Business 101 Ch. 5
All states except Louisiana have adopted the Uniform Partnership Act to replace earlier laws of governing partnerships. Three key elements
1. common ownership 2. shared profits and losses 3. the right to participate in managing operations of the business
Limited Liability Company (LLC)
A company similar to an S corporation but without the special eligibility requirements.
what is a franchisee?
A person who buys a franchise
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.
franchise agreement
an arrangement whereby someone with a good idea for a business (franchieser) sells the rights to use the business name and sell a product or service (franchise) to others (franchisees) in a given territory
leveraged buyout
attempt by employees, management, or a group of private investors to purchase an organization primarily through borrowing the necessary funds. the employees, managers, or investors now become the owners of the firm (not limited to US buyers)
sole proprietorship
business managed by one person
scams called ... usually involve people coming to town, renting nice offices, taking out ads, and persuading people to invest. eventually disappear with the investors' money
bust-outs
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.
limited partnership
has one more more general partners and one or more limited partners - a general partner is an owner who has unlimited liability and is active in managing the firm - a limited partner is an owner who invests money in the business but does not have any management responsibility or liability for losses beyond their investment
cooperative
is owned and controlled by the people who use it—producers, consumers, or workers with similar needs who pool their resources for mutual gain
vertical merger
joins two firms operating in different stages of related businesses ex: a soft drink company and an artificial sweetner maker would ensure the merged firm a constant supply of the ingredient and quality control of the soft drink company's product
partnership
legal form of business with two or more owners
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.
what are the advantages of limited liability companies?
limited liability companies have the advantage of limited liability without the hassles of forming a corporation or the limitations imposed by S corporations. LLCs may choose wether to be taxed as partnerships or corporations
what does limited liability mean?
limited liability 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.
limited liability
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
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
farm cooperative
organization in which farmers share in growing and selling farm products
master limited partnership (mlp)
partnership acts like a corporation and is traded on the stock exchange but is taxed like a partnership and thus avoids the corporate income tax
what are the advantages of s corporations?
s corporations have the advantages of limited liability and simpler taxes. To qualify for s corporation status, a company must have fewer than 100 stockholders, its stockholders must be individual or estates and US citizens or pernament residents, and the company cannot derive more than 25 percent of its income from passive sources.
conventional (c) corportation
state chartered legal entity with authority to act and have liability separate from its owners - its stockholders - limits liability of owners enables many people to share in the ownership (profits) without having commitments
instead of merging or selling to another company, some corporations decide to maintain, or regain control a firm internally. this is called....
take a firm private - managment or a group of stockholders obtains all the firm's stock for themselves by buying it back from the other stockholder
what are the advantages and disadvantages of partnerships?
the advantages include more financial resources, shared management and pooled knowledge, and longer survival. The disadvantages include unlimited liability, division of profits, disagreements among partners, and difficulty of termination
in order to qualify as an S corporation, a company must
1. have no more than 100 shareholders 2. have shareholders that are individuals or estates, and who are citizen or permanent residents of the US 3. have only one class of stock 4. derive no more than 25% of income from passive sources (rents, royalties, interest)
advantages to sole proprietor ship (6)
1. 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 (taxed as personal income)
disadvantages of corporations
1. Initial cost - lawyers/accounts 2. Extensive paperwork 3. Double taxation - pays tax on income before it can distribute any (dividends) to stockholder 4. Two tax returns - both corporate and individual 5. Size - infelxible 6. Difficulty of termination - hard to end 7. Possible conflict with stockholders and board of directors - Since the board of directors chooses the company's officers, entrepreneurs serving as managers can find themselves forced out of the company
disadvantages to LLC
1. No stock - llc members need the approval of the other members in order to sell their interests to the company 2. Limited life span - identify dissolution dates. can choose to reconstitute the LLC after it dissolves 3. Fewer incentives - llc cant deduct the cost of fringe benefits for members owning 2% or more of the company 4. Taxes - llc member must pay self-employment taxes 5. Paperwork - less than corporations, more than sole proprietors
disadvantages for a franchise
1. large start-up costs - demand a fee for the rights to franchise 2. shared profit - franchsior often demands a large share of profits in addition to start up fees or royalty (percentage commission based off sales not profit) 3. management regulation - management "assistance" has a way of becoming managerial orders, directives, and limitations franchisees feeling burdened may lose the drive to run their own business 4. coattail effect - The actions of other franchises have an impact on your future growth and profitability. Due to this coattail effect, you could be forced out of business even if your particular franchise has been profitable. ex: krispy kreme flooded new stores and availablitiy, product caused overexposure 5. restrictions on selling - Unlike owners of private businesses, who can sell their companies to whomever they choose on their own terms, many franchisees face restrictions on the resale of their franchises. to control quality, franchisors often insist on approving the new owner, who must meet their standards. 6. fraudulent franchisors - many franchisors are small which prospective franchisees may know little about. deliver little or nothing of what they promised
