Intro to Business CH.5

Rank the order in which members of a corporation are chosen in order to separate ownership from management. Start at the top of the managerial hierarchy.

1. owners/stockholders elect board of directors 2. Board of Directors hire officers of the corporations 3. Officers hire managers of the corporation 4. Managers hire employees

Cooperative

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. Most common form of business ownership

Franchisor

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

Corporation

A legal entity with authority to act and have liability apart from its owners

Partnership

A legal form of business with two or more owners

What is a master limited partnership?

A master limited partnership is a partnership that acts like a corporation but is taxed like a partnership

What is a merger?

A merger is the result of two firms forming one company, The three major types are vertical mergers, horizontal mergers, and conglomerate mergers.

General Partnership

A partnership in which all owners share in operating the business and in assuming liability for the business's 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 supervision

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

Franchisee

A person who buys a franchise

Conventional (C) corporation

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

S Corporation

A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships.

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.

Leveraged Buyout (LBO)

An attempt by employees, management, or a group of investors to purchase an organization primarily through 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

What is the role of a cooperative?

Cooperatives are organizations owned by members/customers. Some people form cooperatives to acquire more economic power than they would have as individuals. Small businesses often form cooperatives to gain more purchasing, marketing, or product development strength.

Separation of ownership from management

Corporations are able to raise money from many different owners/stockholders without getting them involved in management

What are the main differences between general and limited partners?

General partners are owners (partners) who have unlimited liability and are active in managing the company. Limited partners are owners (partners) who have limited liability and are not active in the company.

Disadvantage of Corporations

Initial Cost Extensive Paperwork Double taxation Two tax returns Size Difficulty of termination Possible conflict with stockholders and board of directors

What is the definition of corporation?

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

What is the major challenge to global franchises?

It is often difficult to transfer an idea or product that worked well in the United States to another culture. It is essential to adapt to the region.

Disadvantage of Franchises

Large start-up costs Shared profit Management Regulation Coattail effects Restrictions on selling Fraudulent Franchisors

What are leveraged buyouts, and what does it mean to take a company private?

Leveraged buyouts are attempts by managers and employees to borrow money and purchase the company. Individuals who , together or alone, buy all the stock for themselves are said to take the company private.

Which is considered an advantage of incorporating?

Limited Liability

What are the advantages of limited liability companies?

Limited liability companies have the advantage of limited liability with out the hassles of forming a corporation or the limitations imposed by S corporations. LLCs may choose whether to be taxed as partnerships or corporations.

Advantages of Franchises

Management and marketing assistance Personal ownership Nationally Recognized name Financial advice and assistance Lower failure rate

What does limited liability mean?

Means that corporate owners (stockholders) and limited partners are responsible for losses only up to the amount they invest. Their other personal property is not at risk.

What does unlimited liability mean?

Means that sole proprietors and general partners must pay all debts and damages caused by their business. They may have to sell their houses cars, or other personal possessions to pay business debts.

What are the advantages of S corporations?

S corporations have the advantages of limited liability (like a corporation) and simpler taxes (like a partnership). To qualify for S corporation status, a company must have fewer than 100 stockholders (members of a family count as one shareholder), its stockholders must be individuals or estates and US citizens or permanent residents, and the company cannot derive more than 25 percent of its income from passive sources.

What are the advantages and disadvantages of partnerships?

The advantages include more financial resources, shared management and pooled knowledge, and longer survival. The disadvantage include unlimited liability, division of profits, disagreements among partners, and difficulty of termination.

What are the advantages and disadvantages of sole proprietorships?

The advantages of sole proprietorships include ease of starting and ending, ability to be your own boss, pride of ownership, retention of profit, and no special taxes. The disadvantages include unlimited liability, limited financial resources, difficulty in management, overwhelming time commitment, few fringe benefits, limited growth, and limited life span.

What are the benefits and drawbacks of being a franchisee?

