How to form a business Flashcards

1
Q

What is a sole proprietorship?

A

A business owned and usually run by one individual, offering simplicity but with unlimited liability.

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2
Q

What are some advantages of a sole proprietorship?

A

Ease of starting and ending.
Full control and pride of ownership.
Retention of all profits.
No special taxes.

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3
Q

What are some disadvantages of a sole proprietorship?

A

Unlimited liability.
Limited financial resources.
Management difficulties.
Overwhelming time commitment.
Limited growth and life span.

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4
Q

What is a general partnership?

A

A partnership where all partners share in running the business and assume unlimited liability for debts.

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5
Q

What is a limited partnership (LP)?

A

A partnership with a general partner who manages the business with unlimited liability, and a limited partner who has limited liability and no management role.

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6
Q

What is a limited liability partnership (LLP)?

A

A partnership that limits a partner’s liability to their own actions and protects them from the negligence of other partners.

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7
Q

What are some pros of partnerships?

A

More financial resources.
Shared management and expertise.
Longer survival.
No special taxes.

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8
Q

What are some disadvantages of partnerships?

A

Unlimited liability (in general partnerships).
Division of profits.
Potential disagreements.
Difficulty of termination.

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9
Q

What is a corporation?

A

A state-chartered legal entity separate from its owners, with the authority to act and assume liability independently.

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10
Q

What are some pros of corporations?

A

Limited liability.
Ability to raise large capital.
Perpetual life.
Ease of ownership transfer.
Attracting talent with stock options.
Separation of ownership and management.

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11
Q

What are some cons of corporations?

A

High initial costs and paperwork.
Double taxation.
Filing two tax returns.
Potential conflicts between shareholders and management.
Bureaucracy and difficulty of termination.

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12
Q

What is a limited liability company (LLC)?

A

An LLC combines the liability protection of a corporation with the tax benefits of a partnership.

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13
Q

What are some pros of LLCs?

A

Limited liability.
Flexible ownership.
Choice of taxation.
Flexible distribution of profits.
Operating flexibility.

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14
Q

What are some cons of LLCs?

A

No stock; ownership is nontransferable.
Fewer incentives for investors.
Possible self-employment or franchise taxes.
Complex legal requirements.

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15
Q

What is a merger and what are its types?

A

A merger is the combination of two companies into one entity. Types include:

Vertical merger (different stages of production).
Horizontal merger (same industry).
Conglomerate merger (unrelated industries).

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16
Q

What is an acquisition?

A

An acquisition occurs when one company buys another, absorbing its assets and operations

17
Q

What is a franchise?

A

A franchise is a business model where an individual (franchisee) buys the rights to operate under an established business’s name (franchisor) in a specific territory.

18
Q

What are some pros of franchises?

A

Lower failure rate.
Management and marketing support.
Nationally recognized brand.
Financial advice and assistance.
Personal ownership.

19
Q

What are some cons of franchises?

A

High startup costs.
Shared profits.
Restrictions on operations.
Coattail effects from other franchisees.
Risk of fraudulent franchisors.

20
Q

What are Leveraged Buyouts (LBOs)?

A

An LBO is when employees, management, or private investors purchase a company using borrowed funds, assuming control of the business.