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busn chapter 6

4 ownership options
1. sole proprietorship
2. partnership
3, corporation
4. limited liability company (LLC)
sole proprietorship
a form of business ownership with a single owner who usually actively manager the company
what is the most common type of business organization in the U.S.
sole proprietorship
5 advantages of sole proprietorship
1. ease of formation: minimal paperwork
2. retention of control: manage the entire thing yourself
3. pride of ownership: personal satisfaction
4. retention of profits: profits just go to you
5. possible tax advantage: earnings taxes only as income of proprietor, not on earnings as a business
5 disadvantages of sole proprietorship
1. limited financial resources: lenders reluctant to lend money
2. unlimited liability: only one responsible
3. limited ability to attract and maintain talented employees: don’t have the resources to pay high salaries
4. heavy workload and responsibilities: many hours, lost of decisions in areas where they lack expertise
5. lack of permanence: just extensions of their owners, when owner goes away, business goes away
a voluntary agreement under which two or more people act as co-owners of a business for profit
general partnership
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
4 advantages of a general partnership
1. ability to pool financial resources: more owners = more financial capital
2. ability to share responsibilities and capitalize on complementary skills: share burden of running a business; use mix of skills to best advantage
3. ease of formation: can be established by verbal agreement
4. possible tax advantages: only taxes a partners’ personal income
4 disadvantages of a general partnership
1. unlimited liability: both partners will lose out if one makes a bad decision
2. potential for disagreements: more than one person involved with differing ideas
3. lack of continuity: if a current partner withdrawals, management relationships change potentially ending partnership
4. difficulty in withdrawing from a partnership: partner who withdrawals remains personally liable for debts or obligations the firm had at the time of withdrawal
a form of business ownership in which the business in considered a legal entity that is separate and distinct from its owners
articles of incorporation
the document filed with a state government to establish the existence of a new corporation
limited liability
when owners 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
limited liability corporation (LLC)
a form of business ownership that offers both limited liability to its owners and flexible tax treatment
4 advantages of an LLC
1. limited liability
2. tax pass-through: no separate tax on earnings of the company, only taxed as incomes of the owners
3. simplicity and flexibility in management and operation: not required to hold regular board meetings
4. flexible ownership: can have any number of owners
5 disadvantages of an LLC
1. complexity of formation: can take more time than sole proprietorships due to having to file articles of organization and pay filing fees
2. annual franchise tax: exempt from corporate income taxes but still have annual franchise tax
3. foreign status in other states: must register or qualify to operate as “foreign” companies when they do business in states other than the state in which they were organized
4. limits on types of firms that can form LLCs: most states don’t permit banks, insurance companies and nonprofits to operate as LLCs
5. differences in state laws: LLC laws still evolving; operating in multiple states is complicated
limited partnerships
a partnership that includes at least one general partner who actively manages the company and accepts unlimited liability and one limited partner who gives up the right to actively manage the company in exchange for limited liability
limited liability partnership (LLP)
a form of partnership in which all partners have the right to participate in management and have limited liability for company debts; all partners actively involved but they have some form of limited liability (the amount of liability differs per state)
c corporation
the most common type of corporation, which is a legal business entity that offers limited liability to all of its owners, who are called stockholders
5 advantages of a c corporation
1. limited liability: stockholders not personally liable for the debts of their company
2. permanence: corporations can continue operating as long as they remain financially viable and the majority of stockholders want the business to continue; unaffected by removal of owner
3. ease of transfer of ownership: stockholders can easily withdraw from ownership by selling their shares of stock
4. ability to raise large amount of financial capital: corporate bonds issued raise large amounts of capital, financial advantage over other forms of ownership
5. ability to make use of specialized management: can offer higher salaries to highly qualified professional managers
5 disadvantages of a c corporation
1. expense and complexity of formation and operation: more formal operating requirements
2. complication when operating in more than one state: must file paperwork to operate business outside of where the company started
3. double taxation of earnings and additional taxes: IRS taxes the corporation’s earnings and also taxes personal income of the stockholders
