Business - Chapter 6 Study Guide

Identify and describe three advantages of general partnerships.

1.) Ability to Pool Financial Resources - With more owners investing in the company, a partnership is likely to have a stronger financial base than a sole proprietorship. 2.) Ability to Share Responsibilities and Capitalizes on Complementary Skills - Partners can share the burden of running the business, which can ease the workload. Tasks and jobs can also be divided based on complementary skills, using each partner's talents to best advantage. 3.) Possible Tax Advantages - The earning of a partnership "pass through" the business--untouched by the IRS--and are only taxed only as the partners' personal income. Again, this avoids the potential for double taxation endemic to corporations.

List and define three disadvantages of forming a general corporation.

1.) Expense and Complexity of Formation and Operation - Establishing corporations can be more complex and expensive than forming a sole proprietorship or partnership. For example, they are required to hold regular board meetings and keep accurate minutes. 2.) Double Taxation of Earnings and Additional Taxes - The IRS considers a C corporation to be a separate legal entity and taxes its earnings accordingly. 3.) More Paperwork, More Regulations, and Less Secrecy - Corporations are more closely regulated and are required to file more government paperwork than other forms of business. Large, publicly traded corporations are required to send annual statements to all shareholders and to file detailed quarterly and annual reports with the Securities and Exchange Commission (SEC).

Describe two disadvantage of franchising for the franchisor.

1.) Lack of Control - The franchise agreement usually requires the franchisee to follow the franchisor's procedures to the letter. People who want the freedom and flexibility to be their own boss can find these restrictions frustrating. 2.) Restrictions on Sale - Franchise agreements normally prevent franchisees from selling their franchises to other investors without approval from the franchisor.

Identify and explain two disadvantages of sole proprietorships.

1.) Limited Ability to Attract and Maintain Talented Employees - Most sole proprietorships are unable to pay the high salaries and substantial perks that are highly qualified, experienced employees get when they work for big, well-established companies. 2.) Heavy Workload and Responsibilities - Being your own boss can be very rewarding, but it can also mean very long hours and a lot of stress. Sole proprietors-- as the ultimate authority in their business--often must perform tasks or make decisions in areas where they lack expertise.

Describe at least one advantage and disadvantage for the franchisee.

Advantage: Training and Support - The types of training and support the franchisor will provide to the franchisee. Disadvantage: Fees and Other Payments - The fees the franchisee must pay for the rights to use the franchisor's products and methods, and when these payments are due.

Discuss why limited liability companies have become increasingly popular.

Also like a corporation--and as its name implies--an LLC offers its owners limited liability for the debts of their business. But its offers more flexibility than a corporation in terms of tax treatment; in fact, one of the most interesting characteristics of an LLC is that its owners can elect to have their business taxed either as a corporation or a partnership.

What is a partnership?

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

Secret

is a partner whose participation in a business partnership is hidden from the public but they are active in the management of the business

General

means that all the partners have unlimited personal liability and take full responsibility for the management of the business.

Silent

this partner is one who shares in the profits and losses of the business but is uninvolved in its management.

Limited

this partner is one whose liability is limited to their investment

List and define three advantages of forming a general corporation.

1.) Limited Liability - Stockholders are not personally liable for the debts of the company. If a corporation bankrupt, the stockholders might find that their stock is worthless, but their other personal assets are protected. 2.) Ease of Transfer of Ownership -It's easy for stockholders of publicly traded C corporations to withdraw from ownerships--they simply sell their shares of stock. 3.) Ability to Make Use of Specialized Management - Large corporations often find it easier to hire highly qualified professional managers than proprietorships and partnerships. Major corporations can typically offer attractive salaries and benefits, and their permanence and potential for growth offer managers opportunities for career advancement.

Identify and describe three disadvantages of general partnerships.

1.) Potential for Disagreements - If general partners can't agree on how to run to the business, the conflict can complicate and delay decision making. A well-drafted partnership agreement usually specifies how disputes will be resolved, but disagreements among partners can create friction and hard feelings that harm morale and undermine the cooperation needed to keep the business on track. 2.) Lack of Continuity - If a current partner withdraws from the partnership, the relationships among the participants will clearly change, potentially ending the partnership. This creates uncertainty about how long a partnership will remain in business. 3.) Difficulty in Withdrawing from a Partnership - A partner who withdraws from a partnership remains personally liable for any debts or obligations the firm had at the time of withdrawal--even if those obligations were incurred by the actions of other partners.

Identify and explain two advantages of sole proprietorships.

1.) Pride of Ownership - One of the main reasons many people prefer a sole proprietorship is the feeling of pride and the personal satisfaction they gain from owning and running their own business. 2.) Retention of Profits - If your business is successful, all the profits go to you -- minus your personal taxes.

Describe two advantage of franchising for the franchisor.

1.) Training and Support - The franchisor normally provides the franchisee with extensive training and support. For example, Subway offers two weeks of training at its headquarters and additional training at meetings. 2.) Brand Recognition - Operating a franchise gives the franchise instant brand-name recognition, which can be a big help in attracting customers.

What is a sole proprietorship?

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

What is franchising?

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.