BUS101 - Module 5 - Week 2 - Business Ownership

Discuss the advantages and disadvantages of partnerships

A partnership is a single business in which two or more people share ownership. There are two general types of partnership arrangements: general partnerships and limited partnerships.

A partnership is:

a single business in which two or more people share ownership.

________ usually creates one larger company and one of the original two companies ceases to exist.

A merger

Carol and her friends are creating a new company that ships monthly subscription boxes filled with beauty products to customers. Carol has multiple partners and she wants to avoid both double taxation and personal liability at the same time. In addition, she wants to pay the partners based on their company ownership percentage. Carol can accomplish her goals by forming what type of business entity?

An LLC. A partnership. A C corporation. An S corporation. Answer is one of the corporations!

Which type of company enjoys the benefit of passing along deductions and credits of the company on to partners to file on their individual tax returns? The credits and deductions of this type of business entity are divided by the percentage of individual interest each partner has in the company.

Limited Liability Partnerships LLCs

Disney and Pixar coming together was a "match made in cartoon heaven" some say. This undertaking enabled the two companies to collaborate freely and easily resulting in some of the highest grossing animated films of all time. This is a successful example of:

an acquisition.

In 2014 Microsoft purchased the popular game Minecraft for $2.5B. This is an example of a(n):

an acquisition.

What is the biggest benefit to businesses of horizontal mergers and acquisitions?

Competition is reduced

What are some important factors to consider when choosing an organizational type?

Control versus responsibility, and risk tolerance.

Which form of business ownership involves tax reporting requirements that are fairly simple and the lowest tax rate of any legal structure?

Sole proprietorship

Anthony is starting a business and he is thinking about the costs associated with getting his business established because he does not have a lot of money to spend. Which form of ownership would cost Anthony the least to set up and why?

Sole proprietorship because he would not have to hire a corporate attorney to draft corporate charters, agreements, and articles of incorporation.

Which of the following is a legal entity completely separate from the entities who own it?

corporation

Which of the following entities are subject to limited liability?

corporations

These are the primary disadvantages for the Franchisor in a franchise business model.

Lack of control, vulnerability of trade secrets, and overexposure of brand

A business in which some or all partners have limited liabilities is called a:

Limited liability partnership

Some of the major advantages of incorporating your business are:

Limiting your personal responsibility, raising capital through the sale of stock, and alleviating disagreements between partners

The main characteristic of a B corporation is that it seeks to provide:

a return to shareholders while pursuing other goals that benefit community or society.

A ________ seeks to provide a return to shareholders while pursuing other goals that benefit community or society.

B corporation

You have looked into the various forms of ownership and decide that you would like to establish your business as a B Corporation. Which of the following items will you need to do?

Declare a commitment to creating general public benefit, adopt a third-party standard and prepare an annual benefit report.

When starting a business, why is it important to understand and consider tax implications?

Different forms of business ownership result in businesses and owners being taxed differently. It is important to understand these differences in order to choose the scenario that best fits your needs.

You are forming a new company that delivers food to students across college campuses. You have a number of partners, but your primary goals are to avoid personal liability and double taxation. You want to pay each of the partners based on the percentage of the company that they own. You could accomplish this by forming a(n):

S corporation.

Your friend Jody comes to you asking for advice. She owns a moving company called "Whatever Moves You, LLC" (they have cute musical notes in logo—very clever). She has owned the business for 45 years and has seen tremendous growth. Jody would like to transfer ownership of her business to her 30 year old daughter so that she may retire. What do you tell Jody?

You will need to work with an attorney to see if this is even possible because rules about transferability with an LLC vary from State to State

A new company will be formed by combining Company A with the Company B. This type of business combination is known as a(n):

merger

The "Dino Dig, Inc." gas company has discovered large oil deposits in North Dakota over the last three years. With money from its company profits, it purchases controlling shares and equipment in a truck transportation company and a railroad transportation company. Both of the companies continue to operate under their original names, but now "Dino Dig, Inc." uses its newly obtained assets to more efficiently and cheaply transport its crude oil around the country. Dino Dig, Inc. is great at:

vertical acquisitions

Caitlin is invited to join a business as a partner due to her expertise in the field. She is asked to sign a partnership agreement that gives her 40% of the profits, full control of the marketing activities, but final say on all other decisions goes to the original owner. She is joining:

A limited partnership

If a business has a general partner who runs the business, the business has what type of partnership?

