Chapter 5

Question 1

Sole Proprietorship

Answer 1

A business owned and managed by one person.

Question 2

Partnership

Answer 2

When two or more people legally agree to become co-owners of a business

Question 3

Corporation

Answer 3

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

Question 4

General Partnership

Answer 4

All owners share in operating the business and in assuming liability for the business’s debts.

Question 5

Limited Partenership

Answer 5

Has one or more general partners and one or more limited partners.

Question 6

General Partner

Answer 6

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

Question 7

Limited Partner

Answer 7

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

Question 8

Limited Liability

Answer 8

Means that the limited partners liability for the debts of the business is limited to the amount they put into the company. Personal assets are not at risk.

Question 9

Master limited partnership

Answer 9

A partnership that looks much like a corporation but is taxed like a partnership and thus avoids the corporate income tax.

Question 10

Limited Liability Partnership

Answer 10

Limits parteners 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 11

Conventional corporation

Answer 11

A state chartered legal entity with authority to act and have liability separate from its owners (stockholders)

Question 12

S Corporation

Answer 12

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

Question 13

Limited Liability Company (LLC)

Answer 13

A company similar to an s corporation but without the special eligibility requirements.

Question 14

Merger

Answer 14

The result of two firms joinging to form one company

Question 15

Acquisition

Answer 15

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

Question 16

Vertical Merger

Answer 16

Joins two firms operating in different stages of related businesses.

Question 17

Horizontal Merger

Answer 17

The joining of two firms in the same industry.

Question 18

Conglomerate Merger

Answer 18

Unites two firms in completely unrelated industries in order to diversify business operations and investments.

Question 19

Leveraged buyout (LBO)

Answer 19

An attempt by employees, managers, or investors to buy out the stockholders in a company through borrowing.

Question 20

Franchise Agreement

Answer 20

An arrangement whereby someone with a good idea for a business sells the right to use the business name and sell a product or service to others in a given terrritory.

Question 21

Franchise

Answer 21

The right to use a specific business’s name and sell its products or services in a given territory

Question 22

Franchisee

Answer 22

A person who buys a franchise

Question 23

Cooperative (Co-Op)

Answer 23

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 24

Advantages of a sole proprietorship:

Answer 24

• 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

Question 25

Disadvantages of a sole proprietorship:

Answer 25

- Unlimited Liabilty - the risk of personal losses - Limited financial resources - Management difficulties - Overwhelming Time Commitment - Few fringe benefits - Limited growth - Limited life span

Question 26

Advantages of partnership:

Answer 26

- More financial resources - Shared management and pooled/complementary skills and knowledge - Longer survival - No special taxes

Question 27

Disadvantages of partnerships

Answer 27

- Unlimited Liability - Division of profits - Difficulty of termination - Disagreement among partners

Question 28

Advantages of corporations

Answer 28

- 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

Question 29

Disadvantages of corporations

Answer 29

- Initial Cost - Extensive paperwork - Double taxation - Two tax returns - Size - Difficulty of termination - Possible conflict with stockholders and board of directors

Question 30

Limited Liability Company Advantages:

Answer 30

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

Question 31

Limited Liability Company Disadvantages:

Answer 31

- No Stock - Fewer Incentives - Taxes - Paperwork

Question 32

Franchise Advantages:

Answer 32

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

Question 33

Franchise Disadvantages:

Answer 33

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

Question 34

Types of corporations:

Answer 34

1. Alien Corporation 2. Domestic Corporation 3. Foreign Corporations 4. Closed (private) corporations 5. Open (public) corporatinos 6. Quasi-public corporations 7. Professional corporations 8. Nonprogfit corporatinos 9. Multinational corporations

Question 35

Three Main Forms of Business Ownership:

Answer 35

- Sole Proprietorship - Partnership - Corporation