Chapter 6 DQ PDF

Preview

Summary

Discussion questions for Chapter 6...

Description

Sanchez 1 Norma Sanchez 10/12/20 SID# 0941397 Business Formation: Choosing the Form that Fits 1. Describe the basic features that distinguish the four basic forms of business ownership: sole proprietorships, general partnerships, C corporations, and limited liability companies. There are four basic forms of business ownership that each have different basic features. Sole Proprietorships are a form of business ownership that has a single owner who usually actively manages the company. General partnerships are a partnership in which all partners can take an active role in managing the business and have unlimited liability for any claims against the firm. C corporations are the most common type of corporation, which is a legal business entity that offers limited liability to all of its owners, who are called stockholders. Limited Liability Companies are a form of business ownership that offers both limited liability to its owners and flexible tax treatment. 2. Why do many entrepreneurs initially set up their businesses as sole proprietorships? Why do many successful entrepreneurs eventually decide to convert their sole proprietorship to some other form of ownership such as a corporation or LLC? Entrepreneurs initially set up their businesses as sole proprietorships also because there is a retention of control, pride of ownership, retention of profits, and possible tax advantages. Many successful entrepreneurs decide to convert their sole proprietorship to some other form of ownership such as a corporation or LLC so they can have limited liability, meaning they aren’t personally liable for the debts of their company.

Sanchez 2 3. How do limited partnerships and limited liability partnerships differ from general partnerships and from each other? Limited Partnerships and Limited Liability partnerships differ from general partnerships because limited partnerships and limited liability partnerships allow some partners to limit their personal liability to some extent with particular requirements. General partnerships have unlimited liability for themselves and their partners actions. 4. What advantages help explain why virtually all large companies are organized as C corporations? The advantages that help explain why virtually all large companies are organized as C corporations are the limited liability. The stockholders aren’t personally responsible for the debts of their company, performance meaning the corporation is unaffected by the death or withdrawal of an owner, ease of transfer of ownership because owners can simply sell their shares of stock, ability to raise large amounts of financial capital by issuing shares of stock or by selling corporate bonds, and the ability to make use of specialized management because they can offer attractive salaries and benefits. 5. What steps are involved in forming a C corporation? The steps involved in forming a C corporation are filing articles of incorporation and pay filing fees. It also requires adopting corporate bylaws, which are detailed rules that govern the way the corporation is organized and managed. The requirements vary among the states. Some states are known for their simple forms, inexpensive fees, low corporate tax rates, and “corporation-friendly” laws and court systems, making forming a corporation not much harder or more expensive than a sole proprietorship.

Sanchez 3 6. Describe the relationship between a corporation’s common stockholders, its board of directors, and its chief executive officer (CEO). The relationship between a corporation’s common stockholders, its board of directors, and its chief executive officer (CEO) should be a very close one. The common stockholders are the people who invest the money in a corporation, and thus have the authority to choose the board of directors. The board of directors appoint a CEO to ensure the company’s policies are being adhered to by the corporation. All three gave much power within a corporation. 7. How does a merger differ from an acquisition? What is the difference between a horizontal merger or acquisition and a vertical merger or acquisition? Give a real world example of recent merger to illustrate each type of combination. In both mergers and acquisitions two formerly independent firms come under common ownership, but the way the combination occurs can be different. Acquisition occurs when one corporation buys controlling interests of another company. The acquiring firm remains intact and the firm that is acquired becomes its subsidiary. In a merger, the two formerly independent companies agree to combine to form a new corporate entity. 8. Compare an S corporation with a limited liability company. Why do you think limited liability companies are currently more popular than S corporations? Both provide all owners with limited liability and eliminate the problem of double taxation associated with C corporations. LLC’s have become more popular because they offer more flexibility and fewer restrictions on ownership and operation. S are limited to 100 stockholders. In an LCC, there is no limit to the number of members. S corporation owners must be U.S. citizens, while an LCC has no restrictions on who may own.

Sanchez 4 9. What are the main advantages and disadvantages of a business format franchise arrangement for the franchisee? For the franchisor? The main advantages of a business format franchise arrangement are that it allows the franchisor to expand its business and bring in additional revenue without investing much. The disadvantages are that the franchisors cannot oversee the actions of hundreds of franchises. This can be challenging and complex. For franchisees, the advantages are the right to use a well-known brand name and obtain the right to sell, training, and creditors are more likely to loan them funds. A disadvantage can be that the bad acting of other franchisees can create a negative halo effect that can harm business. 10. What is a Franchise Disclosure Document (FDD) and why is it important? The Franchise Disclosure Document (FDD) is a document the FTC requires franchisors to provide to potential franchisees. The FDD contains detailed information about virtually every aspect of the franchisor and the franchise agreement. It is designed to help potential franchisees make an informed decision about whether or not to enter into a franchise agreement.

