Chapter 5 How to form a business
What are some of the disadvantages of operating a franchise
Large start-up costs Restrictions on selling Shared profit
True or false: The main advantage of a sole proprietorship is ease of start up
True
True or false: To end a sole proprietorship, you simply stop operations
True
The advantages of becoming a conventional corporation include
Access to more capital
Which form of ownership is nontransferable because there is no stock
LLC
What are the advantages of the LLC form of organization
Choice of taxation Limited liability Flexible ownership rules
What are some of the disadvantages of a corporation
Double taxation Cost of forming a corporation
Which statements are accurate as related to corporate taxation
Double taxation occurs Stockholders pay income tax on the dividends they receive
Select the reasons a business might change ownership form
Dropping a partner from the firm Adding a partner to the firm Seeking limited liability
True or false: Corporations must be large in size to benefit from the advantages of incorporating
False
Which is an advantage of the corporate form of business ownership
Limited liability
The form of partnership that limits liability to the limited partner's own acts or those of the people they supervise is a:
Limited liability partnership
Select all advantages of the partnership form of business
Longer survival Pooled skills More financial resources
Rank the order in which members of a corporation are chosen in order to separate ownership from management. Start at top of the managerial hierarchy (FIg. 5.4)
Owners/stockholders elect board of directors Board of Directors hire officers of the corporation Officers hire managers of the corporation Managers hire employees
A unique government creation that looks like a corporation but is taxed like a sole proprietorship or partnership is called a(n) _ corporation
S
One company's purchase of the property and obligations of another company is a(n)
acquisition
When a company purchases the assets and debt of another company they are engaging in a (an)
acquisition
In a franchise, having management support from the franchisor is a(an)_ whereas the coattail effect is considered a _
advantage disadvantage
Select all reasons that disagreements can ruin a partnership:
arguing over profits opposing management styles disagreement over overload
In a leveraged buyout, employees, managers, or investors finance the purchase of the company by:
borrowing against its assets
Sole proprietors like being their own _, because they get satisfaction from making their own decisions
boss
When the actions of other franchises have an affect on your business operation, this is called:
coattail effects
The higher costs of starting up an international franchise are usually counterbalanced by an expanding _ base and less competition
consumer
In order to protect the brand name and image, the franchisor has tight has tight management _
controls standards
A business owned and controlled through pooled resources by the people who use it is a(n) _
cooperative
Being owned by those using the products of a firm rather than simply being a shareholder is what makes a _ unique
cooperative
A legal entity with authority to act and have liability apart from its owners is a:
corporation
When analyzing which type of merger a firm uses to grow, we can classify them by whether they are:
different industries in the same industry different levels of an industry
It is important to have Articles of Partnership because problems between partners may occur due to
disagreements over dividing profits
Select the most popular businesses for franchising
fast food restaurants full service restaurants gas stations with convenience stores
The paperwork needed to start a corporation is extensive, but a corporation must also keep detailed _ records documenting all financial transactions in detail
financial
Bruce owns his own company, but is having trouble working alone because he feels he needs additional expertise, management help, and an influx of money to stay afloat. Bruce should consider:
forming a partnership
A business person concerned about startup costs of a business opportunity should consider a venture other than a(n) _ which has this disadvantage
franchise
The right to use a specific business' name and sell its products of services in a given territory is a(n) _ agreement
franchise
Businesses that are _,like McDonald's, have both a direct and indirect impact on the economy through job creation and spending
franchises
A _ is a company that sells others the right to use their name to make and sell their products
franchisor
Many franchisors are small, obscure companies that prospective franchisees may know little about. Prospective franchisees must beware of:
fraudulent franchisors who provide little help
A _ partner has responsibility or liability for losses beyond their investment, but a _ partner only has liability to the amount they invest
general; limited
Relief from the stress of commuting, extra time for family activities, and low overhead expenses are all advantages of_-_ franchises
home based
When a soft drink company and a mineral water company merge and then are able to supply a variety of drinking products they have formed a(n) _ merger
horizontal
An advantage of cooperatives is that they:
increase the economic power of members
The three types of mergers are differentiated by analyzing whether the companies merging are in the same, related, or different _
industries
A sole proprietorship has a limited life span unless:
it is sold to someone else it is taken over by an heir
Sole proprietors can leave their business to their heirs. This is called:
leaving a legacy
Select the attributes of a corporation
legal entity liability separate from owners state chartered
In a general partnership, all partners share the responsibility for operating the business and assume _ for the business' debts
liability
Although members may choose to reconstitute an LLC after it dissolves, limited_ is considered a disadvantage of this form of business
life span
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
Limited liability, choice of taxation, flexible ownership rules, and operating flexibility are all advantages of a(n) _ company
limited liability
When there is one or more general partners and one or more limited partners, the firm is a(n):
limited partnership
Having carefully chosen partners with different skills and knowledge can help a partnership succeed because:
no one person has all the skills needed it provides for a more balanced life
A _ means that a corporation's existence will not terminate if one or more owners die
perpetual life
Taking a firm _ is when a corporation decides to maintain. or in control of a firm internally by obtaining all of the stock
