Economics 101: Principles of Microeconomics Ch 5. Business Structures & Barriers to Entry

sole proprietor

keeps all the profits, calls all the shots, and manages everything their way

unlimited liability

responsible for all debt and liabilities

partnership

business that has two or more powers

partnership agreement

percentage of ownership, the allocation of profits and losses, decision making authority, and dispute resolution plans

shareholders

• own at least one share in the company

• receive dividends or a piece of the profits

limited liability company

has all the benefits of a sole proprietorship or partnership without the liability

What is the most significant risk factor in a sole proprietorship?

1. Having no regular schedule

2. Doing all of the work

3. Unlimited liability, even for employee actions

4. Having to answer to a board of directors

Unlimited liability, even for employee actions

How are taxes handled in a partnership form of business ownership?

1. The business passes its profits and losses to the owners, and they claim the profits and losses on a corporate tax return.

2. The business passes its profits and losses to the owners, and they claim the profits and losses on their sole proprietorship tax return.

3. The business passes its profits and losses to the owners, and they claim the profits and losses on their personal tax return.

4. The business passes only its profits to the owners, and they claim the profits on their personal tax return.

The business passes its profits and losses to the owners, and they claim the profits and losses on their personal tax return.

How are sole proprietorships taxed?

1. There is no tax liability

2. Profits are reported separate from personal income

3. As a corporation

4. As individuals

As individuals

Mary and Joanne would like to start their own jewelry business. They do not want to file a bunch of papers, but also do not want to be personally liable for debts incurred by the company. Which form of ownership should they pursue?

1. Corporation

2. LLC

3. Sole proprietorship

4. Partnership

LLC

Why is it a good idea to create a partnership agreement?

1. To separate the business, if necessary

2. In case of the untimely death of a partner

3. ALL are correct.

4. To have a dispute resolution plan

ALL are correct.

Sole Proprietorship

• a form of business where there is only one owner, and there is no legal distinction between the business and the owner

• simple to organize and manage when compared to other business organizations

A sole proprietorship must register with which of the following?

1. the Secretary of state

2. the US Small Business Administration

3. the agency regulating business organizations in their county

4. there are no registration requirements

there are no registration requirements

Which of the following businesses represents a sole proprietorship?

1. a consulting firm called AAA Engineering, Incorporated

2. sisters who make custom wedding gowns from a shop in their home

3. a criminal law firm with multiple senior partners

4. a man who owns and operates a lawn mower repair business by himself

a man who owns and operates a lawn mower repair business by himself

Which of the following describes the income tax treatment for a sole proprietorship?

1. No losses generated by the business are recognized.

2. The business is taxed on profits and the owner is then taxed on any profits distributed to her.

3. Income and losses are reported on the owner's personal income tax return.

4. No tax is paid on income generated from the business.

Income and losses are reported on the owner's personal income tax return.

How much protection from liability does a sole proprietorship offer?

1. limited liability, like that of a corporation

2. some liability, like that of a partnership

3. the greatest protection since the company is separate from the owner

4. none, there is no distinction between the owner and the company

none, there is no distinction between the owner and the company

What happens if a sole proprietorship takes on a second owner?

1. The business must take on a new structure or it will be dissolved.

2. The business ceases to be a sole proprietorship.

3. The new owner must purchase their percentage of ownership.

4. Nothing

The business ceases to be a sole proprietorship.

partnership

two or more parties come together and agree to cooperate in advancing their business interests

partnership agreement

a legal document, signed by all the parties in the partnership, and it details the roles, duties, rights, and responsibilities of the partners, as well as how the profits and losses should be distributed among them

• the scope of the partnership’s business

• the percentage of the business each partner owns

• how profits and losses will be allocated

• how the partnership will be managed

• whether new partners can join

• selling or transfer of partnership ownership interest

• termination of the partnership

General partnership

flexibility in the design

General partner

manages the partnership and is personally liable for the partnerships debts and other legal obligations

Limited partner

does not have a right to manage the limited partnership, but she is not personally liable for the partnership’s legal obligation

Which of the following is the best explanation of the main difference or differences between a limited partner and a general partner?

