CH5

advantages of partnerships*

1. more financial resources; a limited partnership is specially designed to help raise money (investors) 2. shared management and pooled / complementary skills and knowledge: partners provide different dkills and perspectives 3. longer survival 4. no special taxes: all profits are taxed as personal income of the owners; partners must also estimate their taxes and make quarterly payments

hierarchy of a corporation*

SEE 129

types of corporations

1. alien corporation: does business in the US but is chartered (invorporated) in another country 2. domestic corporation: does business in the US in which it's chartered (icorporated) 3. foreign corporation: does business in one state but is chartered in another (eg state with attractive rules for incorporation); must register in states where it operates 4. closed (private) corporation: stock is held by a few people and isn't available to the general public 5. open (public) corporation: sells stock to the general public; eg generalmotors 6. quasi-public corporation: chartered by the government as an approved monopoly to perform services to the general public; eg public utilitites; eg federal national mortgage association 7. professional corporation: owners offer professional services (doctors, lawyers, etc). shares aren't pbulicly traded 8. nonprofit corporation: doesn't seek personal profit for its owners 9. multinational corporation: firm that operates in several countries

advantages of sole proprietorships*

1. ease of starting and ending the business; permit or license are easy to get 2. being your own boss 3. pride of ownership 4. leaving a legacy: leave ongoing business for future generations 5. retention of company profits: owners keep the profits earned 6. no special taxes: profits of a sole proprietorship are taxed as personal income of the owner; however, owners do have to pay the self-employment tax; must estimate taxes and make quarterly payments

special forms of business ownership

1. franchises 2. cooperatives

types of partnerships*

1. general partnership 2. limited partnership 3. master limited partnership 4. limited liability partnership (LLP)

disadvantages of corporations*

1. initial cost: high setup costs and require expensive lawyers and accountants. 2. extensive paperwork: corporations must keep detailed financial records, minutes of meetings, and more. 3. double taxation: first the corporation pays tax on its income before it can distribute any, as dividends, to stockholdres. Then stockholders pay income tax on the dividends they receive; states often tax corporations more heavily than other enterprises, and some special taxes apply only to corporations. 4. two tax returns: an individual who incorporates must file both a corporate tax return and an individual tax return 5. size: large corporations sometimes become too inflexible and died down to respond quickly to market changes 6. difficulty of termination 7. possible conflict with stockholders and board of directors: when stockholders elect a board of directors who disagree with management; board of directors chooses company's officers: entrepreneurs serving as managers can find themselves forced out of the company they founded.

disadvantages of franchises

1. large start-up costs: fee for the rights to the franchise 2. shared profit: franchisor often demands royalty: a large share of profit or a percentage commision based on sales, not profit; royalties are before tax and other expenses 3. management regulation: follow franchise rules and regulations 4. coattail effects: actions of other franchises have impact on your future growth and profitability. 5. restrictions on selling: restrictions on the resale of a franchise; new owner must meet standards 6. fraudulent franchisors: many small, obscure companies

advantages of corporations*

1. limited liability: owners are responsible for its losses up to the amount they invest in it 2. ability to raise money for investment: 1) sell shares of its stock to anyone who is interested. 2) loans from banks / individual investors by issuing bonds; 3. size: large corporations with numerous resources can take advantage of oppurtunities anywhere in the world 4. perpetual life: corporations are seperate from those who own them, so if one owner dies it doesn't terminate the corporation 5. ease of ownership change: to change ownership: sell the stock to someone else 6. ease of attracting talented employees: eg by offering benefits as stock options (right to purchase sharesof the corporation for a fixed price) 7. separatoin of ownership from management: raise money from many different owners/stockholders without getting them involved in management; owners/stockholders elect a board of directors, who hire the officers of the corporationand oversee major policy issues. so owners/stockholders have some say in who runs the corporation but have no real control over daily operations.

advantages of an LLC*

1. limited liability: previously available only to limited partners and shareholders of corporations; you can only lose assets stated in the LLC. 2. choice of taxation: LLCs can choose to be taxed as partnerships or as corporations; flow-trough taxation (taxed as income) 3. flexible ownership rules: LLCs do not have to comply with ownership restrictions as S corps do. Owners can be a person, partnership, or corporation 4. flexible distribution of profits and losses: profits and losses don't have to be distributed in proportion to the money each persons invests, as in corporations; LLC members agree on the percentage to be distributed to each member 5. operating flexibility: LLCs do have to submit articles of organization (similar to articles of incorporation), but are not required to keep minutes, file written resolutions, or hold annual meetings; LLC also submits a written operating agreement, similar to a partnership agreement, describing how the company is to be operated.

