chapter 6 Flashcards
what is a sole proprietorship?
one person owning and operating a business, without forming a corporation
in a sole proprietorship, the business and owner are a single entity
what are the 6 advantages to a sole proprietorship?
easy and inexpensive to form
profits are retained by the owner
direct control of the business
freedom from government regulation
taxed once
ease of dissolution
explain how sole proprietorship are easy and inexpensive to form?
very few legal requirements when wanting to start a sole proprietorship business
explain how profits are retained by the owner in a sole proprietorship?
owner obtains the start-up funds and gets all the profits earned by the business. The more efficiently the firm operates, the higher the company’s profitability
explain how direct control of the business is a sole proprietorship advantage?
All business decisions are made by the sole proprietorship owner without having to consult anyone else
explain why a sole proprietorship has freedom from government regulation?
(more freedom than other forms
of business with respect to government controls) no governments requirements to open a sole proprietorship just need to be a licensed business
what are the 7disadvantages of a sole proprietorship?
unlimited liability
difficulty raising capital
limited managerial expertise
trouble finding qualified employees
personal time commitment unstable business life (limited lifespan)
losses are the owners responsibility
limited growth few fringe benefits
explain how unlimited liability is a disadvantage of a sole proprietorship?
Legally, the sole proprietor and the company are one and the same, making the business owner personally responsible for all debts the company incurs. can lose personal assets if needed
why is difficulty raising capital a disadvantage of a sole proprietorship?
Business assets are unprotected against claims of personal creditors, so business lenders view sole proprietorships as high risk due to the owner’s unlimited liability.
why is limited managerial expertise a disadvantage of a sole proprietorship?
The success of a sole proprietorship rests solely with the skills
and talents of the owner
why is trouble finding qualified employees a disadvantage of a sole proprietorship?
Sole proprietors often cannot offer the same pay, fringe benefits, and advancement as larger companies, making them less attractive to employees seeking the most favourable employment opportunities
why is the personal time commitment a disadvantage of a sole proprietorship?
Running a sole proprietorship business requires personal sacrifices and a huge time commitment (12-hour workdays and 7-day workweeks)
why is a unstable business life a disadvantage of a sole proprietorship?
life span of the business is uncertain - owner may lose interest, experience ill health, retire, or die. The business will cease to exist unless the owner makes
provisions for it to continue operating or puts it up for sale
what is liability?
liability is another term for debt, for a business it means the responsibility to pay all debts
why is liability important in a sole proprietorship?
because you have unlimited liability, any debts or damages incurred by the business are also your debts and YOU must pay them
what are required and important to fill out before forming a partnership?
legal forms outlining ALL the details of the partnership
what are the 3 forms of partnerships?
general partnership
limited liability partnership
limited partnership
explain what a general partnership is?
A partnership in which all owners share in operating the business and in assuming liability for the business’s debts. They co-own the assets, and each can act on behalf of the firm. Each partner also has unlimited liability for all the business obligations of the firm
explain a limited partnership?
a partnership with one or more general partners and one or more limited partners
what is a general partner?
an owner (partner) who has unlimited liability and is active in managing the firm
all money invested and personal assets are at risk if needed
what is a limited partner?
An owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment (personal assets are not at risk)
what is a limited liability partnership?
Limits all partner’s risks of losing their personal assets to the outcomes of only their own acts and omissions and those of people under their supervision
all other partners are not liable for another partners mistakes
what are the 12 questions to ask when choosing a business partner?
do you share the same goals
do you share the same vision for the company future
what skills does the other person have
does the other person have the same skills or do they compliment yours
what contacts, resources, or special attributes will the person bring to the business
what type of decision maker is this person
could I happily share authority with this person
do you trust each other
how does this person respond to adversity
do they try to solve the problem or try to defend their ego
can the person accept constructive criticism without getting defensive
to what extent can they bring fun and excitement into the partnership
what percentage of registered businesses in canada are sole proprietorships?
