chapter 4

Question 1

Basic Forms of Business Ownership

Answer 1

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.

Question 2

Sole Proprietorships advantages

Answer 2

Advantages of Sole Proprietorships:

1. Ease of starting and ending the business.
2. Ability to be your own boss.
3. Pride of ownership.
4. Leaving a legacy.
5. Retention of company profits.
6. No special taxes.

Question 3

Disadvantages of Sole Proprietorships

Answer 3

Disadvantages of Sole Proprietorships

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 4

Partnerships types

Answer 4

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.

Question 5

Advantages of Partnerships

Answer 5

1. More financial resources.
2. Shared management and pooled/complementary skills and knowledge.
3. Longer survival.
4. No special taxes.

Question 6

Disadvantages of Partnerships

Answer 6

1. Unlimited liability.
2. Division of profits.
3. Disagreements among partners.
4. Difficulty of termination.

Question 7

Conventional Corporation

Answer 7

• Has stockholders.
• Limits liability of owners.
• Enables many people to share in ownership

Question 8

Advantages of Corporations

Answer 8

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 9

Disadvantages of Corporations

Answer 9

1. Initial cost.
2. Extensive paperwork.
3. Double taxation.
4. Two tax returns.
5. Size.
6. Difficulty of termination.
7. Possible conflict with stockholders and board of
   directors

Question 10

Individuals Can Incorporate

Answer 10

• Normally do not issue stock to others.
• Do not share all the advantages and disadvantages of large corporations.
• Limited liability and tax benefits.

Question 11

S Corporations

Answer 11

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).

Question 12

Limited Liability Companies

Answer 12

• Similar to an S corporation, but without the eligibility
  requirements.
• More than half of new business registrations in some states are LLCs.

Question 13

Advantages of Limited Liability Companies

Answer 13

• Limited liability.
• Choice of taxation.
• Flexible ownership rules.
• Flexible distribution of profits and losses.
• Operating flexibility.

Question 14

Disadvantages of Limited Liability Companies

Answer 14

• No stock.
• Fewer incentives.
• Taxes.
• Paperwork.

Question 15

merger

Answer 15

A merger is the result of two firms joining to form one
company.

Question 16

acquisition

Answer 16

An acquisition is one company’s purchase of the
property and obligations of another company.

Question 17

Three Types of Corporate Mergers

Answer 17

1. Vertical merger.
2. Horizontal merger.
3. Conglomerate merger.

Question 18

Leveraged Buyout

Answer 18

The employees, managers, or investors become the
owners of the firm.

Question 19

Franchise agreement

Answer 19

• 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.

Question 20

Advantages of Franchises

Answer 20

1. Management and marketing assistance.
2. Personal ownership.
3. Nationally recognized name.
4. Financial advice and assistance.
5. Lower failure rate.

Question 21

Disadvantages of Franchises

Answer 21

1. Large start-up costs.
2. Shared profit.
3. Management regulation.
4. Coattail effects.
5. Restrictions on selling.
6. Fraudulent franchisors.

Question 22

Home-Based Franchises

Answer 22

Home-Based Franchises
* Advantages:
* No commuting.
* Extra time for family.
* Low overhead.

Disadvantages:
* Isolation.
* Long hours.

Question 23

Cooperatives

Answer 23

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.

Question 24

vertical mergers

Answer 24

a merger that consolidates the supply line of a product.

Question 25

horizontal mergers

Answer 25

a merger between companies with similiar products

Question 26

conglomerate mergers

Answer 26

merger between companies who have similar audiences with different products.

Conglomerate – a merger between companies who offer diverse products/services.