1.2 The Corporate Life Cycle

Question 1

(1.2) What are the 3 main forms of business organization

Answer 1

(1) sole proprietorship
(2) partnership
(3) corporation

Question 2

(1.2) About 80 percent of businesses operate as _______ _______, however when based on dollar value of sales, 80 percent of all business is conducted by _________.

Answer 2

sole proprietorships; corporations

Question 3

(1.2) What are the ADVANTAGES of a sole proprietorship?

Answer 3

(a) it’s easy and inexpensive to form
(b) it’s subject to few government regulations
(c) it AVOIDS corporate income taxes
* however, all business earnings are taxed as the owner’s
personal income

Question 4

(1.2) What are a sole proprietorships DISADVANTAGES?

Answer 4

(1) may be limited in it’s ability to raise large sums of capital
(2) unlimited personal liability for business debts
(losses can exceed the amount invested in the company and
can include personal property)
(3) life limited to life of its founder

Question 5

(1.2) Proprietorships are used mainly by _____ businesses as they account for only ____ of sales even though 80 percent of all companies are proprietorships.

Answer 5

small; 13%

Question 6

(1.2) Sole proprietorships are easily formed, but often have difficulty raising ______; they subject proprietors to unlimited ______, and they have a limited ______.

Answer 6

capital; liability; life

Question 7

(1.2) Define proprietorship.

Answer 7

an unincorporated business owned by one individual

Question 8

(1.2) A partnership exists whenever _____ or more persons associate to conduct a non-corporate business.

Answer 8

two

Question 9

(1.2) The advantages/ disadvantages of a partnership are similar to those of a _____ _____.

Answer 9

sole proprietorship

Question 10

(1.2) In the event the partnership goes bankrupt and a partner is unable to meet his/her pro rata agreement, the remaining partners must make good on the unsatisfied claims. What is a way to avoid this?

Answer 10

By establishing a limited partnership; limited partners can lose only the amount of their investment in the partnership

Question 11

(1.2) Why are limited partnerships seldom used in general business situations?

Answer 11

No one partner is usually willing to be the general partner and thus except the majority of the business’s risk, and none of the others are willing to be limited partners and give up all control.

Question 12

(1.2) A partnerships major advantage is its _____ _____ and ____ _____ _____.

Answer 12

low cost; ease of formation

Question 13

(1.2) Define corporation.

Answer 13

A legal entity created by a state, and is separate and distinct from its owners and managers

Question 14

(1.2) a partnership’s disadvantages include:

Answer 14

(1) unlimited liability
(2) limited life
(3) difficulty transferring ownership
(4) difficulty raising large amounts of capital

Question 15

(1.2) What 3 ADVANTAGES make it much easier for corporations to raise money in capital markets?

Answer 15

(1) unlimited life - can continue after original founders deceased
(2) easy transferability of ownership through exchange of stock
(3) limited liability - losses limited to actual funds invested

Question 16

(1.2) What are a corporations 2 major DISADVANTAGES?

Answer 16

(1) corporate earnings may be subject to double taxation
(earnings of a corporation are taxed at the corporate level and
then earnings paid out as dividends are taxed again as income
to stockholders)
(2) setup of a corporation and filing required state and federal
reports are more complex and time consuming than for a SP or P

Question 17

(1.2) What is a charter?

Answer 17

The legal document that is filed with the secretary of the state to incorporate a company

Question 18

(1.2) What does setup of a corporation involve?

Answer 18

(1) preparing a charter
(2) writing a set of bylaws
(3) filing the many required state and federal reports

Question 19

(1.2) What information does a charter include?

Answer 19

(1) NAME of proposed corporation
(2) TYPES OF ACTIVITIES it will pursue
(3) amount of CAPITAL STOCK
(4) NUMBER OF DIRECTORS
(5) NAMES/ADDRESSES of director

Question 20

(1.2) Professionals such as doctors, lawyers, and accountants often form a ___ ___ or a ___ ___.

Answer 20

professional corporation (PC); professional association (PA)

Question 21

(1.2) What type of firm–if certain conditions are met, particularly with regard to size and number of stockholders– can establish a corporation but elect to be taxed as if the business were a sole proprietorship or partnership?

Answer 21

S corporation

Question 22

(1.2) What occurs when a closely held corporation or it’s principal stockholders sell stock to the public at large?

Answer 22

an initial public offering (IPO)

Question 23

(1.2) After an IPO, a corporation usually supports it’s growth by:

Answer 23

(1) borrowing from banks
(2) issuing debt
(3) selling additional shares of stock

Question 24

(1.2) What can occur when managers act in their own best interest rather than in the best interest of stockholders/owners?

Answer 24

agency problem/cost

Question 25

(1.2) How can agency problems be addressed?

Answer 25

by a company’s CORPORATE GOVERNANCE

Question 26

(1.2) Corporate governance is the set of rules that control a company’s behavior towards its ____, ____, ____, ____, ____, ____, ____, and ____.

Answer 26

(1) directors
(2) managers
(3) employees
(4) shareholders
(5) creditors
(6) customers
(7) competitors
(8) community