1. A typical partnership agreement spells out details, such as the initial financial contributions each partner will make, the specific duties and responsibilities each will assume, how they will share profits (and losses), how they will settle disagreements, and how they will deal with the death or withdrawal of one of the partners. Well-written agreements can prevent common misunderstandings. Do research on the Internet to create a checklist regarding the steps, forms, and fees needed to establish a general partnership in your state. Explore what’s required for

Sanchez 5 naming the partnership, what should be covered in the partnership agreement, and the steps needed to register for tax purposes at both the state and federal levels. Here are the steps you should take to form a partnership in California: 1. Choose a business name. In California, a partnership may use the surnames of the individual partners or may use a fictitious business name. If you plan to use a fictitious business name, it must be distinguishable from the name of any other company currently on record. 2. File a fictitious business name statement with the county clerk. If you use a business name that is different from the surnames of the individual partners, California requires you to file a fictitious business name statement in the office of the county clerk where you intend to do business. 3. Draft and sign a partnership agreement. A partnership agreement is not a mandatory legal requirement for establishing a partnership. A well-drafted partnership agreement will help you decide in advance how to handle certain situations. 4. Obtain licenses, permits, and zoning clearances. California provides a comprehensive database of every profession that requires a license by a partnership. You can obtain this information by going to CalGold, a service of the California Governor’s Office of Business and Economic Development. In addition, local regulations, including licenses, building permits, and zoning clearances, may apply to your business. You will need to check with your city and county governments for more information. 5. Obtain an Employer Identification Number.

Sanchez 6 Partnerships that wish to have employees need to obtain an Employer Identification Number, or EIN. This is a nine-digit number issued by the IRS to keep track of businesses. All businesses with employees are required to report wages to the IRS using their EIN. 2. It might surprise you to know that limited partnerships can be formed by families as well as companies. Use the Internet to find out how to set up a family limited partnership. Who would be the general partners and who would be the limited partners—and why? What advantages would this type of arrangement have for the family? What has the IRS said about family limited partnerships? The most common way of setting up an FLP is to create a general partnership first with limited partnership interests. The general partner (or partners) then give the limited partnership interest to the children or other family members who are eligible. Whoever holds the general partner title maintains control over the enterprise or assets, but the limited partnership interest lets children or other eligible family memberships share in the ownership. The FLP is a frequently-used technique to shift income tax burdens from parents to children as an estate planning tool. The interests transferred to your children, including all appreciation since the transfer, escape inclusion in your estate when you die. Only the value of the taxable gifts at the time they were transferred into the FLP are included for purposes of estate taxes. 3. For ten years, Illinois Tool Works (ITW) has followed an acquisition strategy where it focused on growing from 800 to 1,000 businesses, each of which sought to follow an 80/20 rule where 80 percent of revenues business came from 20 percent of its products or customers. In support of this strategy, ITW sent hundreds of managers for training to sharpen their negotiating and deal making skills. As a result, ITW bought 201 companies between 2004 and 2008. Indeed, new acquired companies

Sanchez 7 added $1 billion a year to annual revenues totaling nearly $18 billion. Now, however, company leaders believe they’ve focused too much on acquisition. Former CEO David Speer said, “I can buy a lot of companies and fix them, but are they something I want to own four or five years from now?” So ITW is switching to a divestiture strategy aimed at making the company stronger through subtraction rather than addition. Divesting, or selling companies or their parts, is often done to get rid of business units that no longer fit strategic plans. The goal is to raise cash, streamline operations, and focus on the remaining core businesses. Research ITW’s divesting strategy, summarize it, and explain its goals and tactics. Find out the latest developments from the last few years. Do you think the divesting strategy will work? Illinois Tool Works represents one of the most interesting investment propositions in the industrial sector, and the recent investor day presentation only served to highlight it. In a nutshell, management's game plan for the next five years is to improve the productivity of its existing business while divesting some of its underperforming businesses. Management is looking at divesting the challenged businesses and offsetting any EPS dilution (from losing revenue from the divested businesses) by making share repurchases. I believe the divesting strategy will work because they are finding ways to improve companies that have a higher risk of failure for the future and finding potential ways to make money....