How to form a business Flashcards
What is a sole proprietorship?
A business owned and usually run by one individual, offering simplicity but with unlimited liability.
What are some advantages of a sole proprietorship?
Ease of starting and ending.
Full control and pride of ownership.
Retention of all profits.
No special taxes.
What are some disadvantages of a sole proprietorship?
Unlimited liability.
Limited financial resources.
Management difficulties.
Overwhelming time commitment.
Limited growth and life span.
What is a general partnership?
A partnership where all partners share in running the business and assume unlimited liability for debts.
What is a limited partnership (LP)?
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.
What is a limited liability partnership (LLP)?
A partnership that limits a partner’s liability to their own actions and protects them from the negligence of other partners.
What are some pros of partnerships?
More financial resources.
Shared management and expertise.
Longer survival.
No special taxes.
What are some disadvantages of partnerships?
Unlimited liability (in general partnerships).
Division of profits.
Potential disagreements.
Difficulty of termination.
What is a corporation?
A state-chartered legal entity separate from its owners, with the authority to act and assume liability independently.
What are some pros of corporations?
Limited liability.
Ability to raise large capital.
Perpetual life.
Ease of ownership transfer.
Attracting talent with stock options.
Separation of ownership and management.
What are some cons of corporations?
High initial costs and paperwork.
Double taxation.
Filing two tax returns.
Potential conflicts between shareholders and management.
Bureaucracy and difficulty of termination.
What is a limited liability company (LLC)?
An LLC combines the liability protection of a corporation with the tax benefits of a partnership.
What are some pros of LLCs?
Limited liability.
Flexible ownership.
Choice of taxation.
Flexible distribution of profits.
Operating flexibility.
What are some cons of LLCs?
No stock; ownership is nontransferable.
Fewer incentives for investors.
Possible self-employment or franchise taxes.
Complex legal requirements.
What is a merger and what are its types?
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).
What is an acquisition?
An acquisition occurs when one company buys another, absorbing its assets and operations
What is a franchise?
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.
What are some pros of franchises?
Lower failure rate.
Management and marketing support.
Nationally recognized brand.
Financial advice and assistance.
Personal ownership.
What are some cons of franchises?
High startup costs.
Shared profits.
Restrictions on operations.
Coattail effects from other franchisees.
Risk of fraudulent franchisors.
What are Leveraged Buyouts (LBOs)?
An LBO is when employees, management, or private investors purchase a company using borrowed funds, assuming control of the business.
