chapter 4

Question 1

What is a sole proprietorship?

Answer 1

A business that is owned by and usually operated by only one person.

Question 2

Are sole proprietorships usually small or large?

Answer 2

Most are small, but a few can be large.

Question 2

What large corporations started as sole proprietorships?

Answer 2

Walmart & JCPenny.

Question 3

What type of ownership is more popular, sole proprietorships, corporations, or partnerships?

Answer 3

Sole proprietorships are the most popular, but they rank last in sales revenues.

Question 4

What are some advantages of sole proprietorships?

Answer 4

1. Easy to start up (easiest way to start a business).
2. Sole ownership.
3. You keep all your profits (all the profits are for the owner).
4. No special taxes (only the income of the owner is taxed because that is the profit).
5. Flexibility, because you’re your own boss.

Question 5

What are some disadvantages of sole proprietorships?

Answer 5

1. Unlimited liability; business owners are personally liable for all debts of the business.
2. Lack of money; banks and other lenders are usually not willing to spend large amounts of money on sole proprietorships.
3. Difficulty in hiring.
4. Lack of continuity; if the owner dies or retires the business essentially doesn’t exist anymore.

Question 6

What is a partnership?

Answer 6

A group of two or more people acting as co-owners of a business for profit.

Question 7

Are partnerships common?

Answer 7

No, they are much less common compared to sole proprietorships or corporations, making only 10% of all American businesses.

Question 8

How many partners can there be in a partnership?

Answer 8

Trick question! There is no legal limit on the number of partners a partnership may have.

Question 8

What is a general partner?

Answer 8

A person who has full or shared responsibility for operating a business.

Question 9

What is a limited partner?

Answer 9

Someone who invests money in the business, but has no say in the business decisions or any responsibility or liability for any of the losses other than the amount he or she invested into the partnership.

Question 10

What is the partnership agreement?

Answer 10

An agreement that lists the terms of the partnership.

Question 10

What should the partnership agreement state?

Answer 10

1. Who makes the final decisions.
2. What each partners roles are.
3. The investment each partner will make.
4. How much of a profit or a loss each partner gets or is held accountable for.
5. What will happen if a partner dies or they want to stop the partnership.

Question 11

What are the advantages of a partnership?

Answer 11

1. Easy to start up.
2. More capital available (since theres two owners they can pool more funs to the business).
3. More skill to the table and more knowledge (weaknesses of one partner is balanced by the strengths of the other).
4. All profits belong to the owners of the partnership.
5. No special taxes.

Question 12

What are the disadvantages of a partnership?

Answer 12

1. Management disagreements.
2. Lack of continuity (the partnership is void if one of the partners dies or tries to withdraw; the remaining partner can buy back the other partners share).
3. Frozen investment.
4. Unlimited liability: each business owner is equally responsible for whatever debt accrued within a business if the company is unable to repay or defaults on its debt, limited partners are only liable for their original investment, some states allow limited liability partnership (LLP) which the partner has protection from legal action resulting from malpractice or negligence of the other partners.

Question 13

What is a corporation?

Answer 13

A legal entity, which by law that acts like a person in many ways. It can start and run a business, buy or sell property, borrow money, sue or be sued, and make agreements, just like a real person.

Question 14

Where does a corporation exist?

Answer 14

Only on paper.

Question 15

How much revenue do corporations consist of?

Answer 15

They account for 82% of all sales revenue, and they are only 18% of all businesses.

Question 15

What is stock?

Answer 15

The ownership of a share of a company.

Question 16

What is a stockholder?

Answer 16

A stockholder, or shareholder, is a person that owns shares (stock) in a company.

Question 17

What is a closed corporation?

Answer 17

A corporation whose stocks are not owned by a lot of people and are not sold publicly, ex: mars.

Question 18

What is an open corporation?

Answer 18

A corporation whose stock can be bought and sold publicly by any individual, ex: Microsoft, Nike, General Electric.

Question 19

What are the two types of stock?

Answer 19

1. Common stock: gives shareholders ownership in a company and the right to vote on important decisions. But, they are last in line to get paid if the company goes bankrupt.
2. Preferred stock: gives shareholders a higher claim on assets and earnings than common stockholders, meaning they usually receive fixed dividends first. But, they typically don’t have voting rights.