The benefits include getting a nationally recognized name and reputation, a proven management system, promotional assistance, and pride of ownership. Drawbacks include high franchise fees, managerial regulation, shared profits, and transfer of adverse effects if other franchisees fail

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

Conglomerate Merger

The joining of firms in completely unrelated industries

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

Limited Liability

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

Unlimited Liability

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

Merger

The result of two firms forming one company

Franchise

The right to use a specific business's name and sell its products or services in a given territory

What are the three key elements of a general partnership?

The three key elements of a general partnership are common ownership, shared profits and losses, and the right to participate in managing the operations of the business.

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

True

Why do people incorporate?

Two important reasons for incorporating are special tax advantages and limited liability

Limited Liability Company (LLC)

a company similar to an S corporation but without the special eligibility requirements

The advantages of becoming a conventional corporation include?

access to more capital

A partnership ____ can spell out the requirements of terminating a partnership.

agreement

A legal entity with authority to act and have liability apart from its owners is a:

corporation

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

corporation

It is important to have Articles of Partnership because problems between partners may occur due to:

disagreements over dividing profits

A major disadvantage of the corporate form deals with the tax situation called ___ taxation?

double

The paperwork needed to start a corporation is extensive, but a corporation must also keep detailed ____ records documenting all financial transactions in detail.

financial

A disadvantage of corporations is that they become too large to be____?

flexible

A partnership where all owners share in operating the business and assuming unlimited liability for the business's debts is a:

general partnership

Double taxation of a corporation occurs because the company pays tax on ___ , and then individual shareholders pay income tax on the dividends they receive.

income

The ____ cost of incorporating can be expensive because of the need for accountants and lawyers to get started.

initial

LLC's are considered to have operational flexibility because whole they must submit articles of organization, they are not required to:

keep minutes or hold annual meetings

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

legacy

An S corporation has the liability protections of a corporation but is taxed:

like a partnership or sole proprietorship

If the sole proprietor dies, is incapacitated, or retires, the business no longer exists. The disadvantage of a sole proprietorship is called ____ life span.

limited

Taryn and Eilysh have decided to form a partnership. Taryn will not have management responsibility, but will invest money in the business. Taryn will be considered a(n) ____ partner?

limited

Bob and Dan are doctors in a medical practice. Dan is being sued for malpractice, but it will not affect Bob's assets because they formed a(n) ___ _____ partnership?

limited liability

Stockholders' liability for losses only up to the amount they invest is called ____.

limited liability

The various responsibilities of each partner, especially any issues involving ____, should be agreed to in discussions and put in writing before agreeing to a partnership.

money

Select those items considered fringe benefits that people working for a company are likely to receive, but a sole proprietor has to develop on his own:

paid health insurance paid sick or vacation leave time a pension plan not freedom to make your own hours

Longer Survival

partnerships are more likely to succeed than sole proprietorships because being watched by a partner can help a businessperson become more disciplined.

A business that is owned and managed by one person is a(n) ____ _____?

sole Proprietorship

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

sole proprietorship

The three major forms of business are:

sole proprietorship, partnership, corporation

Studies have indicated that partnerships are four times more likely to succeed than:

sole proprietorships

What are the advantages and disadvantages of corporations?

the advantages include more money for investment, limited liability, size perpetual life, ease of ownership change, ease of drawing talented employees, and separation of ownership from management. The disadvantages include initial cost, paperwork, size, difficulty in termination, double taxation, and possible conflict with a board of directors.

In a sole proprietorship, the profits earned by the business are:

the property of the owner, except for taxes owed to the government

Corporations pay tax on company income and shareholders pay again on any dividends received.

true

In a sole proprietorship, debts of the business are considered the responsibility of the owner if the business can't pay. This is referred to as ___ _____?

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

Disadvantages to LLC's

No stock Limited life span Fewer incentives Taxes Paperwork

Acquisition

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

Advantages to LLC's

Limited Liability Choice of taxation Flexible ownership rules Flexible distribution of profits and losses Operating Flexibility - LLCs do have to submit articles of organization, which are similar to articles of incorporation, but they are not required to keep minutes, file written resolutions, or hold annual meetings. An LLC also submits a written operating agreement, similar to a partnership agreement, describing how the company is to be operated.