Management Chapter 6 – Flashcards
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The four types of forms businesses are organized under
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1. Sole proprietorship 2. Partnership 3. Corporation 4. Limited Liability Company
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Sole Proprietorship
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A business that is owned, and usually managed, by a single individual. Simply an extension of the owner. Debts and earnings are treated directly as the individuals
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Partnership
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A voluntary agreement under which two or more people act as co-owners of a business for profit
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General Partnership
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A partnership in which all partners can take an active role in managing the business and have unlimited liability for any claims against the firm
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Corporation
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A form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners
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Articles of Incorporation
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The document filed with a state government to establish the existence of a new corporation
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Limited Liability
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When ones are not personally liable for claims against their firm. Owners with limited liability may lose their investment in the company, but their other personal assets are protected
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Limited Liability Company
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A form of business ownership that offers both limited liability to its owners and flexible tax treatment
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How is LLC similar to a corporation?
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1. Considered a legal entity separate from its owners 2. Offers its owners limited liability for the debts of their business
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How is LCC dif from a corporation?
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1. More flexible in terms of tax treatment (owners can elect to have their business taxed either as a corporation or a partnership or in some states sole proprietorships)
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Advantages of Sole Proprietorships
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1. Ease of Formation 2. Retention of Control 3. Pride of Ownership 4. Retention of Profits 5. Possible Tax Advantage
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Disadvantages of Sole Proprietorships
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1. Limited Financial Resources 2. Unlimited Liability 3. Limited Ability to Attract and Maintain Talented Employees 4. Heavy Workload and Responsibilities 5. Lack of Permanence
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Advantages of Partnerships
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1. Ability to Pool Financial Resources 2. Ability to Share Responsibilities and Capitalize on Complementary Skills 3. Ease of Formation 4. Possible Tax Advantages
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Disadvantages of Partnerships
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1. Unlimited Liability 2. Potential for Disagreements 3. Difficulty in Withdrawing from a Partnership 4. Lack of Community
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Limited Partnerships
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A partnership that includes at least one general partner who actively manages the company and accepted unlimited liability and one limited partner who gives up the right to actively manage the company in exchange for limited liability
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Limited Liability Partnership
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A form of partnership in which all partners have the right to participate in management and have limited liability for company debts
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Types of Corporations
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1. C Corporations 2. S Corporations 3. Salutary Close Corporations 4. Nonprofit Corporations
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C Corporation
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The most common type of corporation, which is a legal entity that offers limited liability to all of its owners, who are called stockholders
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Corporate Bylaws
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The basic rules governing how a corporation is organized and how it conducts it business
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Stockholders
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An owner of a corporation
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Institutional Investors
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An organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and other securities
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Board of Directors
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The individuals who are elected by stockholders of a corporation to represent their interests
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Advantages of C Corporations
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1. Limited Liability 2. Permanence 3. Ease of Transfer of Ownership 4. Ability to Raise Large Amounts of Financial Capital 5. Ability to Make Use of Specialized Management
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Disadvantages of C Corporations
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1. Expense and Complexity of formation and Operation 2. Complications When Operating in More than One State 3. Double Taxation of Earnings and Additional Taxes 4. More Paperwork, More Regulation, and Less Secrecy 5. Possible Conflicts of Interest
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Domestic Corporation vs. Foreign Corporation
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When a business thats incorporated in one state does business in other its called domestic corporation in the state where its incorporated and foreign corporation in the other states
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S Corporation
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A form of corporation that avoids double taxation by having its income taxed as if it were a partnership
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Salutary Close Corporations
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A corporate with a limited number of owners that operates under simpler, less formal rules than a C corporation
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Nonprofit Corporation
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A corporation that does not seek to earn a profit and differs in several fundamental respects from C corporations
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Acquisition
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A corporate restructuring in which one firm buys another
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Merger
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A corporate restructuring that occurs when two formerly dependent business entities combine to form a new organization
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Divestiture
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The transfer of total or partial ownership of some of a firm's operations to investors or to other company
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Spin-off
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Type of divestiture. Occurs when a company issues stock in one of its own divisions or operating units and sets it up as a separate company. Raises no additional funds for the firm
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Carve Out
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Like a spin off in that the firm converts a particular unit or division into a separate company and issues stock in the newly created corporation. Raises additional financial capital
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Advantages of LLCS
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1. Limited Liability 2. Tax Pass Through 3. Simplicity and Flexibility in Management and Operation 4. Flexible Ownership
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Disadvantages of LLCs
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1. Complexity of Formation 2. Annual Franchise Tax 3. Foreign Status in Other States 4. Limits on Types of Firms that Can Form LLCs 5. Differences in State Laws
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Different Types of Mergers
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1. Horizontal Merger 2. Vertical Merger 3. Conflomerate Merger
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Horizontal Merger
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A combination of firms in the same industry
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Common Objective of Horizontal Merger
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1. Increase size and market power 2. Improve efficiency by eliminating duplication of facilities and personnel
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Example of horizontal merger
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Us airways merges with american airlines in 2013
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Vertical Merger
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A combination of firms at different stages in the production of a good or service
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Common Objective of Vertical Merger
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Provide higher integration of production and increased control over the supply of crucial inputs
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Example of vertical merger
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Microsoft acquires mobile phone manufacturer Nokia for 7.2 billion
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Conglomerate Merger
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A combination of two firms that are in unrelated industries
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Common Objective of Conglomerate Merger
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Reduce risk by making the firm less vulnerable to adverse conditions in any single market
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Example of Conglomerate Merger
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Berkshire Hathaway and 3G Capital buy condiment maker Heinz for 23 billion
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Franchise
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A licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, business methods, and other property in exchange for monetary payments and other considerations
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Franchisor
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The business entity in a franchise relationship that allows others to operate its business using resources it suppose in exchange for money and other considerations
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Franchisee
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The party in a franchise relationship that pays for the right to use resources supplied by the franchisor
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2 Most popular types of franchise arrangements
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1. Distributorships 2. Business Format Franchise
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Distributorship
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A type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it
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Business Format Franchise
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A broad franchise agreement in which the franchisee pays for the right to use the name, trademark, and business and production methods of the franchisor
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Advantages of Franchising
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1. Less risk 2. Training and support 3. Brand Recognition 4. Easier access to funding
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Disadvantages of Franchising
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1. costs 2. lack of control 3. negative halo effect 4. growth challenges 5. restrictions on sale 6. poor execution
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Franchise Agreements
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The contractual agreement between a franchisor and franchisee that spells out the duties and responsibilities of both parties
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Key items of Franchise Agreements
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1. Terms and conditions 2. Fees and other payments 3. specific operational requirements 4. conflict resolution 5. assigned territory
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Franchise Disclosure Document
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A detailed description of all aspects of a franchise that the franchisor must provide to the franchisee at least 14 calendar days before the franchise agreement is signed