1. General partners manage and are subject to personal liability, while limited partners do not manage and have limited liability.

2. Limited partners have limited liability and general partnerships have no liability.

3. General partners do not have a right to manage the partnership, and limited partners do have a right to manage the partnership.

4. Limited partners do not invest money or assets into the partnership, and general partners can invest the needed money or assets.

General partners manage and are subject to personal liability, while limited partners do not manage and have limited liability.

What type of partnership offers no protection from personal liability for the partners?

1. All partnerships provide limited liability

2. A limited partnership

3. An LLP

4. A general partnership

A general partnership

What type of partnership has a general partner who has full liability and a limited partner whose liability is limited to their investment in the partnership?

1. All partnerships have this characteristic

2. Limited Liability Limited Partnership

3. Limited Partnership

4. Limited Liability Partnership

Limited Partnership

Which one of the following is the partnership document that governs the rights and responsibilities of the partners?

1. Partnership agreement

2. Bylaws

3. Certificate of partnership

4. Articles of agreement

Partnership agreement

Which one of the following do LPs, LLPS, and LLLPs have in common but is not a characteristic of a general partnership?

1. Income taxes can pass through the partnership to the individual partners so there is only one level of income tax.

2. All partners have limited liability.

3. General partnerships do not typically have to register with the state's secretary of state, but the other types of partnerships do have to register.

4. General partnerships do not have limited partners while the other partnerships do have limited partners.

General partnerships do not typically have to register with the state's secretary of state, but the other types of partnerships do have to register.

Limited Liability Company

characteristics of both partnerships and corporations

Member-Managed LLC

• managed by its members, like a partnership

• all members participate and have a say in all business decisions

Manager-Managed LLC

• managed more like a corporation

• the managers can be members, but don’t have to be

Pass-Through Taxation

income and losses are ignored at the entity level for tax purposes. instead, the income or losses are passed through the entity to the individual owners

What document is used to govern the operations of a limited liability company?

1. Member agreement

2. Articles of organization

3. Bylaws

4. Operating agreement

Operating agreement

What is the best explanation of pass-through taxation?

1. Income is passed through the entity and is reported by individual owners, but losses are taken at the entity level

2. Both income and losses pass through the entity and are reported on the tax returns of the individual owners

3. Only income is ignored at the entity level and it passes to the individual owners

4. Individuals are not subject to taxation, but the entity is taxed on the income

Both income and losses pass through the entity and are reported on the tax returns of the individual owners

Bob goes to Susie's General Store which is a Limited Liability Company. While there, something falls off the shelf and hits Bob on the head. Bob wants to pursue legal action. What are Bob's legal options?

1. Bob can sue both Susie and the General Store.

2. Bob cannot sue Susie or the General Store.

3. Bob can sue Susie for medical bills and damages.

4. Bob can sue the General Store for medical bills and damages.

Bob can sue the General Store for medical bills and damages.

Which of the following is true about a limited liability company?

1. It is basically the same as a corporation.

2. It does not allow you escape personal liability in the operations of your company.

3. It has characteristics of both a corporation and a partnership.

4. It is subject to very high costs, and two types of income tax.

It has characteristics of both a corporation and a partnership.

What does someone have to file to form a limited liability company?

1. Certificate of existence

2. Articles of organization

3. Articles of incorporation

4. Organization certificate

Articles of organization

Corporation

a business organization that is considered a separate entity from its owners

Bylaws

govern the operations of the corporation

Double income taxation

the government taxes corporations on their income

Which one of the following is considered a disadvantage of a corporation?