almost 25% of all registered businesses in canada fall under the form of owner ship
what are the 6 advantages of a partnership?
more financial resources
shared management and pooled, complementary skills and knowledge
longer survival
shared risk
special taxes
flexibility
explain why ease of formation is an advantage of a partner ship?
there is not a lot of registration required, just need partners to agree to do business together and draw up a partnership agreement
explain why availability of capital is an advantage of a partnership?
because in a partnership there are two or more people to contribute financial resources
explain why diversity of skills and expertise is an advantage of a partnership?
partners share responsibilities of managing and operating the business, increasing the chances of the partnerships success. the success of the business doesn’t solely rely on your skill set
explain why flexibility is an advantage of a partnership?
general partners are actively involved in managing their firm and can respond quickly to changes in the business environment
why is having no special taxes an advantage that comes with a partnership?
each partners profit or loss is reported on the partners person income tax return, with any share of profits taxed at personal tax rates
explain why an advantage of a partnership is relative freedom from government control?
except for provincial rules for licensing and permits, the government has little control over partnership activities
what are the 5 disadvantages of a partnership?
unlimited liability
division of profits
disagreements among partners
difficulty of termination
possibility of higher taxes
why is unlimited liability a disadvantage of a partnership?
all general partners have unlimited liability
any one partner can be held personally liable for all partnership debts and legal judgments (such as malpractice) regardless of who caused it?
why is complexity of profit sharing a disadvantage of a partnership?
dividing profits us relatively easy if all partners contribute time, money, expertise and capital equally. but if one put in partner puts in more time and the other partner puts in more money than it is difficult to arrive at a profit sharing formula and that is a fair profit split
why is disadvantage of a partnership difficulty exiting or dissolving the partnership?
as a rule partnerships are easier to form than leave. but it is difficult to dissolve a partnership due to:
calculated share value
who the share is sold to
if the person wanting to leave owns more then 50% the company must reorganize or end
how can you avoid the problems that come with exiting or dissolving a partnership?
most partnership agreements include specific guidelines for for transferring partnership interests and buy-sell agreements that make provisions for surviving partners to buy a deceased partners interest
what is a corporation?
a legal entity subject to the laws of the Provence in which it is formed, a corporation can own property, enter into contracts, sue and be sued and engage in business operations under the terms of its charter
who issues the right to operate a corporation?
provincial government (sometimes federal government)
are corporations taxable entities with a separate life from their owners?
yes owners are not personally liable for its debts
what are the 5 types of corporations?
private
public
non-profit
professional corporations
crown corporations
what makes corporation private?
a corporation not traded on any stock exchange and limited to 50 or fewer stockholders
what makes a corporation public?
a corporation that is traded on one or more stock exchanges
what makes a corporation a non-profit?
a corporation that performs public service and does not seek personal profit for its owners
has special tax considerations to encourage people to start one
what makes a corporation a professional corporations?
owners provide professional services (accountants and architects)
what makes a corporation a crown corporation?
a corporation that can only be started and registered by the provincial or federal government
what are the 7 advantages to a corporations?
limited liability
more money for investment
size: may be larger due to increased resources
perpetual life
ease of ownership change
ease of attracting talented employees
separation of ownership from management
why is limited liability an advantage of a corporation?
corporations are a separate legal entity from their owners, the owners liability is limited to the amount of stock they own. if a corporation goes bankrupt creditors can only take assets of the corporation
why is ease of transferring ownership an advantage of corporations?
stockholders of public corporations can sell their shares at any time without effecting the status of the corporations
why is unlimited life an advantage of corporations?
life of the corporation is unlimited and does not rely on the owners (the death or withdrawal of an owner does not affect its existence)
why are tax deductions an advantage of corporations?
corporations are allowed to make cretic tax reductions that reduces their taxable income
why is the ability to attract financing an advantage of corporations?
corporations can raise money by selling are shares of stock, dividing the stock in to smaller units makes it more affordable and drawing more investors
the large size and stability of a corporation can help them get bank financing
people also have more confidence in and trust corporations which makes them more willing to invest
what are the 6 disadvantages of corporations?
