Chapter 4 Review

advantages of sole proprietorships

1. Ease of starting and ending the business 2. Retention of company profits 3. Being your own boss and pride of ownership 4. No special taxes 5. Not as many government regulations as are on corporations

sole proprietorship

A business that is established, owned, operated, and often financed by one person. Because they are easy and inexpensive to form, 72 percent of all businesses are formed as a sole proprietorship.

conglomerate merger

A conglomerate merger brings together companies in unrelated businesses to reduce risk. An example would be if Disney purchased AT&T, a totally unrelated business.

franchise agreement

A contract allowing the franchisee to use the franchisor's name and its trademark and logo in the operation of a business. The franchisee supplies land, labor, and capital; operates the franchised business; and agrees to abide by the franchise agreement. The franchisor supplies a known and advertised business name, management skills, the required training and materials, and a method of doing business.

corporate charter

A corporation is chartered by the state in which it is formed and acts as an artificial person who can own property, enter into contracts, sue and be sued, and engage in business operations under the terms of its charter.

corporation

A legal entity with an existence and life separate from its owners (shareholders), who therefore are not personally liable for the entity's debts. Approximately 18% of businesses in the U.S. are corporations and they generate 81 percent of the total revenue.

limited partner

A limited partnership has two types of partners: one or more general partners, who have unlimited liability, and one or more limited partners, whose liability is limited to the amount of their investment. A limited partnership must have at least one general partner responsible for the debts of the business.

stockholder

A person that buys stock or shares in a corporation.

articles of partnership

A written agreement that lists and explains the terms of the partnership (who is a partner?, how much did each partner invest?, how will profits be distributed?, how will the business be dissolved?).

partnership

An association of two or more persons who agree to operate a business together for profit. There are approximately 3.4 million partnerships in the United States, which is only about 10 percent of all American businesses.

do partners have unlimited or limited liability?

Each general partner is legally and personally responsible for the debts and actions the other general partners, even if they did not incur those debts or do anything wrong. Limited partners, on the other hand, risk only their original investment.

general partners

In a general partnership, all partners share in the day-to-day management of the business and in the profits. Each partner has unlimited liability for all the business obligations of the firm.

horizontal merger

In a horizontal merger, companies at the same stage in the same industry merge to reduce costs, expand product offerings, or reduce competition. For example, Exxon and Mobil merged in 1998 to form ExxonMobil.

vertical merger

In a vertical merger a company buys a firm in its same industry that is involved in an earlier or later stage of the production or sales process. For example, a vertical merger would take place if Buffalo Wild Wings purchased a chicken wing supplier.

do partnerships pay special taxes?

Like a sole proprietor, each partner is taxed only on his or her share of the profits.

advantages of corporation form of ownership

Limited liability. Investors can lose only their investment if the corporation fails; creditors have no claim to the investors' assets. Ease of transferring ownership. To transfer ownership, all you have to do is sell your stock. Unlimited life. A corporation has a perpetual life regardless of if a board member dies or a manager leaves, or an employee goes to work for another company. The corporation lives on. Can raise capital by issuing stocks and bonds.

where do most sole proprietors get financing to start a business?

Many sole proprietors finance their startup costs from their own savings because banks are usu¬ally unwilling to lend them large sums of money.

common stock

Owners of common stock may vote on corporate matters but receive dividends after preferred stockholders.

preferred stock

Owners of preferred stock usually have no voting rights, but are paid dividends before common stock owners when a dividend is issued.

closed corporation

Some corporations are closed corporations whose stock is owned by relatively few people (sometimes family members) and is not bought and sold on security exchanges.

corporate hierarchy

Stockholders elect a board of directors. Board of directors appoint corporate officers (CEO, CFO, etc.) The officers hire employees to run the day-to-day operations of the company.

board of directors

The board of directors develops goals and the general direction for the company and are directly responsible to the stockholders for the way they operate the firm.

franchisee

The franchisee is the individual or company that sells the goods or services in a certain geographic region.

franchisor

The franchisor is the company that supplies the product concept and methods.

LLC (Limited Liability Company)

The limited liability company (LLC) is a hybrid organization that offers the same liability protection as a corporation but may be taxed as either a sole proprietor or a partnership to avoid double taxation. Less restrictions than S corporations.

main disadvantage of corporations

Unlike sole proprietorships and partnerships, the corporation itself must pay a tax on its profits. Stockholders pay personal income tax on dividends they receive.

main disadvantage of sole proprietorships

Unlimited liability. Unlimited liability means that a business owner is personally liable for all the debts of the business. If the business fails, the sole proprietor's personal property including savings and other assets can be seized to pay creditors.

list the three main forms of business ownership

sole proprietorship, partnership, corporation