Ch. 6 – Business Formation – Flashcards

Business that is owned, and usually managed, by a single individual; extension of the owner in the eyes of the law. -company earnings are treated like owner's income -debts the company incurs are considered owner's personal debts **most common type of business organization in the US

-Ease of Formation (minimal paperwork and costs involved in forming; can form quickly) -Retention of Control (only owner, make all decisions) -Pride of Ownership -Retention of Profits (all profits go to you) -Possible Tax Advantages (no taxes levied directly on earnings of sole proprietorships as a business; taxed only as income of proprietor; not double taxed)

-Limited Financial Resources (only owner responsible for debts, banks and others are often reluctant to lend money) -Unlimited Liability (debts of firm become owner's personal debts, if someone sues your business and wins, the court can seize your personal possessions to see and pay the damages--extra risky) -Limited Ability to Attract and Maintain Talented Employees (can't pay high salaries and substantial perks that highly qualified, experienced employees get from big companies) -Heavy Workload and Responsibilities (long hours and lots of stress; must perform tasks/make decisions in areas where they lack expertise) -Lack of Permanence (if owner dies, retire,s or withdraw from business, company legally ceases to exist--if operates under new ownership, seen as different firm in eyes of law)

Voluntary agreement under which 2 or more people act as co-owners of a business for profit. -General Partnership: each partner has right to participate in company's management and share in profits, but also has unlimited liability for any debts the company incurs -tend to be larger and more profitable than sole proprietorships

No limit to number of parents who can participate (most consist of a few) Formed when partners enter into a voluntary partnership agreement Possible but not advised to start with verbal agreement--better in writing to lay out duties, responsibilities, expectations, etc.

-Ability to Pool Financial Resources -Ability to Share Responsibilities and Capitalize on Complementary Skills -Ease of Formation (not biggest advantage, working out all the details of a partnership agreement can sometimes be a complex and time-consuming process) -Possible Tax Advantages (taxed only as partners' personal income; avoids double taxation)

-Unlimited Liability (not only liable for own mistakes, but for partners' as well; lawsuit can target any individual partner/group--often targets partner with deepest pockets) -Potential Disagreements -Lack of Continuity (if a current partner widows from partnership, relationships among participants will clearly change/could end partnership) -Difficult in Withdrawing from a Partnership (if partner withdraws, still personally liable of any debts or obligations the film ad at the time of withdrawal)

Partnership arrangement th at includes at least 1 general partner and at least 1 limited partner; both contribute financially/profit, but have different roles: -General Partner = fully participate in managing partnership, also assume unlimited personal liability for any of its debts -Limited Partner - cannot actively participle in its management, but have protection of limited liability

Similar to limited partnership, but as the advantage of allowing all partners to take an active role in management, while also offering all partners some form of limited liability (no need to distinguish between limited and general partners) -amount inability protection offered varies among states (full shield, partial shield, etc.) -some states only allow certain professional businesses to form these

Business entity created by filling a from (articles of incorporation) with appropriate state agency, paying state's incorporation fees, add meeting other requirements (different dates have different requirements, "corporation friendly" states attract more businesses, esp. Delaware, where 64% of fortune 500 companies are incorporated) -considered a legal entity that is separate and distinct form its owners--like an artificial person (can legally engage in virtually ay business activity a natural person can pursue--i.e. borrow mine, own property, pay taxes, lawsuits, etc.) -can be a partner or owner of another corporation -limited liability -run by board of directors; owned by stockholders **report about 58% of all business profits (largest share)

Most common type; is a legal business entity that offers limited liability to all of its owners, who are called stockholders -formation requires filing articles of incorporations and paying filing fees -requires adoption of corporate bylaws -Stockholders own corporations--common stock represents basic ownership and have voting rights in stockholders' meetings, but preferred stockholders don't -Individuals can incorporate their business and be the sole shareholder in their corporation -stockholders elect board of directors to oversee company's operations

