Unit 2 Business Principles

acquisition

The purchase of a target company by another corporation or by an investor group typically negotiated with the target company board of directors

board of directors

A group of people elected by the stockholders to handle the overall management of a corporation, such as setting major corporate goals and policies, hiring corporate officers, and overseeing the firm’s operations and finances.

buyer cooperative

A group of cooperative members who unite for combined purchasing power.

C corporation

A conventional or basic form of corporate organization.

conglomerate merger

A merger of companies in unrelated businesses; done to reduce risk.

cooperative

A legal entity typically formed by people with similar interests to reduce costs and gain economic power

has limited liability, an unlimited lifespan, an elected board of directors, and an administrative staff

all profits are distributed to the member-owners in proportion to their contributions.

corporation

A legal entity with an existence and life separate from its owners, who are not personally liable for the entity’s debts

is chartered by the state in which it is formed and can own property, enter into contracts, sue and be sued, and engage in business operations under the terms of its charter.

franchise agreement

A contract setting out the terms of a franchising arrangement, including the rules for running the franchise, the services provided by the franchisor, and the financial terms

Under the contract, the franchisee is allowed to use the franchisor’s business name, trademark, and logo.

franchisee

the individual or company that sells the goods or services of the franchisor in a certain geographic area

franchising

A form of business organization based on a business arrangement between a franchisor and the franchisee

franchisor

the company that supplies the product or service concept to the franchisee

general partners

Partners who have unlimited liability for all of the firm’s business obligations and who control its operations

general partnership

A partnership in which all partners share in the management and profits. Each partner can act on behalf of the firm and has unlimited liability for all its business obligations.

horizontal merger

A merger of companies at the same stage in the same industry; done to reduce costs, expand product offerings, or reduce competition.

joint venture

Two or more companies that form an alliance to pursue a specific project, usually for a specified time period.

leveraged buyout (LBO)

A corporate takeover financed by large amounts of borrowed money; can be started by outside investors or the corporation’s management.

limited liability company (LLC)

A hybrid organization that offers the same liability protection as a corporation but may be taxed as either a partnership or a corporation.

limited partners

Partners whose liability for the firm’s business obligations is limited to the amount of their investment. They help to finance the business but do not participate in the firm’s operations.

limited partnership

A partnership with one or more general partners, who have unlimited liability, and one or more limited partners, whose liability is limited to the amount of their investment in the company.

merger

The combination of two or more firms to form one new company.

partnership

An association of two or more individuals who agree to operate a business together for profit.

S corporation

A hybrid entity that is organized like a corporation, with stockholders, directors, and officers, but taxed like a partnership, with income and losses flowing through to the stockholders and taxed as their personal income.

seller cooperative

Individual producers who join together to compete more effectively with large producers.

sole proprietorship

A business that is established, owned, operated, and often financed by one person.

stockholders (or shareholders)

The owners of a corporation who hold shares of stock that carry certain rights.

vertical merger

A merger of companies at different stages in the same industry; done to gain control over supplies of resources or to gain access to different markets.

angel investors

Individual investors or groups of experienced investors who provide financing for start-up businesses by investing their own funds.

business plan

A formal written statement that describes in detail the idea for a new business and how it will be carried out; includes a general description of the company, the qualifications of the owner(s), a description of the product or service, an analysis of the market, and a financial plan.

debt

A form of business financing consisting of borrowed funds that must be repaid with interest over a stated time period.

entrepreneurs

People with vision, drive, and creativity who are willing to take the risk of starting and managing a business to make a profit, or greatly changing the scope and direction of an existing firm.

equity

A form of business financing consisting of funds raised through the sale of stock (i.e., ownership) in a business.

intrapreneurs

Entrepreneurs who apply their creativity, vision, and risk-taking within a large corporation, rather than starting a company of their own.

small business

A business with under 500 employees that is independently managed, is owned by an individual or a small group of investors, is based locally, and is not a dominant company in its industry.

Small Business Administration (SBA)

A government agency that speaks on behalf of small business; specifically it helps people start and manage small businesses, advises them in the areas of finance and management, and helps them win federal contracts.

Small Business Investment Company (SBIC)

Privately owned and managed investment companies that are licensed by the Small Business Administration and provide long-term financing for small businesses.

venture capital

Financing obtained from venture capitalists, investment firms that specialize in financing small, high-growth companies and receive an ownership interest and a voice in management in return for their money.

autocratic leaders

Directive leaders who prefer to make decisions and solve problems on their own with little input from subordinates

coercive power

Power that is derived from an individual’s ability to threaten negative outcomes.

conceptual skills

A manager’s ability to view the organization as a whole, understand how the various parts are interdependent, and assess how the organization relates to its external environment.

consensual leaders

Leaders who encourage discussion about issues and then require that all parties involved agree to the final decision.

consultative leaders

Leaders who confer with subordinates before making a decision but who retain the final decision-making authority.

contingency plans

Plans that identify alternative courses of action for very unusual or crisis situations; typically stipulate the chain of command, standard operating procedures, and communication channels the organization will use during an emergency.

