Professional Documents
Culture Documents
CHAPTER 4
Options for Organizing Business
Define and examine the advantages and disadvantages of the sole proprietorship form
of organization.
Sole proprietorships—businesses owned and managed by one person—are the most
common form of organization. Their major advantages are the following: (1) They are
easy and inexpensive to form, (2) they allow a high level of secrecy, (3) all profi ts belong to
the owner, (4) the owner has complete control over the business, (5) government regulation is
minimal, (6) taxes are paid only once, and (7) the business can be closed easily. The
disadvantages include: (1) The owner may have to use personal assets to borrow money, (2)
sources of external funds are diffi cult to fi nd, (3) the owner must have many diverse skills,
(4) the survival of the business is tied to the life of the owner and his or her ability to work,
(5) qualified employees are hard to find, and (6) wealthy sole proprietorspay a higher tax than
they would under the corporate form of business.
Identify two types of partnership and evaluate the advantages and disadvantages of the
partnership form of organization.
A partnership is a business formed by several individuals; a partnership may be
general or limited. Partnerships offer the following advantages: (1) They are easy to organize,
(2) they may have higher credit ratings because the partners possibly have more combined
wealth, (3) partners can specialize, (4) partnerships can make decisions faster than larger
businesses, and (5) government regulations are few. Partnerships also have several
disadvantages: (1) General partners have unlimited liability for the debts of the partnership,
(2) partners are responsible for each other’s decisions, (3) the death or termination of one
partner requires a new partnership agreement to be drawn up, (4) it is difficult to sell a
partnership interest at a fair price, (5) the distribution of profits may not correctly reflect the
amount of work done by each partner, and (6) partnerships cannot find external sources of
funds as easily as can large corporations.
Describe the corporate form of organization and cite the advantages and disadvantages
of corporations.
A corporation is a legal entity created by the state, whose assets and liabilities are
separate from those of its owners. Corporations are chartered by a state through articles of
incorporation. They have a board of directors made up of corporate offi cers or people from
outside the company. Corporations, whether private or public, are owned by stockholders.
Common stockholders have the right to elect the board of directors. Preferred stockholders do
not have a vote but get preferential dividend treatment over common stockholders.
Advantages of the corporate form of business include: (1) The owners have limited liability,
(2) ownership (stock) can be easily transferred, (3) corporations usually last forever, (4)
raising money is easier than for other forms of business, and (5) expansion into new
businesses is simpler because of the ability of the company to enter into contracts.
Corporations also have disadvantages: (1) The company is taxed on its income, and owners
pay a second tax on any profits received as dividends; (2) forming a corporation can be
expensive; (3) keeping trade secrets is difficult because so much information must be made
available to the public and to government agencies; and (4) owners and managers are not
always the same and can have different goals.
Define and debate the advantages and disadvantages of mergers, acquisitions,
and leveraged buyouts.
A merger occurs when two companies (usually corporations) combine to form a new
company. An acquisition occurs when one company buys most of another company’s stock.
In a leveraged buyout, a group of investors borrows money to acquire a company, using the
assets of the purchased company to guarantee the loan. They can help merging fi rms to gain
a larger market share in their industries, acquire valuable assets such as new products or
plants and equipment, and lower their costs.Consequently, they can benefit stockholders by
improving the companie’s market value and stock prices. However, they also can hurt
companies if they force managers to focus on avoiding takeovers at the expense of
productivity and profits. They may lead a company to take on too much debt and can harm
employee morale and productivity.
CHAPTER 5
Small Business,Entrepreneurship,and Franchising
Describe how you go about starting a small business and what resources are needed.
First, you must have an idea for developing a small business. Next, you need to devise
a business plan to guide planning and development of the business. Then you must decide
what form of business ownership to use: sole proprietorship, partnership, or corporation.
Small-business owners are expected to provide some of the funds required to start their
businesses, butfunds also can be obtained from friends and family, financial institutions,
other businesses in the form of trade credit, investors(venture capitalists), state and local
organizations, and the Small Business Administration. In addition to loans, the Small
Business Administration and other organizations offer counseling, consulting, and training
services. Finally, you must decide whether to start a new business from scratch, buy an
existing one, or buy a franchise operation.