(i.e. mutual funds, insurance companies, pension funds, and endowment funds) pool money from large number of individuals and use these funds to buy stock and other securities

Basic rules governing how a corporation is organized and how it conducts its business

Individuals who are elected by stockholders of a corporation to represent their interests -establishes the corporation's mission and sets its broad objectives -not involved in day to day management--board appoints a CEO and other corporate officers to manage the company on a daily basis (sets pay and monitors performance of these officers)

-Limited Liability -Permanence (corporations can continue operating as long they remain financially viable and the majority of stockholders want the business to continue) -Ease of Transfer of Ownership (publicly traded C corps let stockholders easily sell shares of stock) -Ability to Raise Large Amounts of Financial Capital (by issuing shares of stock or by selling formal IOUs called corporate bonds) -Ability to Make Use of Specialized Management (hire highly qualified professional managers, offer attractive salaries, benefits, career advancement, etc.)

-Expense and Complexity of Formation and Operation (formal operating requirements, ex: hold regular board meetings, etc.) -Complications When Operating in More than One State (must register/qualify to do business in state other than one incorporated in--additional paperwork, fees, taxes, etc.) -Double Taxation of Earnings and Additional Taxes (C corp is a separate legal entity and taxes its earnings accordingly--dividends taxed again as personal income of stockholders; etc.) -More Paperwork, More Regulations, Less Secrecy (i.e. annual/quarterly reports--10-K, 10-Q) -Possible Conflicts of Interest (crate officers appointed by the board are supposed to further the interests of stockholder, but some top execs pursue policies that further their own interests)

Form of cooperation the avoids double taxation by having its income taxed as if it were a partnership ADVANTAGES: -avoid double taxation -stockholders have limited liability LIMITATIONS: -can't have more than 100 stockholders -each stockholders must be a US citizen or permanent resident of the US (no ownership by foreigner or other corporations)--rare exceptions

Corporation with a limited number of owners that operates under simpler, less formal rules than a C corporation ADVANTAGES: -can operate under simpler arrangements than other corps (i.e. no board of directors or annual stockholders' meeting) -all owners can actively participate in management while still having limited liability DISADVANTAGES: -number of stockholders is limited (varies among states, usually no more than 50) -stockholders normally an't sell their share to the public without first offering gate shares to existing owners -not all states allow formation of this type of corp

Corporation that does not seek to earn a profit and differs in several fundamental respects from C corporations ADVANTAGES: -earnings are exempt form federal and state income taxes -members and directors have limited liability -individuals who contribute money or property to the nonprofit can take a tax deduction, making it easier for these organizations to raise funds form donations DISADVANTAGES: -is has members (who may pay dues) but cannot have stockholders -cannot distribute dividends to members -it cannot contribute funds to a political campaign -it must keep accurate record and file paperwork to document tax-exempt status

Occurs when one firm buys another firm -firming making the purchase = acquiring firm -fim being purchased = target firm (ceases to exist as an indecent entity while the purchasing firm continues in operation and its stock is still traded) -could be hostile takeover

Instead of one firm being the other, the two companies agree to a combination of equals, going together to form a new company out of the two previously independent firms

Combo of firms in the same industry -seek to increase size and market power with the industry and improve efficiency by eliminating duplication of facilities and personnel (ex: 2 airlines merge)

Combo of firms that are at different stages in the production of a good or service, creating a "buyer-seller" relationship; seek to provide tighter integration of production and increased control over the supply of crucial inputs (ex: Microsoft acquires Nokia)

Combo of firms in unrelated industries; seek to reduce risk by making the firm less vulnerable to adverse conditions in any single market (ex: Berkshire hathaway and 3G Capital buy Heinz)

