Chapter 6 Flashcards
Sole Proprietorship
A business that is owned and usually managed by a single individual. A Sole Proprietorship is simply an extension of the owner, any earnings of the company are treated as income of the owner; likewise, any debts the company incurs are considered to be the owner’s personal debts.
What are the PROS of Sole Proprietorship?
Ease of formation,
Retention of Control,
Pride of ownership,
Retention of Profits, Possible Tax Advantage.
What are the CONS of Sole Proprietorship?
Limited Financial resources, Unlimited liability, Limited Ability to attract and maintain talented employees, heavy workload and responsibilities, lack of permanence
(General) Partnership
A voluntary agreement under which two or more people act as co-owners of a business for profit. As we’ll see later in the chapter, there are several types of partnerships. In a General Partnership, each partner has the right to participate in the company’s management and share in profits but also has unlimited liability for any debts the company incurs.
What are the PROS of (General) Partnership
Ability to pool financial resources,
ability to share responsibilities and capitalize on complementary skills,
ease of formation,
possible tax advantages
What are the CONS of (General) Partnership
Unlimited liability, potential for Disagreements, Lack of continuity, Difficulty in withdrawing from a partnership.
Limited Partnerships
A partnership arrangement that includes at least one general partner and at least one limited partner.
Both types of partners contribute financially to the company and share in its profits. But in other respects they play different roles.
General partners
may contribute money, property, and personal services to the partnership. They also have the right to fully participate in managing the partnership, and they have unlimited personal liability for any of its debts just like the partners in a general partnership.
Limited Partners
may contribute money and property to the company, but cannot actively participate in its management. Limited partners have limited liability, they are liable for the debts of the firm only to the extent of their actual investment. As long as they do not actively participate in management, their personal wealth is not at risk.
Limited Liability Partnerships
Similar to limited partnership but has the advantage of allowing all partners to take an active role in management, while also offering all partners some form of limited liability.
Crown Corporation
A business entity created by filing a form with the appropriate state agency, paying the state’s incorporation fees, and meeting certain other requirements.
Unlike a sole proprietorship or a partnership, a corporation is considered to be a legal entity that is separate and distinct from its owners.
In many ways, A corporation is like an artificial person. It can legally engage in virtually any business activity a natural person can pursue.
Ie, a corporation can enter into binding contracts, borrow money, own property, pay taxes, and initiate legal actions in its own name. It can even be a partner or owner in another corporation. The owners of a corporation have limited liability meaning they aren’t personally responsible for the debts and obligations of their company.
PROS of Crown Corporation
Limited liability, permanence, ease of transfer of ownership,
ability to raise large amounts of financial capital, ability to make use of specialized management.
CONS of Crown Corporation
Expense and complexity of formation and operation,
Complications when operating in more than one state,
double taxation of earnings and additional taxes, more paperwork and more regulation,
possible conflicts of interest.
Ownership of Crown Corporations is represented by shares of stock, so owners are called:
stockholders
S Corporation
Does not get double taxed, stockholders have limited liability.
// it can have no more than 100 stockholders, stockholders must be US citizens.
Closed Corporation
Does Not have to elect a board of directors or hold annual stockholders meeting. // Usually no more than 50 stockholders, stockholders cant sell their shares to the public unless they offer one of the owners the shares first, not all states allow this type of corporation.
Non-Profit
Earnings are exempt from federal and state income taxes, members and directors have limited liability, individuals who contribute money or property to the nonprofit can take a tax deduction, making it easier for these organizations to raise funds from donations
// can have members but cannot have stockholders, cannot distribute dividends to members, cannot contribute funds to a political campaign, must keep accurate records and file paperwork to document tax-exempt status.
Common Stock
Varying dividends and may not even get paid dividends sometimes.
Preferred Stock
Voting rights and Fixed dividends.
Corporate Bylaws
Rules governing how a corporation is organized and how it conducts its business.
Institutional Investor
An organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and other securities.
Board of directors
Elected by the stockholders to oversee the operation of the C corp.and protect their interests. The board elects a CEO to manage the company on a daily basis as the board only deals with the corporation’s mission and Broad objectives.
Divestiture
The transfer of total or partial ownership of some of a firm’s assets to investors or to another company. (They do so to rid themselves of the part of their company that does not fit well with their plans while raising capital)
Acquisition
A corporate restructuring in which one firm buys another.
Merger
A corporate restructuring that occurs when two formerly independent business entities combine to form a new organization.
Horizontal Merger
Combination of firms in the same industry.
Vertical Merger
Combination of firms that are at different stages in the production of a good or service creating a “buyer-seller” relationship.
Conglomerate Merger
Combination of firms in unrelated industries.
Limited Liability Company
New type of company emerging, the owners are called members and forming one is similar to a corporation as they have to file a document and paying fees.
PROS of a Limited Liability Company
Limited Liability,
Tax Pass-Through (Can be treated as any of the 3 types of companies depending on what the owners choose),
Simplicity and flexibility in management,
Flexible ownership.
Franchisor
The business entity in a franchise relationship that allows others to operate their business using resources it supplies in exchange for money and other considerations.
Franchisee
The party in a franchise relationship that pays for the right to use the resources supplied by the franchisor.
Franchise
A licensing arrangement whereby a franchisor allows franchises to use its name, trademark, products, business methods and other property in exchange for monetary payments and other considerations.
Distributorship
A type of franchising arrangement in which the franchisor makes a product and licenses the franchise to sell it.
Business format franchise
A broad franchise agreement in which the franchisee pays for the right to use the name, trademark, etc. of the franchisor.
Advantages of a Franchise
Less risk, Training and Support, Brand Recognition, Easier Access to Funding
Disadvantages of a Franchise
Costs, Lack of Control, Negative Halo Effect, Growth Challenges, Restrictions on Sale, Poor Execution
What can be found in the Franchise Agreement?
- Terms and Conditions
- Fees and other Payments
- Training and support
- Specific Operational Requirements
- Conflict Resolution
- Assigned Territory
What are a Franchise’s Terms and Conditions?
Involves the franchisee’s rights to use the franchisor’s trademarks, patents, and signage, and any restrictions on those rights. It also covers how long the agreement will last and under what terms it can be renewed.
What are a Franchise’s Fees and other Payments?
Fees the franchisee must pay for the right to use
What are a Franchise’s Training and support ?
Types of training and support the franchisor will supply
What are a Franchise’s Specific Operational Requirements?
Methods and standards to follow
What are a Franchise’s Conflict Resolution
How they will handle disputes
What are a Franchise’s Assigned Territory
Geographic area in which franchisee will operate and whether the franchisee has exclusive rights in that area.