advantages franchises

1. management and marketing assistance: assistance in all phases of promotion and operation. eg by intensive training; also an etwork of fellow franchisees 2. personal ownership: franchise operation is still your business, and you enjoy as much of the incentives and profit as any sole proprietor would; you must follow more rules, regulations and procedures and share profit. 3. nationally recognized name; established customers 4. financial advice and assistance; some franchisors provide financing to potential franchisees they feel will be valuable parts of the franchise system 5. lower failure rate

overview of all forms of business ownership*

SEE 134

disadvantages LLC*

1. no stock; LLC members need the approval of the other members in order to sell their interests in the company 2. limited life span: LLCs are required to identify dissolution dates in the articles of organization (eg no more than 30 years). Death of a member can cause LLCs to dissolve automatically. Members may choose to reconstitute the LLC after it dissolvers 3. fewer incentives (stimulances): unlike corporations, LLCs can't tax-deduct the cost of fringe benefits (eg health insurance) for members owning 2 percent or more of the company; and no stock options as there are no stocksd 4. taxes: LLC members must pay self-employment taxes on their profits. In contrast S corps pay self-employment tax on owners' salaries but not on entire profits 5. paperwork: Not as great as required for corporations, but more than sole proprietors

three major forms of business ownership*

1. sole proprietorship 2. partnership 3. corporation

disadvantages of partnerships*

1. unlimited liability: each general partner is liable for the debts of the firm, no matter who was responsible for causing them. 2. division of profits: sharing risk means sharing profits 3. disagreements among partners: all terms of the partnership should be spelled out in writing to protect all parties 4. difficulty of termination: who gets what?

disadvantages of sole proprietorships*

1. unlimited liability: risk of personal losses; any debts or damages incurred by the business are your debts. 2. limited financial resources: funds are limited to what the one owner can gateher 3. management difficulties: someone must keep inventory, accounting and tax records; not everyone is skilled at this and hiring someone is hard because you have to compete with salaries of bigger companies. 4. overwhelming time commitment 5. few fringe benefits: eg no paid health insurance, disability insuance, pension plan, sick leave, vacation pay etc. 6. limited growth: expansion is often slow since a sole proprietorship relies on its owner for most of its creativity, business know-how and funding 7. limited life span

types of corporate mergers

1. vertical 2. horizontal 3. conglomerate

corporations*

legal entity with authority to act and have liability apart from its owners; artificial being: entity that exists only in the eyes of the law

master limited partnership (MLP)

acts like a corporation and is traded on the stock exchanges like a corporation, but is taxed like a partnership and thus avoids the corporate income tax; oil and gas industry. income is not taxed before it is passed on to investors as dividends.

general partnership*

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

franchise agreement

arrangement whereby someone ith a good idea for a business (the fanchisor) sells the rights to use the business name and sell a product or service (the franchise) to others (the franchisees) in a given territory; has a proven track record; can be formed as sole proprietorship, partnership, or corporatin.

partnership*

legal form of business with 2 or more owners; relatively easy to form

sole proprietorship*

business that is owned, and usually managed, by one person; most common form of business ownership; easiest to form

leveraged buyout (LBO)

form of taking a firm private; attempt by employees, management or a group of private investors to buy out the stock holders in a company, primarily by borrowing the necessary funds; eg if employees believe they may lose their jobs, or managers believe they could improve corporate performance.

S corporation

government creation that looks like a corporation, but is taxed like sole proprietorships and partnerships; 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 sharholdres (no double taxation) in order to qualify, acompany must: 1. have no more than 100 shareholders (all members of one family count as one shareholder) 2.have shareholders that are individuals or estates, and who are citizens of the US 3. have only one class of stock 4. derive no more than 25 percent of income from passive sources (rents, royalties, interest)

limited partnership*

has one or more general partners and one or more limited partners

horizontal merger

joins two firms in the same industry and allows them to diversify or expand their products. eg soft drink company and mineral water company that can supply a variety of beverage products together. SEE 135

vertical merger

joins two firms operating in different stages of related businesses; eg soft drink company and artificial sweetener maker; for constant supply and quality control SEE 135

limited liability partnership (LLP)*

limits partners' risk of losing their personal assets to the outcomes of only their own acts and omissions and those of people under their supervision. You can operate without the fear that one of your partners might **** up, as would be the case in a general partnership. in many states this personal protection does not extend to contract liabilities such as bank loans, leases and business debt the partnership takes on. So you can still lose personal assets if these are not paid.

taking a firm private

management or a group of stockholders obtain all the firm's stock for themselves by buying it bakc from all other stockholders; eg leveraged buyout

cooperatives (co-op)

owned and controlled by the people who use it- producers, consumers, or workers with similar need who pool their resources for mutual gain. eg electric cooperatives members democratically control these businesses by electing a board of directors that hires professional management. sometimes membership includes working for a number of hours a month. another kind of cooperative is formed to give members more economic power as a group than as individuals; eg farm cooperative who buy and sell shit together cooperatives have an advantage in the marketplace because they don't pay the same kind of taxes corporations pay

general partner*

owner (partner) who has unlimited liability and is active in managing the firm; every partnership must have at least one general partner.

limited partner*

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

limited liability company (LLC)*

similar to an S corp, but without the special eligibility requirements. However, no stock: LLC ownership is nontransferable. LLC members need the approval of the other members in order to sell their interests in the company --> put the partnership in a legal entity

conventional (C) corporation*

state-chartered legal entity with authority to act and have liability separate from its owners (stockholders); stockholders are not liable for the debts or other problems of the corporation beyond the money they invest in it by buying ownership shares (stock). enables many people to share in the ownership (and profits) without working there or having other commitments to it. corporations may choose wheteher to offer ownership to outside investors or remain privately held

flow through taxation

taxed as ordinary income (no double taxation)

limited liability*

the limited partners' liability for the debts of the business is limited to the amount they put into the company; their personal assets are not at risk

merger*

two firms joining to form one compan

conglomerate merger

unites firms in completely unrelated industries in order to diversify business operations and investments. eg soft drink company and snack food company. see 135

bonds*

when a corporation borrows money from individual investors. This involves paying investors interest until the bonds are repaid sometime in the future.