Chapter 5 How to form a business

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When a sole proprietor leaves an ongoing business to future generations, it is said that the owner is leaving a___.

Legacy

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

True

True or false: To end a sole proprietorship, you simply stop operations

True

The advantages of becoming a conventional corporation include

Access to more capital

What are the advantages of the LLC form of organization

Choice of taxation Limited liability Flexible ownership rules

Select all advantages of the partnership form of business

Longer survival Pooled skills More financial resources

Rank the order in which members of a corporation are chosen in order to separate ownership from management. Start at top of the managerial hierarchy (FIg. 5.4)

Owners/stockholders elect board of directors Board of Directors hire officers of the corporation Officers hire managers of the corporation Managers hire employees

Select ways an LLP deals with liability for partners

Partners are not held liable for each others' actions When a partner is sued individually for malpractice, it does not affect other partners Liability is limited to losing only personal assets directly related to personal acts

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

S

A franchise owner will experience the coattail effect when:

a fellow franchisee does something that has an impact on growth and profitability

Select all reasons that disagreements can ruin a partnership:

arguing over profits opposing management styles disagreement over overload

A corporation is formally formed with:

articles of incorporation and bylaws

In a leveraged buyout, employees, managers, or investors finance the purchase of the company by:

borrowing against its assets

Sole proprietors like being their own _, because they get satisfaction from making their own decisions

boss

When the actions of other franchises have an affect on your business operation, this is called:

coattail effects

The higher costs of starting up an international franchise are usually counterbalanced by an expanding _ base and less competition

consumer

In order to protect the brand name and image, the franchisor has tight has tight management _

controls standards

A business owned and controlled through pooled resources by the people who use it is a(n) _

cooperative

Being owned by those using the products of a firm rather than simply being a shareholder is what makes a _ unique

cooperative

A legal entity with authority to act and have liability apart from its owners is a:

corporation

When analyzing which type of merger a firm uses to grow, we can classify them by whether they are:

different industries in the same industry different levels of an industry

It is important to have Articles of Partnership because problems between partners may occur due to

disagreements over dividing profits

The paperwork needed to start a corporation is extensive, but a corporation must also keep detailed _ records documenting all financial transactions in detail

financial

Bruce owns his own company, but is having trouble working alone because he feels he needs additional expertise, management help, and an influx of money to stay afloat. Bruce should consider:

forming a partnership

Businesses that are _,like McDonald's, have both a direct and indirect impact on the economy through job creation and spending

franchises

A _ partner has responsibility or liability for losses beyond their investment, but a _ partner only has liability to the amount they invest

general; limited

When a soft drink company and a mineral water company merge and then are able to supply a variety of drinking products they have formed a(n) _ merger

horizontal

An advantage of cooperatives is that they:

increase the economic power of members

The three types of mergers are differentiated by analyzing whether the companies merging are in the same, related, or different _

industries

A sole proprietorship has a limited life span unless:

it is sold to someone else it is taken over by an heir

Bob and Dan are doctors in a medical practice. Dan is being sued for malpractice, but it will not affect Bob's assets because they formed a(n)_ partnership

limited liability

Limited liability, choice of taxation, flexible ownership rules, and operating flexibility are all advantages of a(n) _ company

limited liability

When there is one or more general partners and one or more limited partners, the firm is a(n):

limited partnership

When two firms join together to form one new company, it is called a(n)_

merger

Having carefully chosen partners with different skills and knowledge can help a partnership succeed because:

no one person has all the skills needed it provides for a more balanced life

An advantage of starting an online franchise is that:

no upfront fee may be required online franchisees can compete in world markets franchisees pay only a set monthly fee

A _ means that a corporation's existence will not terminate if one or more owners die

perpetual life

All profits of a sole proprietorship are taxed as _ income of the business owner

personal

Flexible distribution of profits and losses is considered an advantage of an LLC because:

profit/losses do not have to be distributed in proportion to the money each person invests

A advantage of a sole proprietorship is the business owner keeps all the _, but in a franchise, in many instances, this must be shared with the franchisor

profits

One of the fastest growing franchise sectors is _

senior care

Funds available to a business are limited to what one owner can gather which is disadvantage to the form of business known as a(n) _

sole proprietorship

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

sole proprietorship

As owners, these people are entitled to all profits that are left after all the corporation's other obligations have been paid

stockholders

Conflict may be present if _ elect a board of directors who disagree with management

stockholders

The biggest disadvantage of a home-based franchise is _

the feeling of isolation

A franchise operation is still your business, but you must follow the rules of:

the franchise agreement

A sole proprietorship often grows slowly because the owner is:

the major source of funding the main source of creativity the main source of know-how