A limited partnership.

You are thinking about starting your own business. What are the most important factors you should consider when thinking about your form of business ownership?

Cost of start up, taxation and risk tolerance

Four friends are discussing franchises as a form of business, but have different opinions about how they are defined. Who is correct?

Daniel believes franchises are businesses where the Franchisor licenses a business model, trademarks, and methods to independent entrepreneurs (Franchisees) who own and operate the individual units.

If you were advising a friend about setting up a partnership, which of the following characteristics are advantages of partnerships when compared with sole proprietorships?

Each of the partners bring diverse perspectives and skills.

The following business integration illustrates the definition of a "merger":

Exxon and Mobil

Discuss the advantages and disadvantages of hybrid forms of business ownership

Fortunately there are options that enable the business owner to take advantage of limited personal liability and the benefits of partnership or corporate organization. These include the limited liability corporation (LLC) and limited liability partnership (LLP). Which type of ownership an owner selects will largely be determined by the size, objectives, and vision for the business. Let's take a look at how these different forms of ownership compare to one another.

For a/the ________, the/an ________ is an alternative to expanding through the establishment of a new location, which avoids the financial investment and liability of a chain of stores.

Franchisor, franchise

Jose is a twenty-two year old who just finished college. He lives alone in a small apartment that he rents. Jose has saved up nearly all his earnings from various part-time jobs in order to start his photography business. Given his current situation, Jose most likely has:

High risk tolerance.

Warren is starting a business. His biggest concerns are losing everything he owns if something goes wrong and being mired in strict taxation and administrative regulations. For those reasons, he decides to start a(n):

LLC

What is an LLC?

LLC a business structure that is attractive to small business owners because they provide the limited liability features of a corporation and the efficiences and operational flexibility of a partnership

In some situations, individual business partners are not obligated to consult with other participants in certain business agreements. The fact that a partner can make business decisions without consulting the other partners is considered to be a disadvantage of a:

LLP

Describe the two types of mergers and acquisitions

One of the quickest ways for a business to expand into other markets or products lines is either to merge or acquire/purchase another company. Although this is common in today's business environment, there are still many complex factors to consider before deciding whether a merger or acquisition is the optimal solution.

The following are all advantages of business partnerships EXCEPT:

Partnerships shield the individual partners from debt and liability

Which of the following businesses are examples of a franchise?

Pizza Hut restaurants

The two major drawbacks of an LLC legal structure are:

Potential limited lifespan and self-employment tax

The advantages of being a franchisee are:

Risk reduction, relative autonomy, and brand recognition.

A business professor is trying to describe what makes an LLC different from a C Corporation. Which would be the correct statement for her to make about the difference?

The LLCs and C Corporations are taxed differently.

You have decided to become a franchisee for a proven business. What would be a disadvantage for you being a franchisee?

The high cost to you of the start-up.

Why would a company undertake a horizontal merger or acquisition?

To take advantage of synergies and potential market share gains.

A thirty-five-year old entrepreneur with dependents is considering starting a business. She is concerned about protecting her personal assets and making sure that if her company were to fail, she would not lose her home or personal savings. This is an example of an individual:

With low risk tolerance.

In a limited partnership:

a general partner runs the business.

Benefits of being a franchisee include:

access to a template for the business.

In 2005, Skype, a company for making internet phone calls, was purchased by eBay for $2.6B. This is an example of a(n):

acquisition.

In 2016, Microsoft announced that it would buy LinkedIn for $26.2 billion, in an all cash deal, making it the 6th largest deal if its kind on record. This is an example of:

acquisition.

The disadvantages to starting and running a corporation include:

double taxation

In a sole proprietorship, the owner of the business:

enjoys complete control over all aspects of the business.

AT&T's proposed $39 billion acquisition of T-Mobile USA would have combined two of the four major national providers of mobile telephone services for both individuals and businesses. As a result of this acquisition, AT&T would be the provider of almost 40% of all mobile service, with Verizon and Sprint making up the remainder of the market. This is an example of:

horizontal acquisition.

Walgreens, one of the largest drugstore companies in the U.S., announced in October of 2015 that it would acquire all of Rite Aid's drugstores and debts for a $17.2 billion all-cash transaction. This is an example of a:

horizontal acquisition.

