Deck 6: Business Formation: Choosing the Form That Fits

Question 1

Susan has recently graduated from a reputed business school with a degree in financial management. She wants to join an organization that offers excellent pay and benefits as well as opportunities for growth. In this scenario, Susan is likely to look for employment in an organization that is a sole proprietorship.

Answer 1

False

Question 2

The first step in forming a sole proprietorship is filing out the appropriate paperwork and paying the necessary filing fees with the secretary of state in the state where the business will operate.

Answer 2

False

Question 3

Owners of sole proprietorships are personally responsible for any debts incurred by their business.

Answer 3

True

Question 4

General partnership is the dominant form of business ownership, with the vast majority of large business organizations using this form of ownership.

Question 5

The vast majority of LLCs elect to be taxed as corporations.

Question 6

Most sole proprietorships are small businesses with net incomes that lag far behind those of partnerships and corporations.

Question 7

A corporation is a voluntary agreement under which two or more people act as co­owners of a business for profit.

Question 8

A corporation is the most common type of business organization in the United States.

Question 9

The owner of a sole proprietorship must share any after­tax profits with the company's shareholders.

Question 10

Once the form of ownership for a business is chosen by entrepreneurs it is not possible to convert it to another form.

Question 11

A sole proprietorship is subject to double taxation in that any earnings are taxed both as income to the business and as income to the owner of the business.

Question 12

Rennie Hanks has a great idea for a new business­one he is sure will make a ton of money. He is eager to get started, so he wants to form his business with a minimum of hassle, expense, and red tape. He also wants to be his own boss and have complete control over the company. Rennie's goals suggest that he would seriously consider operating his business as a sole proprietorship.

Question 13

As business entities, corporations may engage in virtually any business activity that a natural person can engage in, including buying and selling property and entering into binding contracts.

Question 14

One benefit of a limited liability company is that it offers more flexibility than a corporation in terms of tax treatment; Its owners can elect to have their business taxed either as a corporation or a partnership.

Question 15

Choice of ownership determines the degree to which each owner has personal liability for the firm's debts and the sources of funds available to the firm to finance future expansion.

Question 16

Ralph Flores owns and operates his own business as a sole proprietor. Recently his company was sued. The fact that Ralph's business is a sole proprietorship means that Ralph is personally protected against any financial loss if the company loses the lawsuit.

Question 17

In terms of total net income, sole proprietorships are the largest forms of business ownership.

Question 18

In terms of total number of businesses by form of ownership, corporations are more common than sole proprietorships.

Question 19

One advantage of a general partnership is that partners maintain limited liability for any debts the company incurs.

Question 20

Sole proprietorships generally have a distinct advantage over other forms of business ownership when it comes to raising large sums of financial resources.

Question 21

Owners of corporations are known as stockholders.

Question 22

In C corporations, the board of directors take an active role in the day­to­day management of the company.

Question 23

Corporations can operate under a corporate charter for no more than 100 years, after which the corporation must be dissolved.

Question 24

Limited partnerships and limited liability partnerships are just two names for exactly the same type of business organization.

Question 25

A general partnership is a voluntary partnership in which all partners can take an active role in managing the business and have unlimited liability for any claims against the firm.

Question 26

A limited partnership is an agreement between two or more individuals to operate a business as co­owners for a limited period of time.

Question 27

A limited partnership allows one partner to contribute financially to a company without having to participate in the daily management.

Question 28

A major advantage of limited liability partnerships (LLP) is that they offer all partners "full­shield" protection in every state.

Question 29

Examples of institutional investors are mutual funds, insurance companies, and pension funds.

Question 30

A general partnership cannot be formed on the basis of a verbal agreement.

Question 31

Bailey is a limited partner in his company. A general partner in his company is going on an extended vacation and has asked Bailey to run the company while he is gone. If Bailey agrees to do so, he will no longer qualify as a limited partner.

Question 32

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Question 33

In a limited liability partnership there is no need to distinguish between limited or general partners, because all partners take an active role in management.

Question 34

Corporate bylaws are the basic rules governing how a corporation is organized and how it conducts its business.

Question 35

Stockholders in a corporation are always individuals.

Question 36

When a general partnership is sued, the lawsuits often go after the more wealthy partners.

Question 37

A partner who withdraws from a general partnership does not remain liable for any debts the firm has at the time of the withdrawal.

Question 38

It is possible to establish a corporation by a simple verbal agreement.

Question 39

There is no limit on the number of partners who can participate in a general partnership.

Question 40

Annie owns 100 shares of stock in the Samson Electricals Corporation, but as a stockholder she does not have the right to vote in stockholders' meetings. Annie owns common stock.

