Chapter 5: How to Form a Business

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

-websites -technology

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 profits 6. No special taxes

Disadvantages of 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

Disadvantages of Franchises

1. Large start-up costs 2. Shared profit 3. Management regulation 4. Coattail effects 5. Restrictions on selling 6. Fraudulent franchisors

Limited Liability Company (LLC)

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

Corporation

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

Conventional (C) Corporation

A state-charted legal entity with authority to act and have liability separate from its owners--its stockholders

General Partnership

All owners share in operating the business and in assuming liability for the business's debts

Which country is the most popular target for U.S.-based franchises to enter the global market?

Canada

Disadvantage of Partnership

Difficulty of termination, hard to get out of partnership

Advantage of Partnerships

Longer survival. Partnerships are more likely to succeed than sole proprietorships because being watched by a partner can help a businessperson become more disciplined

Merger

The result of two firms joining to form one company. It is similar to a marriage, joining two individuals as one family.

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

True

What makes franchising successful in global markets is what makes it successful in the United States:

convenience and a predictable level of service and quality

In a general partnership, all partners share the responsibility for operating the business and assume ______________ for the business's debts.

liability

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

If a corporation is formed, then the owners are known as...

shareholders

The easiest type of business entity to form is a

sole proprietorship

In a sole proprietorship, any debts or damages incurred by the business are your personal debts and you must pay them. This disadvantage is known as __________.

unlimited liability

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

boss, employer

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 are usually filed in the state in which the company will be incorporated

Because of the difficulty in ending a partnership, decisions regarding which two areas should be spelled out in a partnership agreement?

-When a partner can retire -How to distribute assets

In terms of operating flexibility, what are three things that LLCs are not required to do?

-hold annual meetings -file written resolutions -keep minutes

Advantages of 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. Separation of ownership from management. Corporations are able to raise money from many different owners/ stockholders without getting them involved in management.

Advantages of Limited Liability Company

1. Limited liability 2. Choice of taxation 3. Flexible ownership rules 4. Flexible distribution of profits and losses 5. Operating flexibility. LLCs do not have to submit articles of organization, which are similar to articles of incorporation, but they are not required to keep minutes, file written resolution, or hold annual meetings.

Advantages of Franchises

1. Management and marketing assistance 2. Personal ownership 3. Nationally recognized name 4. Financial advice and assistance 5. Lower failure rate

Disadvantages of Sole Proprietorships

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

Sole Proprietorship

A business owned, and usually managed, by one person

S corporation

A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships. The paperwork and details of S corporations are similar to those of conventional (C) corporations. S corporations have shareholders, directors, and employees, and the benefit of limited liability, but their profits are taxed only as the personal income of the shareholders--thus avoiding the double taxation of C corporations

Franchise Agreement

An arrangement whereby someone with a good idea for a business (the franchisor) sells the rights to use the business name and sell a product or service (the franchise) to others (the franchisees) in a given territory

Which are considered disadvantages of incorporating?

Initial Cost Double Taxation Extensive paperwork

Acquisition

One company's purchase of the property and obligations of another company. It is more like buying a house than entering a marriage.

Cooperative (co-op)

Owned and controlled by the people who use it---producers, consumers, or workers with similar needs who pool their resources for mutual gain

What can be said about the survival rate of partnerships as compared to sole proprietorships?

Partnerships are more likely to succeed.

While your are still your own boss as a franchise owner, your territory or selling boundaries may be regulated by the franchisor.

True

Partnership

When two or more people legally agree to become co-owners of a business, the organizations

A franchise owner will experience the coattail effect when ___________.

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

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

acquisition

If one owner of a partnership makes a bad decision that ends up in the business being sued, then...

all partners face unlimited liability

An advantage of the separation of ownership from management in corporations is that the company can raise money from investors but the investors ______________.

are not involved in daily operations

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

cooperative

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

corporation

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

Many minority business owners prefer the ___________ form of business ownership because it offers business connections and support.

franchise

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

like a partnership or sole proprietorship

The result of two firms joining to form one is called a(n) ________.

merger

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

If a sole proprietor is found negligent of an action, then that person could face...

unlimited liability