advantages to a corportation
1. limited liability owners of a business are responsible for its losses to the amount of money they invested 2. ability to raise more money for investment - sell stock to raise money 3. size - modern factories, hire experts in all areas of operation - take advantage of opportunities anywhere in the world 4. perpetual life - death of one owner does not terminate the corporation 5. ease of ownership change - sell stock to someone else 6. ease of attracting talented employees - benefits 7. separation of ownership from management - corporations are able to raise money from different owners/stockholders without getting them involved in management
advantages to LLC
1. limited liability - personal assests are protects 2. choice of taxation - can choose to be taxed as partnerships or corporations 3. flexible ownership rules - could be a person, partnership or corporation 4. flexible distribution of profits and losses - profits and losses dont have to be distributed in proportion to the money each person invests, as in corporations. agree on percentage to be distributed to each member 5. operating flexibility 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
advantages of a franchise
1. management and marketing assistance -franchisee has an established product, help choosing location, and assistance in all phases of promotion and operation 2. personal ownership - own boss but follow more rules, regulations and procedures than a privately owned business (enjoy as much of the incentive and profits as any sole proprietor would) 3. nationally recognized name - instant recognition and support from a product group with established customers 4. financial advice and assistance - franchisees often get valuable assistance and periodic advice form people with expertise in these areas some franchisors provide financing to potential franchisees they feel will be valuable 5. lower failure rate - franchising has grown so rapidly that many weak ones have entered the field. be careful and invest widely
advantages to partnerships (4)
1. more financial resources 2. shares managements and pooled/complementary skills and knowledge 3. longer survival (more disciplined with a partner) 4. no special taxes - all profits are taxes as the personal income of the owners
disadvantages of partnerships
1. unlimited liability - each general parter is liable for the debt of the firm, no matter who was responsible for causing them 2. division of profits - sharing risks means sharing profits and conflicts may arise 3. disagreements among partners - who hires/fires - profit - who works what hours 4. difficulty of termination - hard to get out of a partnership
disadvantages of sole proprietorship (7)
1. unlimited liability - risk of personal loses 2. limited financial resources 3. management difficulties - someone must keep inventory, accounting, and tax records 4. overwhelming time commitment 5. few fringe benefits (no paid health insurance, no paid disability insurance, no pension plane, no sick leave, and no vacation pay) 6. limited growth - expansion is slow bc it relies on its owner for creativity, business understanding, and funding 7. limited life span - if the sole proprietor dies, retires the business no longer exists
general partnership
All owners share in operating the business and in assuming liability for the business's debts.
what is a franchise?
An arrangement to buy the rights to use the business name and sell its products or services in a given territory is called a franchise.
what is the role of a cooperative?
Cooperatives are organizations owned by consumer-members. 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.
acquisition
One company's purchase of the property and obligations of another company.
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.
franchisor
a company that develops a product concept and sells others the rights to make and sell the products
what is the definition of corporation?
a corporation is a state-chartered legal entity with authority to act and have liability separate from its owners
S corporation
a form of corporation that avoids double taxation by having its income taxed as if it were a partnership -have shareholders, directors, employees, and the benefit of limited liability but their profits are taxed only as the personal income of shareholders different from c corporations because they are only taxed once
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.
franchisee
a person who buys a franchise
what are the advantages and disadvantages of corporations?
the advantages include more money for investment, limited liability, size, perpetual life, ease of ownership change, east of drawing talented employees, and separation of ownership from mangement. The disadvantages include initial cost, paperwork, size, difficulty in termination, double taxation, and possible conflict with a board of directors
what are the benefits and drawbacks of being a franchisee?
the benefits including 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.
horizontal merger
the combination of two or more firms competing in the same market with the same good or service ex: a soft drink company and a mineral water company that merge can now supply a variety of beverage products
merger
the result of two firms forming one company (like a marriage, joining two individuals as one family) 3 types
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 element 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 a business.
why do people incorporate?
two important reasons for incorporating are special tax advantages and limited liability
conglomerate merger
unites firms in completely unrelated industries in order to diversify business operations and investments ex: soft drink company and snack food company would form a conglomerate merger
what does unlimited liability mean?
unlimited liability means that sole proprietors and general partners must pay all debuts and damages caused by their business. They may have to sell their houses, cars, or other personal possessions to pay business debts.