Better Business -ch6 – Flashcards

They are easy to set up. With only one person making all the decisions, sole proprietors have greater control and more flexibility to act quickly. The income and expenses of a sole proprietorship flow through the owner's personal tax return. Sole proprietors can deduct business losses from their personal taxes which reduces the personal taxes owed.

Unlimited liability Potential difficulty in borrowing money

means that if business assets aren't enough to pay business debts, then personal assets, such as the sole proprietor's house, personal investments, or retirement plans, can be used to pay the balance. If the type of business you're running has the potential for someone to sue you because of errors on your part, you may not want to operate as a sole proprietorship. A sole proprietor is personally responsible for all the debts and liabilities of the business.

is a type of business entity in which two or more owners (or partners) share the ownership and the profits and losses of the business. Like a sole proprietorship, a partnership is easily formed. There are no special forms required, although a partnership agreement is recommended. Also, like a sole proprietorship, many partners will have unlimited liability.

More owners help contribute to both the starting and ongoing capital of the business. Multiple people are involved in partnerships, so there is more time available to increase sales, market the business, and generate income. Sharing the financial responsibility brings in more people who are interested in the company's overall profitability and are as highly motivated as you are to make the business succeed. Therefore, additional owners, unlike employees, are more likely to be willing to work long hours and go the extra mile. Adding partners to help share the workload also allows for coverage for vacations or when a partner is out due to illness or personal issues. Moreover, if partners have complementary skills, they create a collaboration that can be quite advantageous. Like a sole proprietorship, partners report income on their personal tax return and they can use losses to offset income from other sources.

Adding partners means sharing profits and control. Adding the wrong partner can be very problematic. A potential partner may have different work habits and styles from you, and if the partner's style isn't complementary, the differences can prove challenging. In addition, as the business begins to grow and change, your partner might want to take the business in a different direction than you do.

Capital contributions. The amount of capital, including money, equipment, supplies, computers, and any other tangible thing of value, that each partner contributes to begin the business and how additional capital can be added. 2. Responsibilities of each partner. Outline the responsibilities of each partner from the beginning to reduce potential conflicts. Also, unless otherwise specified, any partner can bind the partnership to any debt or contract without the consent of the other partners. 3. Decision-making process. It is important to consider how decisions will be made. Will just one or two partners make the key decisions? What will be the tiebreaker if needed? 4. Shares of profits or losses. Not only should the agreement specify how to divide profits and losses between the partners, but it should also specify how frequently this will be done. Profits could be divided evenly or be proportional to each partner's initial contribution to the partnership. 5. Departure of partners. The partnership agreement should have rules for a partner's exit, whether it's voluntary, involuntary, or due to death or divorce. Provisions to remove a partner's ownership interest are necessary so the business does not need to liquidate. 6. Addition of partners. The partnership agreement also helps spell out the requirements for new partners entering the partnership.

General partnerships - Default arrangement - Simplest to form Limited partnership - General partners - Limited partners

A general partnership is the "default" arrangement for a partnership and is therefore the simplest of all partnerships to form. In a general partnership, each partner has unlimited liability for the debts and obligations of the partnership, meaning every partner is liable for his or her own actions, as well as those actions of the other partners and the actions of any employees.

have two distinctions of partners. The general partners are full owners of the business, are responsible for all the day-to-day business decisions, and remain liable for all the debts and obligations of the business. Limited partners are involved as investors and as such are personally liable only up to the amount of their investment in the business and must not actively participate in any decisions of the business. Limited partnerships can be very complex to form, so it may be worth exploring other business structures before deciding on this strategy.

A corporation is a specific form of business organization that is legally formed under state laws. A corporation is considered a separate entity apart from its owners; therefore, a corporation has legal rights like an individual, so a corporation can own property, assume liability, pay taxes, enter into contracts, and can sue and be sued—just like any other individual. However, unlike a sole proprietorship, owners of a corporation have limited liability and are represented in the management of the company through a board of directors. Corporations have an unlimited theoretical life, as ownership can be transferred from one shareholder (or their estate) to another. Corporations can raise money by "going public" or selling stock. However, corporations are separate legal entities that must file their own tax return and pay taxes.

owners of the company Large publicly-owned corporations are corporations whose stock are owned by more than 25 stockholders and are regulated by the Securities and Exchange Commission. Shareholders have no involvement in the direct management of the corporation. Shareholders influence corporate decisions by electing directors, overseeing bylaws and the articles of organization (the title of the document filed to create a corporation), and voting on major corporate issues. In privately held or closed corporations there are fewer shareholders, and they are generally involved in the management and daily operations of the business. The shares of privately held corporations are not traded on public stock exchanges.

