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.
Sole Proprietorship – the business is owned by a single individual
Partnership – two or more people serve as co-owners of the business
Corporation – the business is a separate legal entity
Limited Liability Company – a hybrid with characteristics of both a corporation and partnership
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 …show more content…

8. 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. 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) - when the two firms in the combination are both in the same market. A vertical merger- 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. A vertical combination was Comcast’s acquisition of controlling interest in NBC Universal. The biggest example of a horizontal combination was AT&T’s acquisition of T-Mobile
9. Compare an S corporation with a limited liability company. Why do you think limited liability companies are currently more popular than S corporations?
Both provide all owners with limited liability and eliminate the problem of double taxation associated with C corporations. LLCs have become more popular