Ch. 4: How To Form A Business Flashcards
What is a sole proprietorship?
Owned by one person
What is a partnership?
Owned by two or more people
What is a corporation?
A company/group of people recognized by law to act as a single entity
6 Advantages of Sole Proprietorships?
Ease of starting/ending business
Being your own boss
Pride of ownership
Leaving a legacy
Retention of company profits
No special taxes
7 Disadvantages of sole proprietorships?
Unlimited liability-risk of personal loss
Limited financial resources
Management difficulties
Overwhelming time commitment
Few fringe benefits
Limited growth
Limited life span
What is a general partnership?
Shared ownership and liability
What is a limited partnership?
Has general partners and limited partners who have limited liability
What is a master limited partnership?
Acts like a corporation but taxed like a partnership
What is a limited liability partnership?
Limits partners’ risk
4 advantages of partnerships?
More financial resources
Shared management and pooled/complementary skills and knowledge
Longer survival
No special taxes
What are the disadvantages of partnerships?
Unlimited liability
Division of profits
Disagreements among partners
Difficulty of termination
What is a conventional corporation?
Has stockholders, liability of owners, enables many to share ownership
What is an alien corporation?
Does business in US but incorporated in another country (ie: samsung, South Korea(
What is a domestic corporation?
Does business in state they are incorporated (ie: apple, United states)
What is a foreign corporation?
Does business in one state but incorporated in another. These must register in states where it operates. 1/3 of corporations are chartered in DA because of attractive rules for incorporation. (Apple (international) and Samsung (alien))
What is a closed (private) corporation?
Has stock held by a few people and isn’t available to general public (ie: best buy, Publix)
What is an open (public) corporation?
Sells stock to general public. (General Motors, ExxonMobil)
What is a quasi-public corporation?
Chartered by govt as approved monopoly for services to general public (public utilities)
What is a professional corporation?
Owned by those who offer professional services (doctors, lawyers, etc). Shares not publicly traded.
What is a nonprofit corporation?
Don’t seek personal profit for owners (churches, public schools, public charities, research institutes)
What is a multinational corporation?
Operate in several countries (apple, tesla)
What are the advantages of corporations?
Limited liability
Ability to raise more money for investment
Size
Perpetual life
Ease of ownership change
Ease of attracting talented employees
Separation of ownership from management
What is the role of owners/stockholders in corporation hierarchy?
Elect board of directors
What is the role of board of directors in corporation hierarchy?
Hire officers
What is the role of officiers in corporation hierarchy?
Set corporate objectives and select managers
What is the role of managers in corporation hierarchy?
Supervise employees
What are the disadvantages of corporations?
Initial cost
Extensive paperwork
Double taxation
Two tax returns
Size
Difficulty of termination
Possible conflict with stockholders and board of directors
How do individuals incorporate?
Normally do not issue stock to others
Do not share all advantages/disadvantages of large corporations
Limited liability and tax benefits
What is a S Corporation?
A unique govt creation that looks like a corporation but is taxed like sole proprietorships and partnerships.
Profits only taxed as personal income of shareholders
What qualifies for an S corporation?
No more than 100 shareholders
Shareholders are individuals or estates and citizens or permanent residents of the US
Have only one class of stock
Derive no more than 25% income from passive sources (rent, royalties, interest)
Advantages of LLCs?
Limited liability
Choice of taxation
Flexible ownership rules
Flexible distribution of profits
Operating flexibility
Disadvantages of LLCs?
No stock
Fewer incentives
Taxes
Paperwork
What is a merger?
Two firms joining to form one company
What is an acquisition?
One company’s purchase of property/obligations of another company
What is a vertical merger?
Companies in different stages of related industries (software drink company + artificial sweetener company)
What is a horizontal merger?
Companies in the same industry (soft drink company + mineral water company)
What is a conglomerate merger?
Companies in unrelated industries (soft drink company + snack food company)
What must mergers between two competitors prove to the FTC?
That the new combined company does not limit competition unfairly
How does a company take firm private?
Management or group of stockholders obtains all of firm’s stock by buying it back from other stockholders
What is a leveraged buyout?
The employees, managers, or investors become the owners of the firm
What is unlimited liability?
Debts or damages incurred by business are your debts to pay off, even if it means selling home or car to do so.
What is a general partner?
Unlimited liability and active in managing the firm
What is a limited partner?
Owner who invests money in business but does not have any management responsibility or liability for losses beyond their investment
What is a limited partnership?
One or more general partners and one or more limited partners.
What is limited liability?
The limited partners’ liability for the debts of the business is limited to the amount they put into the company, personal assets are not at risk
