Business Formation

Question 1

What are the business ownership options?

Answer 1

Sole proprietorship, partnerships, corporations, Cooperations (Co-op) and LLC (Limited Liability Company)

Question 2

Sole proprietorship

Answer 2

Business owned by one person, easiest and least expensive form of business to start (e.g. farms, retails, establishments, small service businesses)

Question 3

Advantages of Sole proprietorship (5 points)

Answer 3

→ ease of formation: very easy to start. You don’t need a lot of paperwork or formalities

→ retention of control: owner makes every key decision

→ pride of ownership: offer a powerful sense of personal satisfaction

→ profits: all the profits go directly to you

→ privacy

Question 4

disadvantages of sole propriertorship (5 points)

Answer 4

→ Harder to raise money: it’s just you. Banks are also less likely to give large loans to sole proprietors

→ Unlimited liability: debts of the firm become the personal debts of the owner, meaning that you’re unprotected. Your personal savings are at risk

→ Limited ability to attract talented employees: it can be tough to offer top salaries and benefits.

→ Heavy workload: the hours can be long and the stress can be overwhelming

→ Lack of permanence: if the owner dies, retires, or leaves, the firm legally ceases to exist

Question 5

Partnerships

Answer 5

A partnership is when two or more people share ownership of a business

Question 6

Advantages of partnerships (5 points)

Answer 6

→ Pooled financial resources: more money typically comes with more investors
ore people, you have access to more money and skills. It’s easier to raise funds
→ Shared responsibilities: partners share the burdens and provide complementary skills
→ Ease of formation: setting up partnerships is relatively easy and inexpensive
→ Diversity of skills: leads to innovation in products, services, and processes
→ Longevity: Increase chances that the organization will endure

Question 7

Disadvantages of partnership (4 points)

Answer 7

→ Unlimited liability: just like in a sole proprietorship, if the business gets sued, both partners’ personal assets are at risk. General partners have complete personal liability, not just for their own mistakes, but also for the mistakes of their partner

→ Disagreements: conflict can complicate and delay decision-making and destroy personal relationships

→ Difficulty in withdrawing: if a withdrawing partner violates the terms of the agreement, the other partners can sue for breach of contract

→ Lack of continuity: if a current partner leaves the business or a new partner joins, the relationship changes

Question 8

Types of partnership

Answer 8

General and limited

Question 9

General partnership

Answer 9

In a general partnership, all partners share equally in the management of the business and all share unlimited liability for its debts and obligations

Question 10

Limited partnership

Answer 10

A limited partnership consists of at least one general partner and at least one limited partner. The general partner manages the business, while the limited partners are typically investors who do not take part in the day-to-day operations.

Question 11

Corporations

Answer 11

a corporation is a separate legal entity from its owners, meaning it has its own legal rights and obligations

Question 12

Characteristics of Corporations (5 points)

Answer 12

→ Corporations sell shares to investors who share in profit, but don’t manage

→ Corporations are owned by shareholders, each shareholder owns a part of the corporation by purchasing shares, but they do not manage the day-to-day operation

→ Shareholders invest by buying shares

→ Ownership can change hands (by selling shares), but this does not affect the management.

→ A corporations can own and transfer property, enter into contracts and sue or be sued in court

Question 13

Board of directors

Answer 13

The board of directors is a group of people elected by the shareholders to make big decisions for the company. They don’t run the company’s day-to-day activities (like managing employees or handling sales), but they set the overall direction and strategy for the company (mission and objectives)

Question 14

What are the 2 categories of corporations?

Answer 14

Private and public

Question 15

What are the types of Corporations?

Answer 15

C corp, nonprofit corporations and S Corps

Question 16

Why aren’t LLC’s, Franchise and Cooperative considered as corporations? (3 reasons)

Answer 16

LLC: Owned by members rather than shareholders

Franchise: A franchise is a way of doing business, not a separate legal entity. The franchisee can be structured as an LLC, corporation, or other entity type, but the franchise itself is not a corporation

Cooperatives: Owned and operated by a group of individuals for their mutual benefit, focusing on member participation and decision-making, no shareholders

Question 17

Private corporation

Answer 17

Private corporations keep their stock within a select group of people and they do not offer shares for sale to the public do not sell their stock to the general public. Instead, the stock is held by a small group of investors, often including founders, family members, or close associates

Question 18

What are two advantages of private corporations keeping their stock within a select group of people and not offering shares to the public?

Answer 18

→ Retain control over operations

→ Protect business from unwelcomed takeover attempts: because shares aren’t publicly traded, it’s harder for outside entities to buy large amounts of stock and attempt a hostile takeover of the company

Question 19

What are public corporations?

Answer 19

Public corporations are held by and sold to the public. They sell their shares to the general public through stock exchanges, meaning anyone can buy ownership in the company

Question 20

What does IPO stand for?

Answer 20

Initial Public Offering

Question 21

What’s an IPO (initial public offering) and what’s a broken IPO?

Answer 21

1- When a private company sells shares to the public for the first time, it’s called an IPO. This helps the company raise capital

2- A broken IPO refers to a situation where the stock doesn’t perform well after going public.

Question 22

Corporations Advantages (5)

Answer 22

→ Limited liability: shareholders are not personally liable for the debts or legal issues of their firm

→ Permanence: unaffected by the death or withdrawal of an owner

→ Easy to transfer ownership: selling stock

→ Easier to raise money: Corporations can sell shares (stock) to raise large amounts of capital.

