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Chapter 6 Business Foundations Final

What are the four firms associated with starting a business?
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 manages the company
Partnership?
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
Corporation?
A form of business ownership in which the business is 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 ma lose their investment in the company, but their other personal assets are protected
Limited Liability Company (LLC)?
A form of business ownership that offers both limited liability to its owners and flexible tax treatment
What is unique about an L.L.C.?
They can elect to have their business taxed either as a corporation or a partnership
What was the first state to allow LLC? The second?
– Wyoming
– Florida
What is the most common type of business by form of ownership in the United States?
Sole Proprietorship
Which form of ownership has the greatest combined Net Income?
Corporations
What are some of the advantages of a Sole Proprietorship?
Ease of formation, retention of control, pride of ownership, retention of profits, and possible tax advantage (no double taxation)
What are some of the disadvantages of a Sole Proprietorship?
Limited financial resources, unlimited liability, ability to attract and maintain talented employees, heavy workload and responsibilities, and lack of permanence
What are some advantages of a General Partnership?
Ability to pool financial resources, share responsibilities, ease of formation, and tax advantages
What are some of the disadvantages of General Partnerships?
Unlimited liability, potential for disagreements, lack of continuity, and difficulty in withdrawing
Limited Partnership?
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 Partnerships (LLP)?
A form of partnership in which all partners have the right to participate in management and have limited liability for company debts
In an LLP, what is the difference between full shield protection and partial shield protection?
Full Shield: partners have limited liability for all claims against their company, except those resulting from their own negligence

Partial Shield: each partner has limited liability for the negligence of other partners, but still has unlimited liability for any other debts

What are the three types of partnerships?
General, limited, and limited liability
C Corporation?
The most common type of corporation, which is a legal business entity that offers limited liability to all of its owners (stockholders)
Not including a C Corporation, what are the three other types of corporations?
S corporations, statutory close (or closed) corporations, and nonprofit corporations
Corporate Bylaws?
The basic rules governing how a corporation is organized and how it conducts its business
What state has been very successful in attracting corporations?
Delaware
Stockholders?
An owner of a corporation
Common stock vs preferred stock?
Common stockholders have the right to vote in meetings, while preferred stockholders do not.
Institutional Investors?
An organization that pools contributions from investors, clients, or depositors and uses these funds to buy stock and other securities
Board of Directors?
The individuals who are elected by stockholders of a corporation to represent their interests
In a corporation, who establishes the mission and sets its broad objectives?
The Board of Directors
Who manages a corporation on a daily basis, and how are they appointed?
CEO, appointed by the board of directors
Advantages of a C Corporation?
Limited liability, permanence, ease of transfer of ownership, ability to raise large amounts of capital, and ability to make use of specialized management
Disadvantage of a C Corporation?
Expense and complexity of formation, complications when operating in more than one state, double taxation and additional taxes, more paperwork, regulation, and less secrecy, and possible conflicts of interest.
S Corporation?
A form of corporation that avoids double taxation by having its income taxed as if it were a partnership
Statutory Close (or closed) Corporation?
A corporation with a limited number of owners that operates under simpler, less formal rules that a C Corporation
Nonprofit Corporation?
A corporation that does not seek to earn a profit and differs in several fundamental respects from C corporations
Advantages of an S Corporation?
No double taxation, and limited liability
Disadvantages of an S Corporation?
No more than 100 stockholders, and each stockholder must be a U.S. citizen
Advantages of a Statutory Close (or closed) Corporation?
Simpler arrangements (no board of directors or annual stockholders’ meetings), and owners can participate in management while still having limited liability
Disadvantages of a Statutory Close (or closed) Corporation?
Limited number of stockholders (no more than 50), can’t share their shares to the public without first offering shares to the existing owners, and not all states allow this formation
Advantages of a Nonprofit Corporation?
Except from federal and state taxes, limited liability, and tax deductions
Disadvantages of a Nonprofit Corporation?
Must keep accurate records, and it cannot have stockholders, distribute dividends, or contribute funds to a political campaign
Acquisition?
A corporate restructuring in which one firm buys another
Merger?
A corporate restructuring that occurs when two formerly independent business entities combine to form a new organization
Divestiture?
The transfer of total or partial ownership of some of a firm’s operations to investors or to another company
Why would a firm use a divestiture?
To rid themselves of a part of their company that no longer fits well with their strategic plan
What is a spin-off divestiture? Carve-out?
Spin-Off: when a company issues stock in one of its divisions, and sets it up as a separate company, thus eliminating a division that no longer fits (doesn’t generate any additional funds for the firm*) and distributing the new stock to its stockholders

Carve-Out: same concept as a Spin-Off, however it sells the stock to outside investors, thus raising additional financial capital

What is the difference between a spin-off divestiture and a curve-out divestiture?
A curve-out sells its stocks to outside investors, and generates financial capital, meanwhile a spin-off does not generate financial capital and its stock is distributed to its same stockholders
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
Common objective in a Horizontal Merger? [EXAMPLE]
Increase size and market power within the industry, and improve efficiency by eliminating duplication of facilities and personnel
[United Airlines acquisition of Continental Airlines]
Common objective in a Vertical Merger? [EXAMPLE]
Tighter integration of production and increased control over the supply of crucial inputs. [Google acquisition of Motorola, which used Google’s Android operating system and Motorola phones]
Common objective in a Conglomerate Merger? [EXAMPLE]
Reduce risk by making firm less vulnerable to adverse conditions in any single market [Berkshire Hathaway adding Iscar, a company that makes cutting tools to diversify its investment, thus making it less prone to market risks and trends]
Advantages of an LLC?
Limited liability, tax pass-through (taxed only as income of the owners), simplicity and flexibility in management, and flexible ownership
What is a unique aspect that an LLC have that the other business forms do not?
Ability to have their company treated as either a corporation, partnership, or even a sole proprietorship (if owned by a single person)
Disadvantages of an LLC?
Complexity of formation, annual franchise tax, foreign status in other states, limit on types of firms that can form, and differences in state laws
Franchise?
A licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, and other property in exchange for monetary payments and other considerations
Franchisor?
The business entity in a franchise relationships that allows others to operate its business using resources it supplies in exchange for money and other considerations
Franchisee?
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?
Distributorships and business format franchises
Distributorship?
A type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it
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
What is one of the biggest trends in franchising, and why?
An expansion into foreign markets; they are less intense and the markets are less saturated than in the US
What percent of franchises are owned by woman?
30%
Since minorities in franchises have been relatively low, what two major initiatives have helped boost this in recent years?
National Minority Franchising Initiative (NMFI), and MinotirtyFran
Advantages of Franchising?
Less risk, training and support, brand recognition, and easier access to funding
Disadvantages of Franchising?
Costs, lack of control, negative halo effect, growth challenges, restriction on sales, and poor execution
Franchise Agreement?
The contractual arrangement between a franchisor and franchisee that spells out the duties and responsibilities of both parties
What are the key items (7 total) covered in a franchising agreement?
Terms and conditions, fees and payments, training and support, specific operational requirements, conflict resolution, and assigned territory
What is the Franchise Disclosure Document (FDD) and who requires this document to be presented?
– A detailed description of all aspects of a franchise that the franchisor must provide to the franchisee at least fourteen calender days before the franchise agreement is signed.
– Federal Trade Commission (FTC)
Under FTC rules, the franchisor must give the franchisee at least how many days to review the FDD before the franchise agreement can be signed?
14 calender days

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