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Directors—or the board of directors—set policy for the corporation and make the major business and financing decisions. The board of directors elects corporate officers and ensures the corporate managers are doing their job. The Sarbanes-Oxley Act of 2002, mentioned in Chapter 3, includes a new set of standards of accountability for the board of directors. If the members of a board of directors ignore their responsibilities of managing the internal controls of a company, they incur the risk of long prison sentences and huge fines.

includes a new set of standards of accountability for the board of directors. If the members of a board of directors ignore their responsibilities of managing the internal controls of a company, they incur the risk of long prison sentences and huge fines.

elected by the board of directors and are responsible for the daily operation and management of the company. Typical officers include the President (or Chief Executive Officer), Chief Financial Officer, and Chief Operating Officer. Any "officer" position can be formed if it makes sense for the company. In large companies, the responsibilities of each officer are demanding enough that separate positions are necessary. In smaller companies, only one or two persons might perform the role of several different officers.

Limited liability for shareholders Extended life and ownership transfer Raising capital Tax benefits

Limited liability for shareholders Extended life and ownership transfer Raising capital Tax benefits

Because a corporation is a separate legal entity and is responsible for its own debts and obligations, one of the main reasons owners incorporate their business is to protect their personal assets. Stockholders (owners) are not personally liable for business debts.

Shareholders own a corporation, so its existence doesn't depend on its founding members. Shares of ownership are easily exchanged, so the corporation is capable of continuing forever, in theory.

Incorporating offers a business greater flexibility when raising capital. Corporations are able to sell stock to the general public. Banks and venture capitalists are more likely to lend money to a business that is incorporated.

A corporation is taxed at 15 percent for its first $50,000 in annual profits, whereas the same amount of profits from a sole proprietorship or partnership would be taxed at a rate of 28 percent through individual taxes. This advantage may well apply to those smaller businesses.

Double taxation occurs when the corporation is first taxed on its net income, or profit, then distributes that net income to its shareholders in the form of dividends that the individual shareholder must then pay taxes on.

is a regular corporation (a C corporation) that has elected to be taxed under a special section of the Internal Revenue Service code called Subchapter S. S corporations have shareholders like C corporations. S corporations must comply with all other C corporation regulations.

an appropriate structure for owners who meet the requirements for an S corporation and want the legal protection of a corporation but want to be taxed as a sole proprietor or partner.

Unlike C corporations, S corporations do not pay corporate income taxes. Instead, as in a partnership or sole proprietorship, the shareholders in an S corporation pay income taxes based on their proportionate share of the business profits and pay the taxes through their own individual tax returns. The beauty of an S corporation is that it offers the best of both worlds: profits and losses pass through to the shareholders, and the corporate structure provides some limitations on personal liability. However, the S corporation does not assume liability for an owner's personal wrongdoings. This is true for any corporate structure.

, to be an S corporation: The company must not have more than 100 shareholders Shareholders must be U.S. citizens or residents. The company must issue only one class of stock. The company must distribute proportionately all profits and losses to each shareholder based on each one's interest in the business.

) is a distinct type of business that, like an S corporation, combines the corporate advantages of limited liability with the tax advantages inherent in partnerships. LLCs are relatively new compared to S and C corporations. Like a C or S corporation, an LLC requires articles of organization, but an LLC is free of many of the annual meetings and reporting requirements imposed on a C or S corporation, so it's simpler to maintain. LLCs are often used by professional corporations formed by accountants, attorneys, doctors, and other similar professionals who want to separate themselves from partner liability but still reap the other benefits of a partnership. LLCs may be a good choice for start-ups for the tax benefits and easier financing.

