Ch. 05: Forms of Business

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

While your are still your own boss as a franchise owner, your territory or selling boundaries may be regulated by the franchisor.

True

Many firms incorporate in the states of __________ or __________ because those states' laws make the process easier than in other states.

Deleware; Nevada

Which statements are accurate as related to corporate taxation?

Double taxation occurs Stockholders pay income tax on the dividends they receive

Which of these are considered an advantage of corporations?

Ease of transfer of ownership

The coattail effect in franchising means that you will do well as long as other franchises are doing well, even if your particular franchise is not profitable.

False

True or false: Corporations must be large in size to benefit from the advantages of incorporating.

False

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 the top of the managerial hierarchy.

Owners/stockholders elect board of directors Board of Directors hire officers of the corporation Officers hire managers of the corporation Managers hire employees

Which of following are true about the advantages and disadvantages of being a franchise owner:

While the upfront costs of a franchise may be steep, a franchise has a better chance of succeeding than starting a business from scratch Having a nationally recognized name for your business in a franchise can help with marketing and awareness

One company's purchase of the property and obligations of another company is a(n) __________.

acquisition

One company's purchase of the property and obligations of another is called a(n):

acquisition

A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships is:

an S corporation

In a leveraged buyout, employees, managers, or investors finance the purchase of the company by:

borrowing against its assets

Many people do not like working for someone, so being your own __________ is an advantage of sole proprietorships.

boss

The actions of a fellow franchisee will affect your franchise. This is known as the __________ __________.

coattail effect

A business owned and controlled through pooled resources by the people who use it is a(n) ______.

cooperative

A state-chartered legal entity with authority to act and have liability separate from its owners is a:

corporation

It is important to have Articles of Partnership because problems between partners may occur due to

disagreements over dividing profits

Sole proprietors keep all of their profits, but partners must __________ profits based on their partnership agreement.

divide

A major disadvantage of the corporate form deals with the tax situation called __________ taxation.

double

Franchises are important to the __________ because of the number of new businesses started and jobs created.

economy

A disadvantage of franchises is that most demand a __________ from the franchisee for the right to start the franchise.

fee

An entrepreneur would buy a __________ if they are uncomfortable starting their business from scratch.

franchise

Many minority business owners prefer a(n) __________ because it offers business connections and support.

franchise

Businesses that are __________, like McDonald's, have both a direct and indirect impact on the economy through job creation and spending.

franchises

If you are your own boss, you are responsible for paying your own wages/salary and for your own

fringe benefits

The three major types of partnerships are:

general, limited, and master limited

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

A merger of two firms in the same industry that allows the companies to diversify or expand their products is a(n):

horizontal merger

Double taxation of a corporation occurs because the company pays tax on __________, and then individual shareholders pay income tax on the dividends they receive.

income

An entrepreneur could choose to buy a franchise because:

it is less stressful than starting a business from scratch it can be started as a sole proprietorship, partnership, or corporation it's a business brand with a proven track record

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

Leaving a __________ means owners can leave an ongoing business for future generations.

legacy

A __________ __________ can be initiated by employees, managers, or investors who borrow necessary funds to purchase all shares of a firm's stock.

leveraged buyout

In a general partnership, all partners share the responsibility for operating the business and assume __________ for the business's debts.

liability

An S corporation has the liability protections of a corporation but is taxed:

like a partnership or sole proprietorship

The limited partners' risk of losing their personal assets in an LLP is:

limited to the outcomes of their own acts and omissions

Home-based franchises have many advantages, such as:

low overhead expenses relief from the stress of commuting

Franchises offer those starting a business the advantage of a recognized name, management assistance, and:

lower failure rates

The result of two firms joining to form one is called a(n):

merger

When two firms join together to form one new company, it is called a(n) __________.

merger

Advantages of starting an online franchise are:

no upfront fee may be required online franchisees can compete in world markets franchisees pay only a set monthly fee

A key advantage of a home-based franchise is low __________ costs, which can be ongoing. These are the costs associated with rent, utilities, and other fixed costs.

overhead

LLCs can be taxed as __________ or __________, which allows the business owners to choose their method of taxation.

partnerships; corporations

Through flexible distribution of profits and losses, LLC members agree on the __________ of profits/losses to be distributed to each member.

percentage

Having __________ __________ means that a corporation's existence will not terminate if one or more owners die.

perpetual life

When a corporation is separate from its owners and does not terminate with the death of one owner, the corporation has:

perpetual life

Taking a firm __________ is when a corporation decides to maintain, or in some cases regain, control of a firm internally by obtaining all of the stock.

private

Stockholders are __________ from the managers and employees of the firm because they are not actively involved in the operations of the firm.

separate

If you start and manage a landscaping business on your own, you have likely started a:

sole proprietorship

Rather than merge assets or sell to another company, a firm is taken private when management, or a group of stockholders, obtain all of the firm's __________.

stock

When any debts or damages incurred by the business are your debts or damages it is called __________ liability.

unlimited

The disadvantage of sole proprietorships is that any debts or losses incurred by the business are your debts because you and the business are legally one and you have:

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 e-commerce technology

True or false: Partnerships are less likely to survive than sole proprietorships.

False

Which are considered disadvantages of incorporating?

Extensive paperwork Double Taxation Initial Cost

What are the advantages of the LLC form of organization?

Flexible ownership rules Choice of taxation Limited liability

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

What are some of the disadvantages of operating a franchise?

Large start-up costs Shared profit Management regulation

What are some of the advantages of a corporation?

