CHAPTER 5. How to Form a Business

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.

limited liability company (LLC)

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

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.

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.

What is a franchise?

An arrangement to buy the rights to use the business name and sell its products or services in a given territory is called a franchise.

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.

What is the role of a cooperative?

Cooperatives are organizations owned by members/customers. Some people form cooperatives to acquire more economic power than they would have as individuals. Small businesses often form cooperatives to gain more purchasing, marketing, or product development strength.

What are the main differences between general and limited partners?

General partners are owners (partners) who have unlimited liability and are active in managing the company. Limited partners are owners (partners) who have limited liability and are not active in the company.

What is the major challenge to global franchises?

It is often difficult to transfer an idea or product that worked well in the United States to another culture. It is essential to adapt to the region.

What are leveraged buyouts, and what does it mean to take a company private?

Leveraged buyouts are attempts by managers and employees to borrow money and purchase the company. Individuals who, together or alone, buy all the stock for themselves are said to take the company private.

What are the advantages of limited liability companies?

Limited liability companies have the advantage of limited liability without the hassles of forming a corporation or the limitations imposed by S corporations. LLCs may choose whether to be taxed as partnerships or corporations.

Why do people incorporate?

Two important reasons for incorporating are special tax advantages and limited liability.

What does unlimited liability mean?

Unlimited liability means that sole proprietors and general partners must pay all debts and damages caused by their business. They may have to sell their houses, cars, or other personal possessions to pay business debts.

What is the definition of a corporation?

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

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.

What is a master limited partnership?

A master limited partnership is a partnership that acts like a corporation but is taxed like a partnership.

What is a merger?

A merger is the result of two firms forming one company. The three major types are vertical mergers, horizontal mergers, and conglomerate mergers.

general partnership

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

limited partner

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

What does limited liability mean?

Limited liability means that corporate owners (stockholders) and limited partners are responsible for losses only up to the amount they invest. Their other personal property is not at risk.

acquisition

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

What are the advantages of S corporations?

S corporations have the advantages of limited liability (like a corporation) and simpler taxes (like a partnership). To qualify for S corporation status, a company must have fewer than 100 stockholders (members of a family count as one shareholder), its stockholders must be individuals or estates and U.S. citizens or permanent residents, and the company cannot derive more than 25 percent of its income from passive sources.

What are the advantages and disadvantages of partnerships?

The advantages include more financial resources, shared management and pooled knowledge, and longer survival. The disadvantages include unlimited liability, division of profits, disagreements among partners, and difficulty of termination.

What are the advantages and disadvantages of corporations?

The advantages include more money for investment, limited liability, size, perpetual life, ease of ownership change, ease of drawing talented employees, and separation of ownership from management. The disadvantages include initial cost, paperwork, size, difficulty in termination, double taxation, and possible conflict with a board of directors.

What are the advantages and disadvantages of sole proprietorships?

The advantages of sole proprietorships include ease of starting and ending, ability to be your own boss, pride of ownership, retention of profit, and no special taxes. The disadvantages include unlimited liability, limited financial resources, difficulty in management, overwhelming time commitment, few fringe benefits, limited growth, and limited life span.

What are the benefits and drawbacks of being a franchisee?

The benefits include getting a nationally recognized name and reputation, a proven management system, promotional assistance, and pride of ownership. Drawbacks include high franchise fees, managerial regulation, shared profits, and transfer of adverse effects if other franchisees fail.

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

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. Mickey D's Nickname for McDonald's.

franchise

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

What are the three key elements of a general partnership?

The three key elements of a general partnership are common ownership, shared profits and losses, and the right to participate in managing the operations of the business.

franchisor

company that develops a product concept and sells others the rights to make and sell the products. free-for-all atmosphere A situation where all order seems to be lost in conducting business.