chapter 4 Flashcards
Basic Forms of Business Ownership
Three Major Forms
- Sole proprietorship.
Owned by one person. - Partnership.
Owned by two or more people. - Corporation.
Makes up 20 percent of all business, but 81 percent of U.S. business receipts.
Sole Proprietorships advantages
Advantages of Sole Proprietorships:
- Ease of starting and ending the business.
- Ability to be your own boss.
- Pride of ownership.
- Leaving a legacy.
- Retention of company profits.
- No special taxes.
Disadvantages of Sole Proprietorships
Disadvantages of Sole Proprietorships
- Unlimited liability – risk of personal losses.
- Limited financial resources.
- Management difficulties.
- Overwhelming time commitment.
- Few fringe benefits.
- Limited growth.
- Limited life span
Partnerships types
Partnerships
- General partnership.
Shared ownership and liability. - Limited partnership.
Has general partners and limited partners who have limited liability. - Master limited partnership.
Acts like a corporation but taxed like a partnership. - Limited liability partnership.
Limits partners’ risk.
Advantages of Partnerships
- More financial resources.
- Shared management and pooled/complementary skills and knowledge.
- Longer survival.
- No special taxes.
Disadvantages of Partnerships
- Unlimited liability.
- Division of profits.
- Disagreements among partners.
- Difficulty of termination.
Conventional Corporation
- Has stockholders.
- Limits liability of owners.
- Enables many people to share in ownership
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
Disadvantages of Corporations
- Initial cost.
- Extensive paperwork.
- Double taxation.
- Two tax returns.
- Size.
- Difficulty of termination.
- Possible conflict with stockholders and board of
directors
Individuals Can Incorporate
- Normally do not issue stock to others.
- Do not share all the advantages and disadvantages of large corporations.
- Limited liability and tax benefits.
S Corporations
Looks like a corporation but taxed like sole proprietorships and partnerships.
- Profits are taxed only as the personal income of shareholders.
- To qualify, a company must:
1. Have no more than 100 shareholders.
2. Have shareholders that are individuals or estates, and who (as
individuals) are citizens or permanent residents of the U.S.
3. Have only one class of stock.
4. Derive no more than 25 percent of income from passive sources
(rents, royalties, interest).
Limited Liability Companies
- Similar to an S corporation, but without the eligibility
requirements. - More than half of new business registrations in some states are LLCs.
Advantages of Limited Liability Companies
- Limited liability.
- Choice of taxation.
- Flexible ownership rules.
- Flexible distribution of profits and losses.
- Operating flexibility.
Disadvantages of Limited Liability Companies
- No stock.
- Fewer incentives.
- Taxes.
- Paperwork.
merger
A merger is the result of two firms joining to form one
company.
acquisition
An acquisition is one company’s purchase of the
property and obligations of another company.
Three Types of Corporate Mergers
- Vertical merger.
- Horizontal merger.
- Conglomerate merger.
Leveraged Buyout
The employees, managers, or investors become the
owners of the firm.
Franchise agreement
- someone with a good idea for a business (the
franchisor), - sells the rights to use the business name and sell a
product or service (the franchise), - to others (the franchisees) in a given territory.
Advantages of Franchises
- Management and marketing assistance.
- Personal ownership.
- Nationally recognized name.
- Financial advice and assistance.
- Lower failure rate.
Disadvantages of Franchises
- Large start-up costs.
- Shared profit.
- Management regulation.
- Coattail effects.
- Restrictions on selling.
- Fraudulent franchisors.
Home-Based Franchises
Home-Based Franchises
* Advantages:
* No commuting.
* Extra time for family.
* Low overhead.
Disadvantages:
* Isolation.
* Long hours.
Cooperatives
are owned and controlled by the
people who use them.
- Worldwide, co-ops serve one billion members!
- Members democratically control the business by electing a board of directors that hires professional management.
- Farm cooperatives.
vertical mergers
a merger that consolidates the supply line of a product.
horizontal mergers
a merger between companies with similiar products
conglomerate mergers
merger between companies who have similar audiences with different products.
Conglomerate – a merger between companies who offer diverse products/services.
