Unit 1 Challenge 2 objectives and Key Terms- Business Entities

Shareholder Derivative Lawsuit

A lawsuit brought by a shareholder on behalf of the corporation against a third party. Normally an officer would do this, but when he or she fails to take needed action, a shareholder may step in.

Business Judgment Rule

A rule applied by courts that presumes that a business decision made by directors of a corporation is made in good faith that it is in the best interests of the company.

Limited Liability

A limitation on a person's financial liability. In business, this refers to a corporation or a limited liability company (LLC). When one of these entities is sued, the owners of the corporation (shareholders) or of the LLC (members) are typically not liable at all for the acts of the company and only their investment in the company is at stake, not their personal wealth.

Articles of Organization

The state filing required to start an LLC. For corporations, these are called articles of incorporation.

Why are corporations sometimes preferred over sole proprietorships and partnerships? a.) They are less risky, because they better protect the personal assets of shareholders. b.) They are simpler to create and manage. c.) They generally have a lower tax burden. d.) They are more secure, because ownership can never be transferred

They are less risky, because they better protect the personal assets of shareholders.

Which of the following describes a limited partnership? a.) A business with a partner who shares in the profits, but is not liable for debts outside of his or her initial financial contribution b.) A business in which two or more persons have agreed to participate in the day-to-day management of the business c.) A business in which at least one partner shares profits and losses equally, but only for a limited time d.) A small business with a single owner

A business with a partner who shares in the profits, but is not liable for debts outside of his or her initial financial contribution

Which of the following describes a sole proprietorship? a.) A business in which only one partner is fully liable for the business' debts b.) A business with more than one owner, in which each partner is fully and individually responsible for any liabilities incurred by the company c.) A business in which two persons agree to run a single business together d.) A business with a single owner who is responsible for all debts, but individually controls all profits

A business with a single owner who is responsible for all debts, but individually controls all profits

Limited Liability Partnership (LLP)

A form of business organization that allows the partnership to pass through income for tax purposes, but retain limited liability for all partners.

Shareholder

A human being or corporate entity that owns stock in a company but has no legal right to the company's assets.

Limited Liability Company (LLC)

A hybrid between a corporation and a partnership in that it is a separate entity but has fewer formalities than a corporation. It is a simpler form of entity than a corporation but also has limited liability of its owners like a corporation, and unlike a partnership. It can only be formed under state law.

Piercing the Corporate Veil

A judicial process in which a court disregards the protection from personal liability of a corporations' officers, directors, or shareholders when incorporation is viewed as solely for the purpose of perpetuating fraud.

Which of the following describes a general partnership? a.) A business with a single owner who is fully liable for all debts b.) An agreement between two or more persons to operate a business, but in which one partner's losses are limited to what he or she initially invested c.) An agreement between two or more persons to operate a business and share profits and losses d.) An agreement between two separate businesses to form a new business with a single owner

An agreement between two or more persons to operate a business and share profits and losses

Limited Partnership

An unincorporated association formed by two or more individuals to carry on business, and at least one partner is relieved of personal liability for the debts of the partnership, in compliance with special state laws that allow this. The limited partner's liability is limited to his or her investment in the partnership.

General Partnership

An unincorporated association formed by two or more individuals to carry on business, both of whom are personally liable for all debts of the partnership.

Why is incorporation an attractive form of business organization for many new companies? a.) Because there are very few laws that govern corporations b.) Because of the tax advantages that it confers c.) Because it allows parties to invest in the company without taking on significant risk d.) Because it is less burdensome to manage than a sole proprietorship or a partnership

Because it allows parties to invest in the company without taking on significant risk

Which of the following is a consideration when choosing a form of business organization? a.) How much control a business owner wants to retain b.) Which county within a state the business's headquarters will be located c.) Why the business owner chose to enter a particular business field d.) The design of the business's logo

How much control a business owner wants to retain

Partnership

An unincorporated business formed by two or more individuals to make a profit.

Goodwill

In business, the intangible qualities of a business that give it a good reputation; goodwill is considered to have monetary value.

Which of the following is true of the limited liability of corporations a.) It is absolute. b.) It is weaker than that of sole proprietorships. c.) It can be revoked in certain circumstances. d.) It is only applicable to the founding shareholders.

It can be revoked in certain circumstances.

Joint and Several Liability

Liability characterized by the ability of a creditor to sue one or all of the parties at the creditor's option.

Which of the following individuals would benefit most from an LLC? a.) Hector is thinking of starting a business and wants a form of organization that gives him flexibility and adaptability when it comes to taxes. b.) Tessa has a great idea for a start-up and wants a form of business organization that will make it easy for her to raise funds quickly. c.) Veronica is going into business with her friend and thinks they would benefit from a board of directors to help them make major business decisions. d.) Gerald wants to formalize his business, but he's interested in the simplest form of business organization and not really worried about liability.

Tessa has a great idea for a start-up and wants a form of business organization that will make it easy for her to raise funds quickly.

Operating Agreement

The contract between members of an LLC.

Which of the following is a consideration when choosing a form of business organization? a.) The size of the company's customer base b.) The degree of complexity in the business's supply chain c.) The degree of personal liability a business owner wishes to be exposed to d.) The number of market competitors

The degree of personal liability a business owner wishes to be exposed to

Fiduciary

The legal status of a person who is obligated to act in another's best interests, similar to a trustee, with a high degree of care, honesty, and trust.

Franchise

The owner of intellectual property (patents, licenses, trademarks, etc.) who offers to franchisees (individuals or businesses) the use of its protected business ideas to operate a commercial enterprise under the name and mark of the owner.

Which of the following individuals would benefit most from an LLC? a.) Sheri is one of the founders of what is expected to be a large business operation. When it comes to choosing a form of business organization, she values limited liability, but she also wants a board of directors who can make major decisions. b.) Jen has a thriving business that she envisions taking public within a year. She is eager to begin selling stock and raising more funds that she can reinvest in her company. c.) Dave has a great idea for a business, but he hopes that once it gets up and running, he can be a "silent" partner and not have to participate in any day-to-day management. d.) Colin wants to start a business with five of his friends, but they want their business to be a separate entity that protects them from personal liability. They also do not want to deal with burdensome obligations like annual meetings.

Colin wants to start a business with five of his friends, but they want their business to be a separate entity that protects them from personal liability. They also do not want to deal with burdensome obligations like annual meetings.

Corporation

A business that is chartered by state law and requires a uniform structure such as shareholders who elect a board of directors who then elect officers. Regular meetings of record are required. The owners of a corporation (shareholders) are not liable for the business. Only the corporation itself is liable for the business's debts and judgments.

Sole Proprietorship

A business that is owned by one individual alone. This business and the individual who owns the business are one and the same and there is no separation between them, and the owner is fully liable for the business.

Franchisor

A company (such as McDonald's) that enters into a contract with a franchisee (an individual or business) to use the franchisor's intellectual property (patents, licenses, trademarks, etc.) and operate a business as part of the franchise (such as an individual McDonald's restaurant).