Chapter 06 Business Formation: Choosing the Form That Fits

(6-4)In a ______ divestiture, the parent company sells some or all of the shares in a unit or division to the public through an initial public offering or IPO. "spin-off" "carve-out" "split-up" "sell-off"

-"carve-out" In a "carve-out" divestiture, the parent company sells some or all of the shares in a unit or division to the public through an initial public offering or IPO.

Annmarie started making earrings as a hobby, and she would give them to friends and family as gifts. Some of her friends started requesting more jewelry and even offered to pay Annmarie for her work. This prompted her to set up a website where she could sell her jewelry to a wider audience. Although she is just getting started, Annmarie believes that she can grow the business by investing more of her time into marketing her products and coming up with new designs. Annmarie has not filed any articles of incorporation. What kind of business has Annmarie formed? -A limited liability company -A sole proprietorship -A C corporation -A general partnership

-A sole proprietorship Sole proprietorship is a form of business ownership with a single owner who usually actively manages the company.

(6-1)_______ are a form of business in which the business is considered a legal entity that is separate and distinct from its owners. -Corporations -Limited liability companies (LLCs) -Sole proprietorships -Partnerships

-Corporations Corporations are a form of business in which the business is considered a legal entity that is separate and distinct from its owners.

(6-3)Which of the following is true about taxes for partnerships? -Partnerships are exempt from taxes. -Earnings pass through the business and are taxed as the owners' personal income. -Partnerships are only taxed on profits after the owners are paid their personal incomes. -Profits are taxed as the owners' personal income and again as dividends distributed to stockholders.

-Earnings pass through the business and are taxed as the owners' personal income. In a partnership, earnings pass through the business and are taxed as the owners' personal income.

(6-2)To form a sole proprietorship, owners are not required to fill out any special forms or pay any fees. This refers to which of the advantages of sole proprietorships? -Retention of control -Possible tax advantages -Ease of formation -Retention of profits

-Ease of formation Ease of formation means that there are no special forms to be filed or fees to be paid

(6-5)Which of the following is a disadvantage or limitation of limited liability companies (LLCs)? -They are required to hold annual board meetings. -Earnings are taxed as personal income of the owners. -They have limited ability to attract and maintain talent. -Operating in more than one state can be challenging.

-Operating in more than one state can be challenging. State laws regarding LLCs vary considerably. Operating in more than one state is a complicated undertaking.

(6-4)Which of the following is true about C corporations? -Corporations are relatively easy and inexpensive to form. -A corporation's earnings are taxed once, as personal income of the owners. -Owners have limited liability. -Corporations cannot continue to operate when an owner withdraws or passes away.

-Owners have limited liability. Owners of corporations have limited liability.

(6-2)The owner of a sole proprietorship is personally responsible for any debt the company incurs refers to which disadvantage of sole proprietorships? -Lack of permanence -Unlimited liability -Heavy workload and responsibilities -Lack of financial resources

-Unlimited liability Unlimited liability means the owner of a sole proprietorship is personally responsible for any debt the company incurs.

RxBar was the brainchild of Peter Rahal and Jared Smith, who made the first batch of the product, which includes egg whites, dried fruit, nuts, and dates, in Peter's parents' basement. After a few years of solid growth, Peter and Jared sold their company, the Chicago Bar Co., to The Kellogg Company. Kellogg's ________ of the Chicago Bar Co. allowed the company to use its expertise in brand-building to accelerate RxBar's growth among health-conscious consumers around the United States. -divestiture -conglomerate merger -acquisition -vertical merger

-acquisition An acquisition is a type of corporate restructuring in which one firm buys another.

(6-4)The ________ set the mission and broad objectives for a corporation and appoint a CEO. -board of directors -corporation owners -institutional investors -stockholders

-board of directors The board of directors set the mission and broad objectives for a corporation and appoint a CEO.

