Chapter 4 Choosing a Form of Business Ownership

dividend

a distribution of earnings to the stockholders of a corporation

proxy

a legal form listing issues to be decided at a stockholders' meeting and enabling stockholders to transfer their voting rights to some other individual or individuals

General Partners

a person who assumes full or shared responsibility for operating a business

Limited Partners

a person who invests money in a business but has no management responsibility or liability for losses beyond the amount he or she invested in the partnership

hostile takeover

a situation in which the management and board of directors of a firm targeted for acquisition disapprove of the merger

A corporate charter is filed with:

a state's Secretary of State office.

proxy fight

a technique used to gather enough stockholder votes to control a targeted company

Syndicates

a temporary association of individuals or firms organized to perform a specific task that requires a large amount of capital

Partnerships

a voluntary association of two or more persons to act as co-owners of a business for profit

What is the main advantages of a partnership over a sole proprietorship

increased availability of capital and credit and the combined business skills and knowledge of the partners

Unlimited liability

is a legal concept that holds a business owner personally responsible for all the debts of the business

Vertical Mergers

is a merger between firms that operate at different but related levels in the production and marketing of a product

alien corporation

a corporation chartered by a foreign government and conducting business in the United States

foreign corporation

a corporation in any state in which it does business except the one in which it is incorporated

domestic corporation

a corporation in the state in which it is incorporated

What are two characteristics of a partner in a general partnership? Choose 2 answers

1. A partner may lose only the amount of money invested in the business. 2. Each partner has an active role in day-to-day management of the business. 3. If a partner leaves, no notice must be given to anyone other than the other partner(s). 4. Since all partners can execute contracts for the business, suppliers can be engaged quickly. answer: 2. Each partner has an active role in day- to-day management of the business. 4. Since all partners can execute contracts for the business, suppliers can be engaged quickly.

Advantages of Partnerships

1. Ease of Start-Up 2. Availability of Capital and Credit 3. Personal Interest 4. Combined Business Skills and Knowledge 5. Retention of Profits 6. No Special Taxes

Advantages of Sole Proprietorships

1. Ease of Start-Up and Closure 2. Pride of Ownership 3. Retention of All Profits 4. Flexibility of Being Your Own Boss 5. No Special Taxes

Types of Partnerships

1. General Partners 2. Limited Partners

To qualify for the special status of an S-corporation what criteria is needed

1. No more than stockholders are allowed. 2. Stockholders must be individuals, estates, or certain trusts. 3. There can be only one class of outstanding stock. 4. The firm must be a domestic corporation eligible to file for S-corporation status. 5. There can be no partnerships, corporations, or nonresident-alien stockholders. 6. All stockholders must agree to the decision to form an S-corporation.

Disadvantages of Sole Proprietorships

1. Unlimited Liability 2. Lack of Continuity 3. Lack of Money 4. Limited Management Skills 5. Difficulty in Hiring Employees

Disadvantages of Partnerships

1. Unlimited Liability 2. Management Disagreements 3. Lack of Continuity 4. Frozen Investment

Partnership Agreement consists of

1. Who will make the final decisions 2. What each partner's duties will be 3. The investment each partner will make 4. How much profit or loss each partner receives or is responsible for 5. What happens if a partner wants to dissolve the partnership or dies.

What rights do stockholders have?

1. is to share in the profit earned by the corporation through the payment of dividends 2. Owners of common stock may vote on corporate matters 3. right to vote by proxy by accessing the Internet or using a toll-free phone number

In what ways are joint ventures and syndicates differ

A joint venture is an agreement between two or more groups to form a business entity that aims to achieve a specific goal within a specific period of time. A syndicate is a temporary grouping of firms or individuals, to perform a high capital requiring specific task.

Not-for-Profit Corporations

a corporation organized to provide a social, educational, religious, or other service rather than to earn a profit

What is a characteristic of an entrepreneur?

