Chapter 6: Forms of Business Ownership

limited liability partnership (LLP)

A form of partnership in which all partners have the right to participate in management and have limited liability for company debts.

stockholder

An owner of a corporation. Can be institutional investors.

business format franchise

A broad franchise agreement in which the franchisee pays for the right to use the name, trademark, and business and production methods of the franchisor.

conglomerate merger

A combination of two firms that are in unrelated industries.

acquisition

A corporate restructuring in which one firm buys another.

Franchise Disclosure Document (FDD)

A detailed description of all aspects of a franchise that the franchisor must provide to the franchisee at least 14 calendar days before the franchise agreement is signed.

sole proprietorship

A form of business ownership with a single owner who usually actively manages the company.

limited partnership

A partnership that includes at least one general partner who actively manages the company and accepts unlimited liability and one limited partner who gives up the right to actively manage the company in exchange for limited liability.

distributorship

A type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it.

partnership

A voluntary agreement under which two or more people act as co-owners of a business for profit.

What is the most common form of a corporation?

C corporation

... are organizations that pool contributions from investors, clients, or depositors and use these funds to buy stocks and other securities.

Institutional Investors

The ... considers a C corporation to be a separate legal entity and taxes its earnings accordingly.

Internal Revenue Services

What are the advantages of LLCs?

Limited liability, Tax pass-through, simplicity and flexibility in management and operation, and flexible ownership.

articles of incorporation

The document filed with a state government to establish the existence of a new corporation.

In the context of a limited partnership, which of the following statements is true of general partners? a. They have the right to participate fully in managing their partnership. b. They can safeguard their personal wealth by not participating in the company's management. c. They are free of personal liabilities for any of the company's debts. d. They do not contribute financially to the company.

a. They have the right to participate fully in managing their partnership.

In the context of business ownership, the document filed with a state government to establish the existence of a new corporation is referred to as the ...

articles of incorporation

In accordance with corporate bylaws, stockholders elect a ... and rely on it to oversee the operation of their company and protect their interests.

board of directors

The vast majority of limited liability companies (LLCs) elect to be taxed as:

partnerships

institutional investor

An organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and other securities.

What are the advantages of a C corporation?

Can raise financial capital by issuing bonds or shares of stock, unlimited life, easy transfer of ownership, and the ability to take advantage of professional management.

What are the disadvantages of LLCs?

Complexity of formation, annual franchise tax, foreign status in other states, limits on firms that can form LLCS, and differences in state laws.

What are the disadvantages of a C corporation?

Forming a corporation can be more complex and expensive than forming a partnership, any profits distributed to stockholders are taxed twice, subject to extensive government regulation, complications when operating in multiple states, more paperwork, less secrecy, and possible conflicts of interests.

What are the disadvantages of a franchise?

Franchisors often find that dealing with a large number of franchisees can be complex and challenging, and the monetary payments (fees and royalties) they must pay to the franchisor, loss of control over the management of their business, and restrictions on sale.

limited liablity

When owners are not personally liable for claims against their firm. Owners with limited liability may lose their investment in the company, but their other personal assets are protected.

general partnership

A voluntary agreement under which two or more people act as co-owners of a business for profit. All partners take an active role in managing the business and have unlimited liability for the claims against the firm.

What are the advantages of a partnership?

Ability to pool financial resources, shared work load, capitalize on complementary skills, ease of formation, and possible tax advantages.

nonprofit corporation

A corporation that does not seek to earn a profit and differs in several fundamental respects from C corporations. Advantages: Earnings are exempt from federal and state Income taxes, members and directors have limited liability, and individuals who contribute money or property can take a tax deduction. Disadvantages: Cannot have stockholders, cannot distribute dividends to members, can't contribute funds to a political campaign, must keep accurate records, and file paperwork to document tax-exempt status.

statutory closed (or closed) corporation

A corporation with a limited number of owners that operates under simpler, less formal rules than a C corporation. Advantages: Operates under simple arrangements, and owners can participate in management while still having limited liability. Disadvantages: Limited number of stockholders, not allowed in all states, stockholders can't share their shares to the public without offering the shares to existing owners first.

corporation

A form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners. Created by filing the articles of incorporation and paying a fee of incorporation to the appropriate state agency. Owners have limited liability.

limited liability company (LLC)

A form of business ownership that offers both limited liability to its owners and flexible tax treatment. Created by filing a document and paying filing fees in the state where the business is organized. Owners draft an operating agreement. Owners are known as members rather than stockholders or partners.

