Chapter 8 Packet Notes Flashcards Preview

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Flashcards in Chapter 8 Packet Notes Deck (50):

  • Management team
  • Characteristics of a strong management team
  • Team building and structure

Building a Management Team


Managers and other key persons who give a company its general direction.

Management Team


  • Capable of securing the resources needed to make the business a success.
  • Reassures investors about their investment and the continuity of business.
  • Diversity of talent makes the team stronger than an individual entrepreneur.

Characteristics of a Strong Management Team


  • The required combination of education and experience depends on the type of business and the nature of its operations.
  • The key: Achieving a balance of skills and compentencies in functional areas.
  • Designing an internal management structure that defines relationships and responsibilities.
    • Outside professional support can supplement the skills of a management team.
    • An active board of directors can provide counsel and guidance.

Team Building and Structure


  • Achieving balance
  • Expanding social networks
  • Team building and structure
  • Specifying structure

Building a Management Team (More)


A business owned by one person, who bears unlimited liability for the enterprise.

Sole Proprietorship


  • Recieves all of the firm's profits
  • Holds title to all the firm's assets
  • Can easily sell or transfer ownership of the company name and assets.
  • Requires no registration or filing fee.
  • Has absolute freedom from interference by other stakeholders.

Advantages of Sole Proprietorship


  • Bears all business risk
  • Is subject to all claims of creditors
  • Has unlimited personal liability for business.
  • Recieves no tax free benefits as an employee.
  • Death/incapacity of owner terminates personal capital
  • Is taxed on business income as personal income.

Disadvantages of Sole Proprietorship


A legal entity formed by two or more co-owners to carry on a business for profit.



  • Required: Of legal age to contract
  • Desired: Honest, healthy, capable, and compatible.

Partner Qualifications


  • What is our business concept?
  • How are we going to structure ownership?
  • Why do we need each other?
  • How do our lifestyles differ?

Questions about Partnership Formation


  • Choose your partner carefully
  • Be open, but cautious, about partnerships with friends.
  • Test-drive the relationship, if possible.
  • Create a combined vision for the business.
  • Prepare for the worst.

Partnership Insights


  • Sharing workload
  • Sharing emotional burden
  • Procuring executive talent not otherwise affordable.
  • Sharing financial burden
  • Companionship

Advantages of Partnerships


  • Interpersonal conflicts
  • Dissatisfaction with partner
  • Absence of one clear leader
  • Dilution of equity
  • Frustration of not being able to call one's own shots.

Disadvantages of Partnership


  • Partnership agreement
  • Joint and Several Liability
  • Termination of Partnership

Rights and Duties of Partners


A document that states explicitly the rights and duties of partners.

Partnership Agreement


The liability of each partner resulting from any one partner's ability to legally bind the other partners.

Joint and Several Liability


Provisions for rapidly responding to death or departure of a partner.

Termination of a Partnership


A business organization that exists as a legal entity and provides limited liability for its owners.



A business organization recognized by the law as having a separate legal existence ("artificial being"); can be sued, hold property, and incur debt.

Legal Entity


An ordinary, or regular, corporation chartered by the state and taxed by the federal government as a separate legal entity.

  • No new business can start as this

C Corporation


  • Name of company
  • Formal statement of formation
  • Type of business
  • Location
  • Duration
  • Classes and preferences of stock
  • Number and per value of authorized shares
  • Voting privileges for each class of stock
  • Names of incorporators and directors
  • Capital stockholders
  • Statement of limited liability for stockholders
  • Statement of directors' powers

Articles of Incorporation


  • Stock certificate
  • Pre-emptive right
  • Legal Status

Rights and Legal Status of Stockholders


A document specifying the number of shares of stock owned by a shareholder.

Stock Certificate


The right of current stockholders to buy new shares of stock before they are offered to the public.

Preemptive Right


  • Ownership provides control over the firm.
  • Ownership limits liability to investment in the firm.
  • Ownership can be transferred without affecting the firm's operations.

Legal Status


  • Initial Organizational Requirements and costs
  • Liability of owners
  • Continuity of the business
  • Transferability of ownership
  • Management control
  • Attractiveness for raising capital
  • Income taxes

Factors Affecting the Choice of a Firm's Structure


Rise as the formality of the organization increases. In a view of the relatively modest costs, however, this consideration is of minimal importance in the long run.

Initial Organizational Requirements and Costs


  • Self-employed persons are taxed on their busines incomes at tax rates set for individuals.

Federal Income Taxes- Sole Proprietorship


The partnership does not pay taxes; allocated shares of income from partnership are taxed as personal income for each of the partners.

Federal Income Tax- Partnership


As a separate legal entity, it reports its income and pays any taxes related to its profits; dividends paid to shareholders are taxed as personal income.

Federal Income Tax- Corporation


  • Piercing the Corporate Veil
  • Agency Principal

LIability of Owners


A situation in which the courts conclude that incorporation has been used to perpetuate a fraud, skirt a law, or commit some wrongful act, and thus remove liability protections from the corporate entity.

Piercing the Corporate Veil


  • An employer is liabile for the actions of an employee while on company business.
  • Organizing as a corporation or limited liability company shields the personal assets of owners in agency cases.

Agency Principal


  • The limited partnership
  • The limited liability company
  • The professional corporation
  • The nonprofit corporation

Specialized Forms of Organization


  • General partner
  • Limited partners
  • Income (taxable) or losses

The Limited Partnership


Active in the business, personally liabile for the debts of the business.

General Partner


Not active in the business, liability limited to investment in business.

Limited Partner


Apportioned to each partner in a limited partnership.

Income (Taxable) or Losses


Stockholders have limited liability but pay personal income taxes on the business profits.

  • Easier to set up
  • More flexible
  • Tax advantages

The Limited Liability Company


Protects licensed professionals from liability of partners but not their personal liability.

The Professional Corporation


Serves civic, educational, charitable, or religious purposes but not for generation of profits.

The Nonprofit Corporation


An organizational relationship that links two or more independent business entities in a common endeavor.

Strategic Alliances


  • Reduced cycle types through shared resources
  • Increased performance through synergistic combinations of financial resources and creativity.

Benefits of a Strategic Alliance


Difficulty in establishing and maintaining alliances.

Risk of Strategic Alliances


  • Establish a healthy network of contacts
  • Identify and contact indiividuals within a firm who are likely to return your call.
  • Outline the partner's potential financial benefits from the alliance.
  • Learn to speak and understand the "language" of your partner.
  • Continue to monitor the progess of the alliance.

Steps in Building a Strategic Alliance


The governing body of a corporation, elected by the stockholders.

  • Inside directors work for the firm.
  • Outside directors do not work for the firm.

Board of Directors


  • Elect the firm's officers (top management)
  • Approve top management's strategic plans and policies.
  • Review top management's performance.
  • Declare dividends

Duties of Directors


Bring knowledge and experience.

  • Review policy decisions
  • Provide general direction
  • Monitor the firm's ethical behavior
  • Mediate and resolve disputes among top management

Contributions of Board of Directors


The alternative to a board of directors:

  • Provides advice but does not have the fiduciary (money) responsibility for the direction of the firm.
  • May be less threatening and more cooperative than a board of directors.

Advisory Council