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Chapter Four
Forms of Business Ownership
| Question | Answer |
|---|---|
| What is a sole proprietorship? | A business that is established, owned, operated, and often financed by one person |
| Why are sole proprietorship the most common form of business ownership? | They are easy and inexpensive to start, offer complete control, and allow the owner to keep all profits |
| What are the advantages of a sole proprietorship? | Easy and inexpensive to form, Owner keeps all profits, Complete control, Few government regulations, No special taxes, and Easy to dissolve |
| What are the disadvantages of a sole proprietorship> | Unlimited liability, Limited ability to raise capital, Limited management expertise, Difficult to attract employees, Large time commitment, and Business ends if owner dies |
| What does unlimited liability mean? | The owner's personal assets can be used to pay business debts |
| What often happens when a sole proprietorship grows? | It may convert into a partnership, corporation, or LLC to gain more resources and reduce risk |
| What is a partnership? | An association of two or more people who agree to operate a business together for profit |
| Why is a written partnership agreement important? | It clearly outlines responsibilities and helps prevent future disputes |
| What is a general partnership? | A partnership in which all partners share management responsibilities, profits, and unlimited liability |
| What is a limited partnership? | A partnership with at least one general partner and one or more limited partners |
| What is the difference between a general partner and a limited partner? | General partners manage the business and have unlimited liability; limited partners invest money but have limited liability and little management involvement |
| What is a Limited Liability Partnership (LLP)? | A partnership that protects partners from liability for the actions of other partners |
| What is a Limited Liability Limited Partnership (LLLP)? | A limited partnership that provides liability protection to both general and limited partners |
| What are the advantages of partnerships? | More expertise and skills, Shared responsibilities, Easier fundraising, and Relatively low start-up costs |
| What are the disadvantages of partnerships? | Unlimited liability for general partners, Potential conflicts, Shared profits, and Difficult dissolution |
| Why is choosing the right partner important? | Poor partner selection can lead to conflicts and business failure |
| What is a corporation? | A legal entity separate from its owners and chartered by the state |
| What is the biggest advantage of a corporation? | Limited liability protection for owners |
| What does limited liability mean? | Owners generally cannot lose more than the amount they invested in the business |
| What are the five steps in forming a corporation? | Select a company name, Write articles of incorporation, Pay fees and taxes, Hold an organizational meeting, and Adopt bylaws and elect directors |
| What are articles of incorporation? | Legal documents filed with the state to create a corporation |
| What are the three major components of corporation? | Stockholders, Board of Directors, and Officers |
| Who are stockholders? | Owners of the corporation who hold shares of stock |
| What is the role of stockholders? | They elect the board of directors |
| What is the role of the board of directors? | To oversee the corporation, set major policies, and hire officers |
| What is the role of corporate officers? | They manage the daily operations of the corporation |
| What are the advantages of corporations? | Limited liability, Easy transfer of ownership, Long life, Greater access to capital, and Ability to attract skilled employees |
| What are the disadvantages of corporations? | Double taxation, |
| What are the advantages of corporations? | Limited liability, Easy transfer of ownership, Long life, Greater access to capital, and Ability to attract skilled employees |
| What are the disadvantages of corporations? | Double taxation, Expensive to form, More government regulation, and Public financial reporting requirements |
| What is a C Corporation? | The traditional and most common form of corporation |
| What is an S Corporation? | A hybrid business Structure that avoids double taxation if certain requirement are met |
| What is a Limited Liability Company (LLC)? | A hybrid organization that provides limited liability while being taxed like a partnership |
| Why might someone choose a LLC over an S Corporation? | LLCs generally have fewer ownership restrictions and greater flexibility |
| What is a cooperative? | A business owned and operated by members for their mutual benefit |
| What characteristics of corporations do cooperatives share? | Limited liability, Unlimited life span, Board of directors, and Administrative staff |
| What is a buyer cooperative? | An organization that combines members' purchasing power to obtain lower prices |
| What is a joint venture? | A temporary partnership between companies to complete a specific project |
| What is franchising? | A business arrangement in which a franchiser licenses it's business model to a franchisee |
| Who is the franchiser? | The company that owns the brand, products, and business system |
| What does a franchisee recevie? | Established brand name, Proven business model, Training, and Operating procedures |
| What is a major advantage of franchising for franchisers? | Rapid expansion with less financial risk |
| Why does the franchise industry continue to grow? | Changing demographics and consumer demand create opportunities for new franchise concepts |
| What should I do before buying a franchise? | Research the company, Review financials, Consult experts, Read disclosure documents, and Assess my strengths and weaknesses |
| Why is an entrance and exit strategy? | It helps manage risk and plan for future changes or sale of the business |
| What is a merger? | The combination of two or more firms into one new company |
| What is an acquisition? | The purchase of one company by another company or investor group |
| What is a horizontal merger? | A merger between companies at the same stage of the same industry |
| Why do companies pursue horizontal mergers? | To reduce costs, expand product lines, and reduce competition |
| What is a vertical merger? | A merger between companies involved at different stages of production or distribution |
| What is a conglomerate merger? | A merger between companies in unrelated industries |
| What do companies pursue conglomerate mergers? | To diversify and reduce risk |
| What is a Leveraged Buyout (LBO)? | The purchase of a company using mostly borrowed funds |
| Why do companies engage in mergers and acquisitions? | Increase marker share, Reduce competition, Lower costs, Improve efficiency, Increase profitability, Increase profitability |
| What factors increase the like-hood of a successful merger? | Reasonable purchase price, Strategic fit, Strong financial justification, and Realistic integration plans |
| What factors influence how business organize? | Social trends, Demographic changes, and Economic conditions |
| Why are baby boomers important to businesses? | Their aging population creates demand for health, retirement, and lifestyle products and services |
| How are millennial's affecting businesses? | They influence purchasing trends by demanding customization, quality, transparency, and social responsibility |
| Why are some baby boomers delaying retirement? | They remain healthy, active, and engaged in the workforce |
| What recent trend has occurred in mergers and acquisitions? | Increased merger activity and growth in cross-border acquisitions |
| Define Sole Proprietorship | A business owned and operated by one person |
| Define Partnership | Two or more peopleoperating a business for profit |
| Define Corporation | A separate legal entity owned by stockholders |
| Define LLC | A business Structure providing limited liability with partnership-style taxation |
| Define Franchise | A business arrangement between a franchiser and franchisee |
| Define Merger | Two companies combine into one new company |
| Define Acquisition | One company purchases another company |
| Define Board of Directors | Individuals elected by stockholders to oversee corporate management |
| Define Joint Venture | Companies collaborating on a specific project for a limited |
| Define Cooperative | A member-owned business created for mutual benefit |
| What are the three main forms of Business Ownership? | Sole Proprietorship, Partnership, and Corporation |
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