Intro to Business (Week 6)

Warren is starting a business. His biggest concerns are losing everything he owns if something goes wrong and being mired in strict taxation and administrative regulations. For those reasons, he decides to start a(n):

-LLC

The main thing that makes S Corporations different from C Corporations is:

-That the business is not taxed itself. Only the shareholders are taxed.

The typical fee structure for a franchise including initial franchise fees and royalties, is an example of:

-an advantage for the franchisor.

In a sole proprietorship, the owner of the business:

-enjoys complete control over all aspects of the business.

These are the primary disadvantages for the Franchisor in a franchise business model.

-lack of control, vulnerability of trade secrets, and overexposure of the land

Partnerships have several limitations including:

-the potential for disagreements among partners.

Merger (definition)

the consolidation of two companies that, prior to the merger, were operating as independent entities

What are the most important factors to consider when choosing an organizational type for your business?

- Start-up cost, taxation, and control

Your friend Jody comes to you asking for advice. She owns a moving company called "Whatever Moves You, LLC" (they have cute musical notes in logo—very clever). She has owned the business for 45 years and has seen tremendous growth. Jody would like to transfer ownership of her business to her 30 year old daughter so that she may retire. What do you tell Jody?

-"You will need to work with an attorney to see if this is even possible because rules about transferability of LLC's vary by state."

A Subway franchisee does not do a good job managing food safety. Customers purchase sandwiches that contain expired turkey and become ill reflecting poorly on the brand and exposing the company to liability. This is an example of:

-A disadvantage for the franchisor—a lack of control over the franchisee resulting in damage to the brand.

ABC Corporation is the second-largest company in a competitive market with three other major players. ABC wants to expand their market share quickly and become the leader in their space. One of the options their board considers is to purchase the property, plants, and equipment of the fourth-largest company, XYZ Inc. This action would be classified as a/an:

-Acquisition

Define the business structure commonly known as a "sole proprietorship."

-An unincorporated business owned and run by one individual in which there is no distinction between the business and the owner

Which of the following entities can pursue a broader mission that may sometimes be at odds with maximizing profits for shareholders:

-B corporation.

What are some important factors to consider when choosing an organizational type?-

-Control versus responsibility, and risk tolerance.

Which of the following entities are subject to limited liability?

-Corporations

Four friends are discussing franchises as a form of business, but have different opinions about how they are defined. Who is correct?

-Daniel believes that franchises are businesses where the Franchisor licenses a business model, trademark and methods to independent entrepreneurs (Franchisees) who own and operate the individual units.

When starting a business, why is it important to understand and consider tax implications?

-Different forms of business ownership result in businesses and owners being taxed differently. It is important to understand these differences in order to choose the scenario that best fits your needs.

The following business integration illustrates the definition of a "merger":

-Exxon and Mobil

What makes an LLC different from a C Corporation?

-LLCs and C Corporations are taxed differently.

In some situations, individual business partners are not obligated to consult with other participants in certain business agreements. The fact that a partner can make business decisions without consulting the other partners is considered to be a disadvantage of a:

-LLP

This business legal structure can be defined as having single taxation, limited liability, and the flexibility to let each individual in the business decide how much responsibility and participation they want. This is a(n):

-LLP

You and your dear friend want to start an accounting firm together. You know each other well but you don't want to be held responsible for your friends negligence or misconduct should such an event occur. You and your friend also want to be sure that you are only taxed once on company profits. Which type of organizational structure might be best for you?

-LLP

You are thinking about starting a business. Of course, you want to maximize your income and not pay taxes both as a business and as an individual. You are also concerned about liability. If something bad happens with your business, you don't want to be personally liable. What form of business ownership would best meet your needs?

-Limited Liability Company

A business in which some or all partners have limited liabilities is called a:

-Limited Liability Partnership

Your friend tells you he is working on setting up a business. He tells you he has a business partner who shares in all decision making, it has been fairly easy to set up, he will only be taxed once on company profits, and he has limited liability for the company. What kind of business has your friend most likely described?

-Limited Liability Partnership

In an LLP:

-One partner IS NOT responsible or liable for another partner's misconduct or negligence.

The following are all advantages of business partnerships EXCEPT:

-Partnerships shield the individual partners from debt and liability.

The two major drawbacks of an LLC legal structure are:

-Potential limited lifespan and self-employment tax

The advantages of being a franchisee are:

-Risk reduction, brand recognition, and relative autonomy

Legal Structures (examples)

-Sole proprietorship -General partnership -Franchise -Limited partnerships and limited liability partnerships (LLP) -Limited liability company (LLC) -C corporation -S corporation

The most significant differences between C and S corporations have to do with:

-Taxation, administration, and shareholder compensation

Aamer is preparing to interview for a job opening he saw on an employment board. He does a little research and discovers that the business is run by three individuals. How could he tell if the business is a sole proprietorship with two employees or a partnership of three persons?

-The distinction would be if the three persons share legal ownership.

Which of the following is a downside of choosing a business structure where the owner has full control?

-The owner has full responsibility and liability for the business

What would be the advantages of choosing a sole proprietorship over other legal structures of business?