Question 20

Who generally issue common stock?

Answer 20

Smaller corporations.

Question 21

What are dividends?

Answer 21

They are the distribution of earnings to the stockholders or shareholders of a corporation.

Question 22

What are some rights of a stockholder?

Answer 22

1. Getting information about the corporation. 2. Voting on changes to the corporate bylaws. 3. Going to the annual stockholders meeting.

Question 23

What is a proxy?

Answer 23

A form that allows stockholders to let someone else vote on their behalf at a meeting where company decisions are made.

Question 23

What is an organizational meeting?

Answer 23

The final step in creating a corporation. In this meeting, the founders and first stockholders get together to set the company’s rules and choose a board of directors. The board is responsible for running the company and must answer to the stockholders for how they manage it.

Question 24

What are the board of directors?

Answer 24

The group that leads a corporation, and its members are elected by the stockholders. These members can be from inside or outside the company. Their main jobs are to set company goals, make plans to achieve them, oversee the company’s operations, and appoint top company officers.

Question 25

What are the corporate officers?

Answer 25

Top executives in a company, including the chairman of the board, president, executive vice presidents, corporate secretary, and treasurer. They assist the board of directors by making plans, implementing strategies, hiring employees, and managing the daily operations of the business.

Question 25

What are the advantages of corporations?

Answer 25

1. Limited liability: the owners of a company (like shareholders) are not personally responsible for the company's debts or legal issues. They can only lose the money they invested in the company, not their personal belongings. 2. Easy to raise capital (like selling stock). 3. Ease of transfer of ownership. 4. Perpetual life: a corporation continues to exist even if its owners change or pass away. Because it is considered a legal "person." 5. Specialized management: corporations can attract more skilled and talented managers compared to sole proprietorships and partnerships.

Question 26

What are the disadvantages of corporations?

Answer 26

1. Expensive to start up. 2. Double taxation, their profits are taxed twice, once on the income and the second on the personal income of the stockholders. 3. Lack of secrecy: because these corporations are required to submit detailed reports to government agencies and to stockholders, so competitors can use this information to compete more effectively. 4. Government regulations and more paperwork, must meet requirements before they can sell stock to the public.

Question 27

How are S corporations taxed?

Answer 27

Like partnerships, the corporations income is taxed only as the personal income of its stockholders. Good to avoid double taxation while keeping the limited liability benefit.

Question 27

What is an S corporations criteria?

Answer 27

1. No more than 100 shareholders. 2. All shareholders are residents or citizens of that country. 3. Only one type of stock available for ownership. 4. The company must be based in the country where it was formed. 5. All stockholders have to agree to the formation of an S corporation.

Question 28

What is a limited liability company (LLC)?

Answer 28

A business type that combines the benefits of a corporation and a partnership. It protects owners from personal liability while offering more flexibility than a corporation, like BMW of NA.

Question 29

Some advantages of an LLC?

Answer 29

1. Avoids double taxation. 2. Keeps the benefits of being limited liability. 3. More flexibility and fewer restrictions than corporations.

Question 30

What is the difference between an S corporation and an LLC?

Answer 30

The LLC is not restricted to 100 stockholders.

Question 31

What is a non-profit corporation?

Answer 31

A corporation that provides social, educational, religious, or other services rather than to earn profit. Some museums, charities are organized in that way to ensure limited liability.

Question 32

What is a joint venture?

Answer 32

An agreement between two or more groups to make a business entity to get a specific goal. Ex, Nestle and General Mills formed a joint venture called Cereal Partners Worldwide. Once they reach their goal, the joint venture ends.

Question 33

What is a syndicate?

Answer 33

A temporary association of individuals or businesses that come together to work on a specific project that needs a lot of capital. Like a joint venture a syndicate is dissolved as soon as its purpose is finished.

Question 34

What is a merger?

Answer 34

Combining two corporations to form one business.

Question 35

What is an acquisition?

Answer 35

Its basically like a merger but its mainly used for a large corporations.

Question 36

What are the different kinds of mergers?

Answer 36

1. Horizontal merger: when companies that sell similar products merge together. (coca cola, pepsi). 2. Vertical merger: occurs between companies at different stages in the production process who come together. 3. Conglomerate merger: a merger of two firms that have completely unrelated business activities.