Chapter 21: Forms of Business Organization

is a business organization formed under federal tax law that is considered corporation, yet taxed like a partnership

"S" corporation

franchise agreement will specify:

A large amount of money that the franchisee pays up front and royalty payments The location of the franchise and A description of the permitted and required business practices

A "normal" (that is, a non-"S") corporation is often called a "______" corporation

C

disadvantages of coporations

Corporation owners are subject to double taxation greater fromalities are required in establishing and maintaining the corporate existence

advantages of sole proprietorship

Creation (the "start up") is easy The owner has total managerial control The owner retains all profits

advantages of general partnership

It is easy to create ("start-up") Partnership income is partner income Business losses qualify for a tax deduction

There is no limitation on the number of owners permitted in a _______; an ______ may have a single member

LLC, limited liability company

Though once popular, an ______ is generally not as desirable an entity as are an LLP and LLC

LP, limited partner

example of chain style business operation

McDonald's

After a "C" corporation is formed under the relevant state law, the "C" corporation is transformed to an "_____" corporation under federal law

S

An ________ corporation can avoid double taxation

S

Shareholders must report the income from the "_____" Corporation on their personal income tax forms

S

It can have no more than one hundred shareholders

S corporation

major forms of business organizations

Sole proprietorship General Partnership Limited Partnership (LP) Limited liability Partnership (LLP) Limited Liability Company (LLC) corporation

disadvantages of franchise (to the franchisee)

The franchisee must meet the contractual requirements, or possibly lose the franchise For the franchisee, there is little/no creative control over the business

advantages of franchise (to the franchisee)

The franchisee receives assistance from the franchisor in starting the franchise There is trade name/trademark recognition by consumers The franchisor provides advertising

disadvantages of franchise (to the franchisor)

The franchisor has little control (except contractually) over the individual franchise The franchisor can become liable for the franchise if the franchisor exerts too much control

Disadvantages of Sole Proprietorship

The owner has personal liability for all business debts/obligations/losses funding is limited to the owner's personal funds and loans

disadvantages of general partnership

The partners have personal liability for all business debts/obligations/losses, including those incurred by other partners on behalf of the partnership

advantages of corporations

There is limited liability for shareholders It is relatively easy to raise capital by issuing (selling) stock Profits are taxed as income to shareholders (not like a partnership)

advantages of franchise (to the franchisor)

There is low risk for the franchisor in starting a franchise The franchisor will have increased income from franchises

"Limited liability company" must appear in the name T or F

True

franchisee

a person who, by specific terms of agreement, sells goods or services under the trade name or trademark in a franchise

shareholders

are investors in a corporation; they own the corporation

example of distributorship

car dealership

operating agreement

document that creates a multi-member LLC, which is the foundational contract between the members

Partners owe each other a

fiduciary duty, a duty of obedience, and a duty of care to the other partners

Each partner has unlimited personal liability for the business's debts/obligations/losses

general partnership

It is like a sole proprietorship except that it has more than one owner

general partnership

It is the "default" style of partnership

general partnership

Profits are taxed as income to the partners

general partnership

The partnership itself pays no taxes ("pass through" taxation)

general partnership

Unless otherwise specified, each partner has equal control of the business

general partnership

general partner in a limited partnership

has managerial/operational control over the business

limited partner

has no managerial/operational control over business

franchise

is a business arrangement between a franchisor (the owner of trade name or trademark in a franchise) and a franchisee (a person who, by specific terms of agreement, sells goods or services under the trade name or trademark in a franchise)

sole proprietorship

is a business in which one person (the sole proprietor, who is the single person at the end of sole proprietorship) is in control of the management and profits

business trust

is a business organization governed by a group of trustees who operate the trust for the beneficiaries

franchise agreement

is a contract in which a company (the franchisor) grants permission (a license) to another party (the franchisee) to use the franchisor's name, trademark, or copyright in the operation of a business and associated sales of goods in return for payment

corporation

is a legal entity formed by issuing stock to investors (shareholders), who are the owners of the corporation

joint stock company

is a partnership agreement in which company members hold transferable shares while all the company goods are held in names of the partners

limited partnership

is a partnership consisting of at least one general partner and at least one limited partner in which the general partner(s) assume all liability for the partnership's debts and the limited partners assume no liability beyond their originally invested capital

limited liability partnership (LLP)

is a partnership in which a partner has: no personal liability for the misconduct of another partner; and no personal liability for the contractual obligations of the partnership

general partnership

is a partnership in which the partners divide profits and management responsibility and share unlimited personal liability for the partnership's debts

beneficiary

is a person who can expect to benefit from a relationship

trustee

is a person who operates a trust for beneficiaries of a business trust

"S" Corporation

is a small corporation that enjoys the tax status of a partnership ("pass through" taxation status)

chain-style business operation

is a type of franchise in which the franchise operates under the franchisor's business name and is required to follow the franchisor's standards and methods of business operation

distrubutorship

is a type of franchise in which the franchisor manufactures a product and licenses a dealer to sell the product in an exclusive territory

manufacturing arrangement

is a type of franchise in which the franchisor provides the franchisee with a formula or necessary ingredient to manufacture a product

partnership

is a voluntary association between two or more persons who co-own a business for profit

joint venture

is an association between two or more persons/corporations created for a specific business undertaking; it is a short-term partnership

syndicate

is an investment group that forms for the purpose of financing a specific large project

cooperative

is an organization formed by individuals to market new products. Individuals in a cooperative pool their resources to gain an advantage in the market

limited liability company (LLC)

is an unincorporated business that is taxed like a partnership, with the members paying personal income taxes, and has the limited liability of a corporation

dissolution

is the first stage in the termination of a partnership; it is the liquidation of the partnership

fiduciary duty

is the legal obligation of one party to act in the best interest of another

winding up

is the second (and final) stage in the termination of a partnership; it ends the partnership

articles of partnership

is the written agreement that creates the partnership

pass through taxation

meaning that profits are taxed directly as income to the sole proprietor The sole proprietorship itself pays no taxes

Owners of LLC (_________) pay personal income taxes on shares they report

members

franchisor

owner of trade name or trademark

members

owners of LLC

double taxation

profits are taxed as income to corporation, plus income to owners/shareholders

The owner has total control The owner has unlimited liability There are no business formalities It has "pass through" taxation

sole proprietorship