Ch. 05 How to Form a Business
What are the types of corporations, other that an "S"?
1) Alien 2) Domestic 3) Foreign 4) Closed (private) 5) Open (public) 6) Quasi-public 7) Professional 8) Nonprofit 9) Multinational
Cooperative
A business owned and controlled by the people who use it- producers, consumers, or workers with similar needs who pool their resources for mutual gain.
Sole proprietorship
A business that is owned, and usually managed, by one person.
General partnership
A partnership in which all owners share in operating the business and in assuming liability for the business's debts.
Limited liability partnership (LLP)
A partnership that limits partners' risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision.
Master limited partnership (MLP)
A partnership that looks much like a corporation (in that it acts like a corporation and is traded on a stock exchange) but is taxed like a partnership and thus avoids the corporate income tax.
Limited partner
An owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment.
How are the debts of a sole proprietorship handled?
Debts of a sole proprietorship are handled by: any debts or damages incurred by the business are your debts and you must pay them, even if it means selling your home, car, or whatever else you own.
How is ownership transferred in an LLC?
LLC ownership is not transferable. LLC members need the approval of other members in order to sell their interests.
How can size be a disadvantage of a large corporation?
Large corporations sometimes become too inflexible and tied down in red tape to respond quickly to market changes, and their profitability can suffer.
Acquisition
On company's purchase of the property and obligations of another company.
The forms of ownership that have a greater probability of obtaining needed financial backing are:
Partnerships and corporations
How do the owners of a corporation (stockholders') influence how a business is managed?
Stockholders' elect a board of directors, who hire officers of the corporation and oversee major policy issues. The owners/stockholders' thus have some say in who runs the corporation but have no real control over the daily operations.
What are the forms of partnerships?
a) General Partnerships b) Limited Partnerships c) Master limited partnerships
Compare and contrast S corporations with conventional C corporations.
a) S corporations look like a corporation but is taxed like a sole proprietorship b) "S" and "C" corporations both have paperwork similar to each other c) "S" corporations have shareholders', directors, and employees d) "S" corporation have the benefit of limited liability e) "S" corporations profits are taxed only as the personal income of the shareholders- avoiding double taxation
Leveraged buyout (LBO)
An attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing.
General partner
An owner (partner) who has unlimited liability and is active in managing the firm.
What is the difference between a general partner and a limited partner?
General partner: a) Owner b) Unlimited Liability c) Active in managing Limited partner: a) owner who invests money b) No management responsibility c) No liability for loss beyond investment
Describe horizontal merger:
Joins two firms in the same industry and allows them to diversify or expand their products. Example: A soft drink company and mineral water company that merge can now supply a
Illustrate the basic structure of a corporation
Owners/Stockholders (elect the Board of Directors) ^ Board of Directors (hire officers) ^ Officers (set corporate objectives and select managers) ^ Managers (Supervise employees) ^ Employees
What are the advantages for individuals when they incorporate?
The major advantages for individuals are limited liability and possible tax benefits.
Limited liability
The responsibility of a business's owners for losses only up to the amount they invest; limited partners and shareholders (stockholders) have limited liability.
Unlimited liability
The responsibility of business owners for all of the debts of the business.
Franchise
The right to use a specific business's name and sell its products or services in a given territory.
What do you have to do to start a sole proprietorship?
To start a sole proprietorship you must do: 1) Buy or lease equipment needed (i.e. saw, computer, tractor etc.) 2) Put out announcements say you're open for business 3) Maybe purchase a permit
What is meant by two tax returns and "double taxation"?
Two tax returns- individual who incorporates must file both corporate tax return and individual tax return. "Double taxation"- corporate income is taxed twice 1) pays tax on its income, before it can distribute any, as dividends to stockholders'. 2) Stockholders pay income tax on the dividends they receive.
Describe the characteristics of a master limited partnership.
a) Looks much like a corporation (acts like a corporation and is traded on the stock exchange) b) Taxed like a partnership, thus avoids corporate income tax
What are the advantages of a sole proprietorship?
1) Ease of starting and ending the business 2) Being your own boss 3) Pride of ownership 4) Leaving a legacy 5) Retention of company profits 6) No special taxes
What are the advantages of conventional "C" corporations?
1) Limited liability 2) Ability to raise more money for investment 3) Size 4) Perpetual life 5) Ease of ownership change 6) Ease of attracting talented employees 7) Separations of ownership from management
What are the advantages of a partnership?
1) More financial resources 2) Shared management and pooled/ complementary skills and knowledge 3) Longer survival 4) No special taxes
What are the disadvantages of limited liability?
1) No stock 2) Limited life span 3) Fewer incentives 4) Taxes 5) Paperwork
What are three ways a corporation can raise money?
1) Sell shares of its stock 2) Borrow money by obtaining loans from financial institutions 3) Borrow from individuals by issuing bonds
What are the three general forms of business ownership? Which is the most common form of business ownership?
