Chapter 8 "Business Organization" Study Guide Review Flashcards
What type of business is the most popular in the United States?
Sole proprietorship
Define sole proprietorship (75% but only generates about 4% of sales)
Business owned and operated by 1 person
Why are sole proprietorships so easy to start?
Almost no requirements EXCEPT for business license
List and explain the advantages of sole proprietorships (Hint: there are 6)
- Easy to start - if not using own name, register with government
- Ease of management (full control) - run as you wish; fast, flexible decisions
- ONLY receiver of profit - doesn’t share success
- Doesn’t pay separate business income tax - keeps all profits after income taxes
- Psychological satisfaction
- Easy to discontinue - Quit at own will (after paying debts and obligations)
List and explain the disadvantages of sole proprietorships (Hint: there are 6)
- Unlimited liability - fully responsible for ALL losses and debts
- Hard to raise financial capital - use all available savings and banks reluctant to lend money
- Being small - balance costs and revenue through inventory (limited money = hard)
- Limited managerial experience - good in one but not the other
- Hard to get qualified employees - those go to bigger companies (better money, better benefits)
- Limited life - business dies when owner quits, dies, or sells.
Define partnership (only about 7% and only about 5% of sales)
Jointly owned by 2+ people who agree on specific responsibilities and profits
Explain the difference between general partnership and limited partnership
General (more common) - share equally responsibility and liability; 1 sued all held liable
Limited - 1 partner is not active in daily running; limited responsibility; invest to get shares and profits; lose only money put in
List and explain the advantages of partnerships. (Hint: there are 5)
- Easy to start
- Easy to manage (shared decision and specialization) - responsibility shared; each partner brings talent, strength, and skills
- Lack of separate taxes
- Attract money - easy to borrow together instead of alone; both have assets
- Potential for growth
How is a partnerships formed?
Could do handshake agreement, but most draw up articles of partnership - formal legal papers - lays out EVERYTHING ahead (profits/losses/division of property/buy-outs)
List and explain the disadvantages of partnerships (Hint: there are 3)
- Unlimited liability (general) - each partner is FULLY responsible for actions of all partners CHOOSE CAREFULLY
- Limited life - partner dies/leaves, partnership must be dissolved and reorganized to stay in business
- Potential for conflict - work habits, goals, styles, and many things
Define corporation (about 20% BUT about 90% of sales)
“The Big Boys” - company owned by millions of stockholders; limited liability for firm’s debts; if you own stock, you’re part owner of the corporation
Brief summary of how to start a corporation.
Hardest - approval from gov. to issue a charter (permission) to be incorporated
- Charter: Name, address, purpose, # of shares (stock)
- Stocks sold to investors (stockholders own stock certificates for proof of ownership)
- Corporation is profitable, stockholders receives a dividend (check)
List and explain the advantages of a corporation (Hint: there are 5)
- Ability to attract capital (potential growth) - sell more stocks can raise money; expand; borrow money for issuing bonds (written promise to repay with interest)
- Limited liability for owners - lose amount invested
- Hire professional managers/experts
- Unlimited (long) life - doesn’t die with owner; separate legal entity - name = same (continues business)
- Ease of transferring ownership - sell stocks and they now become part-owner; easier to fine new buyer
List and explain the disadvantages of corporation (Hint: there are 4)
- Double taxation - profits taxed first when paying income taxes; profits taxes 2nd when shareholders pay taxes on dividends (personal income)
- And stockholders may pay move if they sell their stocks (capital gains tax) if they made a profit. - Difficult, expensive, time consuming, hard to get charter
- Little voice (loss of control) - sometimes they look out for their interest and not interest of the company
- More regulations by the gov.
Define franchise
Renting/leasing another firm’s successful business model
Who is credited with developing the idea of a franchise?
Issac Singer
Explain the difference between a franchisor and a franchisee
Franchisor - actual owner of business that let’s other investors rent/lease its name, profile, and way of business
Franchisee - investor who rents/leases business model from franchisor and hopes to recoup their investment
List and explain the advantages of franchises (hint: there is 4)
- Respected product, excellent quality standards - follow certain rules and procedures
- National advertising program - parent company pays nationwide advertising
- Management training and support - help inexperienced owners succeed/professional advice
- Centralized buying power - bulk buying
ADVANTAGES FOR FRANCHISOR ALSO
List and explains the disadvantages of franchises (hint: there is 5)
- Sacrifices some freedom in return got parent guidance
- High fees and royalties - fees for right to use name and charge share of earnings
- Strict operating standards - hours; dress code; procedures
- Purchasing restrictions - buy supplies from parent/approved supplies
- Limited product line - agreement allows stores to offer only approved products
What is an income statement?
Report showing business sale’s, expenses, net income and cash flows for a period of time
Define net income
Funds left over after all the firm’s expenses, including taxes are subtracted from sales
Define depreciation
A noncash charge the firm takes for the general wear and tear on its capital goods
Define merger
Combination of two or more businesses to form a single firm
List the SIX reasons businesses merger
- Faster growth
- Synergy
- Economics of scale
- Diversification
- Elimination of rivals
- Change/lose corporate identity
Explain horizontal merger and give an example
- Involves two firms operating and competing in the same kind of business activity
Ex: Merger of Exxon and Mobil
Explain a vertical merger and give an example
Merger between 2 companies producing different goods/services
Ex: Pixar-Disney merger
Define congolmerate
Firm that has at least 4 businesses, each making unrelated products, none of which are responsible for a majority of its sales
Define multinationals
International corporation whose business activities are spread among 2 or more countries
What are the positive and negative features of a multinational?
Positive: Local employment where jobs are needed; allow purchase of imports; inflow of money, resources, goods and services, produce tax revenue; improve local infrastructure; diversity
Negative: Don’t always leave profits local; imports skilled labor; political corruption; support “sweatshop” labor; companies out of business; pay low wages
What are the different ways businesses can find start-up funds?
- Start-up incubators - places to train potential entrepreneurs
- Venture capitalists - investment funds to new business in exchange for ownership share
- Angel investors - provider of funds to a new business
- Crowding funding - using social networking
Define nonprofit organization and give an example
Not operate to generate profit
Ex: American Red Cross
Define cooperative
Business organization owned and operated by a group of individuals for their shared benefit
List and explain the THREE types of cooperatives
- Consumer - retail outlet owned and operated by consumers; pay membership fee
- Service - Provide service rather than goods
- Producer - help members sell their products
Define labor union
Organized group of workers whose aim is to improve working conditions, hours, wages, and fringe benefits
What is a professional association?
Nonprofit organization that works to improve image, working conditions, and skills levels of people in particular occupations
Define chamber of commerce
Local organization of business whose goal is to further the interests of businesses
What is the Better Business Bureau?
Association that promote collective business interests of a interests of a city, state, or other geographical area
What is a trade association?
Nonprofit organization that promotes the interest of particular industries
