Chapter 5

Question 1

Sole proprietorship

Answer 1

A business owned, and usually managed, by one person.

Question 2

Partnership

Answer 2

A legal form of business with two or more owners.

Question 3

Corporation

Answer 3

A legal entity with authority to act and have liability separate from its owners.

Question 4

Unlimited liability

Answer 4

The responsibility of business owners for all debts of the business.

Question 5

What are the advantages and disadvantages of sole proprietorships?

Answer 5

Advantages: are ease of starting and ending the business, being your own boss, pride of ownership. leaving a legacy, retention of company profits, and no special taxes.
Disadvantages: include unlimited liability, limited financial resources, management difficulties, overwhelming time commitment, few fringe benefits, limited growth, and limited life span.

Question 6

Why would unlimited liability be considered a major drawback to sole proprietorships?

Answer 6

With unlimited liability, the sole proprietor is liable for all debts and obligations of the business and must pay them even if it means selling your home, car, or whatever else you own.

Question 7

What are the Major Types of Partnerships

Answer 7

General Partner ship

Limited Partnership

Question 8

General partnership

Answer 8

A partnership in which all owners share in operating the business and in assuming liability for the business’s debts.

Question 9

Limited partnership

Answer 9

A partnership with one or more general partners and one or more limited partners.

Question 10

Types of Partners

Answer 10

General Partner

Limited Partner

Question 11

General partner

Answer 11

An owner (partner) who has unlimited liability and is active in managing the firm.

Question 12

Limited partner

Answer 12

An owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment.

Question 13

Limited liability

Answer 13

The responsibility of a business’s owners for losses only up to the amount they invest; limited partners and shareholders have limited liability.

Question 14

Master limited partnership (MLP)

Answer 14

A partnership that looks much like a corporation (in that it acts like a corporation and is traded on a stock exchange) but is taxed like a partnership and thus avoids the corporate income tax.

Question 15

Limited liability partnership (LLP)

Answer 15

A partnership that limits partners’ risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision.

Question 16

Advantages of Partnership

Answer 16

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

Question 17

Disadvantages of Partnership

Answer 17

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

Question 18

What is the difference between a limited partner and a general partner?

Answer 18

A general partner is an owner who has unlimited liability and can be active in managing the firm. A limited partner is an owner who invests money in the business, but does not have any management responsibility or liability for losses beyond his or her investment.

Question 19

What are some of the advantages and disadvantages of partnerships?

Answer 19

Some of the advantages of partnerships are more financial resources, shared management and pooled/complementary skills and knowledge, longer survival, and no special taxes. Disadvantages of partnerships include unlimited liability (for general partners), division of profits, disagreements among partners, and difficulty of termination.

Question 20

(C) Conventional Corporation

Answer 20

A state-chartered legal entity with authority to act and have liability separate from its owners (its stockholders).
Allows people to share ownership

Question 21

8 Corporate Types

Answer 21

1. Alien corporations
2. Domestic corporation
3. Foreign Corporation
4. Closed (private) corporations
5. Open (public) corporations
6. Quasi-public corporations
7. Professional corporations
8. Nonprofit (or not-for-profit) corporations

Question 22

Advantages of Corporations

Answer 22

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 23

Disadvantages of Corporations

Answer 23

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 24

How do owners affect Management

Answer 24

Owners have an influence on how a business is managed by electing a board of directors. The board hires the top officers (and fires them if necessary). It also sets the pay for those officers. The officers then select managers and employees with the help of the human resource department.

Question 25

Individuals can corporate anyone | True or False

Answer 25

True

Question 26

(S) Corporations

Answer 26

A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships.

Question 27

What are the major advantages and disadvantages of incorporating a business?

Answer 27

Advantages of incorporating a business include limited liability, ability to raise more money for investment, size, perpetual life, ease of ownership change, ease of attracting talented employees, and separation of ownership from management. Disadvantages of incorporating are initial cost, extensive paperwork, double taxation, two tax returns, size, difficulty to terminate, and possible conflict with stockholders and board of directors.

Question 28

What’s the role of owners (stockholders) in the corporate hierarchy?

Answer 28

Stockholders do not have to be employees of the corporation. They are investors who have limited liability. Stockholders elect the board of directors of a company who select the management to control the company.

Question 29

Why are so many new businesses choosing a limited liability company (LLC) form of ownership?

Answer 29

Limited liability companies have become a popular way to form a business since all fifty states now recognize LLCs. Some of the advantages of LLCs are limited liability, choice of taxation (can be taxed as a partnership or corporation), flexible ownership rules, flexible distribution of profit and losses, and operating flexibility.

Question 30

Merger

Answer 30

The result of two firms forming one company.

Question 31

Acquisition

Answer 31

One company’s purchase of the property and obligations of another company.

Question 32

Types of Merger

Answer 32

Vertical Merger:The joining of two companies in different stages of related businesses. Horizontal Merger: The joining of two firms in the same industry. Conglomerate merger:The joining of firms in completely unrelated industries.

Question 33

Leveraged buyout (LBO)

Answer 33

An attempt by employees, management, or a group of private investors to buy out the stockholders in a company.

Question 34

Franchise agreement

Answer 34

An arrangement whereby someone with a good idea for a business (franchisor) sells the rights to use the business name and sell a product or service (franchise) to others (franchisees) in a given territory.

Question 35

Advantages of a Franchise

Answer 35

``` Management and marketing assistance. Personal ownership. Nationally recognized name. Financial advice and assistance. Lower failure rate. ```

Question 36

Disadvantages of a Franchise

Answer 36

``` Large start-up costs. Shared profit. Management regulation. Coattail effects. Restrictions on selling. Fraudulent franchisors. ```

Question 37

Home-Based Franchises Advantages

Answer 37

Relief from commuting stress. Extra family time. Low overhead expenses.

Question 38

Home-Based Franchises Disadvantages

Answer 38

Long hours | Isolation

Question 39

What is a Cooperative (Co-Op)

Answer 39

A business owned and controlled by the people who use it—producers, consumers, or workers with similar needs who pool their resources for mutual gain.

Question 40

What are some of the factors to consider before buying a franchise?

Answer 40

Before buying a franchise be sure to check a company’s (franchisor’s) resources and reputation. There are many franchising scams. The checklist in this chapter gives advice about things to consider before buying a franchise.

Question 41

What opportunities are available for starting a global franchise?

Answer 41

Successful franchising in global markets offers the same opportunities as in domestic markets. However, franchisors must be careful to adapt to the region where they wish to expand.

Question 42

What is a cooperative?

Answer 42

A cooperative is a form of business that is owned and controlled by the people who use it—producers, consumers, or workers with similar needs who pool their resources for mutual gain. Cooperatives are a major force in agriculture and other industries today.