(6-4)Owners of ______ can vote in stockholders' meetings. -limited stock -institutional stock -common stock -preferred stock

-common stock Owners of common stock can vote in stockholders' meetings.

(6-4)The basic rules that govern a corporation are called _______. -a code of ethics -a partnership agreement -corporate bylaws -articles of incorporation

-corporate bylaws Corporate bylaws are the basic rules that govern a corporation.

(6-6)In a _______, the franchisor makes a product and grants distributors a license to sell the product. -Franchise Disclosure Document (FDD) -franchise agreement -business format franchise -distributorship

-distributorship A distributorship is a franchise agreement in which the franchisor makes a product and grants distributors a license to sell the product.

Chick-fil-A is known for having one of the most desirable _____________. In fact, it is harder to become the owner of a local Chick-fil-A than it is to get into Princeton University. One reason is that the contract doesn't require any upfront investment from the local owner. Another is that Chick-fil-A promises to provide top-notch support and training to ensure that each location is successful. -franchisees -distributorships -franchisors -franchise agreements

-franchise agreements A franchise agreement is a contractual arrangement between a franchisor and franchisee that spells out the duties and responsibilities of both parties.

Rory is in talks with Camp Bow Wow, a dog care services company, to establish a new location in Nashville, Tennessee. Before she signs any contracts, Rory wants to understand what kind of support the company will provide her as she opens the business. She also wants to know what will be expected of her in return. Rory should ask Camp Bow Wow for their __________. -franchise agreement -franchise disclosure document (FDD) -franchisee -franchisor

-franchise disclosure document (FDD) A franchise disclosure document (FDD) is 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.

Ricardo has always wanted to own his own business, but he doesn't want to have to build a brand from the ground up. After doing some research, he realizes that the best way to reconcile his entrepreneurial spirit with his reluctance to start from scratch is to become a ________. That way, he can leverage the power of an existing brand while still managing his own business. -franchisee -general partner -distributor -franchisor

-franchisee A franchisee is a party in a franchise relationship that pays for the right to use resources supplied by the franchisor.

Ray Kroc bought a small fast food restaurant called McDonald's in 1961. Under his ownership, the restaurant became so popular that he needed help rapidly expanding into new locations around the United States, and eventually the world. To help with this rapid growth, McDonald's became a _______, allowing others to enter into strict contracts that allowed them to use McDonald's branding, recipes, building design, and operational procedures in exchange for a percentage of revenues. -general partner -franchisee -franchisor -distributorship

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

(6-4)An acquisition in which the target firm is being purchased unwillingly is called a _______. -divestiture -conglomerate merger -proxy fight -hostile takeover

-hostile takeover A hostile takeover occurs when the target firm is being purchased unwillingly.

Cecilia started her own business offering accounting services to small businesses. She filed articles of incorporation to her state's corporation commission and named her company Grow Smart, LLC. Cecilia didn't mind having to put together the paperwork and pay a fee to incorporate her business; she was happy to do so to ensure she had __________ and the flexibility to add more owners and investors as her business grows. -limited liability -a sole proprietorship -unlimited liability -a limited partnership

-limited liability Limited liability is 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.

Omar and Jaqueline want to open their own law practice. Both are ready to invest in startup costs, like paying rent for an office space and putting together a website that helps advertise their new firm. The only thing that is holding them back is the fear of losing personal assets if the business does not do well, and if they are unable to repay business-associated debts with their revenues. Based on these concerns, Omar and Jaqueline should explore forming a(n) __________. -S corporation -sole proprietorship -limited liability partnership (LLP) -limited partnership

-limited liability partnership (LLP) A limited liability partnership (LLP) is a form of partnership in which all partners have the right to participate in management and have limited liability for company debts.

