Understanding Business: Chapter 5

Cooperatives

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 ADVANTAGES: 1. Ease of starting (less expensive to start) 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: 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 - unless it is sold OR

Limited liability company (LLC)

A company similar to an S corporation but without the special eligibility requirements ADVANTAGES: 1. Limited liability 2. Choice of taxation 3. Flexible ownership rules 4. Flexible distribution of profits and losses 5. Operating flexibility - no annual meetings - do not have to file written resolutions - do not have to keep minutes DISADVANTAGES: 1. No stock 2. Limited life span 3. Fewer incentives 4. Taxes 5. paperwork

Partnership

A legal form of business with two or more owners ( written agreement) ADVANTAGES: 1. More financial resources 2. Shared management and pooled/complementary skills and knowledge 3. Longer survival 4. No special taxes DISADVANTAGES: 1. Unlimited Liability 2. Division of profits 3. Disagreements among partners 4. Difficulty of termination

General Partnership

A partnership in which all owners share in operating the business and in assuming liability for the businesses 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 supervsion

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 Partnership

A partnership with one or more general partners and one or more limited partners - not set up for temporary purposes

Conventional corporation

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

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

When a sole proprietor leaves an ongoing business to future generations, it is said that the owner is leaving a ____________________________.

Legacy

Acqusition

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

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

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

Unlimited liabilty

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

Merger

The result of two firms forming one company

The main advantage of a sole proprietorship is ease of start up.

True

franchisor

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

Franchisee

a person who buys a franchise

coattail effect

actions of other franchises can have good or bad effects

Leveraged buyout (LBO)

an attempt by employees, management, or a group of investors to purchase an organization primarily though borrowing

general partner

an owner (partner) who has unlimited liability and is active in managing the firm

limited partner

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

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

boss

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

legacy

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

limited life span

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

separate

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

sole proprietorship

conglomerate merger

the joining of firms in completely unrelated industries

limited liabilty

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

franchise

the right to use a specific business's name and sell its products or services in a given territory ADVANTAGES: 1.Managing and marketing assistance 2.Personal ownership 3.Nationally recognized name 4.Financial advice and assistance 5. Lower failure rate 6. Most popular type to start = restaurants DISADVANTAGES: 1. Large start up costs 2. Shared profit 3. Management regulation 4.Coattail effects 5. Restrictions on selling 6. Fraudulent franchisors

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

true

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

unlimited liability

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

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

when a partner can retire how to distribute assets

Corporation

A legal entity with authority to act and have liability apart from its owners the process of forming a corp - bylaws = how firm is to be operated article of incorp filed in the state the company will be incorporated ADVANTAGES: 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 DISADVANTAGES: 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

S corporation

A unique government creation that looks like a corporation but is taxed like sole proprietorship's and partnerships (if loses its status, may not re-elect status for 5 years) To qualify as a S corporation, a company must: 1. Have no more than 100 shareholders 2. Have shareholders that are individuals or estates, and who are citizens or permanent residents of the US 3. Have only one class of stock 4.Derive no more than 25 percent of income from passive sources