Chapter 4: The Business of Business

Disadvantages of S Corporation

1. Difficulty and expense of formation

*Disadvantages of a corporation

1. Difficulty and expense of organizing 2. Double Taxation (personal income tax on dividends and corporate taxation on profits)

Advantages of Sole Proprietorship

1. Ease of formation 2. "You're the boss" 3. Potential profits

Disadvantages of LLC

1. Limited Life (can end with death of one member) 2. No easy of transferability ( to become a member of LLC, the majority of members must give consent)

Advantages of S Corporation

1. Limited liability 2. Unlimited life 3. Ease of transfer 4. No double taxation

*Advantages of a corporation

1. Limited liability 2. Unlimited life 3. Separation of ownership and management 4. Transfer of ownership is easy

Disadvantages of Partnership

1. Limited life 2. Unlimited liability 3. Partners may disagree 4. Difficult to sell 5. Limited capital

Advantages of LLC

1. Not personally liable for debts of the business 2. Can sue or be sued and hold property in its name 3. Easier to form than corporations and S-corporations 4. Income is not subjected to double taxation 5. No income tax liability 6. Fastest growing form of small business as a result of its advantages

CEO's way to control shares

1. Target the minor shareholders that have 1%. Push business in their direction and they will elect the President to stay in its seat 2. Buy out the directors. Give them bonuses and tell them to recommend directors 3. Presidents take advantage of proxies and control the BoD vote

Officers in Large Corporations

1. They are people who run the corporation by conducting all necessary operations. 2. They hire additional personnel. 3. They are selected by the BoD. 4. They consist of a President, VP, secretary, and treasurer

Advantages of Partnership

1. Two heads better than one 2. Ease of formation 3. Additional capital

Disadvantages of Sole Proprietorship

1. Unlimited liability 2. Limited capital (assets) 3. Burden of responsibility on owner 4. Limited life

Partnership

A business in which two or more persons combine their assets and skills. A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits. There are several types of partnership arrangements. In particular, in some partnerships, all partners share liabilities and profits equally, while in others, partners have limited liability.

Corporation

A business organization licensed to operate by a state or fed gov. Its unique feature is that those who own the company (through stocks) are different from those running the company. They have the ability to enter into contracts, sue/ be sued, and pay taxes

Charter

A corporation's license that gives the firm the right to do business and issue a specified number of shares of stock

Limited Liability Company (LLC)

A limited liability company (LLC) is a corporate structure in the United States whereby the owners are not personally liable for the company's debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship. It is the newest form of business organization

Subchapter S in Internal Revenue Code

Allows owners of corporation with 75 or less stockholders to be taxed as though they are sole proprietorships/ partnerships. This means that that they are able to avoid double taxation.

Cooperatives

Associations of individuals or organizations that band together to b/s more efficiently. There are three main types: consumer cooperatives, producer cooperatives, and cooperative apartment buildings

Artificial persons

Corporations may be viewed as artificial persons as those that sign a contract with them are entering into an agreement with the corporation rather than the people who own it.

Separation of Ownership and Control

Only a few shareholders can own enough shares to significantly impact corporate policy. True power and control lies in those who can select the BoD. Although it is not technically supposed to occur, CEOs typically find ways to control the board

Producer Cooperatives

Organizations of producers who cooperate in buying supplies and equipment and in marketing their products.

Government-owned corporations

Owned and operated by local, state fed gov like Tennessee Valley Authority which provides flood control, agricultural and industrial development for the community. They were developed because private interests were unable to provided necessary services. Since the 1980s, we have shifted away from this and toward privatization

Cooperative Apartment Building

Ran by a corporation whose capital stock is owned by tenants who receive many of the benefits that are normally associated with landlords such as tax deductions and reduced rents.

*Board of Directors (BoD in Large Corporations

They set long-term goals for the corporation while leaving daily jobs for officers. Their jobs include long-term financing, profit distribution, keeping shareholders informed of the company's happenings through financial reports, and conducting BoD elections.

not-for-profit corporation

a corporation organized to provide a social, educational, religious, or other service rather than to earn a profit. Any profit made is put back into the company to further its work. It is exempt from income tax.

Shareholders

those who own shares in corporation

Proxy

written authorization by a shareholder giving another person the right to vote shares.

1. Which form of business organization is most numerous in the United States? (a) sole proprietorships (b) partnerships (c) corporations (d ) cooperatives.

(a) sole proprietorships

2. Which one of the following is the most attractive feature of the sole proprietorship? (a) the ease with which it can be organized (b) its ability to expand across state borders (c) the ease with which ownership can be transferred (d ) its limited liability.

(a) the ease with which it can be organized

7. Which one of the following is true of a limited liability corporation (LLC)? A LLC (a) is the least expensive kind of business to organize (b) is not subject to the corporate income tax (c) is the only form of business organization that offers limited liability (d ) is the only form of business organization that provides unlimited life.

(b) is not subject to the corporate income tax

4. As a rule, who has voting rights in a corporation? Its (a) officers (b) stockholders (c) board of directors (d ) employees.

(b) stockholders

5. Stockholders in a large corporation generally do not (a) receive a share of the profits (b) elect the board of directors (c) manage the everyday affairs of the business (d ) own the business.

(c) manage the everyday affairs of the business

9. The Girl Scouts of America is an example of a (a) consumer co-op (b) sole proprietorship (c) not-for-profit corporation (d ) government-owned corporation.

(c) not-for-profit corporation

10. Which one of the following is the best reason for owning a business of one's own? (a) It is the surest way to a profitable future. (b) Entrepreneurship gives one the ability to ignore the competition. (c) Most new businesses are financial successes. (d ) Entrepreneurs are their own boss.

(d ) Entrepreneurs are their own boss.

8. "Double taxation" refers to the fact that (a) corporations have to pay both state and federal taxes (b) the part of a corporation's earnings not distributed as dividends is subject to excess profits taxes (c) corporations pay both income taxes and sales taxes (d ) corporations pay income taxes on their earnings, and the earnings that they distribute as dividends are subject to personal income taxes.

(d ) corporations pay income taxes on their earnings, and the earnings that they distribute as dividends are subject to personal income taxes.

3. Which one of the following is a disadvantage of most corporations? (a) limited life (b) unlimited liability (c) limited capital (d ) double taxation.

(d ) double taxation.

6. Limited liability, unlimited life, and a charter are characteristics of (a) sole proprietorships (b) partnerships (c) all businesses in the United States (d) corporations.

(d) corporations.

Shares of stock

certificate representing ownership in a corporation. Anyone that owns more than one is part owner of the corporation.

Dividends

profits that are distributed to shareholders; subjected to personal income tax

Consumer Cooperatives

retail outlets owned and operated by consumers. Only members can make a purchase; they usually sell their product at lower than average cost, later distributing profits to members in proportion to how many purchases made.