Lara and Armando have pooled their money to open a high-end hair salon in Manhattan, New York. Lara is an experienced stylist who is responsible for the overall operations of the salon, while Armando is an investor who does not actively participate in managing any part of the business. If the business were to fail, Lara would be personally liable for the business' debts. Armando, however, would not assume any personal liability. This is because they have formed a __________. -limited partnership -general partnership -sole proprietorship -C corporation

-limited partnership A limited partnership is a partnership arrangement that includes at least one general partner and at least one limited partner.

(6-3)In a _______, some partners do not participate in managing the business and in return receive limited liability. -general partnership -limited partnership -liability partnership -limited liability partnership (LLP)

-limited partnership In a limited partnership, some partners do not participate in managing the business and in return receive limited liability.

Dev works at a corporation called First Tee, whose mission is to "introduce the game of golf and its inherent values to kids and teens." Although Dev's company is a corporation, there are no stockholders, and their earnings are tax-exempt. Dev's company is a(n) ___________. -S corporation -statutory close (or closed) corporation -nonprofit corporation -C corporation

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

Jasmine works at the Small Business Development Center in Phoenix, Arizona. One of the first questions many potential business owners ask is about the ideal form of business ownership for their new business. Jasmine has been working with Val, an SBDC client who would like to start his own business. Refer to Scenario 6.1. Val mentions to Jasmine that he has a friend who may join him in starting the pierogi truck. His friend has experience with marketing and operations, whereas Val is more experienced in restaurant management. They would plan to divide tasks a certain way to make sure that the work is divided fairly. Jasmine explains that the business ownership option he is describing is a(n) ____________. -partnership -S corporation -sole proprietorship -corporation

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

When starting her consulting business, Ekaterina was worried about having to fill out complicated paperwork and doing taxes for both her personal and business incomes. She was less concerned about losing her personal assets because her startup costs were minimal (all she needed was a laptop and some business cards). She started a _________ for its ease of formation and possible tax advantages. -sole proprietorship -C corporation -general partnership -limited liability partnership (LLP)

-sole proprietorship A sole proprietorship is a form of business ownership with a single owner who usually actively manages the company. Sole proprietorships are easy to form: owners do not need to file any special paperwork and they are only taxed based on their income.

(6-1)The most common form of business in the United States is a_______.

-sole proprietorship The most common form of business in the United States is a sole proprietorship. More than 70% of all businesses are sole proprietorships.

(6-4)All of the following are true about the owners of a corporation except _______. -stockholders appoint the chief executive officer (CEO) and other corporate officers -stockholders elect a board of directors to represent their interests -common stock owners of a corporation can vote in stockholders' meetings -stockholders have limited liability

-stockholders appoint the chief executive officer (CEO) and other corporate officers Owners of a corporation, called stockholders, can vote in stockholders' meetings if they own common stock. They have limited liability and they elect a board of directors to represent their interests. They do not appoint the chief executive officer or other corporate officers.

(6-4)A disadvantage of a statutory close corporation is _______. -each stockholder must be a U.S. citizen or a permanent resident of the United States -it must keep accurate records and file paperwork to document its tax-exempt status -it cannot contribute funds to a political campaign -stockholders must offer their shares to existing owners before being able to sell them to the public

-stockholders must offer their shares to existing owners before being able to sell them to the public Stockholders offering their shares to existing owners before being able to sell them to the public is a disadvantage of statutory close corporations.

Hannah owns a restaurant group that incorporated as a limited liability company (LLC) in Ohio. One of her top-performing restaurants, Mrs. Newman's Pie Factory, has been invited to open a location in Pittsburgh, which is just two hours away from the original location. Even though the two locations are so close, Hannah knows that she will have to file additional paperwork and pay separate taxes and fees in order to operate her business in Pennsylvania. This additional work is driven by ___________ that Hannah must deal with as the owner of an LLC. -the annual franchise tax -the differences in state laws -the company's foreign status in other states -the complexity of formation

-the company's foreign status in other states Like corporations, LLCs must register or qualify to operate as "foreign" companies when they do business in states other than the state in which they were organized. This results in additional paperwork, fees, and taxes.

