Chapter 10: Business Organizations

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An _____ is by the definition one who initiates and assumes the financial risks of a new enterprise and undertakes to provide or control its management.
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entrepreneur
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The simplest form of business organization, in which the owner is the business.
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Sole Proprietorship
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Thus, anyone who does business without creating a separate business organization, such as a partnership or corporation, has a _____.
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sole proprietorship
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More than ___ of all U.S. businesses are sole proprietorships. They are usually small enterprises with revenues of less than __ per year.
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two-thirds /$1 million
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Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark, trade name, or copyright in the selling of goods or services.
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Franchise
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One receiving a license to use another’s (the franchisors) trademark, trade name, or copyright in the sale of goods and services.
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Franchisee
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One licensing another (the franchisee) to use the owners trademark, trade name, or copyright in the selling of goods and services.
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Franchisor
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A _____ arises when a manufacturing concern (franchisor) licenses a dealer (franchisee) to sell its product. Example: car dealership
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Distributorship
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In ____, such as a burger king restaurant or Hilton hotel, a franchise operates under a franchisors trade name and is identified as a member of a select group of dealers that engage in the franchisor’s business.
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Chain-style business operation
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In a ______ , the franchisor transmits to the franchisee the essential ingredients or formula to make a particular product.
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Manufacturing or processing plant arrangement
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The ___ ___ specifies the terms and conditions of the franchise and spells out the rights and duties of the franchisor and the franchisee.
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franchise contract
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The franchisee ordinarily pays an __ or __ price for the franchise license. This fee is separate from the various products that the franchisee purchases from or through the franchisor.
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initial / lump-sum
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The franchise agreement may specifiywhether the premises for the business must be leased or purchased outright.
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Business Premises
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Typically, the franchisor will determine the territory to be served. Some franchise contracts give the franchisee exclusive rights, or “territorial rights” to a certain geographic area.
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Location of the Franchise
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Although the day-to-day operations of the franchise is normally left to the franchisee, the franchise agreement may provide for the amount of supervision and control agreed on by the parties.
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Quality Control by the Franchisor
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Usually, the franchise agreement will specify that the termination must be “for cause,” such as death or disability of the franchisee, insolvency of the franchisee or breach of the franchise agreement. Most franchise contracts provide that notice of termination must be given. If no set time for termination is specified, then a reasonable time, with notice, will be implied.
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Termination of the Franchise
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Because a franchisors termination of a franchise often has adverse consequences for the franchisee, much franchise litigation involves claims of ___.
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Wrongful Termination
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Federal and state laws protect franchisees from the arbitrary or unfair termination of their franchises by the franchisors.
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Good Faith and Fair Dealing
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Traditionally, partnerships have been classified as either ____ or ____.
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general partnerships/ limited partnerships
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___ is designed for professionals who normally do business as partners in a partnership.
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Limited liability partnership
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An agreement by two or more persons to carry on, as co owners, a business for profit.
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Partnership
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A ____ arises from an agreement, express or implied, between two or more persons to carry on a business for profit.
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general partnership
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1. A sharing of profits and losses. 2. A joint ownership of the business. 3. An equal right in the management of the business.
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3 essential elements to a partnership
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No particular form of partnership agreement is necessary for the creation of a partnership, but for practical reasons, the partnership agreement should be in ____.
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writing
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A written agreement that sets forth each partners rights in, and obligations to, the partnership.
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Articles of Partnership
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A key advantage of the partnership is that the firm itself does not _____.
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pay federal income taxes
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The main disadvantage of the partnership is that the partners are subject to ____ liability for partnership obligations.
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personal
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A doctrine under which a plaintiff may sue, and collect judgement from, any of several jointly liable defendants.
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Joint and Several Liability
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Additionally, a partner who commits a tort that results in a judgement against the partnership may be required to repay the firm for any damages it pays.
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A relationship founded on trust and confidence
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Fiduciary Relationship
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1. A partners duty of loyalty has two aspects. A partner must account to the partnership for any profit or benefit from the firm’s business or the use of its property. A partner must also refrain from dealing with the firm as an adverse party or competing with it. 2. A partners duty of care is limited to refraining from negligent or reckless conduct, intentional misconduct, and violations of the law.
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Fiduciary Duties
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A partnership consisting of one or more general partners and one or more limited partners.
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Limited Partnership
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A limited partnership is a creature of statute, because it does not come into existence until a _____ is filed with the appropriate state office.
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certificate of limited partnership
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A partner who assumes responsibilty for the management of the partnership and liability for its debts.
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General Partner
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A partner who contributes capital to the partnership but has no right to participate in the management or operation of the business and assumes no liability for partnership beyond the capital contributed.
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Limited Partner
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One of the major benefits of becoming a limited partner is this ______.
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limitation on liability
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A form of partnership that allows professionals to enjoy tax benefits of a partnership while limiting their personal liability for the malpractice of other partners.
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Limited Liability Partnership (LLP)
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The major advantage of the LLP is that it allows a partnership to continue as a ____ for tax purposes, but limits the liability of partners.
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pass-through entity
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A major disadvantage of the general partnership is the _____ of its owner-partners.
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unlimited personal liability
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A hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership.
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Limited Liability Company (LLC)
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This business form is governed by the state ____.
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LLC statutes
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A person who has an ownership interest in a limited liability company.
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Member
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The document filed with a designated state official by which a limited liability company is formed.
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Articles of Organization
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To form an LLC, articles of organization must be filed with a ____ agency — usually the _____ office.
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State/ secretary of state’s
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The business’s name must include the words “Limited Liability Company” or the initials “LLC”
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A key advantage of the LLC is that the liability of members is limited to the amount of their ____.
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investments
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An LLC that has _____ can choose to be taxed either as a partnership or as a corporation.
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two or more members
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In a limited liability company, an agreement in which the members set forth the details of how the business will be managed and operated.
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Operating Agreement
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There are two options for managing an LLC:
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member-managed/manager-managed
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A legal business form that complies with statutory requirements.
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Corporation
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Corporations are owned by:
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Shareholders
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The corporations existence as a legal entity, which can be perpetual, depends generally on ____.
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state law
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One of the key advantages of the corporate form of business is that the liability of its owners (shareholders) is limited to their ___.
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investments
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The corporate entity pays taxes on the firms ____, and when income is distributed to shareholders, the shareholders again pay taxes on that income.
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income
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A business corporation that qualifies for special income tax treatment.
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S Corporation
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As in a partnership, the income is taxed only ___.
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once
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The document filed with the appropriate governmental agency, usually the secretary of state, when a business is incorporated.
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Articles of Incorporation
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A set of governing rules adopted by a corporation or other association
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Bylaws
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Corporations can do one of two things with corporate profits: retain them or pass them on to shareholders in the form of ____.
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dividends
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A distribution to corporate shareholders of corporate profits or income, disbursed in proportion to number shares held.
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Dividend
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Another import aspect of corporate taxation is that corporate profits can be subject to ____.
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double taxation
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The proportion of a corporations profits that has not been paid out as dividends to shareholders.
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Retained Earnings
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It also has the right of due process before denial of life, liberty, or property, as well as freedom from unreasonable searches and seizures and from double jeopardy.
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Constitutional Rights of Corporations
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One of the hallmarks of the corporate organizations is that shareholders are not personally liable for the debts of the corporation.
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Liabilities of Shareholders
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Bonus: To disregard the corporate entity and hold the shareholders personally liable for a corporate obligation.
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Pierce the Corporate Veil

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