Acceptance of luck Preference for stability Ability to work independently Seeking external rewards for effort answer: Ability to work independently

S-Corporations

a corporation that is taxed as though it were a partnership

open corporation

a corporation whose stock can be bought and sold by any individual

closed corporation

a corporation whose stock is owned by relatively few people and is not sold to the general public

What ____ merger occurred when financial conglomerate Berkshire Hathaway acquired Media General Corporation

Conglomerate Mergers

An entrepreneur has a small business that has been in operation for more than 15 years. The entrepreneur is the only member of the company and treats the business as a pass-through entity for tax purposes. The entrepreneur is not personally held responsible for business debts and liabilities. Which entity classification is appropriate for this entrepreneur's business?

Corporation Not-for-profit S corporation Limited liability company answer: Limited liability company

An individual has decided to create a new organization that assists the elderly in the community. The organization will ask for tax-exempt donations to provide these services. What is the entity classification for this business?

Corporation Not-for-profit S corporation Limited liability company answer: Not-for-profit

internal Revenue Service tax regulations of Limited-Liability Company

Fewer

active in day-to-day business operations, and each partner can enter into contracts on behalf of the other partners. He or she also assumes unlimited liability for all debts, including debts incurred by any other general partner without his or her knowledge or consent is an example of

General Partners

The proposed merger between AT&T and T-Mobile was an example of a ________ because both firms provide cell phone service to their customers.

Horizontal

Horizontal Mergers

Horizontal Mergers

What should a partnership agreement address?

Investment by each partner Way each partner uses profits Professional experience of each partner Source of each partner's financial contribution answer: Investment by each partner

How does the Small Business Administration provide assistance?

It offers direct loans to entrepreneurs. It offers education on business fundamentals. It makes equity investments in upstart businesses. It assigns members to a firm's board of directors. answer: It offers education on business fundamentals.

prospective partners must file a formal declaration, usually with the secretary of state, that describes the essential details of the partnership and the liability status of each partner involved in the business is an example of

Limited Partners

Internal Revenue Service tax regulations of Regular C-Corporation

Many

Internal Revenue Service tax regulations of S-Corporation

Many

An owner has researched several business models for online coaching services. The owner wants to take advantage of the business model that offers ease of protection against liability of debts, raising money, and transfer of ownership. Which business model is most appropriate?

Non-profit Partnership Sole proprietorship Limited liability corporation answer: Limited liability corporation

What corporation can obtain a tax exempt status

Not-for-Profit Corporations

Which industry attracts small businesses?

Oil drilling Home builders Utility companies Automobile manufacturing answer: Home builders

In what ways are joint ventures and syndicates alike?

Once the goal is reached, the period of time elapses, or the project is completed, the joint venture or syndicates is dissolved

the last step in forming a corporation, the incorporators and original stockholders meet to adopt corporate bylaws and elect their first board of directors. The board members are directly responsible to the stockholders for the way they operate the firm.

Organizational Meeting

Two friends want to start an online company selling baked goods. Since both have agreed to share responsibilities equally, the friends decide a partnership business model will work best because this will allow the two to act as co-owners of the business and split the profits. What is an advantage in choosing this business structure?

Perpetual life Limited liability Ability to sell stock Availability of capital answer: Availability of capital

What corporation's income is taxed only as the personal income of its stockholders

S-Corporations

What type of business should be setup to the effective way to avoid double taxation while retaining the corporation's legal benefit of limited liability.

S-corporation

the simplest and cheapest way to start a business

Sole proprietorship

used most commonly to underwrite large insurance policies, loans, and investments is called

Syndicates

What is an advantage of operating a small business?

The low risk of failure The unlimited potential The ability to adapt to change The diversity of management answer: The ability to adapt to change

What is a contribution of small businesses to the U.S. economy?

They raise capital easily. They involve a low risk of failure. They provide benefits to large businesses. They create close employee relationships. answer: They provide benefits to large businesses.

An individual is interested in establishing a lawn care business as a sole proprietorship. What will be a disadvantage of choosing this business model?