→ Attracts talents: large corporations typically find it easier to hire qualified professional managers, due to more resources and growth opportunities

Question 23

Corporation disadvantages
(4)

Answer 23

→ Expense/complexity of formation and operation: requires significant paperwork, including articles of incorporation and corporate bylaws. It is also more expensive

→ Double taxation: a corporation is separate from its owners, its earnings are taxed. Corporations are taxed twice—once on profits and again on the dividends shareholders receive (a dividend is a payment made by a company to its shareholders, usually as a share of the company’s profits)

→ Paperwork and regulation: publicly traded corporations must send detailed reports to shareholders and to the various government and regulatory agencies

→ Conflicts of interest: top executives could pursue their own interests at the expense of shareholder interests (e.g. power, money, perks)

Question 24

Limited Liability Company (LLC) - (3 points)

Answer 24

• An LLC is a flexible business structure that protects its owners (called members) from being personally responsible for the company’s debts and liabilities.
• It offers simpler management and pass-through taxation, where the profits are reported on the owners’ personal tax returns
• Limited Liability Companies) do not have shareholders. Instead, they have “members.” Members can be individuals or other entities, and they own a percentage of the LLC.

Question 25

An LLC combines the best features of a _______ and a _______

Answer 25

An LLC combines the best features of a corporation and a partnership

Question 26

Limited Liability Company (LLC) advantages (3 points)

Answer 26

→ Limited liability: Like a corporation, the owners of an LLC are not personally liable for the company’s debts.
→ Tax flexibility: The owners can choose to be taxed as a corporation or as part of their personal income
→ Fewer formalities: While you get the liability protection of a corporation, an LLC doesn’t require as many formalities. Fewer formalities than C Corporation

Question 27

LLC disadvantages (2)

Answer 27

→ Harder to attract investors compared to a corporation because LLCs can’t issue stock, therefore it’s also harder to raise capital
(3 points in 1)

→ Complexity: While it’s simpler than a corporation, forming an LLC is still more complex than a sole proprietorship or partnership

Question 28

Franchise

Answer 28

A franchise is a business model where a business (the franchisor) allows others (franchisees) to operate using its brand, products, and business model

(e.g. Opening a McDonald’s franchise means you get to operate a restaurant under the McDonald’s name, using their systems and products)

Question 29

Franchise Fee

Answer 29

the initial cost you pay to buy into the franchise. It gives you the right to use the brand name, products, and established business model

Question 30

Initial investment

Answer 30

This includes the money required to set up the franchise—building, equipment, inventory

Question 31

Ongoing royalty fees

Answer 31

After you’ve established your franchise, you must continue to pay royalties, which are often a percentage of your sales, back to the franchisor (e.g. Great Clips requires franchisees to pay 6% of their monthly sales as royalties)

Question 32

Franchise advantages (3)

Answer 32

→ Established brand: You don’t have to build a reputation from scratch. The brand is already recognized, so customers know what to expect.
→ Support: Franchisees often receive training and support from the franchisor

→ Lower risk compared to starting an entirely new business

Question 33

Franchise disadvantages (4)

Answer 33

→ Limited control: You must follow the franchisor’s rules and systems

→ Costs: Franchises can be expensive to start, with high upfront fees and ongoing royalty payments to the franchisor

→ Growth limitations due to territorial restrictions

→ Conflicts: franchise relationships can become tense when franchisees feel that franchisors are unfairly controlling the business or enforcing terms that hurt profitability (e.g. In the UK, Domino’s franchisees banded together to protest increased costs imposed by the franchisor. This led to the formation of a franchise association to negotiate terms collectively)

Question 34

C Corporations

Answer 34

A C corporation is a type of business structure that offers limited liability to its owners. This means that the personal assets of the shareholders (owners) are protected

• A C Corp is owned by shareholders who purchase stock in the company, unlike LLC’s

Question 35

C Corp advantages (3)

Answer 35

→ Ability to raise large amounts of capital by issuing stock
→ Limited liability
→ Perpetual existence (even if owners or shareholders change)

Question 36

C Corp disadvantages (2)

Answer 36

→ Double taxation (corporate profits taxed, then shareholders taxed on dividends)
→ More regulations and complex management structure

Question 37

Mergers

Answer 37

two companies agree to become one

Question 38

Acquisitions

Answer 38

when one firm (company) buys another (e.g. Facebook, now Meta, acquired Instagram in 2012. Instagram became part of Facebook, and this helped Facebook expand its presence in social media, especially in photo-sharing)

Question 39

Divestures

Answer 39

a divestiture is when a company decides to sell off or separate part of its business. This part of the business could be a division, a product line, or even a brand that the company no longer wants or doesn’t fit into its long-term strategy

Question 40

Types of divestitures

Answer 40

Spin off and carve out

Question 41

Divestitures allow a firm to ____?

Answer 41

streamline operations (making the company simpler, more focused and more efficient)

Question 42

Spin off

Answer 42

a company does a spin-off, it separates part of its business into a new, independent company. The original (parent) company no longer owns this part of the business, but the shareholders (owners) of the parent company still benefit.

Question 43

Carve out

Answer 43

in a carve-out, the company sells a portion of the new business to the public or another company. It creates a new company but still retains some ownership or control over

Question 44

Cooperative

Answer 44

• A cooperative is a business owned and operated by its members for their mutual benefit. Each member has equal ownership and a voice in decision-making, regardless of how much they contribute
• Unlike traditional companies where the goal is profit, cooperatives focus on serving their members. The goal is to meet the members’ needs, not to maximize profits. Profits are just a way to support the services that the co-op provides. It is a means to help it achieve its true goal - to continuously strive to serve members
• can be for profit or nonprofit