BUSN 6 6th Edition Kelly Solutions Manual 1

BUSN 6 6th Edition Kelly
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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.
A sole proprietorship is a business that is owned and usually managed by a single
individual. It is the simplest and least expensive form of ownership to establish. The sole
proprietorship is considered to be an extension of the owner. The owner has unlimited
liability for the debts of the proprietorship.
A general partnership is an agreement between two or more individuals to co-own and
operate a business. Each general partner has the right to participate in the management
of the partnership, and to share in the company’s profits (or losses). Each partner also
has unlimited liability for the debts of the company.
A C corporation is a legal entity that is considered separate and distinct from its owners.
A corporation is like an artificial person; it can own property, enter into contracts, and
initiate legal actions (such as lawsuits) in its own name. It is created by filing a form,
usually called the articles of incorporation, and paying an incorporation fee to the
appropriate agency in the state of incorporation. Ownership of a corporation is
represented by shares of stock, so its owners are called stockholders (or shareholders).
Unlike sole proprietors and general partners, stockholders are not liable for the debts of
their company.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. EOC – 459
End-of-Chapter Solutions / Chapter 6
A limited liability company (LLC) is a hybrid form of business ownership that is similar
in some respects to a partnership while having other characteristics that are similar to a
corporation. Like a corporation, a limited liability company is considered a legal entity
separate from its owners. Also like a corporation—and as its name implies—an LLC
offers its owners limited liability for the debts of their business. But it is subject to fewer
regulations and has more flexible tax treatment than a corporation; in fact, one of the
most interesting characteristics of an LLC is that its owners can elect to have their
business taxed either as a corporation or a partnership.
BUSPROG: Communication
Bloom’s: Knowledge
Topic: Business Ownership Options: The Big Four
Difficulty Level: Easy
Learning Objective: 6-1
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?
The sole proprietorship is the easiest and least expensive form of business to set up. For
entrepreneurs who are eager to get their business up and running this can be a major
advantage. Many entrepreneurs also want to be in control, and sole proprietorships
allow them to be their own boss. Entrepreneurs also tend to be very self-confident and
expect to earn a profit. Thus, the fact that a sole proprietorship allows the single owner
to reap all of the profits is also likely to be an attractive feature.
But sole proprietorships have some major limitations, many of which become
increasingly serious as the company grows. By definition, a sole proprietorship can have
only one owner, so the only sources of equity financing are the entrepreneur’s personal
wealth and retained earnings. Many traditional lenders are reluctant to extend loans to
sole proprietorships. Because of these limitations sole proprietorships often struggle to
raise financial capital to finance growth. (Even if angel investors and venture capital
firms are willing to invest, they typically do so by seeking an equity (ownership) stake in
the company, which means the company can no longer be a sole proprietorship.) Another
drawback of the sole proprietorship is the risk associated with unlimited liability. Finally,
as a company becomes bigger and more complex the entrepreneur may find it
increasingly difficult to manage all aspects of the business alone. Thus, it may be
necessary to bring in professional managers or additional owners to share the work load
(or both). All of these problems can be remedied by forming a corporation or LLC. These
forms of ownership provide access to greater financial resources, provide the owners
with the protection of limited liability and allow for professional management or
additional owners to share some of the workload.
Bloom’s: Comprehension
Topic: Advantages and Disadvantages of Sole Proprietorships
EOC – 460 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
3. How do limited partnerships and limited liability partnerships differ from general
partnerships and from each other?
In a general partnership all of the partners are general partners, meaning that they each
have the ability to participate in managing their company and share in its profits. Each
partner in a general partnership also has unlimited liability for any claims against the
partnership.
A limited partnership must have at least one general partner and at least one limited
partner. General partners in a limited partnership are much like general partners in a
general partnership; they actively manage the company, share in its profits and have
unlimited liability for claims against the partnership. Limited partners contribute money,
other assets (or both) in return for a share of the partnership’s earnings. However, they
do take an active role in managing the company and have limited liability for claims
against their company.
In a limited liability partnership all of the partners can actively participate in managing
their company and share in its profits. However, all partners in this type of partnership
also have some degree of limited liability protection. (The degree of liability protection
varies among states; some offer “full shield” protection which protects the partners
against liability for anything other than their own malpractice or negligence while others
offer less extensive “partial shield” protection.) In some states limited liability
partnerships can only be formed by certain professionals such as lawyers, architects or
accountants.
Topic: Partnerships: Two Heads (and Bankrolls) Can Be Better Than One
4. What advantages help explain why virtually all large companies are organized as C
corporations?
Compared to sole proprietorships and general partnerships, corporations generally have

