Business Formation Flashcards
What are the business ownership options?
Sole proprietorship, partnerships, corporations, Cooperations (Co-op) and LLC (Limited Liability Company)
Sole proprietorship
Business owned by one person, easiest and least expensive form of business to start (e.g. farms, retails, establishments, small service businesses)
Advantages of Sole proprietorship (5 points)
→ 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
disadvantages of sole propriertorship (5 points)
→ 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
Partnerships
A partnership is when two or more people share ownership of a business
Advantages of partnerships (5 points)
→ 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
Disadvantages of partnership (4 points)
→ 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
Types of partnership
General and limited
General partnership
In a general partnership, all partners share equally in the management of the business and all share unlimited liability for its debts and obligations
Limited partnership
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.
Corporations
a corporation is a separate legal entity from its owners, meaning it has its own legal rights and obligations
Characteristics of Corporations (5 points)
→ 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
Board of directors
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)
What are the 2 categories of corporations?
Private and public
What are the types of Corporations?
C corp, nonprofit corporations and S Corps
Why aren’t LLC’s, Franchise and Cooperative considered as corporations? (3 reasons)
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
Private corporation
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
What are two advantages of private corporations keeping their stock within a select group of people and not offering shares to the public?
→ 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
What are public corporations?
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
What does IPO stand for?
Initial Public Offering
What’s an IPO (initial public offering) and what’s a broken IPO?
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.
Corporations Advantages (5)
→ 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
Corporation disadvantages
(4)
→ 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)
Limited Liability Company (LLC) - (3 points)
- 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.