Business Formation: Choosing the Form That Fits

Vocabulary practice flashcards covering business formation forms, including sole proprietorships, partnerships, corporations, LLCs, corporate restructuring, and franchising terms.

Sole proprietorship

A form of business ownership with a single owner who usually actively manages the company, where company earnings are treated as the owner's personal income.

Unlimited liability

A legal condition in which business owners are personally liable for claims against their firm, meaning personal assets such as cash, bank accounts, investments, and homes can be seized to pay business debts.

Partnership

A voluntary agreement between two or more co-owners to operate a business for profit.

Corporation

A business form considered a legal entity that is separate and distinct from its owners, protecting owners with limited liability.

Limited liability

A condition in which owners are not personally liable for claims against their firm; owners may lose their investment in the company, but their personal assets are protected.

Articles of incorporation

The formal document filed with a state government to establish the legal existence of a corporation.

Limited liability company (LLC)

A hybrid business structure that offers limited liability to its owners and flexible tax treatment, classified as neither a partnership nor a corporation.

General partnership

A partnership type where all partners take an active role in managing the business and have unlimited liability for claims against the firm.

Limited partnership

A partnership that includes at least one general partner who actively manages the company with unlimited liability, while other partners give up active management in exchange for limited liability.

Limited liability partnership (LLP)

A partnership form in which all partners have the right to participate in management but are only responsible for their own wrongful acts and debts.

Partnership agreement

A written agreement detailing initial financial contributions, specific duties and responsibilities, profit and loss sharing, settling disagreements, and procedures for the death or withdrawal of a partner.

C corporation

The most common type of corporation; a legal business entity that offers limited liability to all owners (stockholders), with ownership represented by shares of stock.

Institutional investor

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

Corporate bylaws

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

Board of Directors

A group elected by stockholders to represent their interests, oversee corporate operations, and appoint the chief executive officer (CEO) and other corporate officers.

Acquisition

A corporate restructuring event where one firm buys another firm.

Merger

A corporate restructuring in which two formerly independent business entities combine to form a new organization.

Horizontal merger

A combination of two firms that operate in the same industry.

Vertical merger

A combination of firms operating at different stages in the production of a good or service.

Conglomerate merger

A combination of two firms that operate in unrelated industries.

Divestiture

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

S Corporation

A specialized corporation whose earnings are not taxed separately by the Internal Revenue Service and whose stockholders have limited liability, restricted to no more than $100$ stockholders who must generally be U.S. citizens.

Nonprofit Corporation

A corporation whose earnings are exempt from federal and state income taxes and whose donors can take tax deductions, but which cannot issue stock, distribute dividends to members, or contribute funds to a political campaign.

Operating agreement

A foundational document drafted for an LLC (similar to corporate bylaws) establishing rules for management and operations.

Franchise

A licensing arrangement where one party is granted the right to use another business's name, trademark, products, methods, and other property in exchange for money and other considerations.

Distributorship

A franchise arrangement in which the franchisor manufactures a product and licenses franchisees to sell it.

Business format franchise

A franchise arrangement where the franchisee pays for the right to use the name, trademark, and business and production methods of the franchisor.

Franchisor

The business party that allows a franchisee to operate using its resources, name, and methods in exchange for fees or other considerations.

Franchisee

The individual or business that pays a franchisor for the legal right to use the franchisor's products, methods, and branding resources.

Franchise Agreement

The contractual agreement between a franchisor and franchisee that spells out the duties, responsibilities, terms, and conditions of both parties.

Franchise Disclosure Document (FDD)

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

Assigned territory

A franchise agreement provision outlining the specific geographic area in which a franchisee will operate and whether the rights to that area are exclusive.