There is no one entity that is best for every business. The right form depends on many factors. A sole proprietorship is a business with only one owner. It is easiest to form and allows the owner to make all the decisions, while accepting full liability. A limited liability corporation or LLC is very flexible and can work for a business with one or more owners. An LLC protects owners from unlimited liability. A partnership is a business with two or more co-owners who operate under a voluntary legal agreement. In a general partnership, all the partners participate in the management and accept unlimited liability. In a limited partnership, some partners are only investors and are referred to as limited partners. The liability of a limited partner is limited to their investment. A subchapter S corporation gives partners limited liability but avoids double taxation. Finally, a C corporation is a business entity that is separate from its owners. Owners, referred to as shareholders, have limited liability for the debts of the business. C corporations, especially those that are publicly traded, can raise large amounts of capital through the sale of stock.

an incorporated business that does not seek a profit and instead utilizes revenue available after normal operating expenses for the corporation's declared social or educational goals. Not-for-profit corporations must apply for tax-exempt status with the federal government and sometimes with the state in which they are incorporated. Incorporation is not required but is still needed to receive limited liability protection. A nonprofit organization cannot be organized for any person's private gain. Nonprofit organizations do not issue shares of stock. Members may not receive personal financial benefit from profits (other than salary). Some do provide employee benefits, such as retirement plans and health insurance. If a not-for-profit dissolves, the organization's assets go to a similar nonprofit. Donors to corporations can deduct their donations from their taxes. Also, the nonprofit is exempt from paying most federal and/or state corporate income taxes and may also (depending on the state) be exempt from state sales and property taxes.

Cooperatives are not owned by outside investors, but by members. Cooperative members can be individuals or businesses. Cooperatives are motivated to provide services to people with common interests and/or needs. Any profits made by a cooperative are returned to members in proportion to their use. Members buy shares to help finance the cooperative, elect directors to manage the cooperative, and create and amend the bylaws that govern the cooperative. Cooperatives use the benefit of group power, people or companies coming together for a single cause, to negotiate within their marketplace. Members enjoy reduced costs due to greater bargaining power and marketplace strength associated with the larger group.

when two companies come together to form one company. Generally, it implies that the two companies involved are about the same size and have mutually agreed to form a new combined company.

on the other hand, occurs when one company completely takes over another company. The purchased company ceases to exist, and it operates and trades under the buying company's name. Acquisitions are not always welcome.

An unfriendly acquisition occurs when one company tries to take control over another company against its wishes. Unfriendly acquisitions are referred to as hostile takeovers.

An unfriendly or hostile acquisition attempt occurs through a tender offer, where the acquiring firm offers to buy the target company's stock at a price higher than its current value to induce shareholders into selling.

Another method of acquiring a company against its wishes is through a proxy fight in which the acquiring company tries to persuade the target company shareholders to vote out existing management and to introduce management that is sympathetic to the goals of the acquiring company.

is the business buzzword often used to justify a merger or an acquisition. It is the idea that when two companies combine, the result is better than each company could achieve individually. Operating or financial economies of scale usually drive synergy as combined firms often lower costs by trimming redundancies in staff, sharing resources, and obtaining discounts accessible only to a larger firm.

Many times, larger companies acquire smaller companies for their innovativeness, and a smaller company will agree to merge or be acquired if it feels it wouldn't have the opportunity to go public and couldn't survive alone otherwise. IBM has long used the strategy of adding to their product line through acquisitions.

horizontal vertical market extension production extension conglomeration

Horizontal merger: Two companies that share the same product lines and markets and are in direct competition with each other, such as Exxon and Mobil and Daimler-Benz and Chrysler. Vertical merger: Two companies that have a company/customer relationship or a company/supplier relationship, such as Walt Disney and Pixar or eBay and PayPal. Product extension merger: Two companies selling different but related products in the same market, such as the 2005 merger between Adobe and Macromedia. Market extension merger: Two companies that sell the same products in different markets, such as when NationsBank, which had operations primarily in the East Coast and Southern areas of the United States, merged with Bank of America, whose prime business was on the West coast. Conglomeration: Two companies that have no common business areas merge to obtain diversification. For example, Citicorp, a banking services firm, and Travelers Group Inc., an insurance underwriting company, combined to form one of the world's largest financial services group, Citigroup, Inc.

More than ½ of all mergers don't meet expectations because of: Poor integration Conflicting corporate cultures Power struggles in management team Employee turnover