Business Ownership

Flashcards for reviewing business ownership types, advantages, and disadvantages.

Sole Proprietorship

A business owned by a single owner.

Sole Proprietor

The owner of a sole proprietorship.

Disadvantages of a Sole Proprietorship

Owner incurs all losses; unlimited liability; limited funds; limited skills.

Partnership

A business co-owned by two or more people.

Partners

Co-owners of a business.

General Partnership

A partnership in which all partners have unlimited liability; all partners are personally liable for all obligations of a firm.

Limited Partnership

A firm that has some limited partners; where each partner’s liability is limited to the value of their contribution in the partnership. They are only investors and do not involve in management of the business.

General Partners

Partners who manage the business, receive a salary, share the profits or losses of the business and have unlimited liability.

Advantages of a Partnership

Additional funding, losses are shared, more specialization.

Disadvantages of a Partnership

Control is shared, unlimited liability, profits are shared.

S-Corporations

A firm that has 100 or fewer owners and satisfies other criteria. The earnings are distributed to the owners and taxed at the respective personal income tax rate of each owner. Owners have limited liability

Limited Liability Company (LLC)

A firm that has all the favorable features of a typical general partnership but also offers limited liability for the partners. Typically protects a partner’s personal assets from the negligence of other partners in the firm.

Corporation

A state-chartered entity that pays taxes and is legally distinct from its owners.

Charter

A document used to incorporate a business. The charter describes important aspects of the corporation such as name of the firm, stock issued, and the firm’s operations.

Bylaws

General guidelines for managing a firm.

Advantages of a Corporation

Owners of a corporation have limited liability, access to funds, and easy transfer of ownership.

Disadvantages of a Corporation

High organizational expense; financial disclosure; agency problems; high taxes.

Privately held corporation

Ownership is restricted to a small group of investors.

Publicly held corporation

Shares can be easily purchased or sold by investors.

Going public

The act of initially issuing stock to the public.

Equity

The total investment by a firm’s stockholders.

Return on Equity (ROE)

Earnings as a proportion of the firm’s equity.

Risk

The degree of uncertainty about a firm’s future earnings.

Franchise

An arrangement whereby a business owner allows others to use its trademark, trade name, or copyright, under specific conditions.

Franchisor

A firm that allows others to use its trade name or copyright, under specified conditions.

Franchisee

A firm that is allowed to use the trade name or copyright of a franchise.

Distributorship

A type of franchise in which a dealer is allowed to sell a product produced by a manufacturer.

Chain-style business

A type of franchise in which a firm is allowed to use the trade name of a company and follow guidelines related to the pricing and sale of the product.

Manufacturing arrangement

A type of franchise in which a firm is allowed to manufacture a product using a formula provided by another company.