Question 41

S corporations and closed corporations' earnings are exempt from federal and state income taxes based on a commitment to reinvest in local communities.

Question 42

One advantage of a general corporation is that it is easy and inexpensive to form.

Question 43

Ria owns 500 shares of stock in the Omnibux Corporation. She is pleased to learn that the company earned a very nice profit over the most recent operating period. The company has announced that it will pay each shareholder a dividend of $1 per share out of its after­tax profits. Because Omnibux has already paid taxes on this profit, this payment will represent tax­free income for Ria.

Question 44

Melodies Heal, a nonprofit corporation based on the East Coast, must pay federal and state income tax on its earnings due to the fact that it hires musicians to perform at senior care facilities.

Question 45

Corporations are more closely regulated than other forms of business ownership; they are required to file more paperwork than other forms of business.

Question 46

A corporation must register as a foreign corporation if they wish to solicit sales through the mail in a state other than where their corporate home is located.

Question 47

The earnings of S corporations and closed corporations are not exempt from federal and state income taxes.

Question 48

Unlike general corporations, nonprofit corporations have no stockholders and pay no dividends.

Question 49

One drawback of an S corporation is that its earnings are taxed by the IRS, which also taxes the dividends it pays to its stockholders. This results in the double taxation of an S corporation's earnings.

Question 50

S corporations cannot have more than 100 stockholders.

Question 51

In order to qualify as an S corporation, a firm must meet several criteria, including limits on the number and type of stockholders.

Question 52

Nash Games Inc. is incorporated in Illinois but also does business in Missouri. Nash would be classified as a domestic corporation in Illinois and as a foreign corporation in Missouri.

Question 53

Individuals who contribute money or property to a nonprofit organization can take a tax deduction, making it easier for these organizations to raise funds from donations.

Question 54

Mergers and acquisitions basically mean the same thing; the only difference is the size of the companies involved.

Question 55

The earnings of a nonprofit corporation are exempt from federal and state income tax.

Question 56

Large, publicly traded corporations are required to file detailed quarterly and annual reports with the Securities and Exchange Commission.

Question 57

A closed corporation is also known as a not­for­profit corporation.

Question 58

Michael owns stock in an S corporation based in the U.S. He has told his friend Juan about the company, and now Juan wants to invest in the company. Juan is a Mexican citizen who lives in northern Mexico. In this scenario, Juan will be allowed to own stock in the company.

Question 59

Unlike C corporations, members of S corporations have unlimited liability.

Question 60

States cannot impose separate income taxes on C corporations because the dividends paid to stockholders are taxed as personal income.

Question 61

One reason given to justify a conglomerate merger is the desire to diversify into new markets, thus reducing the risk associated with adverse conditions in any single market.

Question 62

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Question 63

Owners of limited liability companies are known as stockholders.

Question 64

Compared to a general corporation, the LLC offers simplicity of management and operations and the tax pass­through, which eliminates the problem of double taxation.

Question 65

SkyFloat and Air Pockets are two mid­sized regional airlines that serve the same territory. If these two airlines merged, the result would be a horizontal merger.

Question 66

After an acquisition, the target firm ceases to exist as an independent entity while the acquiring firm continues to operate.

Question 67

A spin­off not only allows a corporation to eliminate a division that no longer fits in its plans but also generates additional funds for the firm.

Question 68

The formation of an LLC requires filing the articles of organization and paying filing fees in the state where the business is organized.

Question 69

If Brandon Autos Inc., an auto manufacturer and assembler of exclusively hybrid vehicles, merges with a seat belt manufacturer, Brandon will significantly increase its market share.

Question 70

A vertical merger is a combination of firms at different stages in the production of a good or service.

Question 71

Some states do not permit certain types of businesses, such as banks, insurance companies, and nonprofit organizations to operate as LLCs.

Question 72

LLCs must register or qualify to operate as "foreign" companies when they do business in states other than the state in which they were organized.

Question 73

A horizontal merger is a merger of two firms that are in the same industry.

Question 74

A key goal of horizontal mergers is to achieve tighter integration of production and increased control over supply of crucial inputs.

Question 75

Even though they may be exempt from corporate income taxes, many states require LLCs to pay an annual franchise tax.

Question 76

LLCs are as easy to form as a partnership or sole proprietorship.

Question 77

The owner of a single­person LLC can avoid paying self­employment taxes by electing to have the LLC treated as a corporation.

Question 78

In an acquisition, the firm that makes the purchase is called the target firm.

Question 79

A conglomerate merger is a combination of firms that are at different stages in the production of a good or service.

Question 80

One advantage of forming an LLC is that, unlike a corporation, an LLC does not require the owners to file any special paperwork or pay any fees.