BUS101 Study Guide

Unit 2: Entrepreneurship and Legal Forms of Business

2a. Describe the following legal forms of businesses: sole proprietorships, partnerships, corporations, and limited-liability corporations

A. When an entrepreneur decides to create a business, they must decide on the appropriate legal form. Many options are available and each legal form its own advantages and disadvantages.

  • Define sole proprietorshippartnershipcorporation, and limited liability corporation (LLC).
  • List the advantages and disadvantages of each type of business.

Review the advantages and disadvantages of these four legal forms of business in "Forms of Ownership" on page 155 of Introduction to Business.

B. While most businesses maintain the same form and organization throughout their existence, some businesses change their legal form of ownership (such as, from sole proprietor to corporation) or merge with, or acquire, other businesses.

  • What is the difference between merging with and acquiring another business (i.e., a merger vs. an acquisition)?

Review Mergers and Acquisitions.


2b. Evaluate the appropriateness of the different legal forms of business for various business contexts

A. In addition to the four major forms of business ownership, the U.S. Internal Revenue Service has designated some additional types of businesses, such as limited liability companies (LLC), S-corporations, and nonprofit organizations.

  • Define and explain the differences among a limited liability company (LLC), S-corporation, and nonprofit organization.
  • What is the advantage of owning a limited liability company LLC versus a sole proprietorship?

Review limited liability company (LLC) in Other Types of Business Ownership.

B. Let's explore some different scenarios that apply to the four different forms of business ownership. Two differences pertain to the amount of control the owner has over the business and their amount of personal liability.

  • Which form of business ownership gives owners the most protection for their personal property?
  • Which form of business ownership gives owners complete control over all operations?

Review "Forms of Ownership" on page 155 of Introduction to Business and  Selecting a Form of Business Ownership.


2c. Identify and describe the function of the major components of a business plan

A. Once an entrepreneur has chosen an appropriate legal form for their new business, they typically create a business plan to help them choose the best structure and organization.

  • Identify the purpose and function of each section of a typical business plan:
    • executive summary;
    • description of the proposed business;
    • industry analysis;
    • mission statement and core values;
    • management plan;
    • goods, services, and the production process;
    • marketing;
    • global issues;
    • financial plan; and
    • possible appendices.

B. While the business plan is an excellent tool for internal planning, business owners can also use it to communicate with external stakeholders, such as a potential investor who may review the plan to see if the owner has put enough thought into all aspects of the business.

  • What section of the business plan is most important to a loan officer for a bank?
  • What section of the business plan is most important to a potential investor?

Review the purpose of the different components of a business plan components in The Business Plan.


2d. Analyze the potential of a business to be profitable, when considering: legal form of business, tax rates, and break-even analysis

A. Unless it has an outside funding agency, most businesses must make a profit to survive. They need to generate enough revenue to cover their expenses. A business manager needs to calculate how much product they need to sell to cover their expenses or conduct a break-even analysis.

  • Define net profit.
  • Define fixed and variable costs.
  • Define break-even point.
  • What is the formula business managers use to conduct a break-even analysis?
  • How does a break-even analysis account for fixed and variable costs?

Review break-even points for investments on page 167 of Introduction to Business. Review the break-even point for profits and losses in Breakeven Analysis.

B. Taxes, collected by local, state, and federal government entities, benefit society in ways we often fail to recognize and frequently take for granted. For example, businesses benefit from government spending when the highways, rail systems, and seaports they build allow companies to get the goods they manufacture to their customers. Local governments are responsible for creating an education system that will educate their future employees. Customers are more likely to buy products they know have been inspected for quality.

For many companies, taxes are simply a cost for doing business. However, taxes can be expensive and controversial when business owners feel their tax dollars are not being spent efficiently.

  • How does the tax rate affect business operations?
  • How does the tax rate affect business profitability?
  • How does the tax rate impact the cost of products?

Review the role of taxes and business profitability in The Economics of Tax Reform: Lessons from the Donut Shop.


2e. Analyze the impact of small business on the economy

A. As we learned in Unit 1, business managers use various economic indicators to predict future economic growth. For example, small businesses play a vital role in the unemployment rate since they employ so many workers.

  • How do small businesses impact the economy?
  • How do small businesses impact consumers?
  • How do small businesses affect business and product innovation?
  • How do small businesses provide opportunities for women and minorities?

Review this material in The Importance of Small Business to the U.S. Economy.

B. Franchises offer business managers the opportunity to create a small business without having to incur as much risk as they might have to do when creating a business that is unsupported by an outside corporate entity.

  • Name some advantages and disadvantages of owning and operating a franchise business?

Review franchising in "Getting a Franchise" in Starting a Business.


Unit 2 Vocabulary

Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.

  • Acquisition
  • Break-even analysis
  • Break-even point
  • Business plan
  • Corporation
  • Cost of products
  • Executive summary
  • Financial plan
  • Financial projections
  • Fixed costs
  • Franchising
  • Industry analysis
  • Innovation
  • Investor
  • Liabilities
  • Limited Liability Company (LLC)
  • Limited Partnership
  • Loan officer
  • Management plan
  • Market analysis
  • Marketing
  • Merger
  • Mission statement
  • Net profit
  • Non-profit organization
  • Partnership
  • Pass-through taxation
  • Profitability
  • S-Corporation
  • Small business
  • Sole proprietorship
  • Tax rates
  • Variable costs