Ch 5 & 13

Question 1

sole proprietorship

Answer 1

a business that is owned, and usually managed, by one person

Question 2

partnership

Answer 2

a legal form of business with two or more owners

Question 3

corporation

Answer 3

a legal entity with authority to act and have liability apart from its owners

Question 4

unlimited liability

Answer 4

the responsibility of business owner for all of the debts of the business

Question 5

advantages of sole proprietorships

Answer 5

1) ease of starting and ending the business
2) being your own boss
3) pride of ownership
4) leaving a legacy
5) retention of company profits
6) no special taxes

Question 6

disadvantages of sole proprietorships

Answer 6

1) unlimited liability- risk of personal losses
2) limited financial resources
3) management difficulties
4) overwhelming time commitment
5) few fringe benefits
6) limited growth
7) limited life span

Question 7

general partnership

Answer 7

all owners share in operating the business and in assuming liability for the business’ debts

Question 8

limited partnership

Answer 8

one or more general partners and one or more limited partners

Question 9

general partner

Answer 9

owner (partner) who has unlimited liability and is active in managing the firm

Question 10

limited partner

Answer 10

owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment

Question 11

limited liability

Answer 11

the responsibility of a biz’s owners for losses only up to the amount they invest; limited partners and shareholders have limited liability

Question 12

master limited partnership (MLP)

Answer 12

a partnership that looks much like a corporation (in that it acts like a corp and is traded on a stock exchange) but is taxed like a partnership and thus avoids the corporate income tax

Question 13

limited liability partnership (LLP)

Answer 13

partnership that limits partners’ risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision

Question 14

advantages of partnerships

Answer 14

1) more financial resources
2) shared management and pooled/complementary skills/knowledge
3) longer survival
4) no special taxes

Question 15

disadvantages of partnerships

Answer 15

1) unlimited liability
2) division of profits
3) disagreements among partners
4) difficulty of termination

Question 16

conventional (C) corporation

Answer 16

state-chartered legal entity with authority to act and have liability separate from its owners

Question 17

advantages of corporations

Answer 17

1) limited liability
2) ability to raise more money for investment
3) size
4) perpetual life
5) ease of ownership change
6) ease of attracting talented employees
7) separation of ownership from management

Question 18

disadvantages of corporations

Answer 18

1) initial cost
2) extensive paperwork
3) double taxation
4) two tax returns
5) size
6) difficulty of termination
7) possible conflict w/ stockholders and board of directors

Question 19

S corp

Answer 19

a unique govnmt creation the looks like a corp but is taxed like a sole prop and partshp

Question 20

limited liability company (LLC)

Answer 20

similar to an S corp but without the special eligibility requirements

Question 21

requirements of an S corp

Answer 21

1) no more than 100 shareholders
2) have shareholders that are citizens or permanent US residents
3) have only one class of stock
4) derive no more than 25% of income from passive sources

Question 22

advantages of LLC

Answer 22

1) limited liability
2) choice of taxation
3) flexible ownership rules
4) flexible distribution of profits and losses
5) operating flexibility

Question 23

disadvantages of LLC

Answer 23

1) no stock
2) limited life span
3) fewer incentives
4) taxes
5) paperwork

Question 24

merger

Answer 24

result of two firms forming one company

Question 25

acquisition

Answer 25

one company’s purchase of the property and obligations of another company

Question 26

vertical merger

Answer 26

joining of two companies involved in different stages of related businesses

Question 27

horizontal merger

Answer 27

joining of two firms in the same industry

Question 28

conglomerate merger

Answer 28

joining of firms in completely unrelated industries

Question 29

leveraged buyout (LBO)

Answer 29

attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing

Question 30

franchise agreement

Answer 30

arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service to others in a given territory

Question 31

franchisor

Answer 31

company that develops a product concept and sells others the rights to make and sell the products

Question 32

franchise

Answer 32

the right to use a specific business’ name and sell its products or services in a given territory

Question 33

francisee

Answer 33

a person who buys a franchise

Question 34

advantages of franchises

Answer 34

1) management and marketing assistance
2) personal ownership
3) nationally recognized name
4) financial advice and assistance
5) lower failure rate

Question 35

disadvantages of franchises

Answer 35

1) large start-up costs
2) shared profit
3) management regulation
4) coattail effects
5) restrictions on selling
6) fraudulent franchisors

Question 36

cooperatives

Answer 36

business owned and controlled by the people who use it- producers, consumers, or workers with similar needs who pool their resources for mutual gain