Unlimited liability Frozen investments Government regulations Management disagreements answer: Unlimited liability

What ______ merger occurred when social media giant Twitter acquired Summify?

Vertical

How are taxes calculated for a sole proprietorship?

a. As with a partnership, the sole proprietorship pays no income tax but the profit is reported as personal income of the owner. b. Profit on the business is taxed at exactly double what the personal income tax rate is. c. Profits for a sole proprietorship are double-taxed just like the profit of a corporation. d. The profits are taxed at the same rate as the personal income of the owner and then again if the owner takes the profit out of the business. e. A special sole proprietorship tax is added to the personal income tax that a sole proprietor pays. answer: a. As with a partnership, the sole proprietorship pays no income tax but the profit is reported as personal income of the owner.

Which of the following is true about an LLC?

a. LLCs provide less management flexibility than corporations. b. LLCs are double taxed. c. LLCs have unlimited liability for acts and debts. d. LLCs enjoy pass-through taxation. e. LLCs are restricted to 100 stockholders. answer: d. LLCs enjoy pass-through taxation.

Limited liability and personal asset protection

a. Regular C-Corporation b. S-Corporation c. Limited-Liability Company answer: a, b, and c

Double taxation

a. Regular C-Corporation b. S-Corporation c. Limited-Liability Company answer: a. Regular C-Corporation

Restrictions on the number of owners/stockholders

a. Regular C-Corporation b. S-Corporation c. Limited-Liability Company answer: b. S-Corporation

Management flexibility

a. Regular C-Corporation b. S-Corporation c. Limited-Liability Company answer: c. Limited-Liability Company

Which item is NOT typically included in the articles of partnership agreement?

a. The duties of each partner. b. A description of the target market. c. The length of the partnership. d. The investment each partner will make. e. How the business will be dissolved. answer: b. A description of the target market.

During college, Elyssa Wood earned extra money by using her computer skills to prepare papers for students. After graduation, she decided to turn her part-time job into a full-time business that she plans to expand in the future. In the meantime, she wants to maintain complete control of the business. She will most likely organize the business as a

a. corporation. b. limited partnership. c. sole proprietorship. d. cooperative. e. general partnership. answer: c. sole proprietorship

Stockholders directly

a. hire the staff. b. appoint the corporate officers. c. elect the board of directors. d. run the company. e. decide employee bonuses. answer: c. elect the board of directors.

All of the following are benefits of the LLC form of ownership except:

a. limited liability. b. required annual meetings to provide information to owners. c. no restricted number of owners. d. pass-through taxation. answer: b. required annual meetings to provide information to owners.

One of the two major reasons more than 700 New Hampshire corporations have converted to LLCs is to eliminate:

a. the expense of formation. b. limited liability. c. double taxation. d. transfer of ownership. answer: c. double taxation.

joint venture

an agreement between two or more groups to form a business entity in order to achieve a specific goal or to operate for a specific period of time

Corporations or C-corporation

an artificial person created by law with most of the legal rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts

tender offer

an offer to purchase the stock of a firm targeted for acquisition at a price just high enough to tempt stockholders to sell their shares

Why are syndicates formed

because no one person or firm is willing to put up the entire amount required for the undertaking

What is the main ingredient in growth

capital

Walmart has joined forces with India's Bharti Enterprises to establish wholesale cash-and-carry stores that sell directly to local retailers, manufacturers, and farmers in different cities and towns in India. This is an example of

joint venture

corporate charter

license to operate granted to a corporation by the state where it is established

why would a sole proprietor taking on a partner?

obtaining more capital

limited-liability partnership

partner may have limited-liability protection from legal action resulting from the malpractice or negligence of the other partners

Who does not pay the special state and federal income taxes that corporations pay must report taxes on their personal income tax returns and make estimated quarterly tax payments to the federal government

sole proprietorship

Conglomerate Mergers

takes place between firms in completely different industries

merger

the purchase of one corporation by another

Board of Directors

the top governing body of a corporation, the members of which are elected by the stockholders