greater access to financial capital because they tap a large pool of investors by issuing
stocks and bonds. Corporations also have the permanence needed to sustain growth over
the long haul. And, because they usually are able to offer better salaries and benefits and
the greater opportunities for growth and advancement, corporations often are able to
attract highly talented employees.
BUSPROG: Analytic
Topic: Advantages of Corporations
5. What steps are involved in forming a C corporation?
General (or C) corporations are formed by filing articles of incorporation with the
appropriate state agency. The incorporators must pay fees at the time of filing. Another
major step in forming a corporation involves the establishment of corporate bylaws,
which are the basic rules and procedures governing the way the corporation will operate.
The exact forms, fees and other requirements for forming a corporation vary from state
to state. Some states, such as Delaware, are known for their simple forms, low fees, and
corporation-friendly laws.
Bloom’s: Knowledge
Topic: Forming a Corporation
6. Describe the relationship between a corporation’s common stockholders, its board of

directors, and its chief executive officer (CEO).
The common stockholders are the basic owners of a corporation, but few stockholders of
large corporations take an active role in their company’s management. Instead, they
elect the corporation’s board of directors to represent their interests. Board members
seldom get involved in the day-to-day management of the company. Instead, they
establish the basic mission and goals of the corporation and appoint the chief executive
officer (CEO) and other top corporate officers who actually manage the company. The
board evaluates the performance of these top officers, offers them advice, approves major
policy proposals and ensures that the company’s policies adhere to regulatory
requirements.
Topic: The Role of the Board of Directors
Difficulty Level: Moderate
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 is quite different. In an acquisition occurs
one corporation buys controlling interest in another company. The acquiring firm
remains intact and the firm that is acquired (called the target firm) becomes its
subsidiary. In a merger the two formerly independent companies agree to combine to
form a new corporate entity.
A horizontal merger (or acquisition) occurs when the two firms in the combination are
both in the same market. A vertical merger occurs when the firms in the combination are
at different points in a supply chain, so that one is a supplier (or potential supplier) to the
other.
The examples students cite will depend on what specific mergers that have recently been
in the news at the time of the assignment. At the time this text went to print, one of the
biggest recent examples of a vertical combination was Comcast’s acquisition of
controlling interest in NBC Universal. (Another proposed vertical acquisition that had
just been announced when the text was in final preparation was Google’s acquisition of
Motorola Mobility.) The biggest example of a horizontal combination was AT&T’s
acquisition of T-Mobile. (This acquisition had not yet received final approval from the
FCC when the text went to print, but approval seemed very likely.) There have also been
several mergers among major airlines in recent years. Key examples include the Delta
and Northwest merger and the merger of Continental and United.
BUSPROG: Analytic
Bloom’s: Application
Topic: Corporate Restructuring

