Chapter 4: Options for Organizing Business – Practice Flashcards

A set of practice flashcards covering key concepts from the notes on forms of business ownership, partnerships, corporations, and mergers.

What is a sole proprietorship?

A business owned and operated by one individual; the most common form of business organization in the United States.

What are three advantages of sole proprietorships?

Simple management and complete control by the owner; easy and inexpensive formation; profits taxed as personal income.

What are two disadvantages of sole proprietorships?

Unlimited personal liability for debts; limited access to capital and resources.

What is a general partnership?

An association of two or more persons who carry on as co-owners of a business for profit with shared management and unlimited liability.

What is a limited partnership?

A partnership with at least one general partner with unlimited liability and at least one limited partner whose liability is limited to their investment and who typically does not manage.

What are articles of partnership?

Legal documents that set forth the basic agreement between partners, including names, contributions, profit/loss division, responsibilities, and withdrawal terms.

What are two advantages of partnerships?

Availability of capital and credit; combined skills and resources; easier to organize and manage than a corporation.

What are two major disadvantages of partnerships?

Unlimited liability for general partners; potential for disputes and conflicts; life of the partnership ends with death or withdrawal.

What is a corporation?

A legal entity created by the state, whose assets and liabilities are separate from its owners; owned by shareholders who hold stock.

What are domestic, foreign, and alien corporations?

Domestic operates in the state of incorporation; foreign operates in other states; alien operates outside the country of incorporation.

What is the difference between private and public corporations?

Private corporations are owned by a few and do not sell stock to the public; public corporations sell stock to the public and file with the SEC.

What are common stock and preferred stock, and what rights do they confer?

Common stock carries voting rights and variable dividends; preferred stock has priority to dividends and typically lacks voting rights.

What is a preemptive right?

The right of existing stockholders to buy new shares to maintain their percentage ownership.

What are three key advantages of corporations?

Limited liability for owners; easy transfer of ownership via stock; perpetual life and enhanced ability to raise capital.

What are two major disadvantages of corporations?

Double taxation of profits and dividends; higher formation and regulatory costs; greater disclosure and governance requirements.

What is an S corporation?

A corporation taxed as a partnership (pass-through taxation) with restrictions on the number and type of shareholders while preserving limited liability.

What is a limited liability company (LLC)?

An ownership form with limited liability and taxation like a partnership; flexible structure; single- or multi-member; fewer formalities than a corporation.

What is a cooperative (co-op)?

An organization owned by its members (individuals or small businesses) that bands together to reduce costs or share profits; examples include Ace Hardware, Ocean Spray, and REI (consumer-owned).

What is a joint venture?

A partnership formed for a specific project or for a limited time, with control shared between partners.

What is a merger?

The combination of two companies to form a new company.

What is an acquisition?

The purchase of one company by another, usually by buying its stock; the acquired company may become a subsidiary.

What are horizontal, vertical, and conglomerate mergers?

Horizontal mergers: similar products/markets; vertical mergers: different stages of the same industry; conglomerate mergers: unrelated industries.

What is a tender offer?

A public offer to buy a target company's stock at a premium to the market price.

What is a hostile takeover?

An acquisition attempt resisted by the target's management, sometimes countered with defenses like poison pills or white knights.

What is a poison pill?

A tactic that makes the target's stock less attractive to a potential acquirer, e.g., allowing existing shareholders to buy more shares at discount.

What is a leveraged buyout (LBO)?

An acquisition financed largely with borrowed money, using the target's assets as collateral.

What is a Master Limited Partnership (MLP)?

A limited partnership traded on securities exchanges, offering the tax benefits of a partnership with the liquidity of a corporation.

What is an Employee Stock Ownership Plan (ESOP)?

A program that allocates shares of a company’s stock to its employees to align interests and motivate performance.

What is a 501(c)(3) nonprofit organization?

A tax-exempt organization focused on public benefit; funded by donations and grants; required to file forms for accountability.

What is the role of the board of directors?

Elected by shareholders to oversee the corporation's long-range objectives and hire corporate officers; duty of care and loyalty.

Why do public corporations file reports with the SEC?

To disclose financial information and operations; these reports are public and ensure transparency, though they increase regulatory compliance.

What is Sarbanes-Oxley (SOX) in relation to corporate governance?

A regulation aimed at improving corporate governance and accountability, impacting board oversight and internal controls.

What does perpetual life mean for a corporation?

Corporations typically last indefinitely unless otherwise specified in the articles of incorporation.

What is double taxation in the context of corporations?

Taxing profits at the corporate level and again at the shareholder level when profits are distributed as dividends.

What is the difference between the charter (articles of incorporation) and bylaws?

Articles of incorporation establish the company's basic facts; bylaws govern internal management and procedures.