Chapter 5. How to form a business

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 iability

Answer 4

the responsibility of business owners for all debts of the business

Question 5

general partnership

Answer 5

a partnership in which all owners share in operating the business an din assuming liability for the business’s debts

Question 6

limited partnership

Answer 6

a partnership with one or more general partners and one or more limited partners

Question 7

general partner

Answer 7

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

Question 8

limited partner

Answer 8

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

Question 9

limited liability

Answer 9

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

Question 10

master limited partnership (MLP)

Answer 10

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 11

limited liability partnership (LLP)

Answer 11

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 12

conventional (c) corporation

Answer 12

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

Question 13

S corporations

Answer 13

• a unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships
• have shareholders, directors, and employees, plus the benefit of limited liability
• profits are taxed only as the personal income of the shareholder
  -if s status lost must wait to operate under it after 5 years

Question 14

LLCs

Answer 14

similar to an S corporation but without the special eligibility requirements

Question 15

Merger

Answer 15

the result of two firms forming one company

Question 16

aquisition

Answer 16

one company’s purchase of the property and obligations of another company

Question 17

vertical merger

Answer 17

the joining of two companies in different stages of related businesses

Question 18

horizontal merger

Answer 18

the joining of two firms in the same industry

Question 19

conglomerate merger

Answer 19

the joining of firms in completely unrelated industries

Question 20

leveraged buyout (LBO)

Answer 20

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

Question 21

franchise agreement

Answer 21

an arrangement whereby someone with a good idea for 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 22

Cooperative (Co-Op)

Answer 22

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