Chapter 8 "Business Organization" Study Guide Review Flashcards
(38 cards)
What type of business is the most popular in the United States?
Sole proprietorship
Define sole proprietorship (75% but only generates about 4% of sales)
Business owned and operated by 1 person
Why are sole proprietorships so easy to start?
Almost no requirements EXCEPT for business license
List and explain the advantages of sole proprietorships (Hint: there are 6)
- Easy to start - if not using own name, register with government
- Ease of management (full control) - run as you wish; fast, flexible decisions
- ONLY receiver of profit - doesn’t share success
- Doesn’t pay separate business income tax - keeps all profits after income taxes
- Psychological satisfaction
- Easy to discontinue - Quit at own will (after paying debts and obligations)
List and explain the disadvantages of sole proprietorships (Hint: there are 6)
- Unlimited liability - fully responsible for ALL losses and debts
- Hard to raise financial capital - use all available savings and banks reluctant to lend money
- Being small - balance costs and revenue through inventory (limited money = hard)
- Limited managerial experience - good in one but not the other
- Hard to get qualified employees - those go to bigger companies (better money, better benefits)
- Limited life - business dies when owner quits, dies, or sells.
Define partnership (only about 7% and only about 5% of sales)
Jointly owned by 2+ people who agree on specific responsibilities and profits
Explain the difference between general partnership and limited partnership
General (more common) - share equally responsibility and liability; 1 sued all held liable
Limited - 1 partner is not active in daily running; limited responsibility; invest to get shares and profits; lose only money put in
List and explain the advantages of partnerships. (Hint: there are 5)
- Easy to start
- Easy to manage (shared decision and specialization) - responsibility shared; each partner brings talent, strength, and skills
- Lack of separate taxes
- Attract money - easy to borrow together instead of alone; both have assets
- Potential for growth
How is a partnerships formed?
Could do handshake agreement, but most draw up articles of partnership - formal legal papers - lays out EVERYTHING ahead (profits/losses/division of property/buy-outs)
List and explain the disadvantages of partnerships (Hint: there are 3)
- Unlimited liability (general) - each partner is FULLY responsible for actions of all partners CHOOSE CAREFULLY
- Limited life - partner dies/leaves, partnership must be dissolved and reorganized to stay in business
- Potential for conflict - work habits, goals, styles, and many things
Define corporation (about 20% BUT about 90% of sales)
“The Big Boys” - company owned by millions of stockholders; limited liability for firm’s debts; if you own stock, you’re part owner of the corporation
Brief summary of how to start a corporation.
Hardest - approval from gov. to issue a charter (permission) to be incorporated
- Charter: Name, address, purpose, # of shares (stock)
- Stocks sold to investors (stockholders own stock certificates for proof of ownership)
- Corporation is profitable, stockholders receives a dividend (check)
List and explain the advantages of a corporation (Hint: there are 5)
- Ability to attract capital (potential growth) - sell more stocks can raise money; expand; borrow money for issuing bonds (written promise to repay with interest)
- Limited liability for owners - lose amount invested
- Hire professional managers/experts
- Unlimited (long) life - doesn’t die with owner; separate legal entity - name = same (continues business)
- Ease of transferring ownership - sell stocks and they now become part-owner; easier to fine new buyer
List and explain the disadvantages of corporation (Hint: there are 4)
- Double taxation - profits taxed first when paying income taxes; profits taxes 2nd when shareholders pay taxes on dividends (personal income)
- And stockholders may pay move if they sell their stocks (capital gains tax) if they made a profit. - Difficult, expensive, time consuming, hard to get charter
- Little voice (loss of control) - sometimes they look out for their interest and not interest of the company
- More regulations by the gov.
Define franchise
Renting/leasing another firm’s successful business model
Who is credited with developing the idea of a franchise?
Issac Singer
Explain the difference between a franchisor and a franchisee
Franchisor - actual owner of business that let’s other investors rent/lease its name, profile, and way of business
Franchisee - investor who rents/leases business model from franchisor and hopes to recoup their investment
List and explain the advantages of franchises (hint: there is 4)
- Respected product, excellent quality standards - follow certain rules and procedures
- National advertising program - parent company pays nationwide advertising
- Management training and support - help inexperienced owners succeed/professional advice
- Centralized buying power - bulk buying
ADVANTAGES FOR FRANCHISOR ALSO
List and explains the disadvantages of franchises (hint: there is 5)
- Sacrifices some freedom in return got parent guidance
- High fees and royalties - fees for right to use name and charge share of earnings
- Strict operating standards - hours; dress code; procedures
- Purchasing restrictions - buy supplies from parent/approved supplies
- Limited product line - agreement allows stores to offer only approved products
What is an income statement?
Report showing business sale’s, expenses, net income and cash flows for a period of time
Define net income
Funds left over after all the firm’s expenses, including taxes are subtracted from sales
Define depreciation
A noncash charge the firm takes for the general wear and tear on its capital goods
Define merger
Combination of two or more businesses to form a single firm
List the SIX reasons businesses merger
- Faster growth
- Synergy
- Economics of scale
- Diversification
- Elimination of rivals
- Change/lose corporate identity