private
Flexible distribution of profits and losses is considered an advantage of an LLC because:
profit/losses do not have to be distributed in proportion to the money each person invests
A advantage of a sole proprietorship is the business owner keeps all the _, but in a franchise, in many instances, this must be shared with the franchisor
profits
One of the fastest growing franchise sectors is _
senior care
Ease of formation is a advantage of a(n)_
sole proprietorship
Funds available to a business are limited to what one owner can gather which is disadvantage to the form of business known as a(n) _
sole proprietorship
If you start and manage a landscaping business on your own, you have likely started a:
sole proprietorship
As owners, these people are entitled to all profits that are left after all the corporation's other obligations have been paid
stockholders
Conflict may be present if _ elect a board of directors who disagree with management
stockholders
The biggest disadvantage of a home-based franchise is _
the feeling of isolation
A franchise operation is still your business, but you must follow the rules of:
the franchise agreement
A sole proprietorship often grows slowly because the owner is:
the major source of funding the main source of creativity the main source of know-how
When any debts or damages incurred by the business are your debts or damages it is called _ liability
unlimited
When each general partner is liable for the debts of the firm, no mater who was responsible for causing the debt, this is called _ liability
unlimited
When you own a sole proprietorship you and the business are considered one, so you have _ liability for financial obligations such as debt
unlimited
In a sole proprietorship, any debts or damages incurred by the business are your personal debts and you must pay them. This disadvantage is known as:
unlimited liability
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
Many brick and mortar franchisees are using _ to expand their businesses online to lower costs and better meet the needs of their customers
websites technology e-commerce
If the owner of a sole proprietorship wants to incorporate, the following disadvantages must be considered:
Costs of incorporation Double taxation
Select ways an LLP deals with liability for partners
Partners are not held liable for each others' actions When a partner is sued individually for malpractice, it does not affect other partners Liability is limited to losing only personal assets directly related to personal acts
Rank the forms of business ownership based on ease of starting. Put the easiest form at the top
Sole proprietorship Partnership Corporation
True or false: Corporations pay tax on company income and shareholders pay again on any dividends received
True
True or false: When working for a company, a comprehensive benefit plan may add up to 30 percent or more to a worker's salary
True
When two firms operating in different stages of related businesses join, it is called a(n)____ merge.
Vertical
The decrease in female franchise owners is caused by:
a lack of money to cover high start-up costs
A corporation is formally formed with:
articles of incorporation and bylaws
In addition to the articles of incorporation, a corporation has _ ,which describe how the firm is to be operated from both legal and managerial points of view
bylaws
The owner of an LLC can be a person, partnership, or _
corporation
Which form of business has double taxation and limited liability as its characteristics
corporation
The failure rate for franchises is lower than other business ventures because of:
financial advice and assistance nationally recognized names
LLCs do have to submit articles of organization and an operating agreement, but do not have to:
hold annual meetings keep minutes file written resolutions
A soft drink company is merging with a company that produces bottled water. This type of merger is considered a
horizontal merger
The responsibility for a loss only up to the amount invested is _ liability
limited
The _ limited partnership looks much like a corporation in that it acts like a corporation and is traded on a stock exchange
master
An advantage of starting an online franchise is that:
no upfront fee may be required online franchisees can compete in world markets franchisees pay only a set monthly fee
All profits of a sole proprietorship are taxed as _ income of the business owner
personal
The limited liability partnership ensures that the limited partners'_ assets are not at risk
personal
Limited liability is considered an advantage of forming a LLC because:
personal assets are protected
In developing a partnership agreement, it is recommended that you:
seek legal advice
The three major forms of business most common in the United States are
sole proprietorships corporations partnerships
A key disadvantage of a general partnership is:
unlimited liability
A merger that joins two companies involved in different but related levels of an industry is a(n) _ merger
vertical
A franchisee must know how much _ is needed to purchase the franchise and operate it
equity capital
Advantages of international franchising include:
expanding customer base
The initial goal of a(n) _ cooperative was to join together to get better prices for their food products
farm
Amy wants to start a business but is concerned with starting from scratch. To alleviate her concern Amy could
obtain a franchise
Select the disadvantages of a sole proprietorship:
-large time commitment -limited financial resources -unlimited liability
Minority- owned businesses are growing at more than _ times the national rate
6
Elements such as more financial resources, shared management, and longer survival are those used to define the:
Uniform Partnership Act
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:
a pension plan paid health insurance paid sick or vacation leave time
Partners can not only bring money into the business, but also _, which allows the business to borrow additional resources
credit
The start-up costs of filing for incorporation are high because:
lawyers and accountants are needed to do the complex filing
A nationally established franchise provides a franchise with a _ that is recognized by consumers, and therefore, saves on marketing costs
name
True or false: It is not important to know the length of time a franchisor has been in operation
False
True or false: Partnerships are less likely to survive than sole proprietorships
False
A company similar to an S corporation but without the special eligibility requirements is an:
LLC
No stock, limited life span, and fewer incentives are disadvantages of a(n)_
LLC
When a sole proprietor leaves an ongoing business to future generations, it is said that the owner is leaving a___.
