Chapter 4: Options for Organizing Business — Vocabulary Flashcards

A comprehensive set of vocabulary flashcards covering forms of business ownership, corporate structure, governance, financing, and mergers/acquisitions based on Chapter 4 notes.

Sole Proprietorship

A business owned and operated by one individual; the simplest and most common form; owner has complete control but unlimited liability; profits taxed as personal income.

Unlimited Liability

Owner is personally responsible for all business debts; personal assets can be used to satisfy business obligations; risk increases with personal wealth.

Limited Liability

Owners are protected from personal liability beyond their investment in the business; personal assets are generally not at risk.

General Partnership

A partnership where two or more people share ownership, management, profits, and unlimited liability for debts.

Limited Partnership

A partnership with at least one general partner (unlimited liability) and at least one limited partner (liability limited to investment; limited partners do not manage).

Articles of Partnership

Legal documents outlining the basic agreement between partners, including contributions, profit sharing, roles, and withdrawal provisions.

Master Limited Partnership (MLP)

A limited partnership traded on securities exchanges; combines tax benefits of a limited partnership with some liquidity of a corporation.

Two basic Types of Partnership

General partnership (shared management and liability) and limited partnership (includes limited partners with limited liability).

Advantages of Partnerships

Ease of organization, broader resources from multiple partners, pooled skills, and often greater earning power than a sole proprietorship.

Disadvantages of Partnerships

Unlimited liability for general partners, potential for disputes, life of the partnership tied to partners, and difficulties in transferring ownership.

Corporation

A legal entity created by the state, separate from its owners, with limited liability, ability to own assets, and ability to issue stock; can be private or public.

Domestic Corporation

A corporation that does business in the state where it is chartered.

Foreign Corporation

A corporation doing business in states other than its charter state.

Alien Corporation

A corporation doing business outside the country where it was incorporated.

Private Corporation

Owned by a small number of individuals; its stock is not sold to the public and financial information is not publicly disclosed.

Public Corporation

Stock is available for purchase by the general public and is traded on public exchanges; subject to public reporting requirements.

Stockholders (Shareholders)

Owners of a corporation who hold shares of stock and are entitled to profits and governance rights (votes for directors).

Common Stock

Stock with voting rights for shareholders and residual claim on profits; dividends vary with profitability.

Preferred Stock

Stock that has priority over common stock for dividends and assets but usually lacks voting rights; often has fixed dividends and may be cumulative.

Dividends

Distribution of a portion of a company’s profits to its shareholders, typically paid in cash or additional shares.

Preemptive Right

Right of existing shareholders to purchase new shares to maintain their percentage ownership in a company.

Perpetual Life

A corporation is typically chartered to exist indefinitely, continuing despite changes in ownership.

Double Taxation

Corporate profits are taxed at the corporate level and again as shareholder dividends at the individual level.

IPO (Initial Public Offering)

The first sale of a company’s stock to the public, enabling it to become a public company.

Incorporators

Individuals who create a corporation and sign the articles of incorporation.

Articles of Incorporation

Legal documents filed with the state to form a corporation, outlining key details like name, purpose, stock, and directors.

Corporate Charter

A grant by the state to form a corporation, based on information in the articles of incorporation.

Bylaws

Internal rules and procedures adopted by the board of directors to govern the corporation.

Board of Directors

A group elected by shareholders to oversee the long-term direction and governance of the corporation.

Officers

Corporate executives (e.g., CEO, President) responsible for managing daily operations and reporting to the board.

Sarbanes-Oxley Act (SOX)

Legislation to improve corporate governance and financial reporting, increasing board independence and internal controls.

Employee Stock Ownership Plan (ESOP)

A program that gives employees shares of the company’s stock, aligning employee and company interests and potentially boosting productivity.

Nonprofit/501(c)(3) Organization

Organizations focused on services rather than profits and exempt from certain taxes; donations may be tax-deductible and they file IRS forms to maintain status.

Quasi-Public Corporation

Government-owned or government-operated entities that provide services rather than earn profits (e.g., USPS, NASA).

Cooperative (Co-op)

An organization owned and operated by its members (individuals or small businesses) to gain benefits like discounts, shared services, or profits distributed to members.

Joint Venture

A partnership formed for a specific project or limited time, often involving large investments and shared control.

Merger

The combination of two companies to form a new entity, often to achieve synergies and growth.

Acquisition

One company purchases another, which may become a subsidiary or have its operations merged.

Horizontal Merger

A merger between companies that operate in the same industry and market.

Vertical Merger

A merger between companies at different stages of the production process (supplier-customer relationship).

Conglomerate Merger

A merger between companies in unrelated industries.

Tender Offer

A public offer to buy some or all of a target company’s stock at a premium to gain control.

Hostile Takeover

An acquisition opposed by the target’s management; defense mechanisms may be used (poison pill, white knight, etc.).

Poison Pill

A defense to make the target less attractive to an acquirer by diluting or devaluing its stock.

White Knight

A more acceptable company that agrees to acquire the target to avoid a hostile takeover.

Leveraged Buyout (LBO)

An acquisition financed primarily with borrowed funds secured by the target’s assets, often using the acquired company’s cash flows to repay debt.

Crowdfunding

Raising small amounts of capital from many people, often via online platforms (e.g., GoFundMe, Kickstarter) to fund a venture.

Horizontal, Vertical, Conglomerate Mergers (Summary)

Classifications of mergers by relation: horizontal (same industry), vertical (different stages of production), conglomerate (unrelated industries).