Ch 5: How to Form a Business

conventional (C) corporations

-a state-chartered legal entity with authority to act and have liability separate from its owners (its stockholders)

leveraged buyout (LBO)

-an attempt by employees, management or group of investors to buy out the stockholders in a company

advantages of LLC

1. limited liability 2. choice of taxation 3. flexible ownership rules 4. flexible distribution of profits and losses 5. operating flexibility

sole proprietorship

a business owned, and usually managed, by one person

corporation

a legal entity with authority to act and have liability apart from its owners

limited partner

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

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

acquisition

one company's purchase of the property and obligations of another company

how owners affect management

owners/stockholders (elect board of directors) --> board of directors (hire officers) --> officers (set corporate objectives and select managers) --> managers (supervise employees) --> employees

limited liability company (LLC)

similar to s corporation but without the special eligibility requirements. LLCs were introduced in Wyoming in 1977 and were recognized by the IRS as a partnership for federal income tax purposes in 1988

merger

the result of two firms joining to form one company

partnership

two or more people legally agree to become co-workers of a business

who can incorporate?

-anyone: truckers, doctors, plumbers, athletes, and small business owners can incorporate -normally, stock is not issued when individuals incorporate so the advantages and disadvantages are not exactly the same as for large corporations -major advantages are limited liability and possible tax benefits

vertical merger

-join two firms in different stages of related business -a merger between a soft drink company and an artificial sweetener marker would ensure the merged firm a constant supply of an ingredient the soft drink manufacturer needs

horizontal merger

-joins two firms in the same industry and allows them to diversify or expand their products -a soft drink company and a mineral water company that merge can now supply a variety of drinking products

what are the major advantages and disadvantages of incorporating a business?

Advantages of incorporating a business include: 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. Disadvantages of incorporating are: Initial cost, extensive paperwork, double taxation, two tax returns, size, difficulty to terminate, possible conflict with stockholders and board of directors.

unlimited liability

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

limited partnership

a partnership with one or more general partners and one more more limited partners

s corporations

-a unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships - have shareholders, directors, and employees, plus the benefit of limited liability -profits are taxed only as the personal income of the shareholder

disadvantage of franchising

-large start-up costs -shared profit -management regulation -coattail effects -restrictions on selling -fraudulent franchisors

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 of ownership from management

advantage of franchise

-management and marketing assistance -personal ownership -nationally recognized name -financial advice and assistance -lower failure rate

advantages of partnerships

-more financial resources -shared management and pooled skills and knowledge -longer survival -no special taxes

conglomerate merger

-unites firms in completely unrelated industries in order to diversify business operations and investments -a soft drink company and a snack food company

disadvantages of partnerships

-unlimited liability -division of profits -difficult to terminate -disagreement among partners

largest private corporations in US

1. cargill 2. koch industries 3. chrsyler 4. GMAC financial services 5. PricewaterhouseCoopers 6. Mars 7. Bechtel 8. HCA 9. Ernst & Young 10. Publix Supermarkets

advantages of sole proprietorships

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 profit 6. no special taxes (taxed as personal income of the owner, and the owner pays the normal income tax on the money)

America's largest corporations

1. exxon mobil 2. wal-mart 3. chevron 4. conocphillips 5. general electric 6. general motors 7. ford 8. at&t 9. HP 10. valero energy

qualify for s corporation

1. have no more than 100 shareholders (all members of a family count as a shareholder) 2. have shareholders that are individuals or estates, and who (as individuals) are citizens or permanent residents of the US 3. have only one class of stock 4. derive no more than 25% of income from passive sources (rents, royalties, interest)

disadvantages of corporations

1. initial cost (cost thousands of dollars and require expensive lawyers and accountants) 2. extensive paperwork 3. double taxation (corporation pays tax on its income before it can distribute any, as dividends, to stockholders. then the stockholders pay income tax on the dividends they receive). 4. two tax returns 5. size 6. difficulty of termination 7. possible conflict with stockholders and board of directors

disadvantages of LLC

1. no stock 2. limited life span 3. fewer incentives 4. taxes 5. paperwork

disadvantages of sole proprietorships

1. unlimited liability 2. limited financial resources 3. management difficulties 4. overwhelming time commitment 5. few fringe benefits 6. limited growth 7. limited life span

Why are so many new businesses choosing a limited liability company (LLC) form of ownership?

Limited liability companies have become a popular way to form a business since all fifty states now recognize LLCs. Some of the advantages of LLCs are: Limited liability, choice of taxation (can be taxed as a partnership or corporation), flexible ownership rules, flexible distribution of profit and losses, operating flexibility.

what is the role of owners (stockholders) in the corporate hierarchy?

Stockholders do not have to be employees of the corporation. They are investors who have limited liability. Stockholders elect the board of directors of a company who select the management to control the company.

If you buy stock in a corporation and someone gets injured by one of the corporation's products, can you be sued? Why or why not?

Stockholders in a corporation have limited liability meaning as owners they are responsible for its losses only up to the amount they invested. The corporation could be sued and forced out-of-business but the stockholder would only lose what he/she invested.

general partnership

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