Chapter 6: Business Formation

Corporation

A form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners

Limited Liability Company (LLC)

A form of business ownership that offers both limited liability to its owners and flexible tax treatment

Sole Proprietorship

A form of business ownership with a single owner who usually actively manages the company

What are the characteristics of the four basic forms of business ownership?

SOLE PROPRIETORSHIP (owned and usually managed by a single person), PARTNERSHIP (voluntary arrangement under which 2+ people act as co-owners of a business for profit), CORPORATION (legal entity created by filing a document with a state agency, and is also considered to be separate and distinct from its owners who have limited liability for the debts of their company), and LIMITED LIABILITY COMPANY (relatively new, like corporation offers limited liability to all of its owners, also offer more flexibility in tax treatment and have simpler operating requirements).

Franchisor

The business entity in a franchise relationship that allows others to operate its business using resources it supplies in exchange for money and other considerations

Articles of Incorporation

The document filed with a state government to establish the existence of a new corporation

Board of Directors

The individuals who are elected by stockholders of a corporation to represent their interests

Vertical Merger

A combination of firms at different stages in the production of a good or service

Horizontal Merger

A combination of two firms that are in the same industry

Conglomerate Merger

A combination of two firms that are in unrelated industries

Stockholder

An owner of a corporation

Why are limited liability companies becoming an increasingly popular form of ownership?

Avoid problem of double taxation endemic to C corps but still giving all owners protection of limited liability. Fewer regulations than corporations and owners have flexibility to either manage the company themselves or hire professional managers.

Acquisition

A corporate restructuring in which one firm buys another

Merger

A corporate restructuring that occurs when two formally independent business entities combine to form a new organization

Franchise

A licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, business methods, and other property in exchange for monetary payments and other considerations

Partnership

A voluntary agreement under which two or more people act as co-owners of a business for profit

What are the pros and cons of partnerships?

General Partnership-- PROS: pooled financial resources, shared workload to take advantage of complimentary skills, earnings taxed only as income to the partners/no separate income tax on business itself. CONS: each owner has unlimited liability for the debts of the company, disagreements can complicate decision making, death/withdrawal of a partner can cause instability/uncertainty in the management and financing of company. Limited Partnership-- must have at least one general partner and one limited partner. General partners actively manage company and have unlimited liability, while limited partners have limited liability but may not actively manage the partnership. Limited Liability Partnership-- all partners may manage their company and are protected by some degree of limited liability.

Why have corporations become the dominant form of business ownership?

Most common form of corporation is C CORPORATION, all stockholders have limited liability. C corps can raise financial capital by issuing bonds or shares of stock, giving a financial growth advantage. Also, unlimited life, easy transfer of ownership, ability to take advantage of professional management; however, are complex and expensive than partnership, profits are double taxed, and subject to extensive government regulation.

What are the advantages and disadvantages of franchising?

PROS: franchisor gains revenue without the need to invest its own money, franchisee gains right to use a well-known brand name and proven business methods and often receives training and support from the franchisor. CONS: franchisors often find that dealing with a large number of franchisees can be complex and challenging, franchisees must pay fees and royalties to franchisor and do not have much control over management of their business.

What are the advantages and disadvantages of a sole proprietorship?

PROS: simplest and least expensive form of ownership to establish, single owner has flexibility to run business on her own, owner retains all of the profits, and earnings are taxed only as income of owner with no separate tax levied on the business itself. CONS: single owner has unlimited liability for debts of business, requires one to work long hours and assume heavy responsibilities, it may be difficult to raise funds for expansion, and they have a limited life.

Franchisee

The party in a franchise relationship that pays for the right to use resources supplied by the franchisor