Business Formation and Small Business Ownership

Vocabulary flashcards covering key terms, definitions, and data figures on business formation options, franchising, entrepreneurship, and small business management.

Sole Proprietorship

A form of business ownership with a single owner who usually actively manages the company.

Unlimited Liability

When businesses formed as sole proprietorships or business partnerships cannot pay their bills, all or part of the business owner's personal financial assets, such as cash, bank accounts, investments, or homes, can be seized to pay the business debts.

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 may 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.

Total Number of Businesses by Form of Ownership (Exhibit 6.1)

A breakdown of U.S. business entities showing Sole Proprietorships at 27.12 million (72.4%), Corporations at 6.33 million (16.9%), and Partnerships at 4.01 million (10.7%).

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 Partnership (LLP)

A partnership in which all partners have the right to participate in the management and have limited liability for company debts.

C Corporation

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.

Corporate Bylaws

The basic rules governing how a corporation is organized and how it conducts its business.

Stockholder

An owner of a corporation.

Institutional Investor

An organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and other securities.

Board of Directors

The individuals who are elected by stockholders of a corporation to represent their interests, establish the corporation's mission, set broad objectives, and appoint officers.

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 (usually no more than 50) that operates under simpler, less formal rules than a C corporation.

Nonprofit Corporation

A corporation that does not seek to earn a profit and differs in several fundamental respects from C corporations.

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.

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.

Divestiture

The transfer of total or partial ownership of some of a firm's operations to investors or to another company.

Spinoff

A corporate restructuring by subtraction where a company issues stock in one of its own operating units and sets it up as a separate company.

Carve-out

A corporate restructuring where a firm converts a particular unit or division into a separate company and issues stock in the newly created corporation to sell to outside investors.

Franchise

A licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, business methods, and other property in exchange for monetary payments and other considerations.

Franchisor

The business entity in a franchise relationship 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.

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.

Franchise Agreement

The contractual arrangement between a franchisor and franchisee that spells out the duties and responsibilities of both parties.

Franchise Disclosure Document (FDD)

A detailed description of all aspects of a franchise that the franchisor must provide to the franchisee at least 14 calendar days before the franchise agreement is signed.

Entrepreneurs

People who risk their time, money, and other resources to start and manage a business.

Necessity Entrepreneurs

Individuals who launch a business because they believe it is their only economic option.

Internal Locus of Control

A deep-seated sense that the individual is personally responsible for what happens in their life.

External Locus of Control

A deep-seated sense that forces other than the individual are responsible for what happens in their life.

Angel Investors

Individuals who invest in start-up companies with high growth potential in exchange for a share of ownership.

Venture Capital Firms

Companies that invest in start-up businesses with high growth potential in exchange for a share of ownership.

Market Niche

A small segment of a market with fewer competitors than the market as a whole.

New Business Survival Rates (Exhibit 7.2)

Data showing survival rates of new businesses over time: Year 1 (100%), Year 2 (78%), Year 3 (66%), Year 4 (56%), Year 5 (50%), Year 6 (45%), Year 7 (42%), Year 8 (40%), Year 9 (37%), and Year 10 (35%).

Small Business Administration (SBA)

An agency of the federal government designed to maintain and strengthen the nation's economy by aiding, counseling, assisting, and protecting the interests of small businesses.

Small Business Development Centers (SBDCs)

Local offices—affiliated with the Small Business Administration—that provide comprehensive management assistance to current and prospective small business owners.

SCORE (Service Corps of Retired Executives)

An organization—affiliated with the Small Business Administration—that provides free, comprehensive business counseling for small business owners from qualified volunteers.

Business Plan

A formal document that describes a business concept, outlines core business objectives, and details strategies and timelines for achieving those objectives.