either company is.

In Week 2 you met the antitrust laws, such as the Sherman Act (1890), that police monopoly. This course names that link and does not cover how a merger is reviewed.

Misconception check. Students often think every merger joins two rivals. That is tempting, because the mergers people talk about most are between competitors. But a vertical merger joins a supplier and a buyer, and a conglomerate merger joins companies with nothing in common. The cure is to ask one question about the two companies before the deal: rivals, supplier and buyer, or unrelated?

Memory hook: side by side, up and down, or no relation.

Key terms

sole proprietorship — A business owned by one person, easy to start, in which the owner answers personally for every business debt and the business ends with the owner. (first used: 1. Meet the sole proprietorship: one owner, no cap)
unlimited liability — An owner's duty to pay the business's debts out of personal assets, such as savings or a car, with no cap on the amount. (first used: 1. Meet the sole proprietorship: one owner, no cap)
general partnership — A business owned by two or more general partners who share its management, its profits, and unlimited personal liability for its debts. (first used: 2. Add a partner: shared decisions, shared debts)
general partner — An owner in a partnership who helps run the business and answers personally, with no cap, for all of its debts. (first used: 2. Add a partner: shared decisions, shared debts)
partnership agreement — A written contract among partners that sets out who puts in what, who decides what, how profits are shared, and what happens if a partner wants out. (first used: 2. Add a partner: shared decisions, shared debts)
corporation — A business that the law treats as a legal person separate from its owners, so it can own property, owe debts, and continue after its owners change. (first used: 3. Form a corporation: a legal person of its own)
stock — Shares of ownership in a corporation, which the corporation can sell to raise money. (first used: 3. Form a corporation: a legal person of its own)
stockholder — A person or organization that owns shares of stock in a corporation and is therefore one of its owners. (first used: 3. Form a corporation: a legal person of its own)
limited liability — Protection that caps an owner's loss from a business's debts at what the owner put into the business, so personal assets beyond that are not at risk. (first used: 3. Form a corporation: a legal person of its own)
limited liability company — A business structure created under state law, often called an LLC, that gives its owners limited liability without being a corporation. (first used: 4. Name the LLC and the other forms the IRS lists)
S corporation — A corporation that the IRS lists as a separate common business form because of how it is treated for federal tax purposes. (first used: 4. Name the LLC and the other forms the IRS lists)
cooperative — A business owned and controlled by the members who use its services, such as family farms that market their crops together. (first used: 4. Name the LLC and the other forms the IRS lists)
personal exposure — The most an owner could lose personally if a business fails: the money the owner put in plus any business debt the owner must repay from personal assets. (first used: 5. Compare the forms for the coffee cart)
liability shield — The protection a separate legal entity, such as a corporation or an LLC, gives its owners' personal assets from the business's debts. (first used: 5. Compare the forms for the coffee cart)
franchise — An arrangement in which a business owner pays for the right to run an outlet under another company's brand and system in a defined territory. (first used: 6. Weigh a franchise: buying into someone else's brand)
franchisor — The company that owns a brand and supplies its name, operating system, training, and ongoing support to franchisees. (first used: 6. Weigh a franchise: buying into someone else's brand)
franchisee — The owner who pays fees for the right to run an outlet under a franchisor's brand in a territory, following a franchise agreement, without owning the brand. (first used: 6. Weigh a franchise: buying into someone else's brand)
Franchise Rule — The Federal Trade Commission rule that requires a franchisor to give a prospective franchisee a disclosure document before the sale. (first used: 6. Weigh a franchise: buying into someone else's brand)
disclosure document — The document the FTC's Franchise Rule requires a franchisor to give a prospective franchisee, covering 23 specified items of information. (first used: 6. Weigh a franchise: buying into someone else's brand)
merger — A deal in which two companies combine to form a single company. (first used: 7. Sort mergers and acquisitions by type)
acquisition — A deal in which one company buys another company, which then belongs to the buyer. (first used: 7. Sort mergers and acquisitions by type)
horizontal merger — A combination of two companies that sell the same kind of product at the same stage, usually rivals in one industry. (first used: 7. Sort mergers and acquisitions by type)
vertical merger — A combination of two companies at different stages of making and selling one product, such as a buyer and one of its suppliers. (first used: 7. Sort mergers and acquisitions by type)
conglomerate merger — A combination of two companies in unrelated lines of business, such as a fitness-studio company and a pet-food maker. (first used: 7. Sort mergers and acquisitions by type)

Summary

A sole proprietor answers personally for every business debt; a trade name is no shield.
General partners share management and the same unlimited liability, not half each.
A corporation is a legal person; a stockholder can lose what was paid for the shares, and no more.
An LLC is a form state law creates, not a kind of corporation.
The IRS names the S corporation among the common forms; cooperatives are owned by their members.
The cart's owner faces 30,000 dollars of personal exposure as a sole proprietor and 20,000 dollars as a single-member LLC.
A franchisee pays for the right to use a brand and never owns it.
The FTC's Franchise Rule requires a disclosure document with 23 items.
Mergers are horizontal, vertical, or conglomerate, by how the two companies relate.

Check your understanding

Work these before looking at the answers — they are ungraded, and the answers (with reasoning) are at the bottom of the page.

An illustrative dog-walking business owner put in 3,000 dollars of savings and borrowed 5,000 dollars for a small van. The business fails, and nothing from it goes toward the loan. Find the owner's worst-case personal exposure as a sole proprietor and as a single-member LLC, and the difference.
Sort each illustrative deal as horizontal, vertical, or conglomerate: (a) a grocery chain buys a rival grocery chain in the next state; (b) an ice-cream maker buys the dairy farm that supplies its milk; (c) a bus maker buys a chain of bookstores.
A friend says, "I paid for a sandwich franchise, so now I own the brand." Explain what the friend actually bought.
An investor paid 800 dollars for shares in an illustrative furniture corporation. The corporation fails owing 50,000 dollars. What is the most the investor can lose, and does limited liability mean the investor lost nothing?

Answers (worked reasoning — read after attempting)

As a sole proprietor, the owner loses the 3,000 dollars put in and still owes the loan personally: 3,000 + 5,000 = 8,000 dollars. As a single-member LLC, the loan is the LLC's debt, so the most the owner can lose is the 3,000 put in. The difference is 8,000 − 3,000 = 5,000 dollars, the amount of the loan, which is the exposure the shield removes.
(a) Two grocery chains sell the same kind of product at the same stage, so the deal is horizontal. (b) The dairy farm supplies an input to the ice-cream maker, so they sit at different stages of one product, which makes it vertical. (c) Buses and books share no product and no supplier link, so the deal is conglomerate. The trap is thinking every merger joins rivals; only (a) does.
The friend is a franchisee. The fee bought the right to run one outlet under the sandwich brand in a territory, following the franchise agreement, with the franchisor's system, training, and support. The franchisor still owns the brand. Before buying, the friend should have received the disclosure document the FTC's Franchise Rule requires.
The investor can lose at most the 800 dollars paid for the shares, because the 50,000 dollars of debt belongs to the corporation, a separate legal person. Limited liability does not mean the investor lost nothing: the shares are likely worth nothing, so the 800 dollars is gone. It means the loss stops there.

Next up in this module: the Readings & Resources page, the lecture tutorial, the practice set, and the quiz — and next week the course turns to ethics, asking what a corporation is for and whom it owes.

Built with The Course Maker · samples.thecoursemaker.com