4. more paper, more regulation, and less secrecy: more closely regulated, reports to be sent to shareholders and the SEC; anyone can look at these forms making it hard to keep corporate information secret from competitors
5. possible conflicts of interest: sometimes top executives make decisions based on their own interests at the expense of the stockholders
foreign company
operates in a state *other* than the state in which it was organized
alien company
operates in a *country* other than the country in which it was organized
corporate bylaws
the basic rules governing how a corporation is organized and how it conducts its business
an owner of a corporation
institutional investor
an organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and other securities
board of directors
the individuals who are elected by stockholders of a corporation to represent their interests
s corporation
a form of corporation that avoids double taxation by having its income taxed as if it were a partnership
statutory close (closed) corporation
a corporation with a limited number of owners that operates under simpler, less formal rules than a C corporation
nonprofit corporation
a corporation that does not seek to earn a profit and differs in several fundamental respects from C corporations
a corporate restricting in which one firm buys another
a corporate restructuring that occurs when two formerly independent business entities combine to form a new organization
the transfer of total or partial ownership of some of a firm’s operations to investors or to another company
occurs when a company issues stock in one of its own divisions of operating units and sets it up as a separate company
like a spin-off in that the firm converts a particular unit or decision into a separate company and issues stock in the newly created corporation, but instead of distributing new stock to current stockholders, it sells the stock to outside investors which raises financial capital
horizontal merger
a combination of two firms that are in the same industry
vertical merger
a combination of firms at different stages in the production of a good or service
conglomerate merger
a combination of two firms that are in unrelated industries
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
4 advantages of a franchise
1. less risk: offer access to a proven business system and product
2. training and support: franchisor provides franchisee with extensive training and support
3. brand recognition: operating a franchise gives the franchisee instant brand-name recognition
4. easier access to funding: bankers and other lenders more willing to lend money if the business is a part of an established franchise
6 disadvantages of a franchise
1. costs: typical agreement requires franchisees to pay an initial franchise fee when they enter into the agreement and have to pay an ongoing royalty to the franchisor
2. lack of control: franchise agreement usually requires franchisee to follow franchisor’s procedures
3. negative halo effect: irresponsible or incompetent behavior of a few franchisees can create a negative perception that adversely affects franchise as a whole and success of other franchisees
4. growth challenges: franchise agreements usually limit the franchisee’s territory and require franchisor approval before expanding into other areas
5. restrictions on sale: agreements normally prevent franchisees from selling their franchises to other investors without prior approval from franchisor
6. poor execution: not all franchisors live up to their promises
the business entity in a franchise relationship that allows others to operate its business using resources it supplies in exchange for money and other considerations
the party in a franchise relationship that pays for the right to use resources supplied by the franchisor
what are the two most popular types of franchise arrangements
1. distributorship
2. business format franchise
a type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it
-ex: arrangement between automakers and dealerships that sell their cars
business format franchise
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
-grants the franchisee the right to both are and sell its good or service
franchise agreement
the contractual arrangement between a franchisor and franchisee that spells out the duties and responsibilities of both parties
terms and conditions
franchisee’s rights to use the franchisor’s trademarks, patents, and signage and any restrictions on those rights
fees and other payments
fees franchisee must pay for right to use franchisor’s products and methods and when payments are due
training and support
types of training and support franchisor will provide to franchisee
specific operational requirements
methods and standards established by franchisor that franchisee is required to follow
conflict resolution
how franchisor and franchisee will handle disputes
assigned territory
geographic area in which franchisee will operate and weather franchisee has exclusive rights in that area
franchise disclosure document (FDD)
a detailed description of all aspects of a franchise that the franchisor must provide to the franchisee at least fourteen calendar days before the franchise agreement is signed
6 components of a franchise agreement
1. terms and conditions
2. fees and other payments
3. training and support
4. specific operational requirements
5. conflict resolution
6. assigned territory

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