Business Enterprise: End of Chapter Questions - Chapter 6, Summaries of Business Economics

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M. Gonzales,

Business enterprise: EOC

questions

Chapter 6 EOC Questions

1. Describe the basic features that distinguish the four basic forms of business ownership: sole proprietorships, general partnerships, C corporations, and limited liability companies. There are four basic forms of business ownership that each have different basic features. Sole proprietorships are a form of business ownership has a single owner who usually actively manages the company. They have one owner, the proprietor typical manages the company, the owner has unlimited liability, they are taxed only as income to the owner, and they have no special filing required with the state. General partnerships are 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. They have two or more owners, all general partners have the right to participate in management, the owners have unlimited liability, they are taxed only as income to the owners, and there are no special filing required with the state. C corporations are 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. They have no limit on the number of stockholders, most of the stockholders don’t take an active role in management instead they elect a board of directors who set policy/appoint/oweresse corporate officers who actively manage the company, the owners have limited liability, their earnings are subject to double taxation meaning they are taxed as income to the corporation and the dividends are taxed as income to the stockholders, and they must file articles of incorporation with the state and pay the filing fee. Limited Liability Companies are a form of business ownership that offers both limited liability to its owners and flexible tax treatment. They have no limit on owners, the owners may be member- or manager-managed, the owners have limited liability, they have the option to be taxed as either a partnership or a corporation, and they must file articles of organization with the state and pay the filing fee. 2. Why do many entrepreneurs initially set up their businesses as sole proprietorships? Why do many successful entrepreneurs eventually decide to convert their sole proprietorship to some other form of ownership such as a corporation or LLC? Many entrepreneurs initially set up their businesses as sole proprietorships because they are easy to form because they are simply an extension of the owner and the company earnings are treated just like the owner’s income, as well as any debts the company incurs are considered to be the owner’s personal debt. Entrepreneurs initially set up their businesses as sole proprietorships also because there is a retention of control, pride of ownership, retention of profits, and possible tax advantages. Many successful entrepreneurs decide to convert their sole proprietorship to some other form of ownership such as a corporation or LLC so they can

this board to oversee the operation of their company and protect their interest, but them seldom take an active role in the day-to-day management, instead in accordance with corporate bylaws, the board appoints a chief executive officer (CEO). The CEO and other corporate officers manage the company on a daily basis. The board sets their level of compensation and monitors their performance to ensure that they act in a manner consistent with the common stockholders’ interest.

7. How does a merger differ from an acquisition? What is the difference between a horizontal merger or acquisition and a vertical merger or acquisition? Give a real world example of recent merger to illustrate each type of combination. A merger differs from an acquisition because a merger is a corporate restructuring that occurs when two formerly independent business entities combine to form a new organization, whereas an acquisition is a corporate restructuring in which one firm buys another. The difference between a horizontal merger or acquisition and a vertical merger or acquisition is a horizontal merger is a combination of two firms that are in the same industry, whereas a vertical merger is a combination of firms at different stages in the production of a good or service. A real world example of a horizontal merger is United Airlines’ acquisition of Continental Airlines in 2010. A real world example of a vertical merger is Google’s announcement in 2011 of its acquisition of Motorola Mobility, a company that manufactures cell phones using Google’s Android operating system. 8. Compare an S corporation with a limited liability company. Why do you think limited liability companies are currently more popular than S corporations? An S corporation is a form of corporation that avoids double taxation by having its income taxed as if it were a partnership, where as a limited liability company is a form of business ownership that offers both limited liability to its owners and flexible tax treatment. I think limited liability companies are currently more popular than S corporations because they don’t have restrictions on ownership. They also face fewer restrictions than corporations and give the owners the flexibility to either manage the company themselves or hire professional managers. 9. What are the main advantages and disadvantages of a business format franchise arrangements for the franchisee? For the franchisor? The main advantages of a business format franchise arrangements for the franchisee are less risk, training and support from the franchisor, brand recognition, and easier access to funding. The main disadvantages of a business format franchise arrangements for the franchisee are costs, lack of control, negative halo effect, growth challenges, restrictions on sale, and poor execution. The main advantages of a business format franchise arrangements

for the franchisor are it allows the franchisor to expand the business and bring in additional revenue without investing its own capital. Also, franchisees may have a greater incentive than salaried managers to do whatever it takes to maximize the success of their outlets. The main disadvantages of a business format franchise arrangements for the franchisor are operating a business with lots of semi-independent owner-operators can be complex and challenging. It can be difficult to keep all of the franchisees satisfied and disappointed franchisees sometimes go to the public with their complaint, damaging the reputation of the franchisor.

10. What is a Franchise Disclosure Document (FDD) and why is it important? A Franchise Disclosure Document (FDD) is 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. It is important because it is vital for anyone thinking about entering into a franchise agreement to know all the facts before signing on the dotted line. it is an invaluable source of information about virtually every aspect of the franchise agreement. It provides contact information for at least 1000 current franchisors and it is written in “plain English,” not complex legal jargon, so you actually have a have a chance to understand what you’re reading. It is still a good idea to have a lawyer who is knowledgeable about the franchise law read it.