Foundations Chapter 6

Advantages of general partnerships

1. Ability to pool financial resources 2. Ability to share responsibilities and capitalize on complementary skills 3. Ease of formation 4. Possible tax advantages

Types of corporations

1. C corporations 2. S corporations 3. Statutory close (closed) corporations 4. Nonprofit corporation

Disadvantages of LLCs

1. Complexity of Formation 2. Annual Franchise tax 3. Foreign Status in other states 4. Limits on types of firms that can form LLCs 5. Differences in state laws

Disadvantages of franchising

1. Costs 2. Lack of control 3. Negative halo effect 4. Growth challenges 5. Restrictions on sale 6. Poor execution

Advantages to sole proprietorships

1. Ease of formation 2. Retention of Control 3. Pride of ownership 4. Retention of profits 5. Possible tax advantage

Disadvantages of C corporations

1. Expense and Complexity of formation and operation 2. Complications when operating in more than one state 3. Double taxation of earnings and additional taxes 4. More paperwork, more regulation, and less secrecy 5. Possible conflicts of interest

Types of partnerships

1. General partnership 2. Limited partnership 3. Limited liability partnership

Types of mergers

1. Horizontal merger 2. Vertical merger 3. Conglomerate merger

Advantages of franchising

1. Less risk 2. Training and support 3. Brand recognition 4. Easier access to funding

Advantages of LLCs

1. Limited Liability 2. Tax Pass-through 3. Simplicity and Flexibility in Management and Operation 4. Flexible Ownership

Disadvantages of sole proprietorships

1. Limited financial resources 2. Unlimited liability 3. Limited ability to attract and maintain talented employees 4. Heavy workload and responsibilities 5. Lack of permanence

Advantages of C corporations

1. Limited liability 2. Permanence 3. Ease of Transfer of Ownership 4. Ability to raise large amounts of financial capital 5. Ability to make use of specialized management

Types of corporate restructuring

1. Mergers 2. Acquisitions 3. Divestitures

Key terms in franchise agreement

1. Terms and conditions 2. Fees and other payments 3. Training and support 4. Specific operational requirements 5. Conflict resolution 6. Assigned territory

Disadvantages of general partnerships

1. Unlimited liability 2. Potential for disagreements 3. Lack of continuity 4. Difficultly in withdrawing from a partnership

Business format franchises

A broad franchise agreement in which the franchise pays for the right to use the name, trademark, and business and production methods of the franchisor

Corporation

A business entity created by filing a form (articles of incorporation) with the appropriate state agency, paying the state's incorporation fees, and meeting other requirements. It is considered to be a legal entity that is separate and distinct from its owners. The owners have limited liability

sole proprietorship

A business that is owned, and usually managed by a single individual. As far as the law is concerned, it is simply an extension of the owner. Company earnings are treated just like the owner's income. Any debts the company incurs are considered to be the owner's personal debts. -The most common type of business organization in the U.S.

horizontal merger

A combination of firms in the same industry. Done to increase size and market power within the industry and to improve efficiency by eliminating duplication of facilities and personnel. Eg. US Airways merges with American Airlines.

Conglomerate merger

A combination of firms in unrelated industries. Done to reduce risk by making the firm less vulnerable to adverse conditions in any single market. Eg. Berkshire Hathaway and 3G Capital buy condiment marker Heinz.

vertical merger

A combination of firms that are at different stages in the production of a good or service, creating a "buyer-seller" relationship. Done to provide tighter integration of production and increased control over the supply of crucial inputs. Eg. Microsoft acquires mobile phone manufacturer Nokia.

Merger

A corporate restructuring that occurs when two formerly independent business entities combine to form a new organization.

nonprofit corporation

A corporation that does not seek to earn a profit and differs in several fundamental aspects from C corporations.

Statutory close (closed) corporated

A corporation with a limited number of owners that operates under simpler, less formal rules than a C corporation.

Franchise disclosure document (FDD)

A detailed document that provides descriptions of all aspects of a franchise that the franchisor must provide to the franchisee at least fourteen calendar days before the franchise agreement is signed.

Carve-out

A type of divestiture. It is like a spin-off in that the firm converts a particular unit of division into a separate company and issues stock in the newly created corporation. However, instead of distributing the new stock to its current stockholders, it sells the stock to outside investors, thus raising additional financial capital.

distributorships

A type of franchising agreement in which the franchisor makes a product and licenses the franchisee to sell it.

common stock

A type of stock that represents basic ownership interest in a corporation.

Partnership

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

National minority franchising initiative (NMFI)

Founded in 2000. One of the inititatives that were created to give minority franchising a boost. The website currently maintains a directory of more than 500 franchisors who actively promote minority franchise ownership.

Publicly traded

Stock within large corporations is normally publicly traded, meaning that anyone with the money and inclination to do so can buy shares--and anyone who owns shares is free to sell them.

instititional investors

Stockholders don't have to be individuals. This is an organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and other securities.

Negative halo effect

THe irresponsible or incompetent behavior of a few franchisees can create a negative perception that adversely affects not only the franchise as a whole, but also the success of other franchisees.

Corporate bylaws

The basic rules governing how a corporation is organized and how it conducts its business.

franchisor

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

Franchise agreement

The contractual agreement between a frachisor and franchisee that spells out the duties and responsibilities of both parties. It is a legally binding contract.

articles of incorporation

The document filed with a state government to establish the existence of a new corporation.

Target firm

The firm being purchased in an acquisition.

Acquiring firm

The firm making the purchase of another firm in an acquisition.

C corporation

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. Requires filing articles of incorporation and corporate bylaws Formation is more complex

stockholders

The owner of a corporation. Ownership of C corporations is represented by shares of stock.

franchisee

The party in a franchise relationship that pays for the right to use resources supplied by the franchisor.

Board of directors

The stockholders elect these. They are the individuals who are elected by stockholders of a corporation to represent their interests. The stockholders rely on this board to oversee the operation of their company and protect their interests.

Divestiture

The transfer of total or partial ownership of some of a firm's operations to investor or to another company. Firms often use these to rid themselves of a part of their company that no longer fits well with their strategic plans.

Limited liability company (LLC)

A form of business ownership that offers both limited liability to its owners and flexible tax treatment. Hybrid between a corporation and a partnership Can elect to have their business taxed as either a corporation or a partnership. They are a relatively new form of ownership in the U.S.

S corporations

A form of corporation that avoids double taxation by having its income taxed as if it were a partnership

Limited liability partnership (LLP)

A form of partnership in which all partners have the right to participate in management and have limited liability for company debts. Best for Accountants, Lawyers, and Architects

Franchise

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.

General partnership

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.

Limited partnership (LP)

A partnership that includes at least one general partner who actively manages the company and accepts unlimited liability and one limited partner who gives up the right to actively manage the company in exchange for limited liability.

Acquisition

A type of corporate restructuring. It occurs when one firm buys another firm.

spin-off

A type of divestiture that occurs when a company issues stock in one of its own divisions or operating units and sets it up as a separate company--complete with its own board of directors and corporate offices. In the spin-off, stockholders end up owning two separate companies rather than one.

foreign corporation

When a business that's incorporated in one state does business in other states it is called this in any other state other than the one in which it is incorporated.

domestic corporation

When a business that's incorporated in one state does business in other states it is called this in the state where it's incorporated.

limited liability

When owners are not personally liable for claims against their firm. Owners with this may lose their investment in the company, but their other personal assets are protected.

hostile takeover

When the acquiring firm buys the target firm despite the opposition of the target's board and top management. A type of acquisition.