Ch 5 - Foundations of Business

Avoiding double taxation is reason enough for approximately

4.7 million U.S. companies to operate as S corporations

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.

limited partnership

A partnership with one or more general partners and one or more limited partners.

limited partner

An owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment.

In a franchise, having management support from the franchisor is a(n) ______________ whereas the coattail effect is considered a __________________.

Blank 1: advantage, positive, or benefit Blank 2: disadvantage, negative, or drawback

A business entity owned, controlled, and operated by a group of users for their own benefit.

Cooperative

2. Ethan is married with four kids. He has a mortgage, a car payment, and several other bills. He has thought about starting a small business. He's excited about the potential of his business ideas, but he's also concerned about the risk of personal losses associated with starting his business as a sole proprietorship.

Disadvantage of a sole proprietorship

5. Laura has owned her business for approximately one year. During this year, she has realized that she underestimated how much time running her small business would take. On average, she works 80 hours per week.

Disadvantage of a sole proprietorship

1. Coattail effects

Disadvantage of franchising

10. Shared profit

Disadvantage of franchising

Smile Dental: Dr. Berry decided to open a dental office on his own. He wanted his personal assets protected in case of malpractice but didn't want the hassle that comes along with traditional incorporating.

LLC

Disadvantages of Franchises

Large start-up costs Shared profit Management regulation. Coattail effects. Restrictions on selling. Fraudulent franchisors.

Why the drive toward forming LLCs? Advantages include:

Limited liability Choice of taxation Flexible ownership rules Flexible distribution of profits and losses. Operating flexibility.

Advantages of Corporations

Limited liability. Ability to raise more money for investment. Size Perpetual life Ease of ownership change Ease of attracting talented employees. Separation of ownership from management.

An individual who has shared ownership in a partnership but takes no part in managing it and has limited liability.

Limited partner

What are some of the advantages of franchising?

Lower failure rate Recognized name Financial advice

Franchising clearly has some advantages:

Management and marketing assistance. Personal ownership. Nationally recognized name. Financial advice and assistance. Lower failure rate.

acquisition

One company's purchase of the property and obligations of another company.

A unique government creation that looks like a corporation but is taxed like a sole proprietorship or partnership is called a(n) corporation. Listen to the complete question

S

Entity taxed like a sole proprietorship or partnership but maintains benefits of incorporation like limited liability.

S corporation

An unincorporated business with one owner.

Sole proprietorship

Like the fee, the length of time it will take to actually have your business incorporated will vary by state

The average time is approximately 30 days from the date of application.

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

The responsibility of a business's owners for losses only up to the amount they invest; limited partners and shareholders have limited liability.

unlimited liability

The responsibility of business owners for all of the debts of the business.

merger

The result of two firms forming one company.

franchise

The right to use a specific business's name and sell its products or services in a given territory.

True or false: The main advantage of a sole proprietorship is ease of start up.

True; A sole proprietorship is the easiest type of business to start.

True or false: The owner of a sole proprietorship is responsible for developing any fringe benefits they have.

True; As a business owner, you are responsible for your own health insurance, pension plan or retirement fund, paid time off, disability insurance, and other benefits you might receive as an employee of a business.

state's office charges a fee for incorporating a business, varying by state from

a low of $50 in Arkansas to a high of $725 in Nevada

Because owners are only responsible for losses up to the amount they have invested in a corporation, limited liability is considered:

a major advantage

One company's purchase of the property and obligations of another company is a(n)

acquisition or buyout

How many businesses are started each year?

approximately 400,000 are started each year

In a leveraged buyout, employees, managers, or investors finance the purchase of the company by:

borrowing against its assets

Many people do not like working for someone, so being your own ___________ is an advantage of sole proprietorships.

boss

Select the reasons why size is an advantage of the corporation.

build modern facilities attract experts for hire acquire the latest equipment

If a software company and a snack food company merged, it would be called a(n) _________ merger.

conglomerate

A merger that joins firms in completely unrelated industries is a:

conglomerate merger

A business owned and controlled through pooled resources by the people who use it is a(n) ______.

cooperative

When producers, consumers, or workers with similar needs pool their resources for mutual gain, they start a(n):

cooperative

A state-chartered legal entity with authority to act and have liability separate from its owners is a:

corporation

A(n) ______________ is a state-chartered entity that exists in the eyes of the law and controls risk to the owners of the firm.