controlling

The process of assessing the organization’s progress toward accomplishing its goals; includes monitoring the implementation of a plan and correcting deviations from the plan.

corporate culture

The set of attitudes, values, and standards that distinguishes one organization from another.

decisional roles

A manager’s activities as an entrepreneur, resource allocator, conflict resolver, or negotiator.

democratic leaders

Leaders who solicit input from all members of the group and then allow the members to make the final decision through a vote.

effectiveness

The ability to produce the desired result or good.

efficiency

Using the least amount of resources to accomplish the organization’s goals

empowerment

The process of giving employees increased autonomy and discretion to make decisions, as well as control over the resources needed to implement those decisions.

expert power

Power that is derived from an individual’s extensive knowledge in one or more areas.

free-rein (laissez-faire) leadership

A leadership style in which the leader turns over all authority and control to subordinates.

global management skills

A manager’s ability to operate in diverse cultural environments.

human relations skills

A manager’s interpersonal skills that are used to accomplish goals through the use of human resources.

informational roles

A manager’s activities as an information gatherer, an information disseminator, or a spokesperson for the company.

interpersonal roles

A manager’s activities as a figurehead, company leader, or liaison.

leadership

The process of guiding and motivating others toward the achievement of organizational goals.

leadership style

The relatively consistent way that individuals in leadership positions attempt to influence the behavior of others.

legitimate power

Power that is derived from an individual’s position in an organization.

management

The process of guiding the development, maintenance, and allocation of resources to attain organizational goals.

middle management

Managers who design and carry out tactical plans in specific areas of the company.

mission

An organization’s purpose and reason for existing; its long-term goals.

mission statement

A formal document that states an organization’s purpose and reason for existing and describes its basic philosophy.

nonprogrammed decisions

Responses to infrequent, unforeseen, or very unusual problems and opportunities where the manager does not have a precedent to follow in decision-making.

operational planning

The process of creating specific standards, methods, policies, and procedures that are used in specific functional areas of the organization; helps guide and control the implementation of tactical plans

organizing

The process of coordinating and allocating a firm’s resources in order to carry out its plans.

participative leaders

Leaders who share decision-making with group members and encourage discussion of issues and alternatives; includes democratic, consensual, and consultative styles.

programmed decisions

Decisions made in response to frequently occurring routine situations.

referent power

Power that is derived from an individual’s personal charisma and the respect and/or admiration the individual inspires.

reward power

Power that is derived from an individual’s control over rewards.

situational leadership

Selecting a leadership style based on the maturity and competency level of those who will complete the task.

strategic planning

The process of creating long-range (one to five years), broad goals for the organization and determining what resources will be needed to accomplish those goals.

supervisory (first-line) management

Managers who design and carry out operation plans for the ongoing daily activities of the firm.

tactical planning

The process of beginning to implement a strategic plan by addressing issues of coordination and allocating resources to different parts of the organization; has a shorter time frame (less than one year) and more specific objectives than strategic planning.

technical skills

A manager’s specialized areas of knowledge and expertise, as well as the ability to apply that knowledge.

top management

The highest level of managers; includes CEOs, presidents, and vice presidents, who develop strategic plans.

What type of ownership is central to capitalism?

Private ownership

What percentage of all U.S. businesses are sole proprietorships?

0.72

Which form of business earns the highest share of total U.S. profits?

Corporations

What is a key disadvantage of running a sole proprietorship?

Limited access to capital

Why is it often difficult for sole proprietors to attract qualified employees?

They usually offer fewer benefits and advancement opportunities

Why is employee work-life balance important for business leaders?

It increases employee trust in leadership

Which is NOT an advantage of a sole proprietorship?

Unlimited liability protection

What is meant by “unlimited liability” in a sole proprietorship?

Owners are personally responsible for all business debts

What is a major advantage of a partnership compared to a sole proprietorship?

Shared management and diverse expertise

In a general partnership, what is true about liability?

All partners have unlimited liability

In a limited partnership, what is the role of limited partners?

They invest and have limited liability

Why might profit sharing be complex in a partnership?

Partners contribute different amounts of time or money

Which of the following is NOT typically included in a partnership agreement?

Government regulation limits

What is one reason a partnership can be harder to dissolve than to form?

Partner shares must be valued and transferred properly

Which type of partnership protects each partner from debts caused by the other partners?

Limited liability partnership (LLP)

What defines a multinational corporation?

A company that operates globally without regard to headquarters location

What is a key disadvantage of general partnerships related to personal risk?

Partners may lose personal assets

What makes partnerships flexible in responding to business changes?

Active involvement of general partners

What makes a corporation a separate legal entity?

It is chartered by a state and can own property, sue, and be sued

What major advantage do stockholders have in a corporation?

Limited liability

What distinguishes corporations from sole proprietorships and partnerships in terms of taxation?

Corporations are taxed separately from their owners

What step is NOT part of the incorporation process?

Registering with the IRS for personal taxes

Why are S corporations attractive to small businesses?

They avoid double taxation while providing liability protection

What is contract manufacturing?

A foreign firm producing goods under a domestic brand

How are profits typically distributed in a cooperative?

In proportion to members’ contributions