(6-6)A_______is a contractual arrangement where the______agrees to meet the operating requirements of a_______.

Franchise, Franchisee,Franchisor. A franchise is a contractual arrangement where the franchisee agrees to meet the operating requirements of a franchisor.A franchise is a contractual arrangement where the franchisee agrees to meet the operating requirements of a franchisor.A franchise is a contractual arrangement where the franchisee agrees to meet the operating requirements of a franchisor.

Siti is the CEO of a tech company in California. She is planning a new product launch, and she will need to hire a few new developers and engineers to get the product ready. She raised money for her company by issuing common stock on the New York Stock Exchange (NYSE). What kind of business is Siti running? -A C corporation -A general partnership -A sole proprietorship -A limited liability partnership (LLP)

-A C corporation C corporations are 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.

Patricia and Yon started a coffee shop together. Patricia is in charge of managing food prep and marketing while Yon manages coffee roasting and hiring. They try to split up all other tasks evenly. Patricia and Yon have most likely formed what kind of business? -A C corporation -A sole proprietorship -A limited liability company -A general partnership

-A general partnership A general partnership is 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.

(6-3)One owner in a partnership may be the creative force behind the business's product, while another is excellent at managing the finances of the business. This is an example of which advantage of general partnerships? -Ability to share responsibilities and capitalize on complementary skills -Potential for disagreements -Ease of formation -Ability to pool financial resources

-Ability to share responsibilities and capitalize on complementary skills The responsibilities of running the business can be shared, and each partner's skills can be used to the best benefit of the company.

(6-10)Heidi and Sue discuss culture as it relates to Camp Bow Wow franchises. The company's strong culture is a huge benefit for franchise owners because customers know the company, what they stand for, and how they will treat pets. This relates to which advantage of franchising for the franchisee? -Less risk -Brand recognition -Easier access to funding -Training and support -Assessment question

-Brand recognition The advantage of brand recognition relates to helping attract customers.

(6-5)Which of the following is true of limited liability companies (LLCs)? -Certain types of businesses may not be able to form LLCs. -They are required to hold annual board meetings. -Like S corporations, they are limited in the number of owners they can have. -Owners have unlimited liability.

-Certain types of businesses may not be able to form LLCs. Some states prohibit banks, insurance companies, and nonprofit organizations from operating as LLCs.

(6-1)________ offer limited liability to owners. -Partnerships and sole proprietorships -Sole proprietorships and corporations -Corporations and limited liability companies (LLCs) -Limited liability companies (LLCs) and partnerships

-Corporations and limited liability companies (LLCs) Corporations and LLCs offer limited liability to owners.

Ahmad is a sole proprietor. When he decided to start selling his handmade greeting cards, he set up a website and started advertising his business, Daily Smiles, through social media. He did not have to file any special paperwork with the government or pay special fees to make Daily Smiles an official business. Which benefit of sole proprietorship does this describe? -Possible tax advantage -Ease of formation -Retention of control -Retention of profit

-Ease of formation Ease of formation refers to the steps required to legally start a business. Unlike some other forms of ownership, sole proprietors do not need to file any special paperwork or pay special fees in order to start their businesses.

(6-4)Being able to easily sell stock of publicly traded corporations illustrates which advantage of C corporations? -Ease of transfer of ownership -Double taxation of earnings and additional taxes -Ability to raise large amounts of financial capital -Permanence

-Ease of transfer of ownership Stockholders of publicly traded C corporations can easily sell their stock at any time, thereby transferring ownership.

(6-6)Which of the following is an advantage for the franchisor? -Expanding the business -Brand recognition -Training and support -Easier access to funding

-Expanding the business For the franchisor, advantages include expanding the business and bringing in additional revenue without investing their own capital.

