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Chapter 5 Starting a New Business

agency problem
When managers do not act as responsible agents for the shareholders who own the business
General guidelines for managing a firm
capital gain
The price received from the sale of stock minus the price paid for the stock
Chain-style business
A type of franchise in which a firm is allowed to use the trade name of a company and follows guidelines related to the pricing and sale of the product
A document used to incorporate a business. The charter describes important aspects of the corporation.
A state-chartered entity that pays taxes and is legally distinct from its owners
A type of franchise in which a dealer is allowed to sell a product produced by a manufacturer
The total investment by the firm’s stockholders
An arrangement whereby a business owner allows others to use its trademark, trade name, or copyright, under specific conditions
A firm that is allowed to use the trade name or copyright of a franchise
A firm that allows other to use its trade name or copyright, under specified conditions
general partners
Partners who manage the business, receive a salary, share the profits or losses of the business, and have unlimited liability
general partnership
A partnership in which all partner have unlimited liability
going public
The act of initially issuing stock to the public
limited liability company (LLC)
A firm that has all the favorable features of a typical general partnership but also offers limited liability for the partners
limited partners
Partners whose liability is limited to the cash or property they contributed to the partnership
limited partnership
A firm that has some limited partners
manufacturing arrangement
A type of franchise in which a firm is allowed to manufacture a product using the formula provided by another company
Co-owners of a business
A business that is co-owned by two or more people
privately held
Ownership is restricted to a small group of investors
publicly held
Shares can be easily purchased or sold by investors
return on equity (ROE)
Earnings as a proportion of the firm’s equity
The degree of uncertainty about a firm’s future earnings
A firm that has 100 or fewer owners and satisfies other criteria. The earnings are distributed to the owners and taxed at the respective personal income tax rate of each owner
sole proprietor
The owner of a sole proprietorship
sole proprietorship
A business owned by a single owner
unlimited liability
No limit on the debts for which the owner is liable

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