corporation

Selling shares of stock to anyone allows a _________ to raise more money to grow.

corporation

A major disadvantage of the corporate form deals with the tax situation called ___________ taxation.

double or dual

Many brick and mortar franchisees are using ______ to expand their businesses online to lower costs and better meet the needs of their customers.

e-commerce technology websites

The paperwork needed to start a corporation is extensive, but a corporation must also keep detailed _____________ records documenting all financial transactions in detail.

financial, public, or accounting

One of the most important advantages of the sole proprietor form of ownership is that a business owner:

finds it easier to start and end the business

An agreement that gives a business the right to use a business's name and sell a product or service in a given area is a(n):

franchise

An entrepreneur would buy a _______________ if they are uncomfortable starting their business from scratch.

franchise

Franchisors often use technology to meet the needs of both their ________ customers and their because technology makes communication faster and more widespread.

franchisees, employees, suppliers, investors, or stakeholders

Relief from the stress of commuting, extra time for family activities, and low overhead expenses are all advantages of _______________ - ______________ franchises.

home-based

When a soft drink company and a mineral water company merge and then are able to supply a variety of drinking products they have formed a(n) _____________ merger.

horizontal

A merger of two firms in the same industry that allows the companies to diversify or expand their products is a(n):

horizontal merger

The __________ cost of incorporating can be expensive because of the need for accountants and lawyers to get started.

initial

LLC's are considered to have operational flexibility because while they must submit articles of organization,they are not required to:

keep minutes or hold annual meetings

A __________ ____________ can be initiated by employees, managers, or investors who borrow necessary funds to purchase all shares of a firm's stock.

leveraged buyout

An S corporation has the liability protections of a corporation but is taxed:

like a partnership or sole proprietorship

An advantage of the corporate form of business is that limited liability allows it to:

limit individual responsibility for losses

If the sole proprietor dies, is incapacitated, or retires, the business no longer exists. This disadvantage of a sole proprietorship is called _________ life span.

limited

Taryn and Eilysh have decided to form a partnership. Taryn will not have management responsibility, but will invest money in the business. Taryn will be considered a(n) _____________ partner.

limited

The form of business ownership called _______ protects the person's personal assets from the debts of the business.

limited liability

The form of partnership that limits liability to the limited partner's own acts or those of the people they supervise is a:

limited liability partnership

When the continued operation of the business is dependent on the life of the business owner, it is referred to as:

limited life span

When there is one or more general partners and one or more limited partners, the firm is a(n):

limited partnership

The limited partners' risk of losing their personal assets in an LLP is:

limited to the outcomes of their own acts and omissions

Franchises offer those starting a business the advantage of a recognized name, management assistance, and:

lower failure rates

About 20 percent of franchises are owned by African Americans, Latinos, Asians, and Native Americans. Franchisors are becoming more focused on recruiting franchisees.

minority or diverse

Advantages of starting an online franchise are:

online franchisees can compete in world markets no upfront fee may be required franchisees pay only a set monthly fee

A key advantage of a home-based franchise is low ________________ costs, which can be ongoing. These are the costs associated with rent, utilities, and other fixed costs.

overhead or operating

Through flexible distribution ________________ of profits and losses, LLC members agree on the of profits/losses to be distributed to each member.

percentage, proportion, division, share, or distribution

When a corporation is separate from its owners and does not terminate with the death of one owner, the corporation has:

perpetual life

Unlimited liability as it relates to sole proprietorships is the risk of loss of ________________ assets beyond the assets of the business.

personal

Stockholders are ___________ from the managers and employees of the firm because they are not actively involved in the operations of the firm.

separate, independent, or separated

A business that is owned and managed by one person is a(n)

sole proprietorship

If you start and manage a landscaping business on your own, you have likely started a:

sole proprietorship

Studies have indicated that partnerships are four times more likely to succeed than:

sole proprietorships

An advantage of partnerships is a longer ___________ rate than sole proprietorships, because they become more disciplined and the business's life is based on all the partners.

survival

Gathering leads on a company website, selling products and keeping up to date on news via email, and chat rooms all serve as examples of using _______________ to assist franchisees and customers.

technology

Perpetual life for a corporation means that the death of one owner does not ___________ the corporation.

terminate, dissolve, or end

Many franchises are expanding internationally because:

there are large new markets available

One of the most notable advantages of an online franchise is

there is no brick-and-mortar real estate cost.