When Jerome started his computer repair service, he was the only owner. As his business picked up, he soon realized he would need to expand his operations. Luckily, he was able to bring on additional owners who were willing to invest in the company and help him create a long-term growth strategy. Which benefit of forming a limited liability company (LLC) does this describe? -Simplicity and flexibility in management and operations -Flexible ownership -Tax pass-through -Limited liability

-Flexible ownership LLCs can have any number of owners, and the owners of LLCs can include foreign investors and other corporations.

(6-4)______ seek to increase size and market power within the industry and improve efficiency by eliminating duplication of facilities and personnel. -Vertical mergers -Conglomerate mergers -Horizontal mergers -Divestitures

-Horizontal mergers A horizontal merger is the combination of two firms that are in the same industry. They seek to increase size and market power within the industry and improve efficiency by eliminating duplication of facilities and personnel.

(6-1)_______ are a form of business that offers both limited liability to its owners and flexible tax treatment. -Partnerships -Limited liability companies (LLCs) -Sole proprietorships -Corporations

-Limited liability companies (LLCs) Limited liability companies (LLCs) are a form of business that offers both limited liability to its owners and flexible tax treatment.

(6-10)When choosing the form of business for Camp Bow Wow, Heidi wanted to limit her responsibility for debts or obligations the business might incur. Although the safety of the dogs was her first priority, Heidi worried that if a "camper" was injured while at Camp Bow Wow, she could be responsible for veterinary care. Additionally, Camp Bow Wow was Heidi's main source of income, and she would be the only owner. As a result, Heidi wanted to be sure that the company's earnings weren't reduced through double taxation. Considering these factors, which form of business was best for Camp Bow Wow? -Limited liability company (LLC) -Sole proprietorship -Corporation -General partnership

-Limited liability company (LLC) The limited liability company (LLC) offers both limited liability and pass-through taxation.

(6-6)For a franchisee, which of the following is a disadvantage of owning a franchise? -Keeping a large number of franchisees satisfied -Negative actions of other franchisees could impact the business -Being required to sign a franchise agreement -Difficulty securing financial capital

-Negative actions of other franchisees could impact the business The negative halo effect means that negative actions of other franchisees could impact the business.

(6-4)________ cannot distribute dividends. -Statutory close corporations -S corporations -C corporations -Nonprofit corporations

-Nonprofit corporations Nonprofit corporations cannot distribute dividends.

(6-10)In 2014, Camp Bow Wow was bought by VCA, Inc., a company that operates more than 1,000 animal hospitals in the United States and Canada. In 2017, VCA was purchased by Mars Inc. Before buying VCA, the Petcare division of Mars Inc. already owned Banfield Pet Hospital, and BluePearl specialty and emergency pet hospital. Mars Inc. also owns a variety of brands including 3 Musketeers, Dove, Milky Way, Combos, and Ben's Original, as well as pet care brands Iams, Whiskas, Pedigree, and Temptations. Each of these transactions are considered _______. -acquisitions -vertical mergers -conglomerate mergers -horizontal mergers

-acquisitions Each of these transactions are acquisitions because the companies did not merge as equals to form a new company.

(6-5)Although limited liability companies (LLCs) have tax pass-through advantages, they are required to pay _______. -an annual franchise tax -liability tax -dividends to stockholders -taxes on company profits

-an annual franchise tax LLCs are required to pay an annual franchise tax to remain in good standing.

The J.M. Smucker Company is widely known for selling jams and jellies, but over the past few decades, the company has experimented with other product offerings, such as coffee, baking products, natural foods and juices, and, finally, pet food and treats. Refer to Scenario 6.2. Around the same time that The J.M. Smucker Company sold the Pillsbury brand, the company decided to purchase a firm, Big Heart Pet, which operated in a completely different industry: pet food and treats. This ____________ allowed The J.M. Smucker Company to diversify its product offerings even further. -conglomerate merger -vertical merger -divestiture -horizontal merger

-conglomerate merger A conglomerate merger is a combination of two firms that are in unrelated industries.