Legacy
Which is considered an advantage of incorporating
Limited liability
_ protect(s) investors' personal assets which makes them more likely to take a risk on investing in a corporation
Limited liability
Select reasons why management difficulties are considered a disadvantage of sole proprietorships
People good at one skill like selling and may not be good at another such as managing One person is responsible to keep track of inventory, accounting operations and tax records It is hard to attract employees to help run the business due to competition with larger companies offering better benefits
What are some of the advantages of franchising
Personal ownership Lower failure rate Recognized name
True or false: Size is considered both an advantage and disadvantage to incorporating
True
True or false: The failure rate of franchises is lower than other business ventures
True
A franchise owner will experience the coattail effect when:
a fellow franchisee does something that has an impact on growth and profitability
When choosing to form a partnership, a business owner should consider all of the following:
a partner's level of expertise in different areas of business the level of participation of each partner the financial contribution of each partner
Members of democratically control cooperatives by electing a(n) _ of directors that hires professional management
board
The fastest way for a foreign firm to enter the U.S. market may be to _ the operations of a U.S. company
buy
Bruce is meeting with his accountant to choose whether his LLC is to be taxed as a partnership or a corporation. This advantage of forming an LLC is called:
choice of taxation
The joining of films in completely unrelated industries is a(n) _ merger
conglomerate
Increasing the economic power of others and not paying the same taxes are both advantages of _
cooperatives
Corporations have the ability to offer benefits such as stock options which serves to attract talented employees. This is an advantage of the _ form of business
corporate
In obtaining a franchise an important issue to consider when evaluating the market is the
current competition that already exists in your territory
Among the advantages of farm cooperatives for their members is that they:
do not pay taxes as corporations do increase economic power
Mark, Cal, and Aidan have decided to form a business where all owners will share in operating the business and in assuming liability for the business debts. They are most likely forming a(n) _ partnership
general
Drew and Owen are business partners. Drew invested money and manages the business while Owen invested his money, but does not participate in the business management. Drew is considered a _ partner while Owen is considered a _ partner
general limited
Select all attributes that make the initial cost of incorporating a disadvantage
hiring lawyers for consolation enlisting the services of accountants start-up costs associated with documentation
Ending partnerships can be difficult because of problems deciding:
how a partner can retire how to distribute assets the worth of a retiring partner's share
Jane wants to start a new Subway franchise in her town. In the initial stage of investigating, Jane must consider all of the following
how to terminate the franchise the financial strength of the franchisor how much capital is needed to purchase the franchise
Franchises are expanding internationally to access additional _ that have new customers and to increase their profit potential
markets
The main types of partnerships include:
master limited limited general
When two firms join together to form one new company, it is called a(n)_
merger
Franchisors would like their franchisees to "mirror" their customer bases. Therefore, many franchisors, such as Domino's Pizza have developed _ franchisee recruitment initiatives
minority
An advantage of having one or more partners is that:
more financial resources are available more skills and knowledge are available the organization may survive for a longer time
A legal form of business with two or more owners is a(n):
partnership
Termination of a partnership is difficult without a(n) _ agreement
partnership
The partnership business entity is not taxed, because each partner pays tax on the business's profits as their _
personal income
Individuals who start and manage a business are concerned with risk. They may choose to incorporate to decrease:
personal liabilities
Having a partner may share the risk, but it also means sharing _, because each partner must be rewarded for their participation in the business
profits
An advantage of the corporate form of business is that limited liability allows it to:
raise larger sums of money from investors borrow larger sums of money
_ of company profits is considered an advantage of a sole proprietorship
retention
In order to qualify to become a S corporation, a company must have:
shareholders who are individuals or estates no more than 100 shareholders
For a business to grow, prosper, and create economic opportunity, many people have to be willing to invest money in it. An advantage of a corporation is its ability to raise money through the sale of _
shares
The large _ costs for the rights to a franchise can vary from a few thousand to millions of dollars
start-up
A corporation allows people to own _ and share in the profits of the firm
stock
Corporations issue _ to shareholders and this allows ownership to change when it is sold
stock
People who own and manage their own businesses rightfully have pride of ownership because they:
take the risks and provide needed goods and services
Sole proprietors often feel that owning a business is a way of life because they seldom have enough _ to complete all their tasks
time
Funds available for a sole proprietorship are limited to:
what the owner can provide
