Exam 5: How to Form a Business

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:

Most states have legal restrictions that prevent individuals from incorporating.

If you want to sell your ownership in a publicly traded corporation,you find someone willing to buy your shares.

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.

Stock options are the right to purchase shares of the corporation for a fixed price.

Travis has agreed to invest $16,000 in a partnership with his sister and brother-in-law.He does not intend to actively work in the partnership,nor does he wish to risk any of his own assets other than the $16,000 he initially invests.The partnership has agreed to permit him to share in the profits.As an expert on forms of business ownership,you know that Travis is a ______________ in this partnership.

The S corporation is likely to be less popular in the future because:

In a limited partnership,the general partners should encourage the limited partners to take a more active role in the operations of the business.After all,the limited partner has comparable liability in the business,even though he/she may not be a partner for as long a period of time as the general partners.

Delaware is a popular state to seek incorporation due to its reduced costs and other perks.

One way to eliminate some of the risk of your partners making costly mistakes that could jeopardize your personal assets is to set-up a:

Cali owns Dog Trotters,a dog-walking business that she started to earn money after school and supplement her allowance.She planned to keep all the profits,and kept things simple,by putting a flier on the bulletin board at the local grocery store announcing that she was available to provide this service.Cali's business is a:

One disadvantage of _________ is the initial cost of formation.

Franchised businesses are successful (both domestically and internationally)because:

A comparison of the three major forms of business ownership shows that sole proprietorships are usually the most difficult type of business to establish.

Which of the following statements about S corporations is most accurate?

Opening and operating a franchise in a different country:

The strategy of investors who are attempting a leveraged buyout is to:

A(n)_____________ is a company that has a proven business model and is willing to sell the rights to use the business model to others so that they can sell the same product or service within a given territory.

One advantage of corporations is that the initial cost of organization is usually lower than for other forms of business ownership.

A multinational corporation is a firm that operates in several countries.