Ch. 4: How To Form A Business

Question 1

What is a sole proprietorship?

Answer 1

Owned by one person

Question 2

What is a partnership?

Answer 2

Owned by two or more people

Question 3

What is a corporation?

Answer 3

A company/group of people recognized by law to act as a single entity

Question 4

6 Advantages of Sole Proprietorships?

Answer 4

Ease of starting/ending business
Being your own boss
Pride of ownership
Leaving a legacy
Retention of company profits
No special taxes

Question 5

7 Disadvantages of sole proprietorships?

Answer 5

Unlimited liability-risk of personal loss
Limited financial resources
Management difficulties
Overwhelming time commitment
Few fringe benefits
Limited growth
Limited life span

Question 6

What is a general partnership?

Answer 6

Shared ownership and liability

Question 7

What is a limited partnership?

Answer 7

Has general partners and limited partners who have limited liability

Question 8

What is a master limited partnership?

Answer 8

Acts like a corporation but taxed like a partnership

Question 9

What is a limited liability partnership?

Answer 9

Limits partners’ risk

Question 10

4 advantages of partnerships?

Answer 10

More financial resources
Shared management and pooled/complementary skills and knowledge
Longer survival
No special taxes

Question 11

What are the disadvantages of partnerships?

Answer 11

Unlimited liability
Division of profits
Disagreements among partners
Difficulty of termination

Question 12

What is a conventional corporation?

Answer 12

Has stockholders, liability of owners, enables many to share ownership

Question 13

What is an alien corporation?

Answer 13

Does business in US but incorporated in another country (ie: samsung, South Korea(

Question 14

What is a domestic corporation?

Answer 14

Does business in state they are incorporated (ie: apple, United states)

Question 15

What is a foreign corporation?

Answer 15

Does business in one state but incorporated in another. These must register in states where it operates. 1/3 of corporations are chartered in DA because of attractive rules for incorporation. (Apple (international) and Samsung (alien))

Question 16

What is a closed (private) corporation?

Answer 16

Has stock held by a few people and isn’t available to general public (ie: best buy, Publix)

Question 17

What is an open (public) corporation?

Answer 17

Sells stock to general public. (General Motors, ExxonMobil)

Question 18

What is a quasi-public corporation?

Answer 18

Chartered by govt as approved monopoly for services to general public (public utilities)

Question 19

What is a professional corporation?

Answer 19

Owned by those who offer professional services (doctors, lawyers, etc). Shares not publicly traded.

Question 20

What is a nonprofit corporation?

Answer 20

Don’t seek personal profit for owners (churches, public schools, public charities, research institutes)

Question 21

What is a multinational corporation?

Answer 21

Operate in several countries (apple, tesla)

Question 22

What are the advantages of corporations?

Answer 22

Limited liability
Ability to raise more money for investment
Size
Perpetual life
Ease of ownership change
Ease of attracting talented employees
Separation of ownership from management

Question 23

What is the role of owners/stockholders in corporation hierarchy?

Answer 23

Elect board of directors

Question 24

What is the role of board of directors in corporation hierarchy?

Answer 24

Hire officers

Question 25

What is the role of officiers in corporation hierarchy?

Answer 25

Set corporate objectives and select managers

Question 26

What is the role of managers in corporation hierarchy?

Answer 26

Supervise employees

Question 27

What are the disadvantages of corporations?

Answer 27

Initial cost Extensive paperwork Double taxation Two tax returns Size Difficulty of termination Possible conflict with stockholders and board of directors

Question 28

How do individuals incorporate?

Answer 28

Normally do not issue stock to others Do not share all advantages/disadvantages of large corporations Limited liability and tax benefits

Question 29

What is a S Corporation?

Answer 29

A unique govt creation that looks like a corporation but is taxed like sole proprietorships and partnerships. Profits only taxed as personal income of shareholders

Question 30

What qualifies for an S corporation?

Answer 30

No more than 100 shareholders Shareholders are individuals or estates and citizens or permanent residents of the US Have only one class of stock Derive no more than 25% income from passive sources (rent, royalties, interest)

Question 31

Advantages of LLCs?

Answer 31

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

Question 32

Disadvantages of LLCs?

Answer 32

No stock Fewer incentives Taxes Paperwork

Question 33

What is a merger?

Answer 33

Two firms joining to form one company

Question 34

What is an acquisition?

Answer 34

One company's purchase of property/obligations of another company

Question 35

What is a vertical merger?

Answer 35

Companies in different stages of related industries (software drink company + artificial sweetener company)

Question 36

What is a horizontal merger?

Answer 36

Companies in the same industry (soft drink company + mineral water company)

Question 37

What is a conglomerate merger?

Answer 37

Companies in unrelated industries (soft drink company + snack food company)

Question 38

What must mergers between two competitors prove to the FTC?

Answer 38

That the new combined company does not limit competition unfairly

Question 39

How does a company take firm private?

Answer 39

Management or group of stockholders obtains all of firm's stock by buying it back from other stockholders

Question 40

What is a leveraged buyout?

Answer 40

The employees, managers, or investors become the owners of the firm

Question 41

What is unlimited liability?

Answer 41

Debts or damages incurred by business are your debts to pay off, even if it means selling home or car to do so.

Question 42

What is a general partner?

Answer 42

Unlimited liability and active in managing the firm

Question 43

What is a limited partner?

Answer 43

Owner who invests money in business but does not have any management responsibility or liability for losses beyond their investment

Question 44

What is a limited partnership?

Answer 44

One or more general partners and one or more limited partners.

Question 45

What is limited liability?

Answer 45

The limited partners' liability for the debts of the business is limited to the amount they put into the company, personal assets are not at risk