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 limited liability companies (LLCs) and S corporations provide all owners with
limited liability and eliminate the problem of double taxation associated with C
corporations. In recent years LLCs have become more popular than S corporations
because they offer more flexibility and fewer restrictions on ownership and operation.
For example, while S corporations are limited to no more than one hundred owners
(stockholders) there is no limit to the number of members who may own a limited liability
company. And while all owners of an S corporation must be U.S. citizens or permanent
U.S. residents, no such restrictions are placed on who may own an LLC.
BUSPROG: Analytic
Bloom’s: Analysis
Topic: Advantages of LLCs
9. What are the main advantages and disadvantages of a business format franchise
arrangements for the franchisee? For the franchisor?
The main advantages of business format franchising for the franchisor it that the
arrangement allows the franchisor to expand the business and bring in additional
revenue (in the form of franchising fees and royalties) without investing more of its own
capital.
The main disadvantage of franchising from the franchisor’s perspective is that
overseeing the actions of hundreds (or even thousands) of semi-independent franchisees
can be challenging and complex. Moreover, if some of the franchisees fail to live up to
their responsibilities, they can damage the reputation (and undermine the value) of the
entire franchise organization. This is known as the negative halo effect.
For franchisees, the main advantages are the right to use a well-known brand name and
obtain the right to sell proven products and use proven business methods. Franchisees
can also benefit from the support and training most franchisors offer. Because of the
proven product and methods and well-known brand name, franchisees also may find
creditors are more willing to loan them funds than other types of small businesses. In
fact, many franchisors offer either direct or indirect financial assistance to their
franchisees.
From the franchisee’s perspective the relatively high costs of initial franchise fee and
ongoing royalty payments to the franchisor can be a major disadvantage. Another
drawback is the fact that franchisees lose a significant degree of freedom and flexibility
to run the business the way they want. In general, franchisees are not allowed to open
new units or sell existing units with the approval of the franchisor. Also, some franchisors
promise more than they deliver in terms of support. Finally, the irresponsible behavior of
other franchisees can create a negative halo effect that can harm the franchisee’s
business.
BUSPROG: Analytic
Bloom’s: Analysis
Topic: Franchising: Proven Methods for a Price
10. What is a Franchise Disclosure Document (FDD) and why is it important?

The Franchise Disclosure Document 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. The FTC requires the franchisor to give the franchisee at least 14
calendar days to review the FDD before the franchise agreement can be signed.
The FTC requires the FDD be written in “plain English,” meaning that it should be free
from legal and technical jargon, so that a typical franchisee can understand it. Even so, it
is advisable to have a lawyer familiar with franchising review the document.
Topic: Entering into a Franchise Agreement
Application Questions
1. Conduct an interview with an individual in your community who is running a business as
a sole proprietorship. Find out how the owner started the business and why he or she
chose the sole proprietorship form of organization. Ask the business owner what advice
he or she would give to you if you were considering going into business. Report back to
your class.
The answer to this question will vary depending on the responses of the business owner.
Many owners are likely to point out that they chose a sole proprietorship because it was
easy and inexpensive to start, gave them the chance to be in complete control (be their
own boss), and that they got to keep all of the after tax profits for themselves. Another
common response is likely to be pride in ownership.
As far as advice, this too will vary depending on the situation. Most sole proprietors are
likely to advise the student to plan carefully, to make sure they are comfortable “going it
alone,” and are prepared to put in very long and stressful hours. Many will also
probably point out the importance of making sure the student has adequate financial
resources to keep the business running until it has time to get established.
BUSPROG: Analytic
Bloom’s: Diversity
Topic: Advantages and Disadvantages of Sole Proprietorships
Difficulty Level: Challenging
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?
Family limited partnerships (also called FLPs or FLIPs) are partnerships designed to
protect a family’s assets and reduce gift and property tax burdens. Like all limited
partnership, a FLIP consists of two types of partners. The parents serve as general
partners, allowing them to maintain complete control over the partnership’s assets. The
children are named limited partners, and legal titles to the family’s assets are transferred
to them. This arrangement allows the parents (as the general partners) to maintain
control over the assets while protecting them from creditors or lawsuits. It also helps the
family minimize inheritance and gift taxes. The IRS has expressed concern about abuse
and has vowed to crack down on misuse of this type of arrangement. But most experts
maintain that, if properly established, FLIPs are perfectly legal.
BUSPROG: Technology
Topic: Limited Partnerships
3. In early 2011 two high-profile acquisitions captured the attention of government

