Chapter 5- How to Form a Business

Sole Proprietorship Advantages

-Ease of starting and ending -Ability to be your own boss -Pride of ownership -Retention of profit -No special taxes

Franchise

A business established or operated under an authorization to sell or distribute a company's goods or services in a particular area

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 supervison

Franchisee

A person who buys a franchise

General Partner

An owner (partner) who has unlimited liability and is active in managing the firm

Conglomerate Merger

The joining of firms in completely unrelated industries

Sole Proprietorship Disadvantages

-Unlimited Liability -Limited Financial Resources -Difficulty in Management -Overwhelming time commitment -Few Fringe Benefits -Limited Growth -Limited Life Span

What is the role of a cooperative?

-Cooperatives are organizations owned by members/customers. -Some people form cooperatives to acquire more economic power than they would have as individuals -Small businesses often form cooperatives to gain more purchasing, marketing, or product development strength

What are the benefits of being a franchisee?

-Getting nationally recognized name and reputation -A proven management system -promotional assistance -Pride of ownership

What are the drawbacks of being a Franchisee?

-High Franchise Fees -Managerial regulations -Shared profits -Transfer of adverse effects if other franchisees fail

What are disadvantages of Corporations?

-Initial Cost -Paperwork -Size -Difficulty in termination -Double taxation -Possible conflict with a board of directors

What are advantages of S Corporation?

-Limited Liability (like a corporation) and simpler taxes (like a partnership)

What are the advantages of Limited Liability Companies?

-Limited Liability without the hassles of forming a corporation or the limitation imposed by S corporations -LLCs may choose whether to be taxed as partnerships or corporations.

What are the advantages of a Partnerships?

-More financial resources -Shared management -Pooled Knowledge -Longer survival

What are the advantages of a Corporation?

-More money for investment -Limited Liability -Size -Perpetual Life -Ease of ownership change -Ease of drawing talented employees -Separation of ownership from management

Acquisition

-One company's purchase of the property and obligations of another company. -A corporate restructuring in which one firm buys another

What are the disadvantages of partnerships?

-Unlimited Liability -Division of profits -Disagreements among partners -Difficulty of termination

What are the 3 key elements of a general partnership?

1. Common Ownership 2.Shared profits and losses 3.The right to participate in managing the operations of the business

Why do People Incorporate?

1. Special Tax Advantages 2. Limited Liability

How do you qualify for S Corporation Status?

1.Company must have 100 Stockholders (members of a family count as one shareholder) 2.Its Stockholders must be individuals or estates and U.S. citizens or permanent residents 3. The company cannot derive more than 25% of its income from passive sources

Limited Liability Company (LLC)

A business organization in which the business (not the owner) is liable for the company's debts.

Cooperative

A business owned and controlled by those who use its services.

Corporation

A business owned by stockholders who share in its profits but are not personally responsible for its debts

Sole Proprietorship

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

Franchisor

A business that leases its trade name and operating system to another person

Limited Liability

A form of business ownership in which the owners are liable only up to the amount of their individual investments Limited Liability means that corporate owners (stockholders) and limited partners are responsible for looses only up to the amount they invest. Their other personal property is not at risk

Partnership

A legal form of business with two or more owners

Master Limited Partnership (MLP)

A partnership that looks much like a corporation but is taxed like a partnership and thus avoids the corporate income tax

Concentional (C) Corporation

A state-Chartered legal entity with authority to act and have liability separate from it's owner

S Corporation

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

Limited Partner

An owner who invest money in the business but does NOT have any management responsibility OR liability for losses beyond the investment

What is the main differences between general and limited partners?

General Partners are owners (partners) who have unlimited liability and are active in managing the company Limited partners are owners (partners) who have LIMITED liability and are NOT active in the company.

What does it mean to take a company private?

Individuals who, together or alone, buy all the stock for themselves are said to take the company private

Unlimited Liability

The owner is personally and fully responsible for all losses and debts of the business Unlimited Liability means that sole proprietors and general partners must pay all debts and damages caused by their business. They may have to sell their houses, cars, or other personal possessions to pay business debts.

Merger

The result of two firms forming one company

Limited Partnership

a partnership with one or more general partners and one or more limited partners

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

What is the major challenge to global Franchises?

it is often difficult to transfer an idea or product that worked well in the US to another Culture. It is essential to adapt to the region.

Horizontal Merger

the combination of two or more firms competing in the same market with the same good or service

Vertical Merger

the combination of two or more firms involved in different stages of producing the same good or service