Chapter 5

Types of Partnerships

(1) general partnerships (2) limited partnerships (3) master limited partnerships

Disadvantages of Partnerships

1. Unlimited liability 2. Division of profits 3. Disagreements among partners 4. Difficulty of termination

partnership

A legal form of business with two or more owners.

acquisition

One company's purchase of the property and obligations of another company.

open (public) corporation

Sells stock to the general public. General Motors and ExxonMobil are examples of public corporations

conglomerate merger

The joining of firms in completely unrelated industries.

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

corporation

Foreign Corporations

do business in one state but are chartered in another. About one-third of all corporations are chartered in Delaware because of its relatively attractive rules for incorporation. A foreign corporation must register in states where it operates.

Alien Corporation

does business in the US but is chartered (incorporated) in another country

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

LLC's are considered to have operational flexibility because while they must submit articles of organization,they are not required to:

keep minutes or hold annual meetings

In a general partnership, all partners share the responsibility for operating the business and assume

liability

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

separate, independent, or separated

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

sole proprietorship

Advantages of Sole Proprietorship

1. Ease of starting and ending the business. 2. Ability to be your own boss 3. Pride of ownership. 4. Leaving a legacy. 5. Retention of company profits. 6. No special taxes.

In order to qualify for an S corporation,

1. Have no more than 100 shareholders. (All members of a family count as 1 shareholder.) 2. Have shareholders that are individuals or estates, and who (as individuals) are citizens or permanent residents of the United States. 3. Have only one class of stock. 4. Derive no more than 25 percent of income from passive sources (rents, royalties, interest).

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

merger

True or false: The main advantage of a sole proprietorship is ease of start up.

true

corporations bylaws

-How, when, and where shareholders' and directors' meetings are held, and how long directors are to serve. -Directors' authority. -Duties and responsibilities of officers, and the length of their service. -How stock is issued. -Other matters, including employment contracts.

LLCs Advantages include:

1. Limited liability 2. Choice of taxation 3. Flexible ownership rules 4. Flexible distribution of profits and losses 5. Operating flexibility

Which are considered disadvantages of incorporating?

-Initial Cost -Extensive paperwork -Double Taxation

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

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

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

domestic coporation

does business in the state in which they are chartered (incorporated)

nonprofit (or not-for-profit) corporation

don't seek personal profit for their owners

closed (private) corporation

have stock that is held by a few people and isn't available to the general public

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

sole proprietorship

The easiest type of business entity to form is a

sole proprietorship

An advantage of partnerships is a longer ____________ rate than sole proprietorships, because they become more disciplined and the business's life is based on all the partners.

survival

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

Advantages of Partnerships

1. More financial resources 2. Shared management and pooled/complementary skills and knowledge 3. Longer survival 4. No special taxes

merger

The result of two firms forming one company.

The process of forming a corporation varies somewhat from state to state

-The corporation's name. -The names of the people who incorporated it. -Its purposes. -Its duration (usually perpetual). -The number of shares that can be issued, their voting rights, and any other rights the shareholders have. -The corporation's minimum capital. -The address of the corporation's office. -The name and address of the person responsible for the corporation's legal service. -The names and addresses of the first directors. -Any other public information the incorporators wish to include.

Disadvantages of a corporation

1. Initial cost 2. Extensive paperwork 3. Double taxation 4. Two tax returns 5. Size 6. Difficulty of termination 7. Possible conflict with stockholders and board of directors

Diadvantages of Franchising

1. Large start-up costs 2. Shared profit 3. Management regulation 4. Coattail effects 5. Restrictions on selling 6. Fraudulent franchisors

Advantages of a corporation

1. Limited liability 2. Ability to raise more money for investment 3. Size 4. Perpetual life 5. Ease of ownership change 6. Ease of attracting talented employees 7. Separation of ownership from management

Advantages of Franchising

1. Management and marketing assistance 2. Personal ownership 3. Nationally recognized name 4. Financial advice and assistance 5. Lower failure rate

LLC's Disadvantages

1. No stock 2. Fewer incentives 3. Taxes 4. Paperwork

The three major forms of business ownership:

1. Sole proprietorships 2. Partnerships 3. Corporations

Disadvantages of Sole Proprietorship

1. Unlimited liability—the risk of personal losses. 2. Limited financial resources. 3. Management difficulties 4. Overwhelming time commitment 5. Few fringe benefits 6. Limited growth 7. Limited life span

approximately how many businesses are started each year in the US?

400,000

cooperative (co-op)

A business owned and controlled by the people who use it—producers, consumers, or workers with similar needs who pool their resources for mutual gain.

sole proprietorship

A business that is owned, and usually managed, by one person.

limited liability company (LLC)

A company similar to an S corporation but without the special eligibility requirements.

franchisor

A company that develops a product concept and sells others the rights to make and sell the products.

corporation

A legal entity with authority to act and have liability separate from its owners.

general partnership

A partnership in which all owners share in operating the business and in assuming liability for the business's debts.

limited liability partnership (LLP)

A partnership that limits partners' risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision.

master limited partnership (MLP)

A partnership that looks much like a corporation (in that it acts like a corporation and is traded on a stock exchange) but is taxed like a partnership and thus avoids the corporate income tax.

limited partnership

A partnership with one or more general partners and one or more limited partners.

franchisee

A person who buys a franchise.

conventional (C) corporation

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

S corporation

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

How many years does it take to operate again when an S corporation loses its S status?

An S corporation that loses its S status may not operate under it again for at least five years

franchise agreement

An arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service to others in a given territory.

leveraged buyout (LBO)

An attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing.

limited partner

An owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment.

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

False

A unique government creation that looks like a corporation but is taxed like a sole proprietorship or partnership is called a(n) __________ corporation.

S

Who is not liable for the debts or other problems of the corporation beyond the money they invest in it by buying ownership shares, or stock, in the company.

Stockholders

vertical merger

The joining of two companies involved in different stages of related businesses.

horizontal merger

The joining of two firms in the same industry.

limited liability

The responsibility of a business's owners for losses only up to the amount they invest; limited partners and shareholders have limited liability.

franchise

The right to use a specific business's name and sell its products or services in a given territory.

A(n) ______ is where one company purchases the property and obligations of another.

acquisition

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

agreement

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

an S corporation

quasi-public corporation

are chartered by the government as an approved monopoly to perform services to the general public. public utilities are examples.

An advantage of the separation of ownership from management in corporations is that the company can raise money from investors but the investors:

are not involved in daily operations

A corporation is formally formed with:

articles of incorporation and bylaws

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

boss

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

double

A corporation is a legal __________ with authority to act and have liability separate from its owners.

entity

Don wanted to incorporate his business and liked the attributes of an S-corporation, however, he did not feel the eligibility requirements would work for his purposes. He is likely to choose to form a(n) __________ __________ company.

limited liability

Many people do not have what to run a business on their own?

money, time, or desire

multinational corporation

operate in several countries

Professional Corporation

owned by those who offer professional services (doctors, lawyers, etc.) Shares in professional corporations aren't publicly traded.

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

partnership

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

partnership

If your company debts or damages are solely your responsibility you could be experiencing the disadvantage associated with owning a sole proprietorship called __________ __________.

unlimited liability

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

vertical