108. Double taxation means that a corporation pays twice the amount of taxes as a sole
proprietorship or partnership.
109. The major differences between an S corporation and a limited liability company are limits
on the number of owners and the citizenship status of individuals who are owners.
110. The owners of a limited liability company (LLC) must pay self-employment taxes on any
profits they earn, even if they did not obtain a salary from the company.
111. A group of medical doctors are interested in incorporating their business. There is no
advantage due to the costs involved.
112. Nutty Dough is a small chain of donut shops currently owned and operated by a group of
seven partners. The owners think that their chain has the potential for rapid growth, but several
of the partners are concerned about the growing financial risks that will accompany this growth.
One way the partners could deal with this problem would be to incorporate their business.
113. Chad recently invented Wave-Aerobics, a next generation watercraft that can safely
perform water stunts similar to an amusement park ride. As the founder of a fast growing
business, you think his goal of incorporating, “to remain in steadfast control of the firm’s
operations for an indefinite number of years,” is good strategy.
114. Mojo Motors is a small conventional corporation with only 212 stockholders. Eleven of the
stockholders are citizens of Mexico, and eight others are citizens of Canada. Due to its size and
diversity in ownership, you would recommend that Mojo Motors change to an S corporation.
115. The owners of Idle Time Gaming Company would like to become an S corporation.
Unfortunately, their lawyer advised them that they do not meet some of the requirements
necessary to qualify as an S corporation. An alternative form of business that would give them
similar advantages is a limited liability company.
116. The owners of California Canines, a firm that designs and manufactures coats, sweaters,
jackets, and rainwear for dogs, want to organize as an LLC. Two members are college students
and two others are thirty-something couples with young children. This is good strategy because
each member can choose to commit to limited or unlimited liability.
117. A few years back, your friends who are horse fanatics inherited several acres of land that
they turned into a retirement haven for race horses. Peaceful Pastures was recently incorporated
as a limited liability company. The members are reevaluating this form of ownership. Unlike an S
corporation, they now pay self-employment taxes on all company profits—not just on the salaries
they pay themselves.
118. After a successful five years, Peaceful Pastures, LLC (a retirement ranch for race
horses), thinks it may be able to attract donations from animal activist groups and even the
federal government if it becomes a nonprofit corporation. As its business advisor, you explain
that as a nonprofit corporation, the owner(s) may earn a salary but the business should not seek
after-tax profits.
119. Chipper’s Golf Resort has the opportunity to buy 1,000 acres of property adjacent to its
18–hole golf course. After talking with her banker, the owner is encouraged to begin the
paperwork to change from a limited liability company form of business ownership to a
corporation. You applaud this strategy because she will eliminate the problem of double
taxation.
120. When two firms join together to form one company, it is called a merger.
121. The three major types of mergers are acquisition, joint, and connective.
122. An acquisition is when one company buys the property and obligations of another
company.
123. Taking a firm private involves converting a firm from a corporation to a general
partnership.
124. If firms wish to gain market share in their current market, they would consider a
conglomerate merger.
125. The purpose of a conglomerate merger is to diversify operations and investments.
126. A merger between two businesses in different stages of related businesses is known as a
vertical merger.
127. A horizontal merger refers to a merger between two companies that serve entirely
different markets.
128. A horizontal merger refers to a merger between two companies in the same industry, and
serving the same markets.
129. A leveraged buyout is an attempt by top management to gain control of a company by
issuing a large amount of new stock.
130. When a group of investors take a firm private, they purchase all the company’s
outstanding stock.
131. In recent years, foreign firms were reluctant to merge with or acquire American
corporations.
132. A merger is a mutual agreement where a firm joins together with another firm, whereas
an acquisition is when one firm purchases the assets and obligations of another firm.
133. One reason that a firm would choose to merge or acquire another company would be to
gain market share.
134. One reason that a firm may choose to merge or acquire another company would be
diversity of products or services.
135. The strategy of a leveraged buyout is used when employee talent is at a minimum.
136. Taking a firm private means turning a profit–seeking corporation into a nonprofit
corporation in order to avoid a hostile takeover.
137. A major objective of a leveraged buyout is to enable investors to gain control of a
company by issuing new shares of ownership, thus minimizing the use of debt.
138. Hole-In-One Golf Company announced plans to purchase the property and assume the
obligations of Champion Golf, Inc., one of its major competitors. Hole–In-One Golf Company’s
plans are an example of a merger.
139. Two competitors, Stanley’s Food Mart and Bluejay Groceries, recently issued a joint
announcement stating their decision to merge. The announcement claimed that the new firm
would have more financial resources, which would enable it to expand services and broaden
offerings to consumers. This proposed merger is an example of a horizontal merger.
140. Tech Solutions, Inc., a manufacturer of laptops, is considering a merger with Outtel, a
leading producer of microprocessors and other computer chips. Tech Solutions believes such a
merger would give them a guaranteed source of needed components, and enable them to have
better control over quality. If this merger occurs, it would be an example of a horizontal merger.
141. Cory Raider is leading a group of stockholders who want to take the Bigbux Corporation
private. If Cory’s group succeeds, Bigbux’s stock will no longer be available to investors on the
open market.
142. Due to several years of poor performance, Scrappy’s Metal Fabrication, Inc., is closing.
Through the use of debt financing, workers plan to purchase the company’s stock from current
shareholders in order to buy the firm, improve company performance, and save jobs.
143. A franchise agreement is an arrangement where a franchisor sells the rights to a business
name and the right to sell a product or service within a given territory to a franchisee.
144. A franchise may be organized as a sole proprietorship, partnership, or corporation.
145. Franchisees are not always pleased with management regulations handed down from the
franchisor. In some cases, franchisees have been known to band together to express concern
over marketing and management direction.
146. Franchisors give franchisees the right to use their name and product, with the
understanding that franchisees obtain all financing and develop all marketing strategies on their
own.
147. The most popular businesses for franchising are restaurants.
148. In a franchise arrangement, ownership remains in the hands of the franchisor.
149. One of the major advantages for the franchisee is instant business name recognition and
important management assistance from the franchisor.
150. Franchisees must follow more rules, regulations, and procedures than if they operated
independently owned businesses.
151. The coattail effect refers to the burden of corporate rules and regulations on franchisees.
152. The coattail effect refers to inevitable repercussions on your business if a fellow
franchisee should fail.
153. One drawback of franchises is that they have a higher failure rate than other types of
business ventures.
154. The franchisee pays the franchisor a share of profits or a percentage commission on sales,
known as a
royalty
.
155. Many franchisors have rules that prohibit franchisees from sponsoring their own
websites.
156. Because of the growth of minority-owned businesses in the U.S., franchisors are becoming
more focused on recruiting minority franchisees.
157. It is impossible to run a franchise completely from home.