regulators. The first saw cable giant Comcast announce that it would buy a 51% stake in
NBC-Universal. This deal was approved by the Federal Communications Commission,
contingent on certain conditions. The second combination—which hadn’t been approved
at the time the text went to print—involved a proposal by telecommunications giant
AT&T to buy its smaller rival, T-Mobile for $39 billion.
Research the events leading up to these combinations, including the investigation by the
FCC and Justice Department into both proposals. Find out the latest developments in both
cases and answer the following questions:
• Would the Comcast-NBC combination be classified as a horizontal acquisition, a

vertical acquisition or a conglomerate acquisition? Explain. How would AT&T’s
acquisition of T-Mobile be classified? Explain
• What concerns did critics raise about the Comcast-NBC combination? How did the
FCC’s ruling take these criticisms into account?
• On balance, how do you think the Comcast acquisition of NBC Universal will impact
consumers?
• Have the FCC and Justice Department issued their ruling on the AT&T acquisitions
of T-Mobile? If so, what did they decide—and what reasons did it give? If not, what
do you think will happen in this case based on the information you discovered from
your research? Are you in favor of this combination? Why or why not?
The combination of Comcast and NBC Universal is primarily a vertical merger, since it
involves the combination of companies whose primary businesses are at different stages
of the supply chain-- NBC creates content while Comcast distributes it over its cable
network.
The merger proposal attracted opposition from analysts who believed it would give
Comcast too much control over the distribution of content. The FCC’s approval was thus
made contingent on Comcast agreeing to allow competing cable and satellite television
providers access to content from NBC and Universal studios. Comcast also had to agree
to give up its management of HULU, though it was allowed to maintain its financial
investment in this content provider. Comcast must also required to offer content from
NBC Universal to legitimate Internet video providers at a reasonable cost and to
continue offering stand alone broadband Internet service to customers who choose not to
subscribe to its cable service. The idea behind these conditions was to stimulate more
competition for cable giants (like Comcast) by encouraging alternative sources of
programming.
When it announced that it approved the merger the FCC stated that the conditions it
placed on Comcast would protect consumers by providing assurances of continued
competition. In particular, the FCC suggested that these conditions would stimulate the
development of Internet based competition for cable television.
The AT&T acquisition of T-Mobile is a horizontal merger since the two companies
compete in the wireless segment of the telecommunications market. Student answers to
other questions dealing with the AT&T acquisition of T-Mobile questions will depend on
what the FCC and Justice Department rule and what conditions (if any) are placed on
the acquisition if it is approved.
BUSPROG: Reflective Thinking
Bloom’s: Evaluation
Topic: Corporate Restructuring
4. In an effort to give shareholders a greater voice concerning the compensation of top

