Businesses Flashcards
What is a functional institution?
any organization that connects the consumer and producer of a product. Businesses connect because of profit
Why are small jobs valuable to our economy?
because of the jobs they create and innovation of ideas
What percentage of businesses in the US are small? Survival rate?
80 percent of all businesses in the US are small and 8 out of 10 will close before the end of the first year
What is the Small Business Administration (SBA)?
offer low interest loans,help small businesses, free advice
What is a sole proprietorship?
1 owner
What are the advantages of a sole proprietorship?
freedom to try new things, fulfilling a dream, flexible operation
What are the disadvantages of a sole proprietorship?
Very little operating capital, personal sacrifice,unlimited liability (owner is 100% liable for the companies debts) limited life
What is a partnership?
more than 1 owner, but not incorporated
What are the advantages of a partnership?
more operating capital, specialization
What are the disadvantages of a partnership?
incompatibility and unlimited liability, limited life
What is a corporation?
form of business that is authorized by law to act like a legal entity
What are the advantages of a corporation?
- limited liability: owner cannot lose more than what they have invested
- capital accumulation: securities
- efficient production of product: they do not waste resources
- business continuity: day to day operation is not affected by changes in ownership (board of directors)
What are the disadvantages of a corporation?
- higher tax rate
- inefficient decision making: they have to go through small businesses and VP’s
- Too much government regulation.
What are the 3 steps to forming a corporation?
- get a charter
- get money to get started
- elect a board of directors
Where will you get your charter from?
The state government in which you will operate, ideally look for lower state corporation taxes: delaware, sc (coastline, ports)
What is on the application for a charter?
1.Name of Company
2.Address of corporation (becomes legal entity)
3.Description of product (make sure its safe)
Public or Private Corporation
What is a public corporation?
competition to buy shares of stock goes up which helps raise more money, but not much capital
What is a private corporation?
- shares of ownership can only be traded with a select group of people, therefore you know your share holders, potentially, you won’t bring in much money
- pay a fee to state government to make sure you don’t set up fake corporation
What is the Board of Directors and what do they do?
- elected by common stock holders
- vote one time for every share of common stock they own
- Major stock holders want to be on board of directors to help company do well
What are the responsibilities of the Board of Directors?
Responsibilities:
- hold annual share holders meeting
- give annual report
- select CEO to make day to day decisions for corporation
- select a CFO (chief financial officer) to be in charge of money, monitor trading of their stock, and to outbid whoever is trying to have too much stock
What is the SEC?
Securities Exchange Commission, stocks and bonds are regulated by the SEC. They try to prevent fraud
What is a bond holder?
they loan money to the corporation and expect to get it all back with interest
What are the 2 categories of bonds?
secured and debentured
What is a secured bond?
the SEC will not allow the company to release secure bonds unless they have sufficient collatoral (wealth that can be liquidated to repay a loan)
What is a debentured bond?
not backed with collatoral (junk bond)
EX: the SEC will not back a long history, stable company
What are the 2 types of secured bonds?
zero-coupon and convertible
What is a zero-coupon bond?
- Long term high yield bond
- Win win situation
- Legal tax shelter (you aren’t paying taxes)
What is a convertible bond?
have the option of turning the bond into stock
What are the 2 kinds of stock?
preferred and common
What is preferred stock?
if there is any money left over after bankruptcy/liquidation, the money will go to the preferred stock holders. They are promised a specific percentage return based on total preferred investment if a dividend is paid
What is a dividend?
portion of net profit that is returned to stockholders by the BOARD OF DIRECTORS as a gesture of good faith.
Why might a company not issue a dividend?
use it for research to better their company so more people will invest
What are the disadvantages to preferred stock?
they cost more and you don’t get to vote
What is common stock?
less expensive and allows your to vote
Who is allowed to trade securities?
only those who are licensed by the SEC
What is an under writers license?
- usually a company because it takes a lot of money to own
- will buy large quantities of new securities for resale
- corporation only gets money from stock the first time its sold
What is a securities dealers license?
tend to be companies that buy large quantities of used securities
What is a corporate raider?
their goal is to liquidate the company…completely legal
they look for companies whose common stock isn’t expensive, high break up value and board of directors isn’t paying attention
What is a broker?
will trade small quantities of used securities
Where are securities traded?
in the US and must be a licensed stock exchange
Three Exchanges: regional, NYSE and NASDAQ
What is a horizontal combination?
when a business acquires another similar to itself (pizza hut buying papa johns)
What is vertical combination?
when a company acquires another company that enhances or improves its production. (adds step in production process) this is legal as long as it doesn’t result in a monopoly
What is a conglomeration?
when a business acquires another business that is unrelated to itself
- if they diversify, they are buying companies unlike themself, when they start to lose money, they divest, sell unrelated company stock
- conglomerates in tabacco industry, when people stop smoking, they eat
How do these 3 combinations occur?
merger, consolidation, holding (parent)
What is a merger?
when one company totally absorbs another company, one company completely disappears
What is a consolidation?
when 2 or more companies voluntarily blend together to form a new company
What is a holding/parent company?
when a company owns a majority of another company’s common stock. the company can always buy itself back
What is an inter-locking directorate?
a person who is serving on the board of directors of different companies as long as a monopoly doesn’t form
