Exam 5: How to Form a Business

Your friend, Brett called to tell you he just left a sales pitch for a new web site development franchise where "he can get in for a few thousand dollars." He wants to know if you are ready to invest too. Although you lack expertise in graphic design or html programming, this should be a safe investment since it is already advertised as a franchise system. It's probably too good to pass up.

A disadvantage of corporations is that their charters are only valid for 99 years, so corporations are less permanent than other types of businesses.

One of the major disadvantages of a sole proprietorship is the:

In a general partnership, all partners share in management of the business and in the liability for the firm's debts.

A disadvantage of corporations is that they generally require extensive paperwork.

Franchised businesses are successful (both domestically and internationally because:

A limited partner is an owner who assumes no management responsibility and has no liability for losses beyond the amount invested.

A significant disadvantage of owning a sole proprietorship is the:

Which of the following is an advantage of franchises?

Mini-Case For as long as she could remember, Jenna Raiter's passion was cars. As a teenager, she spent hours with her dad tinkering with the family car, learning to change the oil and making minor repairs. She got a job at a local garage while still in high school. A few years after graduating from high school and completing the auto mechanics degree at a local community college, Jenna decided she wanted to be her own boss. She quit her job, borrowed some money from her dad, and began her own repair shop, the AutoMotion Garage. Jenna's hard work gradually attracted a loyal clientele of satisfied customers. Her success has her thinking about opening garages in two other locations, but she lacks the financial resources needed for expansion. Furthermore, the success of her business is forcing Jenna to spend more time managing the business and less time doing the actual technical work she still enjoys. She wants to find business partners who can help her with management and provide additional financial resources. She has approached a couple of friends she met in high school: Al Ternator and Lew Banfilter, to see if they would like to join the business. -Al also suggested another way Jenna could finance her expansion. He described setting-up a chain of AutoMotion Garages by selling the rights to use AutoMotion's name, business model, garage design and service ideas to others who would like to own a similar shop. These individuals would pay AutoMotion an initial fee and monthly royalties based on earnings. Al is suggesting that Jenna set up a:

Rocky Rhodes is convinced that he has a great idea for a new business. Unfortunately, the type of business he wants to start would require a fairly high initial investment and Rocky has a poor credit rating and very little personal wealth. Rocky would be unlikely to find success if he organized his business as a sole proprietorship.

Global franchising offers:

Taking a firm private involves converting a firm from a corporation to a general partnership.

The strategy of a leveraged buyout is used when employee talent is at a minimum.

Sierra is interested in becoming a franchise owner, by opening and operating one of 50 Cactus Katie's Grills, a very successful fast food chain specializing in food dishes from the American southwest. Which of the following problems is Sierra most likely to encounter if she agrees to become a franchisee?

Compared to sole proprietorships, an advantage of partnerships is their ability to obtain more financial resources.

Limited partnerships are just like general partnerships, except that they are partners for a limited time period.

Ramon lives in Mexico City and is a Mexican citizen. He has several friends in the United States who own shares in an S corporation. Ramon would like to invest in this company. Ramon:

One disadvantage of is the initial cost of formation.

One advantage of an S Corporation is that the profits of the business are distributed to the owners and taxed as each owner's personal income, thus avoiding the problem of double taxation.