high initial costs
extensive paperwork
double taxation
two tax returns
termination is difficult
stock holder and board conflict
explain why double taxation of profits are a disadvantage of corporations?
corporations must pay federal and provincial income taxes on their profits. in additions any profits (dividends) paid to stockholders are taxed as personal income
why is cost and complexity of formation a disadvantage of corporations?
iforming a corporation involves several steps, and costs can run in to the thousands of dollars
what are some costs of forming a corporation?
provincial filing
registration costs
license fees
attorney fees
accountant fees
why is having more government restrictions a disadvantage of a corporation?
unlike sole proprietorships and partnerships, corporations are subject to many regulations and reporting requirements that they must meet
what is corporate governance?
due to corporate scandals, board members are under increasing scrutiny to ensure that they are effectively fulfilling their roles and responsibilities to their stakeholders and not doing anything to slow funding
how are members who serve on boards liable?
members who are on boards of both for-profit and non-profit may be held personally liable for the misconduct of the organization
what do companies need to follow if they wish to operate in canada?
they must follow federal and provincial laws and regulations including all provincial and federal registration and reporting information
why would shareholders and board members have conflict in a corporation?
since the owners and management (board members) are separate entites and not the same there could be a conflict of how something is done
what is an article of incorporation?
a legal authorization from the provincial/ territorial government for a company to use company format
what are the 5 ways of corporate expansion?
a merger
an acquisition
a vertical merger
a horizontal merger
a conglomerate merger
what is a merger?
the result of two firms forming one company
what is an acquisition?
one companies purchase of the property and obligations and debt of another company
what is a vertical merger?
the joining of two firms involved in different stages of related business
what is a horizontal merger?
the joining of two firms in the same industry and allows them to diversify or expand their products
what is a conglomerate merger?
a merger that unites firm in completely unrelated industries (crayon selling crayons/marker and merging with a flower company)
what are the four reasons why mergers do not work?
companies overpay to acquire another firm
acquiring company overestimates cost saving and synergies
after merger, managers disagree about integrating operations
after merger, cost cutting obsession hurts business, costing the top employees and customers
why do companies sometimes overpay when acquiring another firm?
they do not do their research and the company being acquired inflates overall value of intangible things (projected profits)
why does the acquiring company sometimes overestimate cost savings and synergies?
they are trying to acquire some skill from another company but it doesn’t work out how they thought
why do managers disagree about integrating operations after a merger?
because they different managers from the 2 companies have different views on business opportunity
what is a leveraged buyout (LBO)
a leveraged buyout (LBO) is an attempt by employees, management or a group of investors to purchase an organization primarily through borrowing
what is an example of a leveraged buy out?
hotel In the Caribbean was bought out by managers, employees and investors borrowed money to buy out the hotel
what is a franchise agreement?
a contract that allows the franchisee to use the franchisor’s business name, trademark and logo. the agreement also outlines rules for running the franchise, services provided by the franchisor and financial terms
whatare the 6 things the franchisee agree to in the franchise agreement?
to follow the franchisor’s operating rules
keeping inventory at certain levels,
buying a standard equipment package,
keeping up sales and service levels
taking part in franchisor promotions
maintaining relationship with the franchisor
what does a franchisor agree to in a franchise agreement?
franchisor provides the use of a proven company name and symbols
provides help in finding a site
provides building plans
provides guidance and training
provides management assistance
provides managerial and accounting systems and procedures
provides employee training
provides whole sale prices for supplies
provides financial assistance
what is franchising?
franchising is a form of business that involves a franchisor supplying product or service concept and the franchisee selling the goods or services in a certain demographic area
what areas of business do franchises market products?
a variety of industries (food, retail, hotel, travel, real estate, business services, cleaning services, weight loss centres and wedding services)
what are the 5 responsibilities of a franchisor?
assign territory
may provide financial aid/advice
offers merchandise or supplies at a competitive price
provides training and support
business expansion
who are the two people involved in a franchise?