When any debts or damages incurred by the business are your debts or damages it is called _ liability

unlimited

When each general partner is liable for the debts of the firm, no mater who was responsible for causing the debt, this is called _ liability

unlimited

When you own a sole proprietorship you and the business are considered one, so you have _ liability for financial obligations such as debt

unlimited

In a sole proprietorship, debts of the business are considered the responsibility of the owner if the business can't pay. This is referred to as _

unlimited liability

Many brick and mortar franchisees are using _ to expand their businesses online to lower costs and better meet the needs of their customers

websites technology e-commerce

Funds available for a sole proprietorship are limited to:

what the owner can provide

True or false: Corporations must be large in size to benefit from the advantages of incorporating

False

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

False

Which form of ownership is nontransferable because there is no stock

LLC

What are some of the disadvantages of operating a franchise

Large start-up costs Restrictions on selling Shared profit

Which is an advantage of the corporate form of business ownership

Limited liability

The form of partnership that limits liability to the limited partner's own acts or those of the people they supervise is a:

Limited liability partnership

True or false: Corporations pay tax on company income and shareholders pay again on any dividends received

True

True or false: When working for a company, a comprehensive benefit plan may add up to 30 percent or more to a worker's salary

True

When two firms operating in different stages of related businesses join, it is called a(n)____ merge.

Vertical

When choosing to form a partnership, a business owner should consider all of the following:

a partner's level of expertise in different areas of business the level of participation of each partner the financial contribution of each partner

In a franchise, having management support from the franchisor is a(an)_ whereas the coattail effect is considered a _

advantage disadvantage

In addition to the articles of incorporation, a corporation has _ ,which describe how the firm is to be operated from both legal and managerial points of view

bylaws

The owner of an LLC can be a person, partnership, or _

corporation

Which form of business has double taxation and limited liability as its characteristics

corporation

Partners can not only bring money into the business, but also _, which allows the business to borrow additional resources

credit

Advantages of international franchising include:

expanding customer base

The failure rate for franchises is lower than other business ventures because of:

financial advice and assistance nationally recognized names

A business person concerned about startup costs of a business opportunity should consider a venture other than a(n) _ which has this disadvantage

franchise

A _ is a company that sells others the right to use their name to make and sell their products

franchisor

Many franchisors are small, obscure companies that prospective franchisees may know little about. Prospective franchisees must beware of:

fraudulent franchisors who provide little help

Relief from the stress of commuting, extra time for family activities, and low overhead expenses are all advantages of_-_ franchises

home based

A soft drink company is merging with a company that produces bottled water. This type of merger is considered a

horizontal merger

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

liability

The responsibility for a loss only up to the amount invested is _ liability

limited

The _ limited partnership looks much like a corporation in that it acts like a corporation and is traded on a stock exchange

master

The limited liability partnership ensures that the limited partners'_ assets are not at risk

personal

Limited liability is considered an advantage of forming a LLC because:

personal assets are protected

The partnership business entity is not taxed, because each partner pays tax on the business's profits as their _

personal income

An advantage of the corporate form of business is that limited liability allows it to:

raise larger sums of money from investors borrow larger sums of money

In developing a partnership agreement, it is recommended that you:

seek legal advice

The three major forms of business most common in the United States are

sole proprietorships corporations partnerships

A key disadvantage of a general partnership is:

unlimited liability

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

vertical

A franchisee must know how much _ is needed to purchase the franchise and operate it

equity capital

The initial goal of a(n) _ cooperative was to join together to get better prices for their food products

farm

Select the most popular businesses for franchising

fast food restaurants full service restaurants gas stations with convenience stores

A nationally established franchise provides a franchise with a _ that is recognized by consumers, and therefore, saves on marketing costs

name

Amy wants to start a business but is concerned with starting from scratch. To alleviate her concern Amy could

obtain a franchise

Select the disadvantages of a sole proprietorship:

-large time commitment -limited financial resources -unlimited liability

What are some of the disadvantages of a corporation

Double taxation Cost of forming a corporation

Minority- owned businesses are growing at more than _ times the national rate

6

Which statements are accurate as related to corporate taxation

Double taxation occurs Stockholders pay income tax on the dividends they receive

Elements such as more financial resources, shared management, and longer survival are those used to define the:

Uniform Partnership Act

In obtaining a franchise an important issue to consider when evaluating the market is the

current competition that already exists in your territory

Ease of formation is a advantage of a(n)_

sole proprietorship

If the owner of a sole proprietorship wants to incorporate, the following disadvantages must be considered:

Costs of incorporation Double taxation

Select the reasons a business might change ownership form

Dropping a partner from the firm Adding a partner to the firm Seeking limited liability

True or false: It is not important to know the length of time a franchisor has been in operation

