How to Form a Business?

Question 1

What are the three major forms of business ownership?

Answer 1

1. Sole Proprietorship
2. Partnership
3. Corporation

Question 2

What is a sole proprietorship?

Answer 2

A business owned and usually managed by one person.

Question 3

What defines a partnership?

Answer 3

A legal form of business with two or more owners.

Question 4

What is a corporation?

Answer 4

A state-chartered legal entity with authority to act and have liability separate from its owners.

Question 5

What are the advantages of a sole proprietorship?

Answer 5

Ease of starting and ending, being your own boss, pride of ownership, legacy, retention of profits, no special taxes.

Question 6

What are the disadvantages of a sole proprietorship?

Answer 6

Unlimited liability, limited financial resources, management difficulties, overwhelming time commitment, few fringe benefits, limited growth, limited lifespan.

Question 7

What are the advantages of partnerships?

Answer 7

More financial resources, shared management, longer survival, no special taxes.

Question 8

What are the disadvantages of partnerships?

Answer 8

Unlimited liability, division of profits, disagreements among partners, difficulty of termination.

Question 9

What are the advantages of corporations?

Answer 9

Limited liability, ability to raise money, size, perpetual life, ease of ownership change, ease of attracting talent, separation of ownership from management.

Question 10

What is a general partnership?

Answer 10

A partnership where all owners share in operating the business and assume liability for its debts.

Question 11

What distinguishes a limited partnership?

Answer 11

It includes one or more general partners and one or more limited partners.

Question 12

What is a limited liability partnership (LLP)?

Answer 12

A partnership that limits partners’ risk of losing personal assets to their own acts and omissions.

Question 13

What are the advantages of LLCs?

Answer 13

Limited liabilities, choice of taxation, flexible ownership rules, flexible profit distribution, operating flexibility.

Question 14

What are the disadvantages of LLCs?

Answer 14

No stock (nontransferable ownership), fewer incentives, taxes, paperwork.

Question 15

What do stockholders expect?

Answer 15

Dividends and an increase in stock price for potential resale.

Question 16

What is a general manager’s role?

Answer 16

To represent the company and act on its behalf with limited liability.

Question 17

What is an annual report?

Answer 17

A document that includes the balance sheet and financial performance of a company.

Question 18

What is the balance sheet composed of?

Answer 18

Left side: assets (e.g., cash, patents)
Right side: equity and liabilities.

Question 19

What is a merger?

Answer 19

The result of two firms forming one company.

Question 20

What is the difference between a vertical and horizontal merger?

Answer 20

Vertical: firms at different stages in the supply chain; Horizontal: firms in the same industry.

Question 21

What is an acquisition?

Answer 21

One company’s purchase of another company’s property and obligations.

Question 22

What is a franchise agreement?

Answer 22

An arrangement where a franchisor sells the rights to use a business name and sell products/services to franchisees.

Question 23

What are the pros of franchising?

Answer 23

Management assistance, personal ownership, recognized name, financial advice, lower failure rate.

Question 24

What are the cons of franchising?

Answer 24

Large start-up costs, shared profit, management regulation, restrictions on selling, potential fraud.