Chapter 3 Flashcards
Sole Proprietorship
a business owned and run by one person
Forming a Proprietorship
no requirements except for occasional business, licenses, and fees
Advantages of a Proprietorship (6)
- ease of starting up
- ease of management
- owner enjoys the profits without having to share them with other owners
- doesn’t have to pay separate business income taxes
- psychological satisfaction
- ease of getting out of business
Disadvantages of a Proprietorship (6)
- unlimited liability
- difficult to raise financial capital
- small size and efficiency
- limited managerial experience
- difficult to attract qualified employees
- limited life
unlimited liability
the owner is personally and fully responsible for all loses and debts of the business
inventory
a stock of finished goods and parts in reserve
limited life
the firm legally ceases to exist when the owner dies, quits, or sells the business
General Partnership
all partners are responsible for the management and financial obligations of the business
Limited Partnership
at least one partner isn’t active in the daily running of the business
Advantages of a Partnership (6)
- ease of establishment
- ease of management
- lack of special taxes on a partnership
- attract financial capital more easily than proprietorships
- larger than proprietorships
- attract top talent into their organizations
Disadvantages of a Partnership (4)
- each partner is fully responsible for the acts of all other partners
- potential for conflict between partners
- limited partnership
- bankrupcy
limited partnership
investor’s responsibility for the debts of the business is limited by the size of his or her investment in the firm
bankruptcy
a court granted permission to an individual or business to cease or delay debt payments
Corporation
a form of business organization recognized by law as a separate legal entity having all the rights of an individual
charter
a government document that gives permission to create a corporation
stock
ownership certificates in the firm
dividend
a check representing a portion of the corporate earnings
common stock
basic ownership of a corporation
preferred stock
nonvoting ownership shares of the corporation
Advantages of a Corporation (5)
- ease of raising financial capital
- directors of the corporation can hire professional managers to run the firm
- limited liability for owners
- unlimited life
- ease of transferring ownership
bond
written promise to repay the amount borrowed at a later date
prinicipal
amount borrowed
interest
price paid for the use of another’s money
Disadvantages of a Corporation (4)
- difficult to get a charter
- the owners/shareholders have little say in how the business is run after they have voted for the board of directors
- double taxation
- subject to more government regulation
double taxation
stockholders’ dividends are taxed twice - once as a corporate profit and again as personal income
a merger
a combo of 2+ businesses to form a single firm
Income Statement
a report showing a business’ sales, expenses, and profits for a certain period
net income
difference of all expenses, including taxes, from its revenues
depreciation
a non cash charge the firm takes for the general wear and tear on its capital goods
cash flow
total amount of new funds the business generates from operations
Reasons for Merging (5)
- businesses aren’t growing at the rate they want with the internal funds
- efficiency
- need to acquire new product lines
- catch up or eliminate rivals
- lose corporate identity
horizontal merger
2+ firms produce the same kind of product join forces
vertical merger
firms involved in different steps of manufacturing join together
a conglomerate
a firm that has at least 4 businesses, each making unrelated products, none of which is responsible for a majority of its sales
a multinational
a corporation that has manufacturing or service operations in a number of different countries