If your company debts or damages are solely your responsibility you could be experiencing the disadvantage associated with owning a sole proprietorship called

unlimited liability

A merger between a soft drink company and an artificial sweetener maker could be considered a(n) _____________ merger.

vertical

A merger that joins two companies involved in different but related levels of an industry is a(n) ______ merger.

vertical

The UPA defines the three key elements of any general partnership as

(1) common ownership, (2) shared profits and losses, and (3) the right to participate in managing the operations of the business.

Types of Partnerships

(1) general partnerships, (2) limited partnerships, and (3) master limited partnerships.

The three major forms of business ownership

(1) sole proprietorships, (2) partnerships, and (3) corporations

Select those items considered fringe benefits that people working for a company are likely to receive, but a sole proprietor has to develop on his own:

-a pension plan -paid sick or vacation leave time -paid health insurance

9. Restrictions on selling

Disadvantage of franchising

cooperative (co-op)

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.

franchisor

A company that develops a product concept and sells others the rights to make and sell the products.

corporation

A legal entity with authority to act and have liability separate from its owners.

partnership

A legal form of business with two or more owners.

general partnership

A partnership in which all owners share in operating the business and in assuming liability for the business's debts.

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.

franchisee

A person who buys a franchise.

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.

A corporate action in which one company buys the assets and obligations of another company and assumes control.

Acquisition

1. Abigayle has recently started her business as a sole proprietorship. All she did to get started was post an announcement in the local paper and obtain all the appropriate local licenses.

Advantage of a sole proprietorship

3. Hunter has just completed his first year of operation as a sole proprietor of a successful sporting goods store. There were challenges but he was excited about getting to keep all the profits of the venture to himself.

Advantage of a sole proprietorship

4. Jordan has just completed his first year of operation as a sole proprietor of a successful marketing firm. Realizing a significant profit, he is happy that he does not have to worry about double taxation of his earnings.

Advantage of a sole proprietorship

2. Financial advice and assistance

Advantage of franchising

4. Lower failure rate

Advantage of franchising

6. Management regulation

Advantage of franchising

7. Nationally recognized name

Advantage of franchising

8. Personal ownership

Advantage of franchising

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.

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.

Merger between two or more companies that are involved in totally unrelated business activities.

Conglomerate merger

RST Inc.: A group of colleagues opened a paintball arena. They wanted to limit the liability of the owners so the investors didn't encounter any personal losses. Additionally, they wanted those who helped with the start-up costs to have a share of the profits.

Corporation

6. LuAnn has owned her small business for three years as a sole proprietorship. The business has grown during those three years. LuAnn realizes she needs additional funds, but the funds available to the business are limited to what she can gather alone.

Disadvantage of a sole proprietorship

3. Large start-up costs

Disadvantage of franchising

Advantages of Sole Proprietorship

Ease of starting and ending the business. All you have to do to start a sole proprietorship is buy or lease the needed equipment (a saw, a laptop, a tractor, a lawn mower) and put up some announcements saying you are in business. You may have to get a permit or license from the local government, but often that is no problem. It is just as easy to get out of business; you simply stop. There is no one to consult or disagree with about such decisions. Ability to be your own boss. Working for others simply does not have the same excitement as working for yourself—at least, that's the way sole proprietors feel. You may make mistakes, but they are your mistakes—and so are the many small victories each day. Pride of ownership. People who own and manage their own businesses are rightfully proud of their work. They deserve all the credit for taking the risks and providing needed goods or services. Leaving a legacy. Owners can leave an ongoing business for future generations. Retention of company profits. Owners not only keep the profits earned but also benefit from the increasing value as the business grows. No special taxes. All the profits of a sole proprietorship are taxed as the personal income of the owner, and the owner pays the normal income tax on that money. However, owners do have to pay the self-employment tax (for Social Security and Medicare). They also have to estimate their taxes and make quarterly payments to the government or suffer penalties for nonpayment.

Which are considered disadvantages of incorporating?

Extensive paperwork Double Taxation Initial Cost

Which of these are advantages of a limited liability companies?

Flexible ownership rules Choice of taxation Limited liability

A form of business in which one party gives another rights to sell its products or services and use its business format in a certain geographic area.