executives the Dodd-Frank Act of 2010 included a “say on pay” provision. Search the
Internet to find out what actually happened when the stockholders at major corporations
actually voted on compensation. Did the results suggest that there was widespread anger
or frustration among stockholders with the way executives were paid? Explain.
At the time this text was printed the “say on pay” provision had only been in effect for
about a year, so the results are very preliminary. By the time students research this issue
more results will be available, so their findings may vary. However, based on early
returns, the stockholders for the vast majority of corporations appear to be reasonably
satisfied with how the top executives of their companies are compensated. Business Week
magazine reported that through mid June of 2011 only 32 of 1,998 votes on pay had
expressed dissatisfaction with pay. However, it is important to note that there were some
high profile examples of negative votes, including Hewlett-Packard and Stanley Black &
Decker. Also, some commentators suggest that “say on pay” had a greater impact on
than the actual vote count suggests because the very threat of a negative vote (and the
resulting negative publicity) may have caused many boards of directors to reduce or
modify pay packages before presenting them to stockholders and putting the matter to a
vote.
Another interesting development that students might discover as they do their research is
that several disgruntled shareholder groups used “say on pay” vote results as
springboards to justify lawsuits against boards of directors. This was an unexpected
development, since the “say on pay” votes are nonbinding.
BUSPROG: Diversity
Topic: The Role of the Board of Directors
5. Do research on the Internet to learn about the forms and fees involved in forming a
limited liability company in your state. What type of information is required in the
articles of organization? What types of fees and taxes are assessed on LLCs? Compare
the requirements for forming LLCs in your state with requirements for other states in the
same geographic region. Which state in your area has the most LLC-friendly
requirements? [Hint: in many states information about forming LLCs is available through
the Division of Corporations (or Corporation Division), which is under the Secretary of
State’s Office. These sites usually contain access to the specific forms and instructions
for filling them out. A number of other websites also provide information about forming
corporations.]
Student answers will vary depending on the state. There is a significant degree of
variation among states in the complexity of forms and in the fees for setting up LLCs.
However, students in many states may be surprised at how simple the forms are and how
low the fees are in their states.
BUSPROG: Technology
Topic: Forming and Managing an LLC
Team Project
As homework ask your students to research the costs and benefits of becoming a franchisee for a
specific franchise. (Basic information on costs and benefits is usually available at the franchise
websites and also at websites such as Entrepreneur.com and The Franchise Mall
(http://www.thefranchisemall.com). Students should also search the Internet for any recent
articles and reports relevant to the franchise that might impact its future business prospects.
Upon completion of their research, students should come to class prepared to discuss the
following questions:
1. From the student’s perspective, what makes the franchise an attractive opportunity? Has
the franchise been “in the news” for any reason (good or bad) recently?
2. What is the franchise fee for the franchise? What other start up costs would a franchisee
incur? What are the royalties and other ongoing fees franchisees must pay?
3. Does the franchisor offer any help with financing? If so, what type?
4. What types of training and support does the franchisor offer?
Divide the class into small groups of three to five students. Give the groups 10-15 minutes to
describe and compare the franchises their members researched. The goal of the discussion is to
select the franchise the group views as the best investment opportunity. Each group should
provide a brief oral report to the class identifying the franchise it chose and explaining why that
franchise was selected.
Case Connection
Responding to an Electrifying Business Opportunity
You’ve known Eric since third grade. You remained friends through high school and were
roommates your freshman and sophomore years in college. But he majored in physics and you
majored in finance, so later in your college careers you were usually heading to different classes
and had different interests.
Eric is one smartest, most creative people you’ve ever met. After graduating—he did so with
highest honors—he went to grad school to work on his Ph.D. in physics at a top-notch university.
The two of you lost touch for a few years, though you did hear from a mutual acquaintance that
Eric had created quite a name for himself en route to his Ph.D., which he earned a couple of
years ago. Meanwhile, you took a job at a major corporation after graduation and have steadily
moved up the corporate ladder.
It was a nice surprise last week when you answered your phone and heard his voice. After a few
minutes of pleasant chitchat Eric got down to his real reason for calling. He explained that while
doing research for his doctoral dissertation he stumbled on an idea for a new type of battery
technology. After graduating he continued working on the new technology and recently applied
for a patent for a new type of battery based on this technology. You heard the excitement in his
voice when he told you that his new battery could easily double the range of electric cars and
(even better) be completely recharged in about 5 minutes using an ordinary electrical outlet. Eric
also told you that once the kinks are worked out of the production process, his batteries were
likely to be easier and less expensive to produce than current batteries. In short, his battery could
revolutionize the electric automobile industry, and make Eric a multimillionaire in the process.
Eric then told you that he wants to start his own company to exploit his new technology. He
called you because he needs some advice. He doesn’t have a business background and knows
very little about the process of starting and financing a startup company. He asked if you would
help him decide the best way to structure his new company. He also hinted that he would like to
have you invest in the company. You told him you’d do a little research (and a little thinking)
and get back to him in a few days.
After the phone call you did some Internet research on battery technology and electric cars. You
weren’t able to follow all the technical details, but discovered several articles in reputable
journals that mentioned Eric’s breakthrough. Based on what you gathered from these articles,
Eric was being honest when he told you his technology had real promise. However, you also
found several other articles about competing technologies, and noted that some of them also
appeared quite promising. A couple of articles pointed out that the battery technology that gets to
