Intro to Business Chapter 5

Cooperative (Co-Op)

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.• Serve one billion members worldwide.• Members democratically control the business by electing a board of directors that hires professional management.• Other cooperatives are formed to give members more economic power as a group than they have as individuals, such as a farm cooperative.

Sole proprietorship

A business owned, and usually managed, by one person.

Acquisition

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

Horizontal merger

The joining of two firms in the same industry.

Disadvantages of Corporations

1. Initial cost 2. Extensive paperwork 3. Double taxation 4. Two tax returns 5. Size 6. Difficulty of termination 7. Possible conflict with stockholders and board of directors

Advantages of Corporations•

1. Limited liability 2. Ability to raise more money for investment 3. Size 4. Perpetual life 5. Ease of ownership change 6. Ease of attracting talented employees 7. Separation of ownership from management

Advantages of Franchises

1. Management and marketing assistance 2. Personal ownership 3. Nationally recognized name 4. Financial advice and assistance 5. Lower failure rate

Corporation

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

Partnership

A legal form of business with two or more owners.

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 (L L P)

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

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.

Conventional (C) Corporation

A state-chartered legal entity with authority to act and have liability separate from its owners (its stockholders).• Enables many people to share in ownership.

S Corporations

A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships.• Have shareholders, directors, and employees, plus the benefit of limited liability.• Profits are taxed only as the personal income of the shareholders.

Limited Liability Companies continued

Advantages of LLCs:1. Limited liability.2. Choice of taxation.3. Flexible ownership rules.4. Flexible distribution of profits and losses.5. Operating flexibility.

Home-Based Franchises

Advantages:• Relief from commuting stress.• Extra family time.• Low overhead expenses.

Franchise agreement

An arrangement whereby someone with a good idea for a business (franchisor) sells the rights to use the business name and sell a product or service (franchise) to others (franchisees) in a given territory. Can be formed as a sole proprietorship, a partnership, or a corporation.• More than 733,000 franchised businesses operate in the U.S., creating 7.6 million jobs.

Leveraged buyout (LBO)

An attempt by employees, management, or a group of private investors to buy out the stockholders in a company.• Range in size from $50 million to $34 billion and involve everything from small family businesses to giant corporations.Business acquisitions are not limited to U.S. buyers.

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.

Individuals Can Incorporate

Anyone—truckers, doctors, plumbers, athletes, and small business owners—can incorporate.• Stock is normally not issued to outsiders when individuals incorporate, so they do not share the advantages and disadvantages of large corporations.• Major advantages are limited liability and possible tax benefits.

Advantages of Sole Proprietorships

Ease of starting and ending the business. 2. Being your own boss. 3. Pride of ownership. 4. Leaving a legacy .5. Retention of company profits. 6. No special taxes.

Qualifications for S corporations:

Have no more than 100 shareholders.• Have shareholders that are individuals or estates, and who (as individuals) are citizens or permanent residents of the U.S.• Have only one class of stock.• Derive no more than 25% of income from passive sources.If an S corporation loses its S status, it may not operate under it again for at least 5 years.

Limited Liability Companies

L L Cs are similar to an S corporation but without the special eligibility requirements.• More than half of new business registrations in some states are L L Cs.

Disadvantages of Franchises

Large start-up costs.2. Shared profit.3. Management regulation.4. Coattail effects.5. Restrictions on selling.6. Fraudulent franchisors.

Advantages of Partnerships

More financial resources.• Shared management and pooled/complementary skills and knowledge.• Longer survival.• No special taxes.

Disadvantages of LLCs:

No stock; ownership is nontransferable.2. Fewer incentives.3. Taxes.4. Paperwork.

Conglomerate merger

The joining of firms in completely unrelated industries.

Vertical merger

The joining of two companies in different stages of related businesses.

Limited liability

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

Unlimited liability

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

Merger

The result of two firms forming one company.

Disadvantages of Sole Proprietorships

Unlimited liability — The responsibility of business owners for all debts of the business.2. Limited financial resources.3. Management difficulties.4. Overwhelming time commitment.5. Few fringe benefits.6. Limited growth.7. Limited life span.

Disadvantages of Partnerships

Unlimited liability.• Division of profits.• Disagreements among partners.• Difficulty of termination.

Quasi-public corporations

are chartered by the government as an approved monopoly to perform services to the general public.

Professional corporations

are owned by those who offer professional services.

Foreign corporations

do business in one state but are chartered in another. About one-third of all corporations are chartered in Delaware because of its relatively attractive rules for incorporation. A foreign corporation must register in states where it operates.

Alien corporations

do business in the United States but are chartered (incorporated) in another country.

Domestic corporations

do business in the state in which they are chartered (incorporated).

Closed (private) corporations

have stock that is held by a few people and isn't available to the general public.

Open (public) corporations

sell stock to the general public.

Federal Trade Commission

that the new combined company does not limit competition unfairly.