1. It becomes difficult to transfer ownership interests in a corporation.

2. Shareholders hold more liability for things that happen with the business.

3. Planning for the company's future is more difficult when it becomes a corporation.

4. A corporation is more complex and expensive to run.

A corporation is more complex and expensive to run.

What do you call the documentation that governs the corporation's activities?

1. operating agreement

2. bylaws

3. Articles of Incorporation

4. shareholder agreement

bylaws

Tyler is the sole owner and stockholder of the corporation, Tyler's Tires. Two years ago, Tyler's Tires hired Anna as the CEO. If Tyler dies, what happens to Tyler's Tires?

1. Nothing, it continues to run under the direction of the CEO.

2. Management of the company goes to the next of kin.

3. The company will need to seek new management in order to continue operation.

4. The company is immediately liquidated.

Nothing, it continues to run under the direction of the CEO.

What is the primary reason a business would decide to become a corporation over any other form of organization?

1. A corporation is a simple form of business for the owners to operate.

2. Owners who wish to retain complete control over all operations would choose to be a corporation.

3. It is ideal for those who want a business that is considered a separate entity from its owners.

4. Forming a corporation would limit tax liability for owners and leave more capital for operations.

It is ideal for those who want a business that is considered a separate entity from its owners.

What is the difference between an S-corporation and a C-corporation?

1. The level of liability protection afforded shareholders is higher for an S-corporation.

2. A C-corporation is subject to double income taxation, while an S-corporation is not.

3. An S-corporation is organized under state law and a C-corporation is registered under federal law.

4. A C-corporation has a tax treatment that allows income and losses to flow through to each shareholder.

A C-corporation is subject to double income taxation, while an S-corporation is not.

Corporation

completely separate from the individuals that run the business

Double Taxation

income taxes are paid twice on the same source

Limited Liability

limited personal liability for the financial obligations of the business

Piercing the Corporate Veil

fail to treat the corporation as a separate legal entity

Alisa owns Alright Business Services. It is a corporation, but Alisa does not use the word 'Incorporated' or 'Inc.' anywhere on her correspondence. Alisa is in charge of paying the bills for the business and sometimes writes rent checks out of her personal account. The business is not doing well, and is several months behind on making rent payments. Her landlord sues Alright Business Services and Alisa for the rent. How will the landlord recover the unpaid rent?

1. Both from the business and from Alisa.

2. Only from the business, since it's a corporation.

3. Only from Alisa, since she's in charge of the bills.

4. Neither from the business nor from Alisa.

Both from the business and from Alisa.

When a corporation takes out a bank loan, who is responsible for the debt?

1. The owners and shareholders

2. The owners

3. The corporation

4. Both the corporation and shareholders are responsible

The corporation

A corporation is taxed on its profits, and the owners are taxed on the income they receive from the corporation. What does this refer to?

1. Double taxation

2. Duplication taxation

3. Corporate taxes

4. Capitalization taxation

Double taxation

Which of the following actions results in piercing the corporate veil?

1. Failure to adequately capitalize the corporation

2. All of the answers are correct.

3. Failure to regularly hold shareholder and director meetings

4. Failure to formally issue stock to the initial shareholders

All of the answers are correct.

A corporation's owners are known as _____.

1. associations

2. shareholders

3. directors

4. board members

shareholders

wholly owned subsidiary

• a company that is completely owned by another company

• offer an opportunity for companies to diversify and manage risk

parent company/ holding company

• the company that owns the subsidiary

• will hold all of the of the subsidiary’s common stock

vertical integration

companies in a supply chain are under the control of a common owner

diversification

a means for a company to reduce risk by developing different types of business

How does a company benefit from forming or purchasing a wholly owned subsidiary?

1. By using the subsidiary to monopolize a particular sector of the market

2. By using the subsidiary to maintain consistency in corporate interests

3. By using the subsidiary to diversify for the sake of market expansion

4. By using the subsidiary as a means of absorbing risk in a business transaction

By using the subsidiary as a means of absorbing risk in a business transaction

Why might a company want to establish a wholly owned foreign subsidiary?