franchisor and franchisee
what is a franchisor?
the person selling the business or letting the franchisee use the logo and company
what is a franchisee?
the person using the logo and managing the physical location of that business
what are the 4 responsibilities of a franchisee?
pay upfront costs
make monthly or annual payments to the franchisor (royalty fee)
runs business by franchisors rules and procedures
buys materials from franchisor or approved supplier
what are the 5 advantages to franchises?
management and marketing assistance
personal ownership
nationally recognized name
financial advice and assistance
low failure rate
what are the 6 disadvantages to franchises?
large start up cost
shared profit
management regulations
coattail effect
restrictions on selling
fraudulent franchisors
why is increased ability for franchisor to expand an advantage of franchises?
because franchisees finance their own units, franchisors can grow with out making a major investment
why is a recognized name, product and operating concept an advantage of franchises?
consumers know they can trust products from a big company like Pizza Hut. as a result the franchisees risk is reduced and the opportunity for success is increased
why is management training and assistance an advantage in franchises?
the franchisor provides a structured training program that gives the franchisee a crash course in how to start and operate their business. and ingoing training for managers and employees
why is financial assistance an advantage in franchises?
being linked to a nationally knows company can help the franchisee obtain funds from a lender
the franchisor typically gives the franchisee advice on financial management, referrals to lenders and help in preparing loan applications
how does a franchisor get paid by the franchisee?
by a recurring royalty fee
why is loss of control a disadvantage of a franchise?
the franchisor has to give up some control over operations and has less control which could lead to a drop in overall quality
why is cost of franchising a disadvantage of a franchise?
franchising can be very costly, costs will vary depending on the type of business and may include expensive facilities and equipment.
the franchisee also has to pay fees and royalty to the franchisor (normally tied to a certain percent of sales)
why is restricted operating freedom a disadvantage of a franchise?
the franchisee has to conform to the franchisors operating rules and facilities design as well as inventory and supply standards
some franchises require franchisees to purchase from only the franchisor or approved supplier
failure to conform to the franchisor policies could mean loss of the franchise
what are the 4 ways to avoid disaster in a franchise?
research officers and their business experience
get all summary of any bankruptcy and litigation
estimate ALL costs to set up a franchise
review franchise contract and three most recent financial statments
what is a co-operative?
a co-operative is a legal entity with corporate features like limited liability, unlimited lifespan, elected board of directors and administrative staff
they are organized solely to meet the needs of the memebr-owners and not to make a profit for the investors
member-owners pay annual fees to the co-operative and share in the profits
how are profits distributed to members in co-operitives?
they are distributed in proportion to their contributions
why are co-operatives created?
cooperatives are organized by members solely to meet the needs of the member- owners, not to accumulate capital for investors
most cooperatives are democratic and practice “one member, one vote” providing equal control over the cooperative
what is unlimited liability?
company is in debt and cannot pay it than the creditors can take personal assets of the owner or the general partner
what are the 7 types of co-operatives in Canada?
consumer co-operative
producer co-operative
multistakeholder co-operative
worker co-operative
worker- shareholder co-operative
federation
mutual
what is a consumer co-operative?
they provide their members with goods and services for personal use
examples: grocery stores, credit unions
what is a producer co-operative?
some producer co-operatives process and market their member’s goods and services directly, while others may also sell the products
what is a multistakeholder cooperative?
co-operitaves made of different categories of members who share a common interest in the organization
what is a worker co-operitave?
the purpose of these co-operitaves is to provide employment for their members through operating an enterprise
EX: forestry, fair trade
what is a worker- shareholder co-operative?
a co-operative that holds partial ownership of the business in which its members are employed
because of its share capital, the co-operative may participate in the management of the business
what is a federation?
a federation is a co-operative of co-operatives in which the members are co-operatives themselves
what is a mutual?
a mutual is an organization created by and for its members to offer mutual aid or mutual protection
EX: insurance, loans
