Intro To Business Exam 2

Formula for success

Success = vision + hard work x be nice to people

Sole proprietorship

A business that is owned (and usually operated) by one person; Make up the majority of businesses in the US

5 advantages of sole proprietorship

1. Ease of startup and closure

2. Pride of ownership

3. Retention of all profits

4. No special taxes

5. Flexibility of being your own boss

5 disadvantages of sole proprietorship

1. Unlimited Liability 

2. Lack of Continuity 

3. Lack of Money 

4. Limited Management Skills 

5. Difficulty in Hiring Employees

3 types of business ownership

Sole proprietorship, partnerships, corporations

Partnerships

A voluntary association of two or more persons to act as co-owners of a business for a profit 

2 types of partners

General partners and limited partners

General partner

A person who assumes full or shared responsibility for operating a business 

Limited Partner

A person who invests money in a business but has no management responsibility or liability for losses beyond the money they invested 

Articles of Partnership (partnership agreement)

An agreement listing and explaining the terms of the partnership

5 Things a partnership agreement must state

1. Who will make the final decisions 

2. Each partner’s duties 

3. The investment each partner will make 

4. How much profit or loss each partner receives or is responsible for 

5. What happens if a partner wants to dissolve the partnership or dies 

6 advantages of partnerships

1. Ease of start up 

2. Availability of Capital Credit 

3. Personal Interest 

4. Combined Business Skills and Knowledge 

5. Retention of Profits 

6. No Special Taxes 

4 Disadvantages of partnerships

1. Unlimited Liability 

2. Management Disagreements 

3. Lack of Continuity  

4. Frozen Investments 

EBITDARMI

E - Earnings 

B – Before 

I – Interest 

T – Taxes 

D – Depreciation 

A – Amortization 

R – Rent 

M – Management fees 

I – Insurance 

Corporation

An artificial person, created by law, with most of the legal rights of a real person

Legal rights of a corporation

• The right to start and operate a business 

• The right to buy or sell property 

• The right to borrow money 

• The right to sue or be sued 

• The right to enter into binding contracts 

Stock

Shares of ownership in the corporation

Stockholder

A person who owns a corporation’s stock

Closed corporation

a corporation whose stock is owned by few people and not open to the public

Open corporation

a corporation whose stock can be bought and sold by an individual 

3 types of corporations

domestic, foreign, alien

Domestic corporation

a corporation in the state in which it is incorporated (Bath and Body Works in Ohio)

Foreign corporation

A corporation in any state in which it does business except the one in which it is incorporated (Bath and Body Works in Tennessee) 

Alien corporation

A corporation chartered by a foreign government and conducting business in the United States 

Articles of incorporation (corporate charter)

a contract between a corporation and the state in which the state recognizes the formation of the artificial person that is the corporation 

6 things a corporate charter must include

1. The firm’s name and address 

2. The incorporators’ names and addresses 

3. The purpose of the corporation 

4. The maximum amount of stock and types of stock to be issued 

5. The length of time the corporation is to exist 

6. The name and address of the corporation’s registered agent 

Two types of stock

Common and preferred

Common stock

The most basic form of corporate ownership and whose owners may vote on corporate policies

Preferred stock

Stock owned by individuals or firms who usually do not have voting rights, but whose claims on dividends are paid before those of common-stock owners

Dividend

A distribution of earnings to the stockholders of a corporation 

Proxy

A legal form listing issues to be decided at a stockholders’ meeting and enabling stockholders to transfer their voting rights to some other individual or individuals 

Organizational meeting

every corporation must have at least 1 per year; the incorporators and original stockholders meet to talk about business 

Hierarchy of corporate structure

1. Stockholders (owners); elect... 

2. Board of directors; appoints... 

3. Officers (and CEO); hire... 

4. Employees 

Advantages of corporations

1. Limited liability 

2. Ease of raising capital

3. Ease of transfer of ownership

4. Perpetual life

5. Specialized management

Disadvantages of corporations

1. Difficulty and expense of formation 

2. Government regulation and increased paperwork 

3. Conflict within the corporation 

4. Double taxation – taxed twice; once as corporate income and a second time as the personal income of stockholders 

5. Lack of secrecy – must submit detailed reports 

Types of corporations

C corp, S corp, LLC, Nonprofit

S Corporation

A corporation that is taxed as though it is a partnership, but still gets limited liability

S Corporation criteria

1. No more than 100 stockholders allowed 

2. Can only offer common stock 

3. Newer form of a corporation 

Limited Liability Corporation (LLC)

A form of business ownership that combines the benefit of a corporation and a partnership while avoiding some of the restrictions and disadvantages of those forms of ownership 

Difference between an LLC and an S Corp

LLCs are not limited to 100 stockholders

Not for profit corporations

A corporation organized to provide a social, educational, religious, or other service rather than to earn a profit 

Merger

The combining of two corporations or other business entities to form one business

Hostile takeover

a situation in which the management and board of directors of a firm targeted for acquisition disapprove of the merger 

3 types of mergers

Horizontal, vertical, conglomerate

Horizontal merger

a merger between firms that make and sell similar products or services in similar markets 

Vertical merger

a merger between firms that operate at different but related levels in the production and marketing (merge between a company and their supplier) 

Conglomerate merger

a merger between two completely different corporations in different industries 

Reasons most businesses fail

• Time to realize a profit 

• Lack of capital 

• Cash flow problems 

• YOU GET TOO PRIDEFUL (make money, but then spend it too fast) 

KPAs (Key Performance Indicators)

• Financial stability 

• Customer focus (customer service) 

• Quality of product 

• Quality of employees 

• Management/leadership

Vision statement

Where you want to go as a business

Mission statement

a statement of basic purpose that makes an organization different from others

Management

The process of coordinating people and other resources to achieve the goals of an organization 

4 Types of resources

Material, human, financial, informational

4 Basic management functions

Planning, organizing, leading, controlling

Planning

Establishing an organization’s goals and deciding how to accomplish them 

Types of plans

Strategic, tactical, operational, contingency

Organizing

The grouping of resources and activities to accomplish some end result in an efficient and effective manner (moving resources around) 

Leading

The process of influencing people to work toward a common goal 

Motivating

providing reasons for people to work (getting people jazzed/excited)

Controlling

The process of evaluating and regulating ongoing activities to ensure that goals are achieved

3 steps of controlling

1. Setting standards 

2. Measuring actual performance 

3. Taking corrective action 

Levels of management

top, middle, first-line

Top management

Ceo, Cfo, etc. Implement strategic plans (broad and guiding)

Middle management

Managers/supervisors who report to top management; Implement tactical plans (carry out strategy)

First-line management

Supervise employees; Implement operational plans (carry out tactical plans)

5 Skills of successful managers

Analytical, interpersonal, communication, technical, conceptual

Analytical skills

Seeing and understanding data, reality of what’s going on, thinking through processes 

Interpersonal skills

Connecting with people on the individual level 

Communication skills

Conveying a message

Technical skills

Ability to use a computer system

Conceptual skills

Ability to see the big picture