Chapter 4: Business Types Flashcards
Advantages of a sole proprietorship
- Ease of start-up and closure
- Pride of ownership
- Retention of all profits
- No special (corporation) taxes
- Flexibility of being your own boss
Disadvantages of sole proprietorship
- Unlimited liability
- Lack of continuity
- Lack of money
- Limited management skills
- Difficulty in hiring employees
Two possible types of partners (partnerships)
- General partner
- Limited partner
Articles of partnership
An agreement listing and explaining the terms of the partnership.
Advantages of partnerships
- Ease of start-up
- Availability of capital and credit
- Personal interest
- Combined business skills and knowledge
- Retention of profits
- No special taxes
Disadvantages of partnerships
- Unlimited liability
- Management disagreements
- Lack of continuaties
- Frozen investment
Name the rights of a corporation
- The right to start and operate a business
- The right to buy or sell property
- The right to borrow money
- The right to sue or be sued
- The right to enter into binding contracts
Name information in the articles of incorporation
- The firm’s name and address
- The incorporators’ names and addresses
- The purpose of the corporation
- The maximum amount of stock and types of stock to be issued
- The rights and privileges of stockholders
- The length of time the corporation is to exist
Name two tipes of stock
- Common stock
- Preferred stock
Major responsibilities of the board of directors
To set company goals and develop general plans/strategies for meeting those goals.
The board is responsible for the firm’s overall operation.
What to the corporate officers do?
They help the board to:
- make plans,
- carry out strategies established by the board,
- hire employees,
- manage day-to-day business activities.
They periodically report to the board of directors.
Advantages of corporations
- Limited liability
- Ease of raising capital
- Ease of transfer of ownership
- Perpetual life
- Specialized management
Disadvantages of corporations
- Difficulty and expense of formation
- Government regulation and increased paperwork
- Conflict within the corporation
- Double taxation
- Lack of secrecy
Criteria qualifying an S-corporation
- No more than 100 stockholders are allowed
- Stockholders must be individuals, estates, or certain trusts
- There can be only one class of outstanding stock
- The firm must be a domestic corporation
- There can be no partnerships, corporations, or nonresident-alien stockholders
- All stockholders must agree to the decision to form an S-corporation
Advantages of an S-corporation
- Avoid double taxation
- Limited liability
- Corporation that is taxed as a partnership
Advantages of a Limited-liability company
- Can be taxed like a sole-proprietorship, partnership or a company
- Limited-liability
- Management flexibility (no annual meetings etc.)
Reasons for seeking Corporate growth
- Greater profit (greater sales revenue)
- Growing economy means that a business must grow (in order not to shrink relative to the economy)
- Means for executives to boost their power, prestige and reputation.
Horizontal Merger
Merger between firms that make and sell similar products and services in similar markets.
This is to reduce the number of firms in an industry - thus reducing competition.
Vertical Merger
Merger between firms that operate at different levels.
One of the merging firms is generally either a supplier or customer of the other.
Conglomerate Mergers
Merger between firms in completely different industries.