the market first has the best chance to dominate the market—if it can live up to its hype.
After you completed your research you took some time to reflect on Eric’s request. You know
Eric is extremely smart, hard working and honest. He’s a long-time friend and it would be
exciting to work with him on a project that could revolutionize the automobile industry—and
also help the environment. But it is clear that the company will face a lot of competition from
other startups. The new company will need to be set up quickly and raise a significant amount of
money to get the battery to market ahead of the competition. The potential payoff is huge, but so
are the risks.
You Decide:
• What are the key challenges Eric faces?
Eric has little experience or knowledge about what it takes to start and manage a
business, so he will need significant help. His technology appears promising, but it is
unproven and he’s likely to face substantial competition from alternative approaches, so
there is a lot of risk. He needs a substantial amount of money, but given these risks it is
unlikely that traditional lenders would be willing to make loans. Finally, he needs to
move fast to get to the product developed before competitors corner the market. The form
of ownership Eric chooses could have a substantial impact on how successfully he can
meet these challenges.
BUSPROG: Analytic
Bloom’s: Analysis
• Given the challenges, prepare a short report for Eric listing at least 3 forms of ownership
that might be worth considering. Provide a brief summary of the advantages and
disadvantages of each option.
Note: the exact requirements for many of the forms of ownership discussed below vary
considerably among the states, as do fees, taxes, regulations and other considerations.
The discussion that follows is couched in general terms, but students may take into
account the specifics of each form in their own state.
Students could recommend a number of options, but a sole proprietorship shouldn’t be
one of them! Sole proprietorships face too many limitations in raising funds, and given
the amount of risk involved the idea of unlimited liability is also unattractive. Given his
lack of business expertise Eric probably needs to bring in at least one or two additional
owners who can help manage the company.
Several other forms of ownership are more promising. Eric could set up a limited
partnership with himself as a general partner (which would give him the right to manage
the company) and with limited partners to supply additional financial capital. The limited
partners could share in the company’s profits but could not take an active role in
management. Given Eric’s limited business knowledge he might want to include one or
more additional general partners to help him run the company. But Eric and any other
general partners would face the risks associated with unlimited liability. (Of course,
some types of risk can be mitigated by purchasing insurance.)
Another approach might be to set up a limited liability partnership. This would give all of
the partners both the right to participate in management and the protection of limited
liability. However, in some states (including California and New York) only professionals
such as lawyers, accountants and architects can form LLPs. So in these states Eric would
not be able to set up his business as an LLP. In addition, the amount of limited liability
protection offered by LLPs varies among states. In several states LLPs offer only “partial
shield” protection. In these states each partner is protected from liability caused by the
malpractice or negligence of other partners, but has unlimited liability for other claims.
Another possibility would be to incorporate the business. This would provide all owners
(including Eric) with the protection of limited liability. It would also be a good choice if
Eric thinks he might want to take the company public sometime in the future. However,
corporations can be more complex to set up than other forms of business and are subject
to more regulations and formal operating requirements. Also, tax returns tend to be more
complex, and earnings paid to stockholders would be subject to double taxation (though
thoughtful students might point out that this wouldn’t be a problem if the earnings were
reinvested to finance growth). One way to avoid the double taxation issue would be to
form an S corporation which allows the corporation to be taxed as a partnership. But
establishing an S corporation would limit the number of stockholders and restrict
ownership to individual American citizens. (This may not be a problem for Eric
depending on how much financial capital he wants to raise, but he needs to be aware of
these limitations since they might affect future growth opportunities.)
Perhaps the best solution would be to form an LLC. While setting up an LLC involves
paperwork and fees similar to that of a corporation, once the LLC is formed it is subject
to fewer regulations, restrictions and operating requirement and offers more flexibility in
tax treatment than a corporation. It also provides all owners with the protection of
limited liability. However, if Eric eventually plans to “go public” to attract a wider range
of investors, he would find the corporate form of business more practical.
BUSPROG: Analytic
• Assume that Eric is impressed by your recommendations and formally offers you an
opportunity to join his new company as part of the ownership and management team.
You’ve been earning a nice salary for the past few years and have managed to
accumulate an impressive portfolio of financial investments. You could invest a
significant amount of money in Eric’s company, but only if you sold off many of these
assets. Would you be willing to do this? Would you be willing to quit your job and accept
Eric’s offer to become an owner/manager of the new company? Explain, citing the key
factors that guided your decision.
There is no right or wrong answer to this question; it is simply designed to get students
thinking about the different roles they could play in forming a new business and the
consequences of their decisions. Most student answers would probably fall into one of
three basic categories:
1. Thanks but no thanks. Investing in a new company is just too risky. Because of
our friendship and my desire to see you succeed, I’ll provide you with advice on
the best form of ownership and suggestions on the best ways to raise financial
capital, but I don’t want to risk any of my financial capital or my position with my
current company.
2. I’ll invest financially in the company in exchange for a stake in ownership.
However, I’ve already got a full time job and benefits that I don’t want to give up,
and have neither the time nor the energy to actively manage the company.
3. This is an exciting and worthwhile project that has the potential to help the
environment—to say nothing of the fact that it offers the potential of a huge
financial payoff if it is successful. I realize there are big risks, but I not only want
to invest my money, I also want to play an active role in managing the company.
If my money is at risk, I want to have a say in how it is spent! I’m ALL IN!
BUSPROG: Reflective Thinking