False

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

LLC

No stock, limited life span, and fewer incentives are disadvantages of a(n)_

LLC

Which is considered an advantage of incorporating

Limited liability

_ protect(s) investors' personal assets which makes them more likely to take a risk on investing in a corporation

Limited liability

Select reasons why management difficulties are considered a disadvantage of sole proprietorships

People good at one skill like selling and may not be good at another such as managing One person is responsible to keep track of inventory, accounting operations and tax records It is hard to attract employees to help run the business due to competition with larger companies offering better benefits

What are some of the advantages of franchising

Personal ownership Lower failure rate Recognized name

Rank the forms of business ownership based on ease of starting. Put the easiest form at the top

Sole proprietorship Partnership Corporation

True or false: Size is considered both an advantage and disadvantage to incorporating

True

True or false: The failure rate of franchises is lower than other business ventures

True

The decrease in female franchise owners is caused by:

a lack of money to cover high start-up costs

Select those items considered fringe benefits that people working for a company are likely to receive, but a sole proprietor has to develop on his own:

a pension plan paid health insurance paid sick or vacation leave time

One company's purchase of the property and obligations of another company is a(n)

acquisition

When a company purchases the assets and debt of another company they are engaging in a (an)

acquisition

Members of democratically control cooperatives by electing a(n) _ of directors that hires professional management

board

The fastest way for a foreign firm to enter the U.S. market may be to _ the operations of a U.S. company

buy

Bruce is meeting with his accountant to choose whether his LLC is to be taxed as a partnership or a corporation. This advantage of forming an LLC is called:

choice of taxation

The joining of films in completely unrelated industries is a(n) _ merger

conglomerate

Increasing the economic power of others and not paying the same taxes are both advantages of _

cooperatives

Corporations have the ability to offer benefits such as stock options which serves to attract talented employees. This is an advantage of the _ form of business

corporate

Among the advantages of farm cooperatives for their members is that they:

do not pay taxes as corporations do increase economic power

The right to use a specific business' name and sell its products of services in a given territory is a(n) _ agreement

franchise

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

Drew and Owen are business partners. Drew invested money and manages the business while Owen invested his money, but does not participate in the business management. Drew is considered a _ partner while Owen is considered a _ partner

general limited

Select all attributes that make the initial cost of incorporating a disadvantage

hiring lawyers for consolation enlisting the services of accountants start-up costs associated with documentation

LLCs do have to submit articles of organization and an operating agreement, but do not have to:

hold annual meetings keep minutes file written resolutions

Ending partnerships can be difficult because of problems deciding:

how a partner can retire how to distribute assets the worth of a retiring partner's share

Jane wants to start a new Subway franchise in her town. In the initial stage of investigating, Jane must consider all of the following

how to terminate the franchise the financial strength of the franchisor how much capital is needed to purchase the franchise

The start-up costs of filing for incorporation are high because:

lawyers and accountants are needed to do the complex filing

Sole proprietors can leave their business to their heirs. This is called:

leaving a legacy

Select the attributes of a corporation

legal entity liability separate from owners state chartered

Although members may choose to reconstitute an LLC after it dissolves, limited_ is considered a disadvantage of this form of business

life span

Franchises are expanding internationally to access additional _ that have new customers and to increase their profit potential

markets

The main types of partnerships include:

master limited limited general

Franchisors would like their franchisees to "mirror" their customer bases. Therefore, many franchisors, such as Domino's Pizza have developed _ franchisee recruitment initiatives

minority

An advantage of having one or more partners is that:

more financial resources are available more skills and knowledge are available the organization may survive for a longer time

A legal form of business with two or more owners is a(n):

partnership

Termination of a partnership is difficult without a(n) _ agreement

partnership

Individuals who start and manage a business are concerned with risk. They may choose to incorporate to decrease:

personal liabilities

Taking a firm _ is when a corporation decides to maintain. or in control of a firm internally by obtaining all of the stock

private

Having a partner may share the risk, but it also means sharing _, because each partner must be rewarded for their participation in the business

profits

_ of company profits is considered an advantage of a sole proprietorship

retention

In order to qualify to become a S corporation, a company must have:

shareholders who are individuals or estates no more than 100 shareholders

For a business to grow, prosper, and create economic opportunity, many people have to be willing to invest money in it. An advantage of a corporation is its ability to raise money through the sale of _

shares

The large _ costs for the rights to a franchise can vary from a few thousand to millions of dollars

start-up

A corporation allows people to own _ and share in the profits of the firm

stock

Corporations issue _ to shareholders and this allows ownership to change when it is sold

stock

People who own and manage their own businesses rightfully have pride of ownership because they:

take the risks and provide needed goods and services

Sole proprietors often feel that owning a business is a way of life because they seldom have enough _ to complete all their tasks

time

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


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