Chapter 5: Starting a Business

Question 1

sole proprietorship vs corporation vs partnerships

Answer 1

-1 person business owned and usually managed
-an entity that can make decisions and act without the need for authorization from its owners
-when two or more people are the co-owners of a business

Question 2

Bylaws

Answer 2

How a business should operate from legal and managerial points of view according to the article of incorporation

Question 3

Advantages and disadvantages of sole proprietorships

Answer 3

A: own boss, pride of ownership, leaving a legacy, retention of company profits, ease of starting and ending a business, no special taxes
D: unlimited liability, limited financial resources, little to no fringe benefits, large time commitment, limited life span/growth, management difficulties

Question 4

general partnership vs limited partnership

Answer 4

-all owners share liability for the company vs 1 or more general partners and 1 or more limited partners

Question 5

general partner vs limited partner

Answer 5

G: unlimited liability for company
L: one who invests money into a company, but does not have management responsibilities and no liability beyond money invested

Question 6

limited liability

Answer 6

a limited partner’s liability is limited to how much they decide to invest

Question 7

master limited partnership (MLP)

Answer 7

acts like a corporation/traded like one but it is taxed like a partnership

Question 8

limited liability partnership

Answer 8

partner’s risks are limited to themselves in the case that a co-workers commits malpractice

Question 9

Advantages/Disadvantages of Partnerships

Answer 9

A: more financial resources, shared management (knowledge/skills), longer survival, no special taxes
D: -unlimited liability, division of profits, disagreements among partners, difficulty of termination

Question 10

Conventional corporation (C)

Answer 10

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

Question 11

Advantages/Disadvantages of Corporations

Answer 11

A: -limited liability
-ability to raise money for investment (sells shares of its stock)
-size
-perpetual life
-ease ownership change
-ease of attracting talented employees

D:-initial cost
-extensive paperwork
-double taxation (corporate income is taxed twice)
-two tax returns (corporate and personal)
-size (too inflexible)
-difficulty of termination
-possible conflict with stockholder and board of directors

Question 12

S corporation and qualifications

Answer 12

unique government creation=taxed like a sole proprietorship
-Qualifications ^^
-no more than 100 shareholders (family members count as 1)
-shareholder are individuals/estates (US citizens or residents)
-only have 1 class of stock
-derive no more than 25% of income(business) from passive sources (rents, royalties, interest)

Question 13

limited liability company (LLC)

Answer 13

same as the S corporation=no special requirements (protection of being sued because revenue is the only thing that can be sued from a company)

Question 14

Advantages/disadvantages of LLC’s

Answer 14

A; -limited liability
-choice of taxation (partnership or corporation)
-flexible ownership rules (optional: hold annual meetings, keep meetings, file written resolutions)
-flexible distribution of profits and losses
-operating flexibility (not required to hold annual meetings or keep minutes)
D: -no stock(need approval from members to sell interests in the company)
-fewer incentives (little fringe benefits)
-taxes
-paperwork
-initial cost

Question 15

merger vs acquisition(buyout)

Answer 15

-two firms join together to form one company
-one company’s purchase of property/obligations of another company

Question 16

vertical. horizontal, conglomerate merger

Answer 16

-two firms join and operate in different stages of related business (sugar and pepsi)
-two firms join together in the same industry to expand their products
-firms unite from different backgrounds to diversity their business operations and investments

Question 17

leveraged buyout

Answer 17

-attempt by employees, managers, and investors to buyout stockholders in a company by borrowing the necessary funds in order to become company owners

Question 18

Franchise agreement

Answer 18

franchisor allows a franchisee to buy rights of the business name and sell the product/service

Question 19

Advantages/Disadvantages of franchising

Answer 19

A: Management and marketing assistance (established business)
Personal ownership
Nationally recognized name
Financial advice and assistance (from franchise)
Lower failure rate

D:Large start up costs
Shared profits
Management regulation
Coattail effects (franchises may affect your business/where the market goes like Krispy Kremes being available more places)
Restrictions on selling
Fraudulent franchisors

Question 20

Types of franchises

Answer 20

-diversity (looks good to minority groups because they offer financial support to businesses
-home-based (no overhead expenses/no commuting)
-e-commerce

Question 21

cooperative

Answer 21

owned and controlled by people who use it (farming/electrical power)