Sources: “Learn About Business Ownership Structures,” NOLO website:

http://www.nolo.com/legal-encyclopedia/learn-about-business-ownership-structures-29785.html;
“Choosing the Best Ownership Structure for Your Business,” NOLO website:
http://www.nolo.com/legal-encyclopedia/business-ownership-structure-choose-best-29618.html;
“Which Partnership Type Is Right for Me?” Bizfilings.com website:
http://www.bizfilings.com/learn/business-partnerships.aspx; “Limited Liability Partnership vs.
Limited Partnership,” by Dana Griffin, Houston Chronicle website:
http://smallbusiness.chron.com/limited-liability-partnership-vs-limited-partnership-3733.html;
“Inc. vs.LLC: Which Legal Structure Suits Your Business?” by Jenny C. McCune, Bankrate.com
website: http://www.bankrate.com/brm/news/biz/biz_ops/20000831.asp; “Sole Proprietorship
vs. C Corporation vs. S Corporation vs. LLC,” Money Alert website:
http://www.themoneyalert.com/Corp-Entity-Table.html

BUSN 6 6th Edition Kelly Solutions Manual 1

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BUSN 6 6th Edition Kelly Solutions Manual 1

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Test bank: https://testbankpack.com/p/test-bank-for-busn-6-6th-

Solution Manual: https://testbankpack.com/p/solution-manual-

Learning Objective: 6-2

Compared to sole proprietorships and general partnerships, corporations generally have

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

6. Describe the relationship between a corporation’s common stockholders, its board of

Difficulty Level: Moderate

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

3. In early 2011 two high-profile acquisitions captured the attention of government

• Would the Comcast-NBC combination be classified as a horizontal acquisition, a

4. In an effort to give shareholders a greater voice concerning the compensation of top

Responding to an Electrifying Business Opportunity

BUSPROG: Reflective Thinking

Sources: “Learn About Business Ownership Structures,” NOLO website:

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