Limited liability Ability to raise more money for investment

Which of these are advantages of a limited liability companies?

Limited liability Choice of taxation Flexible ownership rules

What are some of the disadvantages of an LLC?

More paperwork than sole proprietors Self-employment taxes

What are some of the advantages of franchising?

Recognized name Lower failure rate Financial advice

Which is the easiest form of business to start up?

Sole proprietorship

Which of the following are true regarding the process of forming a corporation.

The bylaws of the corporation describe how the firm is to be operated The articles of incorporation must be filed in the state in which the company will be incorporated

Select all attributes that make the initial cost of incorporating a disadvantage.

The high cost of hiring lawyers and accountants for the complex filings needed High start-up costs associated with documentation

True or false: The failure rate of franchises is lower than other business ventures.

True

True or false: The owner of a sole proprietorship is responsible for developing any fringe benefits they have.

True

Select the disadvantages of a partnership.

Unlimited liability Partner disagreements Division of profit

A franchise owner will experience the coattail effect when:

a fellow franchisee does something that has an impact on growth and profitability

Because owners are only responsible for losses up to the amount they have invested in a corporation, limited liability is considered:

a major advantage

A partnership __________ can spell out the requirements of terminating a partnership.

agreement

A corporation is formally formed with:

articles of incorporation and bylaws

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

When the actions of others with the same franchise as yours have an impact on your future growth and profitability, this is an example of __________ effects.

coattail

The joining of firms in completely unrelated industries is a(n) __________ merger.

conglomerate

A merger that joins firms in completely unrelated industries is a:

conglomerate merger

Termination of a partnership is difficult without a(n) ______ agreement.

partnership

A(n) __________ is a state-chartered entity that exists in the eyes of the law and controls risk to the owners of the firm.

corporation

Except for states like Delaware, _______ creates a disadvantage to incorporating.

extensive paperwork

Historically, the __________ rate for franchises has been lower than that of other business ventures.

failure

The right to use a specific business' name and sell its products or services in a given territory is a(n) __________ agreement.

franchise

Ed has decided to purchase and follow a business format by becoming a franchisee. The __________ __________ he will sign gives him the right to use the business name and sell the products of the firm.

franchise agreement

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

The attributes of a conventional corporation include that:

it is a legal entity corporate liability is separate from owners it is state chartered

One advantage of a partnership is that:

it is easier to raise money

An advantage of the corporate form of business is that limited liability allows it to:

limit individual responsibility for losses

A __________ partnership has partners who do not share in operating the business.

limited

A key advantage of LLCs is __________ liability where personal assets are protected.

limited

Taryn and Eilysh have decided to form a partnership. Taryn will not have management responsibility, but will invest money in the business. Taryn will be considered a(n) __________ partner.

limited

The responsibility for a loss only up to the amount invested is __________ liability.

limited

A form of business ownership that provides limited liability, as in a corporation, but is taxed like a partnership is a(n) __________ __________ company.

limited liability

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

Stockholders' liability for losses only up to the amount they invest is called ______________.

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

When the continued operation of the business is dependent on the life of the business owner, it is referred to as:

limited life span

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

About 30 percent of franchises are owned by African Americans, Latinos, Asians, and Native Americans. Franchisors are becoming more focused on recruiting __________ franchisees.

minority

The various responsibilities of each partner, especially any issues involving __________, should be agreed to in discussions and put in writing before agreeing to a partnership.

money

A legal form of business with two or more owners is a(n):

partnership

An LLC submits a written operating agreement, similar to a(n) __________ agreement, describing how the company is to be operated.

partnership

Unlimited liability as it relates to sole proprietorships is the risk of loss of __________ assets beyond the assets of the business.

personal

Limited liability is considered an advantage of forming an LLC because:

personal assets are protected

Flexible distribution of profits and losses is considered an advantage of an LLC because:

profits/losses do not have to be distributed in proportion to the money each person invests

The share of profits or sales revenue paid to the franchisor are called __________.

royalties

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

Corporations can raise large amounts of money, take advantage of economies of scale, and hire experts in all areas of operation. This can be summarized as ______ advantage.

size

A business that is owned and managed by one person is a(n)

sole proprietorship

Studies have indicated that partnerships are four times more likely to succeed than:

sole proprietorships

The large __________ costs for the rights to a franchise can vary from a few thousand to millions of dollars.

startup

A corporation can sell __________ to anyone who is interested to raise more money for investment.

stock

Ease of ownership means that buying or selling __________ is all that is necessary to become an owner or past owner of a corporation.

stock

Many franchises are expanding internationally because:

there are large new markets available

One of the most notable advantages of an online franchise is

there is no brick-and-mortar real estate cost.

When you own a sole proprietorship you and the business are considered one, so you have __________ liability for financial obligations such as debt.

unlimited

A key disadvantage of operating a sole proprietorship is:

unlimited liability

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

A merger that joins two companies involved in different but related levels of an industry is a(n) ______ merger.

vertical

When two firms operating in different stages of related businesses join, it is called a(n) __________ merger.

vertical

True or false: If producers, consumers, or workers with similar needs pool their resources for mutual gain, they have created a franchise.

False

True or false: If you and a friend start a business together, you have started a sole proprietorship.

False

Franchisors often use technology to meet the needs of both their customers and their __________ because technology makes communication faster and more widespread.

franchisees

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

The start-up costs of filing for incorporation are high because:

lawyers and accountants are needed to do the complex filings