1) Sole proprietorship 2) Partnerships 3) Corporations The most common is sole proprietorship
The disadvantages of sole proprietorship are:
1) Unlimited liability 2) Management difficulties 3) Limited financial resources 4) Overwhelming time commitment 5) Few fringe benefits 6) Limited Growth 7) Limited life span
What are the disadvantages of a partnership?
1) Unlimited liability: each general partner is liable for debts no matter who's fault 2) Division of profits; sharing profits 3) Disagreements among partners 4) Difficulty of termination
In order to qualify as an "S" corporation a company must:
1)Have no more than 100 stockholders' (members of family count as 1) 2) Hove shareholders that are individuals or estates, and who are citizens or permanent residents of the U.S. 3) Have only one class of stock 4) Derive no more than 25% of income from passive sources ( rents, royalties, interest)
Corporation
A legal entity with authority to act and have liability apart from its owners.
Partnership
A legal form of business with two or more owners.
What is the difference between a merger and an acquisition?
A merger is the result of two firms joining to for one company. It's similar to a marriage, joining two individuals as one family. An acquisition is one company's purchase of the property and obligations of another company. More like buying a house.
conventional (C) corporation
A state-chartered legal entity with authority to act and have liability separate from its owners.
S corporation
A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships.
Describe the characteristics of a limited liability partnership (LLP).
An LLP limits partners' risk of losing their personal assets to only their own acts and to the acts of people under their supervision. Thus, an LLP allows you to operate without the fear that one of your partners might commit an act of malpractice that would result in a judgement that takes away your assets. This protection may not extend to liabilities such as bank loans and other financial obligations.
Franchise agreement
An arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service to others in a given territory.
In a partnership, who is responsible for the debts of the firm and has unlimited liability?
In a partnership each general partner is liable for the debts of the firm, no matter who was responsible for causing them. Each general partner is liable for other general partners mistakes.
What could happen to an LLC in the event of a member's death?
It can cause the LLC's to dissolve automatically. Members may choose to reconstitute the LLC after it dissolves.
Describe a vertical merger:
Joins two firms operating in different stages of related businesses. Example: A merger between a soft drink company and artificial sweetener maker would ensure the merged firm a constant supply of an ingredient the soft drink manufacturer needs. It also can help ensure quality control of the soft drink company's product.
How are profits taxed in a sole proprietorship?
Profits are taxed in a sole proprietorship as the following: a) profits are taxed as personal income (Normal income tax) b) Pay self employment tax ( For Social Security and Medicade)
Because of potential conflict between partners, all terms of the partnership should:
Spelled out in writing to protect all parties and minimize misunderstandings.
What is the difference between a general partnership and a limited partnership? What is the minimum number of general partners required?
The difference between a general partnership and a limited partnership, a general partnership means the same for everyone meaning they share the business profits, debts, running business. Limited partnership is like an investor. Invests money in the business but down not have any management responsibilities. Limits liability. The minimum number of general parters required is at least 1.
The Uniform Partnership Act (UPA) identifies what three key elements of general partnership?
There are three identifiable key elements of a general partnership: 1) Common ownership 2) Shared profits and losses 3) The right to participate in managing the operations of the business
What are the disadvantages of conventional "C" corporations?
1) Initial cost 2) Extensive paperwork 3) Double taxation 4) Two tax returns 5) Size 6) Difficulty of termination 7) Possible conflict with stockholders' and board of directors
List the advantages of limited liability companies (LLC):
1) Limited liability 2) Choice of taxation 3) Flexible ownership rules 4) Flexible distribution of profits and losses 5) Operating flexibility
Which form of ownership is the most common?
Sole proprietorship
Conglomerate merger
The joining of firms in completely unrelated industries.
Vertical merger
The joining of two companies involved in different stages of related businesses.
Horizontal merger
The joining of two firms in the same industry.
Limited liability company (LLC)
A company similar to an S corporation but without the special eligibility requirements.
Franchisor
A company that develops a product concept and sells others the rights to make and sell the products.
Limited partnership
A partnership with one or more general partners and one or more limited partners.
Franchisee
A person who buys a franchise.
Which form of ownerships is separate from its owners?
Corporation: is a form of ownership that is separate from its owners. This is a legal entity with authority to act and have liability apart from it's owners. * There are over 5 million in the U.S. 20% of all businesses.
Merger
The results of two firms forming one company.
What is the benefit of the size of a large corporation? Does a company have to be large to be a corporation?
They can raise large amounts of money to work with, big corporations can build modern factories or software development facilities with the latest equipment. A large corporation with numerous resources can take advantage of opportunities anywhere in the world. Corporations do not have to be large to enjoy the benefits of incorporating.
Explain the following statement, " A corporation is separate from its owners". What is another name for the owners of a corporation.
This statement means a corporation is a state-charted entity with authority to act and have liability separate from its owners. Stockholders' is another name for owners of a corporation.
