Chapter 4 Review Questions: 1. Describe the three types of mergers. 2. What is a sole proprietorship? (b) What are the major advantages and disadvantages of this form of business ownership? 3. Define each term: (a) Domestic corporation (b) Foreign corporation (c) Alien corporation. 4. What issues should be included in a partnership agreement? Why? 5. Explain the difference between an open corporation and a closed corporation. 6. What are the major advantages and disadvantages associated with the corporate form of business ownership?

Answer

1. The three main types of mergers are: Horizontal Mergers (between firms producing the same kind of product in the same market), Vertical Mergers (between firms at different stages of the manufacturing or marketing process), and Conglomerate Mergers (between firms in entirely unrelated industries to diversify business). 2. A sole proprietorship is a business owned and operated by a single individual. (b) Advantages: Easy start-up/closure, retention of all profits, and full control over decisions. Disadvantages: Unlimited liability (the owner is personally responsible for all debts), limited access to capital, and lack of continuity if the owner dies or is unable to work. 3. (a) Domestic corporation: A corporation doing business in the state where it was incorporated. (b) Foreign corporation: A corporation doing business in a state other than where it was incorporated. (c) Alien corporation: A corporation formed in another country but doing business in the United States. 4. A partnership agreement should include the name of the business, duties of each partner, investment amounts, how profits/losses are shared, and procedures for adding or removing partners. It is necessary to prevent future conflicts and clarify legal/financial responsibilities. 5. An open (or public) corporation is one whose stock can be bought and sold by any individual on an exchange. A closed (or private) corporation is one whose stock is owned by relatively few people and is not traded on public markets. 6. Corporate owners enjoy limited liability (only losing what they invested) and the ability to raise large amounts of capital by selling stock. However, corporations face double taxation (once on corporate profits and once on dividends) and are subject to heavy government regulation and documentation requirements.