8 Flashcards
(15 cards)
- What are the three major forms of business
organizations? Describe each.
The three major forms of business organizations are the sole proprietorship, the partnership, and the corporation.
The sole proprietorship is a business owned by one individual.
The partnership is a business that is owned by two or more persons with the intent to make a profit.
The corporation is a legal entity that is organized according to the laws of the state in which it is formed. The business organization is separate from its owners.
- How are sole proprietorships formed?
The sole proprietorship is formed when an individual decides to engage in some activity that provides goods or services, with the intent of making a profit.
- Discuss the purpose of a partnership
agreement. Is such an agreement necessary
for partnership formation?
The partnership agreement is a legal agreement that defines the responsibilities of each partner and specifies the division of profits and losses. In order to form a partnership, there must be some type of agreement. It can simply be the agreement between parties to perform certain duties or make certain contributions of resources or services. While a written agreement is not required for legal purposes, a written document reduces the chance for of misunderstanding.
- What is meant by the phrase separate legal
entity? To which type of business organization
does it apply?
The phrase separate legal entity simply means that the business organization operates separately from its owners. The corporation is referred to as a “separate legal entity” and conducts business with the same rights and responsibilities as a person.
- What is the purpose of the articles of incorporation? What information do they
provide?
The articles of incorporation constitute a legal document that is filed with the appropriate state agency requesting the official formation of a corporation. The articles of incorporation generally set forth the name of the corporation, the proposed date of incorporation, the purpose for which the corporation is formed, the expected life of the corporation, provisions for the capital stock of the corporation, and the names and addresses of the members of the board of directors.
- What is the function of the stock
certificate?
The stock certificate is issued as evidence of ownership in a corporation and represents a certain proportionate share of the business ownership.
- What prompted Congress to pass the
Securities Act of 1933 and the Securities
Exchange Act of 1934? What is the purpose
of these laws?
The stock market crash of 1929 and the subsequent economic depression led to the passage of the Securities and Exchange Acts of 1933 and 1934. These acts were passed to regulate the issuance of stock and govern exchanges of publicly traded stock. A part of this regulation extends to the formulation of certain accounting policies for companies listed on the stock exchanges (publicly traded stock).
- What are the advantages and disadvantages
of the corporate form of business
organization?
The corporate form of business has both advantages and disadvantages.
Advantages:
(1) Limited liability. Owners are not held personally responsible for the actions of the corporation. Generally, the maximum amount an owner can lose is limited to his/her amount of the investment.
(2) Continuity of existence. Corporations do not cease to exist when an owner dies, disposes of his interest, retires, etc.
(3) Free transferability of ownership interest. An owner can readily sell or transfer an interest to another party without interfering in the corporation’s business.
(4) Ease of raising capital. It is generally easier to attract many small investors rather than one or two investors willing to invest large sums of money or assets in a business.
Disadvantages:
(1) Regulation. Corporations are subject to considerably more regulation, both state and federal, than are sole proprietorships and partnerships. Corporations are required to file separate income tax returns and public corporations are required to comply with SEC regulations.
(2) Double taxation. The most important disadvantage of the corporation is double taxation. Since a corporation is a separate legal entity, it must file and pay tax on corporate profits. When these profits are distributed to the owners (shareholders), these distributions are not deductible for the corporation and are taxable income to the shareholders.
- What is a limited liability company?
Discuss its advantages and disadvantages.
The limited liability company is a relatively new organizational form in the United States and operates similar to a partnership in that income is taxed at the owner level. That is, the limited liability company does not pay tax, but the owners must pay tax on company profits. It is similar to a corporation in the sense that the owners have limited personal liability similar to a corporation. The personal assets of the owners are protected from business creditors.
- How does the term double taxation apply
to corporations? Give an example of double
taxation.
The term double taxation as it applies to a corporation means that earnings are taxed both at the corporate level and the shareholder level when earnings are distributed in the form of dividends. For example, assume JCL, Inc. had taxable income of $100,000 and distributed $50,000 of the earnings to the shareholders as dividends. The corporation would pay tax on $100,000 at corporate income tax rates, and the shareholders would pay tax on $50,000 at their individual income tax rates. Consequently, $50,000 of the income from the corporation would be taxed twice.
- Why is it easier for a corporation to raise
large amounts of capital than it is for a
partnership?
Because corporations can be owned by millions of individuals, they are able to pool the resources of many individuals which permits access to billions of dollars of capital. Proprietorships and partnerships are bound by the financial condition of a few, private investors.
- Why might a company repurchase its own
stock?
A company will repurchase its own stock for a number of reasons. Some of the most common reasons include: (1) to reduce the number of shares outstanding and thus increase the earnings per share, (2) to accumulate stock to use for employee bonus plans, (3) to accumulate stock to be used in a merger or acquisition, (4) to avoid a hostile takeover, and (5) to keep the stock price high with active trading.
- What is meant by equity financing? What is
meant by debt financing?
Equity financing refers to capital acquired from owners; usually the term refers to issuance of stock.
Debt financing refers to borrowing in the form of notes and bonds payable.
- What is a widely held corporation? What is
a closely held corporation?
A widely held corporation is one in which the stock is held by a large number of investors.
A closely held corporation is one in which ownership is concentrated in the hands of a few people.
- What are some reasons that a corporation
might not pay dividends?
In deciding whether to declare dividends, the board of directors must consider whether the corporation has sufficient cash to cover operating requirements and meet emergencies. The board may also wish to retain earnings in order to pay dividends in years when cash flows are low. In addition, the board may restrict dividends in order to finance future expansion of the business.
