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Business 101 Chapter 5

Sole Proprietorship definition
A business owned, and usually managed, by one person
Partnership definition
Two or more people legally agree to become co-owners of a business.
Corporation definition
A legal entity with authority to act and have liability apart from its owners
What are the six major benefits of sole proprietorship?
1) Ease of starting your own business
2) Being your own boss
3) Pride of ownership
4) Leaving a legacy
5) Retention of company profit
What are the seven disadvantages of sole proprietorships?
1) Unlimited Liability –Any debts or damages incurred by the business are your debts, even if it means selling your home, car or anything else.
2) Limited financial resources
3) Management difficulties
4) Overwhelming time commitment
5) Few fringe benefits
6) Limited growth
7) Limited life span
General partnership definition
All owners share in operating the business and in assuming liability for the business’s debts.
Limited partnership definition
A partnership with one or more general partners and one or more limited partners.
General partner definition
An owner (partner) who has unlimited liability and is active in managing the firm
Limited partner definition
An owner who invests money in the business, but enjoys limited liability
Limited liability definition
Liability for the debts of the business is limited to the amount the limited partner puts into the company; personal assets are not at risk.
Master limited partnership definition
A partnership that looks much like a corporation, but is taxed like a partnership and thus avoids the corporate income tax.
Limited liability partnership definition
Limits partners’ risk of losing their personal assets to the outcomes of only their own acts and omissions and those of people under their supervision.
What are the four advantages of partnerships?
1) More financial resources
2) Shared management and pooled/complementary skills and knowledge
3) Longer survival
4) No special taxes
What are the four disadvantages of partnerships?
1) Unlimited liability
2) Division of profits
3) Disagreements among partners
4) Difficult to terminate
Conventional (C) Corporation definition
A state-chartered legal entity with authority to act and have liability separate from its owners (its stockholders)
What are the seven advantages of corporations?
1) Limited liability
2) Ability to raise more money for investment
3) Size
4) Perpetual life
5) Ease of ownership change
6) Ease of attracting talented employees
7) Separation of ownership from management
What is the business hierarchy?
Owners/stockholders (elect board of directors) –> Board of directors (hire officers) –> Officers (set corporate objectives and select managers) –> Managers (supervise employees) –> Employees
What are the seven disadvantages of corporations?
1) Initial cost
2) Extensive paperwork
3) Double taxation
4) Two tax returns
5) Size
6) Difficulty of termination
7) Possible conflict with stockholders and board of directors
Who can incorporate?
Anyone – truckers, doctors, plumbers, athletes and small business owners can incorporate.
True or false. Normally stock is not issued to outsiders when individuals incorporate, so the advantages and disadvantages are not exactly the same as for large corporations.
What are the major advantages to incorporating?
Limited liability and possible tax benefits
S corporation definition
A unique government creation that looks like a corporation, but is taxed like sole proprietorships and partnerships.
S Corporations have _________, __________, and ________, plus the benefit of
Shareholders, directors, employees, and limited liability
Profits are taxed only as the ______ _______ of the ________
Personal income, shareholder
What are the four qualifications for S Corporations?
1) Have no more than 100 shareholders
2) Have shareholders that are individuals or estates and are citizens or permanent residents of the U.S.
3) Have only one class of stock
4) Derive no more than 25% of income from passive sources
What happens if an S corporation loses its S status?
It may not operate under it again for at least 5 years.
Limited Liability Company (LLC) definition
Similar to an S corporation, but without the eligibility requirements
What are the five advantages of LLC’s?
1) Limited liability
2) Choice of taxation
3) Flexible ownership rules
4) Flexible distribution of profits and losses
5) Operating flexibility
What are the five disadvantages of LLC’s?
1) No stock, therefore ownership is nontransferable
2) Limited life span
3) Fewer incentives
4) Taxes
5) Paperwork
Merger definition
The result of two firms joining to form one company
Acquisition definition
One company’s purchase of the property and obligations of another company
Vertical Merger definition
Joins two firms in different stages of related businesses
Horizontal Merger definition
Joins two firms in the same industry and allows them to diversify or expand their products.
Conglomerate Merger definition
Unites firms in completely unrelated industries in order to diversify business operations and investments.
Leveraged Buyout (LBO) definition
An attempt by employees, management or a group of investors to buy out the stockholders in a company
LBOs have ranged in size from _________ to __________ and have involved everything from small businesses to giant corporations.
$50 million, $31 billion
Franchise agreement definition
An arrangement whereby someone with a good idea for a business (franchisor) sells the rights to use the business name and sell a product or service (franchise) to others (franchisees) in a given territory
What are the five advantages of franchising?
1) Management and marketing assistance
2) Personal ownership
3) Nationally recognized name
4) Financial advice and assistance
5) Lower failure rate.
What are the six disadvantages of franchising?
1) Large start-up costs
2) Shared profit
3) Management regulation
4) Coattail effects
5) Restrictions on selling
6) Fraudulent franchisors
What are the three advantages of home-based franchises?
1) Relief from commuting stress
2) Extra family time
3) Low overhead expenses
What are the two disadvantages of home-based franchises?
1) Isolation
2) Long hours
Cooperatives definition
Businesses owned and controlled by the people who use them – producers, consumers, or workers with similar needs who pool their resources for mutual gain.

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