Business Chapter 6

Sole proprietorship

A business that is owned and usually managed by a single individual. Sole proprietorship is an extension of the owner; company earnings is the owners income and the companys debt is the owners debt

Advantages of General Partnership

Ability to pool financial resources-more owners more money to spend Ability to share responsibilities and capitalize on complementary skills-partners share burden of business, ease workload. Task and jobs can be divided by owners' skills ease of formation-can be established verbally possible tax advantage-earnings pass through "untouched" by the IRS and taxed as partners personal income

Formation of a general partnership

No limit to number of partners, normally two. Voluntary partnership agreement forms a partnership, can be verbal but should be written down to be safe. Details spelled out: initial financial contributions each partner will make, the specific duties and responsibilities each will assume,how they will share the profit, how they will settle disagreements, and how they will deal with the death of one of the partnerships

Disadvantages of General Partnership

Unlimited liability-liable for both you and your partners mistakes. personal assets can be at risk. getting sued the person goes for the one with the deepest pockets potential for disagreement-disagreements can lead to no decisions being made. hard feelings can also be developed that harm morale and undermine the cooperation needed to keep the business on track lack of continuity-if one partner drops then the partnership ends difficulty in withdrawing from a partnership-if a partner withdraws from the partnership they are still liable for any debts or obligations the firm had during the time of withdrawal

business format franchise

a broad franchise agreement in which the franchisee 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). Considered to be a legal entity that is separate from its owner. Owners have limited liability meaning they aren't personally liable for claims against their firm

Merger

a corporate reconstructing that occurs when two formerly independent business entities combine to form a new organization

Nonprofit corporations

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

Statutory close corporations

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

Limited Liability Company

a form of business ownership that offers both limited liability to its owner and flexible tax treatment

Distributorship

a type of franchising arrangement in which the franchisor makes a product and licenses the franchise to sell it

Partnership

a voluntary agreement in which two or more people act as co-owners of a business for profit. General partnership is the most basic

Limitations and disadvantages of LLCs

complexity of formation annual franchise tax foreign status in other states limits on types of firms that can form LLCs Differences in State Laws

Franchise agreement

contractual arrangement between a franchisor and franchisee that spells out the duties and responsibilities of both parties (terms and conditions, fees and other payments, training and support, specific operational requirements, conflict resolution, assigned territory)

Acquisition

corporate reconstruction in which one firm buys another firm (purchaser is the "acquiring firm" and the one being bought is the "acquiring firm")

S corporation

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

Disadvantages of Franchising

costs lack of control negative halo effect growth challenges restrictions on sale poor execution

Advantages of Sole Proprietorships

ease of formation-not much paper work and less expensive retention of control-you're the boss my ***** pride of ownership-you made it retention of profits-you keep the money my ***** possible tax advantage

Board of directors

elected by stockholders to oversee the operation of their company and protect their interests. establishes mission and sets broad objectives. appoint CEO to manage the day to day company

Disadvantages of C Corporations

expense and complexity of formation and operation complications when operating more than one state double taxation of earnings and additional taxes more paperwork, more regulation, and less secrecy possible conflicts of interest

C corporation

filing articles of incorporation. adopting corporate bylaws(detailed rules that govern the way the corporation is organized and managed. more expensive then sole proprietorship and partnerships.

Limited partnership

includes at least one general partnership and one limited partner General partner- right to participate fully in managing their partnership, assume unlimited personal liability for any of its debts limited partnership-cannot actively participate in its management, but they have protection of limited liability. personal wealth not at risk if they do not actively participate in managing the company

Advantages of Franchising

less risk training and support Brand recognition easier access to funding

Franchise

licensing agreement under which one party (the franchisor) allows another party (the franchisee) to use its name, trademark, patents, copyrights, business methods, and other property in exchange for monetary payments and other considerations

Disadvantages of a Proprietorship

limited financial resources-dependent on their own wealth unlimited liability-you are the business, can lose a lot of sued and lose limited liability to attract and maintain talented employess-can't pay skilled workers good money heavy workload and responsibility-stressful and must make decisions in which they lack experience lack of permanence-if something happens to the owner the firm ceases to exist

Advantages of LLCs

limited liability tax pass-through-can decide to be taxed as a partnership or corporation simplicity and flexibility in management and- opertaion(hold regular board meetings) and flexible ownership (any number of owners)

Advantages of C Corporations

limited liability-stockholders personal assets are protected permanence-can continue to operate as long as they remain financially viable and a majority of stock holders want the business to continue. death or withdrawal of owner doesnt matter ease of transfer ownership-stockholders can easily trade C corporations to withdrawal from ownership ability to raise large amounts of financial capital-raise large amounts of money by issuing shares of stocks or selling formal IOUs called corporate bonds ability to make use of specialized management-can hire highly qualified professional managers

Institutional investors

mutual funds, insurance companies, pension funds, and endowment funds, pooled money from individuals to buy stock and securities

Ownership of C corporations

owners are shareholders. common stock holders have voting rights while preferred stockholders do not.

Divestiture

the transfer of total or partial ownership of some of a firm's operations to investors or to another company (spinoff and carve-out)