-The sole proprietorship would be cheaper to set up, the owner would have full control, the owner would be taxed as an individual, and the owner keeps all of the profits.

Why would a company choose to engage in a vertical merger or acquisition?

-To increase synergies by merging firms that would be more efficient operating as one.

Why would a company undertake a horizontal merger or acquisition?

-To take advantage of synergies and potential market share gains.

Integration (definition)

-When businesses acquire other businesses or operations that were previously competitors, suppliers, buyers, or sellers

Caitlin is invited to join a business as a partner due to her expertise in the field. She is asked to sign a partnership agreement that gives her 40% of the profits, full control of the marketing activities, but final say on all other decisions goes to the original owner. She is joining:

-a limited partnership

Which of the below would illustrate the advantages of vertical mergers and acquisition?

-a media company merging with a cable company

If an owner of a business were to die, which of the following entities would cease to exist (which type of business would "die" too)?

-a sole proprietorship

In 2014 Microsoft purchased the popular game Minecraft for $2.5B. This is an example of a(n):

-acquisition.

In 2016, Microsoft announced that it would buy LinkedIn for $26.2 billion, in an all cash deal, making it the 6th largest deal if its kind on record. This is an example of:

-an acquisition

Disney and Pixar coming together was a "match made in cartoon heaven" some say. This undertaking enabled the two companies to collaborate freely and easily resulting in some of the highest grossing animated films of all time. This is a successful example of:

-an acquisition.

Vertical merger (definition)

-characterized by the merger of two organizations that have a buyer-seller relationship or, more generally, two or more firms that are operating at different levels within an industry's supply chain.

The disadvantages to starting and running a corporation include:

-double taxation

AT&T's proposed $39 billion acquisition of T-Mobile USA would have combined two of the four major national providers of mobile telephone services for both individuals and businesses. As a result of this acquisition, AT&T would be the provider of almost 40% of all mobile service, with Verizon and Sprint making up the remainder of the market. This is an example of:

-horizontal acquisition.

Charter Communications is seeking to purchase and bring together Time Warner Cable and Bright House Networks, creating a company that will serve a collective 18.8 million Internet broadband subscribers and 17 million TV subscribers. Charter has specifically cited a desire to have greater bargaining power in negotiating with channel owners like Disney. This is an example of a:

-horizontal merger.

A legal partnership agreement should include:

-how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership, and how to dissolve the partnership.

Unlike many types of businesses, ________ are not recognized as legal business structures in every state. Some states even limit the creation of these to professionals such as doctors or lawyers.

-limited liability partnerships

Acquisition (definition)

-occurs when a company purchases the assets of another business (such as stock, property, plants, equipment) and usually permits the acquired company to continue operating as it did.

A ________ is owned and managed by a group of individuals who share in decision-making and risk.

-partnership

A franchise:

-provides a proven product, business model and brand to the franchisee.

The most common form of business ownership in the U.S. is a:

-sole proprietorship

Disadvantages for a franchisee include:

-the high cost of start-up.

Smart Phone Inc. manufactures its custom phone cases for its awesome phones and tablets. It also manufactures its custom touch screen sensors and owns its own shipping company that delivers its phones and tablets straight to customer homes. Smart Phone Inc. is great at:

-vertical acquisitions

"Klucky Farms" merges with supermarket giant "Super Fresh Foods." Klucky Farms is excited to be able to supply Super Fresh Foods with a steady supply of quality chicken and Super Fresh Foods is glad to have a reliable farm with fair prices under the same corporate leadership. This is an example of:

-vertical merger or acquisition.

________ usually creates one larger company and one of the original two companies ceases to exist.

-A merger

This one feature of an LLP could be considered both an advantage and/or a disadvantage:

-A partner can make a decision affecting the entire business without consulting the other partners

When two companies combine to form a new company it is called a(n):

-Acquisition

Cost of start up, control vs.responsibility, profits, taxation, entrepreneurial ability, risk tolerance, financing and continuity or transferability are each:

-Factors to consider when choosing an organizational type.

What is the most important question a business owner needs to ask themselves if they are considering their business continuity or transferability in the future?

-How can I set up my business to either continue on without me or be sold?

You are forming a new company that delivers food to residents across college campuses. You have a number of partners, but your primary goals are to avoid personal liability and double taxation. You want to pay each of the partners based on their contribution to the success of the company, which is NOT equal to their percentage ownership. You could accomplish this by forming a(n):

-Limited Liability Company

What is an LLC?

-Limited Liability Company—a business structure that is attractive to small business owners because they provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership

Some of the major advantages of incorporating your business are:

-Limiting your personal liability, raising capital through the cell of stock, and alleviating disagreements among partners

What is the purpose of a B Corp and what are the general requirements for operation?

-Make a commitment to creating general public benefit; prepare an annual benefit report, pay an annual fee and adopt a third-party standard

Examples of franchises include:-

-Subway restaurants.

Benefits of being a franchisee include:

-access to a template for the business.

Horizontal merger (definition)

occurs between companies in the same industry.