Franchise

The party that buys the right to use a business's products, brand, business format, trade secrets, and so on.

Franchisee

The party that sells to another party the rights to use its business format, proprietary knowledge, products, and so on.

Franchisor

Business entity with two or more owners who own and operate the business and assume unlimited liability.

General partnership

In order to qualify as a S corporation, a company must:

Have no more than 100 shareholders. (All members of a family count as 1 shareholder.) Have shareholders that are individuals or estates, and who (as individuals) are citizens or permanent residents of the United States. Have only one class of stock. (You can read more about the various classes of stock in chapter 19.) Derive no more than 25 percent of income from passive sources (rents, royalties, interest).

Joining of two or more companies in the same industry and/or with similar product lines.

Horizontal merger

Disadvantages of Corporations

Initial cost. Extensive paperwork Double taxation Two tax returns Size Difficulty of termination Possible conflict with stockholders and board of directors

A company similar to an S corporation but without the special eligibility requirements is an:

LLC

Corporate structure in which investors have limited liability; similar to S corporations without eligibility requirements.

LLC

Which is an advantage of the corporate form of business ownership?

Limited liability

The joining of two or more business entities into a single entity.

Merger

Partnerships usually have the following advantages:

More financial resources Shared management and pooled/complementary skills and knowledge. Longer survival No special taxes

Of course, LLCs have their disadvantages as well. These include:

No stock Fewer incentives Taxes Paperwork

Business entity with two or more owners who share management and profits or losses.

Partnership

Magic City Ice Cream: Scott, with expertise in marketing and sales, and Stacy, with experience in management, opened an ice cream parlor together. They share the profits and responsibilities equally.

Partnership

Taylor Marketing: Taylor began a marketing consultant business on her own. The risk is minimal and there is no need for additional start-up capital.

Sole proprietorship

Which of the following are true regarding the process of forming a corporation.

The bylaws of the corporation describe how the firm is to be operated The articles of incorporation must be filed in the state in which the company will be incorporated

Select all attributes that make the initial cost of incorporating a disadvantage.

The high cost of hiring lawyers and accountants for the complex filings needed High start-up costs associated with documentation

conglomerate merger

The joining of firms in completely unrelated industries.

Full responsibility to pay the debts or obligations of a legal entity.

Unlimited liability

Disadvantages of Partnerships

Unlimited liability Division of profits. Disagreements among partners Disagreements among partners

Disadvantages of Sole Proprietorships

Unlimited liability—the risk of personal losses. When you work for others, it is their problem if the business is not profitable. When you own your own business, you and the business are considered one. You have unlimited liability; that is, any debts or damages incurred by the business are your debts and you must pay them, even if it means selling your home, your car, or whatever else you own. This is a serious risk, and undertaking it requires not only thought but also discussion with a lawyer, an insurance agent, an accountant, and others. Limited financial resources. Funds available to the business are limited to what the one owner can gather. Since there are serious limits to how much money one person can raise, partnerships and corporations have a greater probability of obtaining the financial backing needed to start and equip a business and keep it going. Page 116 Management difficulties. All businesses need management; someone must keep inventory, accounting, and tax records. Many people skilled at selling things or providing a service are not so skilled at keeping records. Sole proprietors often find it difficult to attract qualified employees to help run the business because often they cannot compete with the salary and benefits offered by larger companies. Overwhelming time commitment. Though sole proprietors say they set their own hours, it's hard to own a business, manage it, train people, and have time for anything else in life when there is no one with whom to share the burden. The owner of a store, for example, may put in 12 hours a day at least six days a week—almost twice the hours worked by a nonsupervisory employee in a large company. Imagine how this time commitment affects the sole proprietor's family life. Many sole proprietors will tell you, "It's not a job, it's not a career, it's a way of life." Few fringe benefits. If you are your own boss, you lose the fringe benefits that often come with working for others. You have no paid health insurance, no paid disability insurance, no pension plan, no sick leave, and no vacation pay. These and other benefits may add up to 30 percent or more of a worker's compensation. Limited growth. Expansion is often slow since a sole proprietorship relies on its owner for most of its creativity, business know-how, and funding. Limited life span. If the sole proprietor dies, is incapacitated, or retires, the business no longer exists (unless it is sold or taken over by the sole proprietor's heirs).