Jasmine works at the Small Business Development Center in Phoenix, Arizona. One of the first questions many potential business owners ask is about the ideal form of business ownership for their new business. Jasmine has been working with Val, an SBDC client who would like to start his own business. Refer to Scenario 6.1. Val's long-term plan is to expand his pierogi truck into a brick-and-mortar restaurant. Eventually, he would like to open numerous locations of his restaurant in cities around the United States. Once he grows to that level, Val would like to file articles of incorporation that establish his business as a separate entity, where all of his business assets are separate from any of his personal assets. Jasmine explains that he is describing a ____________. -limited liability company (LLC) -sole proprietorship -partnership -corporation

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

Manoj agreed to make his auto repair services company a _________ for the Goodyear Tire & Rubber Company. As part of this agreement, he will only sell tires made by Goodyear to his customers, and in return, he will have the right to use official Goodyear marketing materials to help advertise his business. -general partner -franchisee -franchisor -distributor

-distributor A distributorship is a type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it.

The J.M. Smucker Company is widely known for selling jams and jellies, but over the past few decades, the company has experimented with other product offerings, such as coffee, baking products, natural foods and juices, and, finally, pet food and treats. Refer to Scenario 6.2. The J.M. Smucker Company acquired the Pillsbury brand of baking products in 2004. In 2018, the company decided to sell the brand to a private equity firm. As part of the sale, known as a(n) ________, The J.M. Smucker Company handed over all of the operations of the brand to the new firm. -conglomerate merger -horizontal merger -divestiture -acquisition

-divestiture

(6-10)The success of Camp Bow Wow allowed Heidi to expand nationally through franchising. Heidi acts as a ______ in this _______. -franchisee; distributorship -franchisee; business format franchise -franchisor; business format franchise -franchisor; distributorship

-franchisor; business format franchise Heidi acts as a franchisor in this business format franchise. Franchisees get to use the Camp Bow Wow name, receive training, and receive help in securing financing.

Two long-time friends, Ben Cohen and Jerry Greenfield, decided that they wanted to go into business together. They took a correspondence course in ice cream making and then both put in an equal amount of money to fund their new business in a converted gas station in Vermont. Both Ben and Jerry were active in managing the business, and both accepted equal liability for any risks associated with it. Ben and Jerry likely started their business as ___________. -general partners -an S corporation -limited liability partners -sole proprietors

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

Jasmine works at the Small Business Development Center in Phoenix, Arizona. One of the first questions many potential business owners ask is about the ideal form of business ownership for their new business. Jasmine has been working with Val, an SBDC client who would like to start his own business. Refer to Scenario 6.1. Jasmine is speaking to Val about his proposal for a pierogi food truck. Val's number one goal when forming his business is to protect his personal assets. He just bought a home and has a car that he shares with his spouse. Jasmine explains to him that he is describing _____________. -a partnership -unlimited liability -limited liability -a sole proprietorship

-limited liability Limited liability is 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.

When Jessica took out a loan to finance her coffee delivery service, she hoped that she would earn enough revenue to repay the loan and interest within the first five years of operation. Unfortunately, she had to abandon the business after just three years. Despite her business no longer being in operation, Jessica was still responsible for the remaining balance of the loan, which she had to pay back using her personal funds. This situation was the result of the ________ Jessica faced when starting a sole proprietorship. -heavy workload -unlimited liability -lack of permanence -limited ability to attract and retain talent

-unlimited liability

(6-2)All of the following are advantages of sole proprietorships except _______. -ease of formation -retention of control -retention of profits -unlimited liability

-unlimited liability Having unlimited liability or being personally responsible for any debt the company incurs is viewed as a disadvantage of a sole proprietorship.

(6-4)In a _______, companies at different levels of the supply chain become one. -divestiture -horizontal merger -conglomerate merger -vertical merger

-vertical merger A vertical merger is the combination of firms at different stages in the production of a good or service.