Chapter 4: Business Types

Question 1

Advantages of a sole proprietorship

Answer 1

• Ease of start-up and closure
• Pride of ownership
• Retention of all profits
• No special (corporation) taxes
• Flexibility of being your own boss

Question 2

Disadvantages of sole proprietorship

Answer 2

• Unlimited liability
• Lack of continuity
• Lack of money
• Limited management skills
• Difficulty in hiring employees

Question 3

Two possible types of partners (partnerships)

Answer 3

• General partner

- Limited partner

Question 4

Articles of partnership

Answer 4

An agreement listing and explaining the terms of the partnership.

Question 5

Advantages of partnerships

Answer 5

• Ease of start-up
• Availability of capital and credit
• Personal interest
• Combined business skills and knowledge
• Retention of profits
• No special taxes

Question 6

Disadvantages of partnerships

Answer 6

• Unlimited liability
• Management disagreements
• Lack of continuaties
• Frozen investment

Question 7

Name the rights of a corporation

Answer 7

• 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

Question 8

Name information in the articles of incorporation

Answer 8

• 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

Question 9

Name two tipes of stock

Answer 9

• Common stock

- Preferred stock

Question 10

Major responsibilities of the board of directors

Answer 10

To set company goals and develop general plans/strategies for meeting those goals.
The board is responsible for the firm’s overall operation.

Question 11

What to the corporate officers do?

Answer 11

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.

Question 12

Advantages of corporations

Answer 12

• Limited liability
• Ease of raising capital
• Ease of transfer of ownership
• Perpetual life
• Specialized management

Question 13

Disadvantages of corporations

Answer 13

• Difficulty and expense of formation
• Government regulation and increased paperwork
• Conflict within the corporation
• Double taxation
• Lack of secrecy

Question 14

Criteria qualifying an S-corporation

Answer 14

• 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

Question 15

Advantages of an S-corporation

Answer 15

• Avoid double taxation
• Limited liability
• Corporation that is taxed as a partnership

Question 16

Advantages of a Limited-liability company

Answer 16

• Can be taxed like a sole-proprietorship, partnership or a company
• Limited-liability
• Management flexibility (no annual meetings etc.)

Question 17

Reasons for seeking Corporate growth

Answer 17

• 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.

Question 18

Horizontal Merger

Answer 18

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.

Question 19

Vertical Merger

Answer 19

Merger between firms that operate at different levels.

One of the merging firms is generally either a supplier or customer of the other.

Question 20

Conglomerate Mergers

Answer 20

Merger between firms in completely different industries.