A legal partnership agreement should include:

how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership, and how to dissolve the partnership.

You are thinking about starting a business. Of course, you want to maximize your income and not pay taxes both as a business and as an individual. You are also concerned about liability. If something bad happens with your business, you don't want to be personally liable. What form of business ownership would best meet your needs?

limited liability company

A ________ is owned and managed by a group of individuals who share in decision-making and risk.

partnership

A franchise:

provides a proven product, business model and brand to the franchisee.

A franchisee is generally expected to pay:

royalty fees for support from the franchiser.

A(n) ________ is an unincorporated business owned and run by one individual in which there is no distinction between the business and the owner.

sole proprietorship

Examples of franchises include:

Subway restaurants.

Once a franchise is established with multiple locations, the company may be able to take advantage of economies of scale with suppliers, advertisers and vendors. This is an example of:

an advantage for the franchisor.

A ________ is owned by a single individual who is responsible for all decisions and liabilities.

sole proprietorship

Smart Phone Inc. manufactures its custom phone cases for its awesome phones and tablets. It also manufactures its custom touch screen sensors and owns its own shipping company that delivers its phones and tablets straight to customer homes. Smart Phone Inc. is great at:

vertical acquisitions

A sole proprietorship is described best by which of the following descriptions?

An unincorporated business owned and run by one individual in which there is no distinction between the business and the owner.

Which of the following entities can pursue a broader mission that may sometimes be at odds with maximizing profits for shareholders:

B corporation.

The most significant differences between C and S corporations have to do with:

Taxation, administration, and shareholder compensation

Aamer is preparing to interview for a job opening he saw on an employment board. He does a little research and discovers that the business is run by three individuals. How could he tell if the business is a sole proprietorship with two employees or a partnership of three persons?

The distinction would be if three people share legal ownership

Why would a company choose to engage in a vertical merger or acquisition?

To increase synergies by merging firms that would be more efficient operating as one.

Identify the correct type of business entity. If a business is a legal entity completely separate from the entities who own it, it is:

a corporation.

A general partnership:

assumes profit, liability and management duties are divided equally among partners.

"Klucky Farms" merges with supermarket giant "Super Fresh Foods." Klucky Farms is excited to be able to supply Super Fresh Foods with a steady supply of quality chicken and Super Fresh Foods is glad to have a reliable farm with fair prices under the same corporate leadership. This is an example of:

vertical merger or acquisition.

In an LLP:

One partner IS NOT responsible or liable for another partner's misconduct or negligence.

Discuss the advantages and disadvantages of corporations

Although not the most common form of business ownership, corporations account for the majority of the revenue from business in the U.S. They are also the most complex type of organization to start and maintain. Types of corporations include C corporations, S corporations, and B corporations.

Tina and her best friend Aaliyah want to start a medical transcriptionist company together. They grew up together and know each other well, but when it comes to business, neither of them want to be held responsible for any negligence or misconduct of the other should something happen. They also want to be certain to only be taxed once on company profits. Which type of organizational structure would be best for Tina and Aaliyah to establish?

LLP

What is an LLC?

Limited Liability Company—a business structure that is attractive to small business owners because they provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

The typical fee structure for a franchise including initial franchise fees and royalties, is an example of:

an advantage for the franchisor.

You have a franchised Planet Fitness gym. You began the business by paying your initial franchise fees and now you pay royalties on a regular basis. This typical fee structure for a franchise is:

an example of an advantage for the franchisor.

A group of friends are creating a new mobile paper shredding company that will go to businesses or organizations to shred their sensitive papers in bulk. You are advising them as to the type of business entity to choose. They have a number of partners, but their primary goals are to avoid personal liability and double taxation. They want to pay each of the partners based on their contribution to the success of the company, which is NOT equal to their percentage ownership. You advise them to accomplish this by forming a(n):

limited liability company.

You are forming a new company that delivers food to residents across college campuses. You have a number of partners, but your primary goals are to avoid personal liability and double taxation. You want to pay each of the partners based on their contribution to the success of the company, which is NOT equal to their percentage ownership. You could accomplish this by forming a(n):

limited liability company.

Discuss the advantages and disadvantages of franchises

For aspiring business owners who do not have the time, vision, or resources to "start from scratch," franchising is a viable alternative for business ownership. Everyone is familiar with franchises—many industries such as fast food are almost wholly comprised of franchises. As appealing as this may seem, there are still risks to franchising for both the franchisor and franchisee.