Occurs when a firm transfers total or partial ownership of some of its operations to investors or to another company (often use this to rid themselves of a part of their company that no longer fits well with their strategic plans) -can raise capital for the firm if sold to outsiders -common type = spin-off (when company issues stock in one of its own divisions or operating units and sets it upas a separate company with own board of directors, etc.; distributes stock in the new company to its existing stockholders so stockholders end up owning 2 separate companies; but doesn't generate any additional funds for the firms) -Carve-out (like as pin-off in that the firm convert sa particular unit or division into a separate company and issues stock in the newly created corporation, but instead of distributing new stock to its current stockholder,s it sells the stock to outside investors, thus raising additional financial capital)

Hybrid form of business ownership that is similar to a corporation and a partnership--like a corporation it is considered a legal entity separate form its owners, and it offers its owners limited liability for the debts of their business; but offers more flexibility than a corporation in tax treatment (can have it taxed as a corporation or a partnership) -relatively new, but in many states now outnumber filings for corporations -majority elects to be taxed as partnership -created by filing a document and paint filing fees in the state where the business is organized -owners are called "members"; members can manage their own company under and arrangement similar to the relationship among professional managers who have responsibilities much like those of the CEO and other top officers in corporations

-Limited Liability -Tax Pass-Through (owners of LLCs may elect to have their companies treated as either a corporation or a partnership or sole proprietorship if owned by a single person; in partnership/SP there is no separate tax on earnings of the company--so taxed only as income--no double taxation) -Simplicity and Flexibility in Management and Operation (not required to hold board meeting, less paperwork, etc.) -Flexible Ownership (any number of owners and can include foreign investors and other corporations)

-Complexity of Formation (take more time and effort than sole proprietorships and partnerships) -Annual Franchise Tax (exempt from corporate income taxes, many states require franchise tax) -Foreign Status in Other states (like corporations they have to register to operate as "foreign" companies when do business in states other than state they were organized) -Limits on Types of Firms that Can Form LLCs (most states don't permit banks, insurance companies, and nonprofit organizations to operate as LLCs) -Differences in State Laws

Licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, business method, and other property in exchange for monetary payments other considerations -growth in franchises in foreign markets -growth of women franchisees -low minority participation in franchises, currently because of lack of awareness of opportunities, but expected to grow especially because of new initiatives to recruit minority franchisees

business entity in a franchise relationship that allows other to operate its business using resources it supplies in exchange for money and other considerations

Party in a franchise relationship that pays forte right to use resources supplied by the franchisor

Type of franchising arrangement where franchisor makes a product and licenses the franchisee to sell it. (ex: automakers and dealerships

A broad franchise agreement in which the franchisee pays of rat right to use the name, trademark, and business and production methods of the franchisor -franchisor grants franchisee right to both make and sell its good or service 0franchisor provides wide range of services to the franchisee, such as help with site selection, training, and financing, but must follow specific guidelines (ex: Wendy's, Jiffy Lube, etc.)

-Less Risk (offer proven business system and product) -Training and Support (from Franchisor) -Brand Recognition (established and trusted brand) -Easier Access to Funding (bankers and lenders are more willing to lend money if the business is part of an established franchise) -For FRANCHISOR = expand business and bring in additional revenue without investing own capital

-Costs (initial franchise fee and ongoing royalties paid to franchisor) -Lack of Control -Negative Halo Effect (poor behavior of a few franchisees can create a negative perception that effects whole franchise) -Growth Challenges (franchise agreements usually limit franchise's territory and require franchisor approval before expanding) -Restrictions on Sale (prevent franchisees from selling their franchises to other investors without prior approval) -Poor Execution (leads to negative halo effect) -For FRANCHISOR = complex and challenging to operate a business with thousands of semi-independent owners-operators; difficult to keep all franchisees satisfied; vocal dissatisfied franchisee can hurt reputation

The contractual arrangement between a franchisor and franchisee that spells out the duties and responsibilities of both parties Includes: -terms and conditions -fees and other payments -training and support -specific operational requirements -conflict resolution -assigned territory

Detailed description of all aspects of a franchise that the franchisor must provide to the franchisee at least 14 days before etc franchise agreement is signed--required by Federal Trade Commission (FTC)