Chapter Six
Business Formation: Choosing the Form that Fits

Review Questions

1. Describe the basic features that distinguish the four basic forms of business ownership: sole proprietorships, general partnerships, C corporations, and limited liability companies.
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?

3. How do limited partnerships and limited liability partnerships differ from general partnerships and from each other?
4. What advantages help explain why virtually all large companies are organized as C corporations?

5. What steps are involved in forming a C corporation?

6. Describe the relationship between a corporation’s common stockholders, its board of directors, and its chief executive officer (CEO).

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.
8. Compare an S corporation with a limited liability company. Why do you think limited liability companies are currently more popular than S corporations?

9. What are the main advantages and disadvantages of a business format franchise arrangements for the franchisee? For the franchisor?

10. What is a Franchise Disclosure Document (FDD) and why is it important?

EXTRA CREDIT (5 POINTS)

1. Conduct an interview with an individual in your community who is running a business as a sole proprietorship. Ask the owner the following questions. How did the owner start the business and why did he or she choose the sole proprietorship form of organization? What advice would he or she would give to you if you were