1. To take advantage of favorable foreign tax treatments.

2. Because some foreign markets are not open to U.S. companies.

3. To take advantage of U.S. tax breaks in a foreign country.

4. It is the only way some foreign governments will permit outside businesses to operate.

To take advantage of favorable foreign tax treatments.

Bondo Computers builds and sells laptops. The company also has several wholly owned subsidiaries that manufacture graphics cards, computer chips and hard drives. What is this an example of?

1. Minimizing tax liabilities

2. Diversification

3. Vertical integration

4. Loss of focus

Vertical integration

What rights does a parent company have?

1. The right to dissolve the subsidiary at any time for any reason.

2. The right to take action against any employee within the subsidiary.

3. The right to make recommendations to the subsidiary's leadership within the scope of their rights.

4. The right to appoint the subsidiary's board of directors.

The right to appoint the subsidiary's board of directors.

Which of the following offers an explanation of a wholly owned subsidiary?

1. A company that is completely owned by another company.

2. A foreign corporate office of a multinational company.

3. A company that is partially owned by another company.

4. A company created by another company to conduct business internationally.

A company that is completely owned by another company.

Private Limited Company or LTD

• a type of privately held small business entity

• limits owner liability to their shares

• limits the number of shareholders to fifty

• restricts shareholders from publicly trading shares

Incorporates

an independent legal entity

Sole Proprietorship

is owned by a single individual who is personally responsible for the company’s business debts and essential to its continues existence

One disadvantage of a private limited company is that they are limited to only 50 shareholders. Why is this seen as a disadvantage?

1. Growth may be limited, because the number of shareholders is restricted.

2. There are limited tax advantages.

3. Because once some acquires a share they cannot sell it.

4. Shareholders have a greater share of liability.

Growth may be limited, because the number of shareholders is restricted.

What type of document has to be filed nine months after the financial year ends?

1. Bookkeeping records

2. Payroll taxes

3. Business plan

4. Financial statement

Financial statement

What is owner liability limited to?

1. Shares

2. Savings

3. Net worth

4. Assets

Shares

What action would negate a shareholder's limited liability protection?

1. Committing murder

2. Owing more that 50% of the company's shares.

3. Committing fraud

4. Making bad business decisions.

Committing fraud

How is a private limited company different from a sole proprietorship?

1. A private limited company is owned by a single individual who is personally responsible for the company's business debts and essential to its continued existence, while a sole proprietorchip is an independent legal entity.

2. A private limited company needs to have at least 20 investors and a sole proprietorship only needs one.

3. A private limited company is more profitable than a sole proprietorship.

4. A sole proprietorship is owned by a single individual who is personally responsible for the company's business debts and essential to its continued existence, while a private limited company is an independent legal entity.

A sole proprietorship is owned by a single individual who is personally responsible for the company's business debts and essential to its continued existence, while a private limited company is an independent legal entity.

Acquisition

a corporate acquisition occurs when ownership of one company is transferred to another company

Merger

a type of acquistion

Hostile Takeover

an acquisition that is not approved by the management and board of directors of the company being acquired

Golden Parachutes

are very generous severance packages offered to management, if they lose their jobs because of a takeover. this makes buying the company more expensive

Tin Parachutes

are severance packages for employees if they are terminated because of a takeover. this may even make buying the company more expensive than golden parachutes because of the volume of the payout

Poison Pill

tries to dilute the value of the target company’s stock. if the value of Mary’s shares in Sharon’s company becomes diluted, Mary will have to buy more shares to stage her takeover. this makes the acquisition more expensive and less attractive

Greenmail

it is where the target company offers to repurchase the unfriendly company’s stock in the target company at a premium

Sandbagging

is trying to stall the process, sometimes hoping that a better company comes along to buy the target company

Pac-Man

defense occurs when the target company tries to take over the company trying to take it over

Scorched earth or a Suicide Pill

occurs when the target company decides to sabotage its own company to make it unattractive for purchase

Which of the following BEST describes a merger?