Joining of two or more companies in similar industries but in different stages or steps of the manufacturing process.

Vertical merger

Which of following are true about the advantages and disadvantages of being a franchise owner:

While the upfront costs of a franchise may be steep, a franchise has a better chance of succeeding than starting a business from scratch Having a nationally recognized name for your business in a franchise can help with marketing and awareness

Electric cooperatives serve 42 million U.S. consumer-members in 47 states—or 12 percent of the population.46

Worldwide, more than 1 billion people are members of cooperatives

A franchise owner will experience the coattail effect when:

a fellow franchisee does something that has an impact on growth and profitability

A(n) ______ is where one company purchases the property and obligations of another.

acquisition

A partnership ____________ can spell out the requirements of terminating a partnership.

agreement

In addition to the articles of incorporation, a corporation has _____________ , which describe how the firm is to be operated from both legal and managerial points of view.

bylaws

Bruce is meeting with his accountant to choose whether his LLC is to be taxed as a partnership or a corporation. This advantage of forming an LLC is called:

choice of taxation

When the actions of others with the same franchise as yours have an impact on your future growth and profitability, this is an example of ______________ effects.

coattail

The actions of a fellow franchisee will affect your franchise. This is known as the

coattail effect

A corporation is a legal ___________ with authority to act and have liability separate from its owners.

entity

Except for states like Delaware, _______ creates a disadvantage to incorporating.

extensive paperwork

The coattail effect in franchising means that you will do well as long as other franchises are doing well, even if your particular franchise is not profitable.

false; The coattail effects is just the opposite - the actions of other franchises have an impact on your future growth and you could be forced out of business even if your particular franchise has been profitable.

True or false: Corporations must be large in size to benefit from the advantages of incorporating.

false; The majority of U.S. corporations are small businesses. These businesses benefit from limited liability and other advantages of the corporate form.

Ed has decided to purchase and follow a business format by becoming a franchisee. The _____________ _______________ he will sign gives him the right to use the business name and sell the products of the firm.

franchise agreement

Mark, Cal and Aidan have decided to form a business where all owners will share in operating the business and in assuming liability for the business debts. They are most likely forming a(n) ______________ partnership.

general

A partnership where all owners share in operating the business and in assuming unlimited liability for the business's debts is a:

general partnership

A sole proprietorship has a limited life span unless:

it is taken over by an heir it is sold to someone else

Leaving a ___________________ means owners can leave an ongoing business for future generations.

legacy

A _________ partnership has partners who do not share in operating the business.

limited

A key advantage of LLCs is ___________ liability where personal assets are protected.

limited

The responsibility for a loss only up to the amount invested is __________ liability.

limited

A form of business ownership that provides limited liability, as in a corporation, but is taxed like a partnership is a(n) ___________ _____________ company.

limited liability

Limited liability, choice of taxation, flexible ownership rules, and operating flexibility are all advantages of a(n) ____________ ______________ company.

limited liability

Stockholders' liability for losses only up to the amount they invest is called ______________.

limited liability

Franchises are expanding internationally to access additional _______________ that have new customers and to increase their profit potential.

markets

An S corporation that loses its S status

may not operate under it again for at least five years

When two firms join together to form one new company, it is called a(n)

merger

_______________ owned businesses are growing at more than the national rate.

minority

A LLC has the choice of taxation and can be taxed as a(n) ____________ or as a corporation.

partnership

An LLC submits a written operating agreement, similar to a(n) ____________ agreement, describing how the company is to be operated.

partnership

Termination of a partnership is difficult without a(n) ______ agreement.

partnership

An advantage of an LLC is flexible distribution of profits and losses, which means profits/losses do not have to be distributed in ________________ to the money each person invests.

proportion

Home-based franchises have many advantages, such as:

relief from the stress of commuting low overhead expenses

The share of profits or sales revenue paid to the franchisor is called a(n)

royalty

A corporation can sell __________ to anyone who is interested to raise more money for investment.

stock

Franchises are attractive to minority populations because:

they provide personal ownership of a business some offer financial support to aspiring business owners

The disadvantage of sole proprietorships is that any debts or losses incurred by the business are your debts because you and the business are legally one and you have:

unlimited liability

Ending a partnership can be difficult because of problems deciding:

when a partner can retire the worth of a retiring partner's share how to distribute assets