S corporation

A form of corporation that avoids double taxation by having its income taxed as if it were a partnership. Advantages: Internal Revenue Services does not tax earning separately, and stockholders have limited liability. Disadvantages: Can only have 100 stockholders, each stockholder must be a U.S. citizen or permanent resident of the United States.

franchise

A licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, business methods, and other property in exchange for monetary payments and other considerations.

corporate bylaws

The basic rules governing how a corporation is organized and how it conducts its business.

franchisor

The business entity in a franchise relationship that allows others to operate its business using resources it supplies in exchange for money and other considerations.

franchise agreement

The contractual arrangement between a franchisor and franchisee that spells out the duties and responsibilities of both parties. Includes terms and conditions, fees and other payments, training and support, specific operational requirements, conflict resolution, and assigned territory.

What are the advantages of a franchise?

The franchisor gains revenue without the need to invest its own money. The franchisee gains the right to use a well-known brand name and proven business methods and often receives training and support from the franchisor.

board of directors

The individuals who are elected by stockholders of a corporation to represent their interests. Oversee the operation of their company and protect their interests. Appoint a chief executive officer (CEO) and other corporate officers to manage the company on a daily basis.

C corporation

The most common type of corporation, which is a legal business entity that offers limited liability to all of its owners, who are called stockholders. Formation includes filing articles of incorporation, paying filing fees, and adopting corporate bylaws. Uses pooled funds to buy stocks and securities. Uses common stock as the basic ownership interest.

franchisee

The party in a franchise relationship that pays for the right to use resources supplied by the franchisor.

What are the advantages of a sole proprietorship?

The simplest and least expensive form of ownership to establish, offers the single owner the flexibility of running the business without having to seek the approval of other owners, retains all of the profits, and the earnings are taxed only as income of the owner, with no separate tax levied on the business itself.

What are the disadvantages of a sole proprietorship?

The single owner has unlimited liability for the debts of the business, long hours and heavy responsibilities, may have difficulty raising funds for expansion, and lack of permanence/limited life.

diversiture

The transfer of total or partial ownership of some of a firm's operations to investors or to another company.

merger

Two formally independent business entities combine to form a new organization. 2 types. horizontal: A combination of two firms that are in the same industry. vertical: A combination of firms at different stages in the production of a good or service.

What are the disadvantages of a partnership?

Unlimited liability for the debts of the company, potential for disagreements, lack of continuity, difficulty withdrawing, and the death or withdrawal of a partner can create instability and uncertainty in management and financing.

A ... is a form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners.

corporation

An individual who decides to establish a sole proprietorship must realize that he or she would be: a. incurring the problem of double taxation. b. creating a business that is legally separate and distinct from himself or herself. c. required to fill out special forms and pay a high proprietorship fee to legalize the company. d. facing unlimited personal liability for the company's debts.

d. facing unlimited personal liability for the company's debts.

One of the drawbacks of sole proprietorships is that the owners: a. need to pay a very high fee during the firm's formation. b. may find it difficult to withdraw from the partnerships established during the firm's formation. c. need to pay double tax. d. may find it difficult to attract and maintain talented employees.

d. may find it difficult to attract and maintain talented employees.

An advantage of a general partnership is that the: a. owners of the business have limited liability. b. firm remains unaffected when an owner withdraws from the partnership. c. potential for disagreements is rare. d. potential for disagreements is rare.

d. potential for disagreements is rare.