Chapter 6 Business quiz

stockholder

An owner of a corporation

Explain why limited liability companies are becoming an increasingly popular form of business ownership.

Limited liability companies (LLCs) are attractive because they avoid the problem of double taxation endemic to C corporations, while giving all owners the protection of limited liability. In this sense, LLCs are similar to S corporations, but without the restrictions on ownership. LLCs also face fewer regulations than corporations and give the owners the flexibility to either manage the company themselves or hire professional managers.

corporate bylaws

The basic rules governing how a corporation is organized and how it conducts its business.

franchisor

The business entity in a franchise relationship that allows others to operate its business using resources it supplies in exchange for money and other considerations.

divestiture

The transfer of total or partial ownership of some of a firm's operations to investors or to another company.

business format franchise

A broad franchise agreement in which the franchisee pays for the right to use the name, trademark, and business and production methods of the franchisor.

vertical merger

A combination of firms at different stages in the production of a good or service.

horizontal merger

A combination of two firms that are in the same industry.

conglomerate merger

A combination of two firms that are in unrelated industries

acquisition

A corporate restructuring in which one firm buys another

merger

A corporate restructuring that occurs when two formerly independent business entities combine to form a new organization

nonprofit corporation

A corporation that does not seek to earn a profit and differs in several fundamental respects from C corporations.

statutory close (or closed) corporation

A corporation with a limited number of owners that operates under simpler, less formal rules than a C corporation.

Franchise Disclosure Document (FDD)

A detailed description of all aspects of a franchise that the franchisor must provide to the franchisee at least 14 calendar days before the franchise agreement is signed.

corporation

A form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners.

Limited Liability Company (LLC)

A form of business ownership that offers both limited liability to its owners and flexible tax treatment.

sole proprietorship

A form of business ownership with a single owner who usually actively manages the company.

S corporation

A form of corporation that avoids double taxation by having its income taxed as if it were a partnership.

limited liability partnership (LLP)

A form of partnership in which all partners have the right to participate in management and have limited liability for company debts.

Evaluate the advantages and disadvantages of franchising.

A franchise is a licensing arrangement under which one party (the franchisor) allows another party (the franchisee) to use its name, trademark, patents, copyrights, business methods, and other property in exchange for monetary payments and other considerations. The franchisor gains revenue without the need to invest its own money. The franchisee gains the right to use a well-known brand name and proven business methods and often receives training and support from the franchisor. On the downside, franchisors often find that dealing with a large number of franchisees can be complex and challenging. For franchisees, the main drawbacks are the monetary payments (fees and royalties) they must pay to the franchisor and the loss of control over management of their business.

franchise

A licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, business methods, and other property in exchange for monetary payments and other considerations

There are two other common types of partnerships.

A limited partnership must have at least one general partner and at least one limited partner. General partners actively manage the company and have unlimited liability for the company's debts. Limited partners have limited liability but may not actively manage the partnership. In a limited liability partnership, all partners may manage their company and are protected by some degree of limited liability for the debts of their firm.

General Partnership

A partnership in which all partners can take an active role in managing the business and have unlimited liability for any claims against the firm.

limited partnership

A partnership that includes at least one general partner who actively manages the company and accepts unlimited liability and one limited partner who gives up the right to actively manage the company in exchange for limited liability.

Describe the characteristics of the four basic forms of business ownership.

A sole proprietorship is a business that is owned, and usually managed, by a single person. A partnership is a voluntary arrangement under which two or more people act as co-owners of a business for profit. A corporation is a legal entity created by filing a document (known in most states as the "articles of incorporation") with a state agency. A corporation is considered to be separate and distinct from its owners, who have limited liability for the debts of their company. A limited liability company (LLC) is a relatively new form of business ownership that, like a corporation, offers limited liability to all of its owners. However, LLCs offer more flexibility in tax treatment and have simpler operating requirements.

Discuss the advantages and disadvantages of a sole proprietorship.

A sole proprietorship is the simplest and least expensive form of ownership to establish. It offers the single owner the flexibility of running the business without having to seek the approval of other owners. If the business is successful, the sole proprietor retains all of the profits. Finally, the earnings of a sole proprietorship are taxed only as income of the owner, with no separate tax levied on the business itself. One key disadvantage of a sole proprietorship is that the single owner has unlimited liability for the debts of the business. Sole proprietors also often work long hours and assume heavy responsibilities, and they may have difficulty raising funds for expansion. Another drawback of sole proprietorships is their limited life. 6-3

distributorship

A type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it

partnership

A voluntary agreement under which two or more people act as co-owners of a business for profit.

institutional investor

An organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and other securities.

franchise agreement

The contractual arrangement between a franchisor and franchisee that spells out the duties and responsibilities of both parties.

Articles of Corporation

The document filed with a state government to establish the existence of a new corporation

board of directors

The individuals who are elected by stockholders of a corporation to represent their interests

Evaluate the pros and cons of the partnership as a form of business ownership.

The most basic type of partnership is a general partnership, in which each co-owner may take an active role in management. Compared to the sole proprietorships, a general partnership offers the advantages of pooled financial resources and the benefits of a shared workload that can take advantage of complementary skills. The earnings of general partnerships are taxed only as income to the partners; there is no separate income tax on the business itself. One major disadvantage of a general partnership is that each owner has unlimited liability for the debts of the company. Moreover, disagreements among partners can complicate decision making. Finally, the death or withdrawal of a partner can create instability and uncertainty in the management and financing of the company.

Explain why corporations have become the dominant form of business ownership.

The most common form of corporation is the C corporation. All stockholders (the owners of a C corporation) have limited liability for company debts. C corporations can raise financial capital by issuing bonds or shares of stock, giving them an advantage when it comes to financing growth. Other advantages include unlimited life, easy transfer of ownership, and the ability to take advantage of professional management. But forming a corporation can be more complex and expensive than forming a partnership. Another drawback is that any profits distributed to stockholders are taxed twice—once as income to the corporation, then again as income to the stockholders. Corporations are also subject to extensive government regulation.

C Corporation

The most common type of corporation, which is a legal business entity that offers limited liability to all of its owners, who are called stockholders.

franchisee

The party in a franchise relationship that pays for the right to use resources supplied by the franchisor.

limited liability

When owners are not personally liable for claims against their firm. Owners with limited liability may lose their investment in the company, but their other personal assets are protected