1. It is when a parent company is absorbed into an existing subsidiary.

2. It is an acquisition that the target company's management opposes.

3. It is when the acquiring company absorbs the target company after acquisition.

4. It is when multiple companies compete with each other to acquire another company.

It is when the acquiring company absorbs the target company after acquisition.

Which of the following BEST defines an acquisition?

1. A company absorbs a target company.

2. A company obtains a controlling interest in another company.

3. A company buys all the shares of another company.

4. A company develops a new line of products to compete with another company.

A company obtains a controlling interest in another company.

What tactic is employed by a target company if it attempts to dilute the value of the shares held by the acquiring company?

1. Poison pill

2. Scorched earth

3. Suicide pill

4. Sandbagging

Poison pill

Why would a company make use of a tactic known as 'Shark Repellent?'

1. Because the value of their shares is constantly falling.

2. Because another company is attempting a hostile takeover.

3. Because their shareholders are attempting to change the top level of management.

4. Because they are trying to reinvest money into the company, rather than pay their shareholders.

Because another company is attempting a hostile takeover.

A company using the Pac-Man defense to combat a takeover will MOST likely do which of the following?

1. Stall the take over by abusing antitrust laws and using other regulatory means

2. Destroy the value of its own assets

3. Launch several new lines of products

4. Go on the offensive and take over the company that is attempting the takeover

Go on the offensive and take over the company that is attempting the takeover

Franchise

a type of business arrangement where a license is granted to a person or business to use the name, business process and products that have been successfully developed by another company

Franchisee

the person that purchases a franchise

What can be a disadvantage associated with the use of a franchise?

1. Turnkey operation for franchisee

2. Brand recognition for franchisor

3. Proven business and system for franchisor

4. Lack of flexible decision-making for franchisee

Lack of flexible decision-making for franchise

What does a company like McDonald's want to ensure in each of its franchises?

1. McDonald's wants each franchise to have a play place.

2. McDonald's wants its patrons to have a similar experience in every location.

3. McDonald's wants each franchise to be close to other fast food restaurants.

4. McDonald's wants each franchise to be a certain distance from the highway.

McDonald's wants its patrons to have a similar experience in every location.

Identify the hindrance to buying a franchise.

1. Strict laws

2. Passing a difficult test

3. Having to personally finance the building of the store

4. Expensive licensing fees and start-up costs

Expensive licensing fees and start-up costs

Which of the following best describes a franchise?

1. A cheap turnkey operation where the owner has little responsibility

2. A family owned business where the family agrees to pass its management down through the next generation

3. A licensing arrangement between a company and another party licensing the use of the company name, products and processes

4. A small business that has a special agreement with government to use any of the country's resources

A licensing arrangement between a company and another party licensing the use of the company name, products and processes

What could happen if a franchisee fails to conform to the franchise requirements?

1. The franchisee is sentenced by law.

2. The franchisor will sell the franchise to another franchisee.

3. The franchisee will lose the franchise.

4. The franchisor will double the royalty fee.

The franchisee will lose the franchise.

Barriers to Entry

that make it difficult to enter a given market

Government Regulation

restrictive licensing requirements or limiting the ability to obtain raw materials

Star-Up Costs

the amount of capital needed to buy the buildings, machinery, pay the workforce and so on

Technology

the technology you need to be successful is protected by a patent

Economics of Scale

the gains in efficiency and lower production costs that often result from a company growing larger and larger

Product Differentiation

if customers perceive existing products as high quality, then a new business owner will need to spend extra money to educate customers about the unique qualities and benefits of its specific products

Network Effect

the situation where a product or service becomes more valuable as more people use it

Access to Suppliers and Distribution Channels

when a new business cannot gain access to the needed raw materials