You and your dear friend want to start an accounting firm together. You know each other well but you don't want to be held responsible for your friends negligence or misconduct should such an event occur. You and your friend also want to be sure that you are only taxed once on company profits. Which type of organizational structure might be best for you?

LLP

The credits and deductions of the company are passed through to partners to file on their individual tax returns. Credits and deductions are divided by the percentage of individual interest each partner has in the company. This is an example of a benefit enjoyed by which type of organization?

Limited liability partnerships

What is the purpose of a B Corp and what are the general requirements for operation?

Make a commitment to creating general public benefit, prepare an annual report, pay an annual fee, and adopt a third-party standard

When it comes to taxes, which statement fits best with a sole proprietorship business

Tax reporting requirements are fairly simple and are the lowest tax rate of any legal structure.

Advantages of an S Corporation include:

Tax savings, business expense tax credits and the business has an independent life from its shareholders.

You form an LLC to protect yourself from personal liability. The business fails and there are debts remaining. Under which of the following circumstances would you be personally liable for business debts.

You signed documents personally securing the debts of the business.

If an owner of a business were to die, which of the following entities would cease to exist (which type of business would "die" too)?

a sole proprietorship

When one company purchases and absorbs another company it is called a(n):

acquisition.

ABC Corporation is the second-largest company in a competitive market with three other major players. ABC wants to expand their market share quickly and become the leader in their space. One of the options their board considers is to purchase the property, plants, and equipment of the fourth-largest company, XYZ Inc. This action would be classified as a/an:

acquistion

In 2016, Microsoft announced that it would buy LinkedIn for $26.2 billion, in an all cash deal, making it the 6th largest deal if its kind on record. This is an example of:

an acquisition

Your friend tells you he is working on setting up a business. He tells you he has a business partner who shares in all decision making, it has been fairly easy to set up, he will only be taxed once on company profits, and he has limited liability for the company. What kind of business has your friend most likely described?

limited liability partnership

Unlike many types of businesses, ________ are not recognized as legal business structures in every state. Some states even limit the creation of these to professionals such as doctors or lawyers.

limited liability partnerships

Disadvantages for a franchisee include:

the high cost of start-up.

The disadvantages of partnerships include:

the need to share decision making across the partners.

Partnerships have several advantages over sole proprietorships including:

the partners bring diverse skills and perspectives.

Partnerships have several limitations including:

the potential for disagreements among partners.

Sharon and Louis are starting a business together. In their legal partnership agreement, what should be included?

Future business decision processes such as; how the partners will dissolve the partnership, resolve disputes, divide profits, and change ownership.

When two companies combine to form a new company it is called a(n):

merger

Corporations whose stock can be sold to the general public are, by definition:

public corporations

Which of the below would illustrate the advantages of vertical mergers and acquisition?

A media company merging with a cable company

This business legal structure can be defined as having single taxation, limited liability, and the flexibility to let each individual in the business decide how much responsibility and participation they want. This is a(n):

LLP

Your friend is thinking about starting her own business. What would you advise her to consider when thinking about her form of business ownership?

Risk tolerance, cost of start up and taxation.

Discuss the advantages and disadvantages of sole proprietorships

Sole proprietorships are the simplest and most common legal structure for a business. These businesses are owned and run by one person.

This one feature of an LLP could be considered both an advantage and/or a disadvantage:

A partner can make a decision affecting the entire business without consulting the other partners

Define the business structure commonly known as a "sole proprietorship."

An unincorporated business owned and run by one individual in which there is no distiction between the business and the owner

List and explain the important factors in choosing an organizational type

Sole proprietorship, partnerships, corporations, and hybrids (LLC, LLP) are all possible options for the legal formation of a business. Each structure carries risks and rewards, costs and benefits. Which form of business ownership is best for an individual depends not only upon the nature of the business opportunity but also the level of personal exposure to risk the owner is willing to accept.

What are the most important factors to consider when choosing an organizational type for your business?

Start-up costs, taxation, and control

Which of the following is a downside of choosing a business structure where the owner has full control?

The owner has full responsibility and liability for the business.

What would be the advantages of choosing a sole proprietorship over other legal structures of business?

The sole proprietorship would be easier to set up, the owner would have full control, the owner would be taxed as an individual, and the owner keeps all of the profits.