Deck 13: Choosing the Legal Form of Organization

Question 1

Sole proprietorships, partnerships, S-corporations, and limited liability companies (LLCs) all permit pass-through earnings and losses, but S-corporations and LLCs offer more protection from liability.

Answer 1

True

Question 2

Having a strategic plan in place for a venture enables the entrepreneur to choose a legal form that won't have to be changed or one that can easily be shifted to when the time is right.

Answer 2

True

Question 3

To settle issues between the remaining partners in the event of the death of a partner, the partnership should have a _____ agreement in place.

A) buy-sell
B) silent partnership
C) secret partnership
D) dormant partnership
E) dissolution

Answer 3

A

Question 4

A study done by the Small Business Administration (SBA) Office of Advocacy in 2011 found that _____ firms changed their legal form in the first four years of their existence.

A) 2 out of 5
B) nearly 35 percent of
C) more than 50 percent of
D) fewer than 1 in 10
E) more than 25 percent of

Question 5

All businesses operate under one of four broad legal structures.

Question 6

Only about 5 percent of all U.S. businesses are _____, but they account for approximately 62 percent of all business receipts.

A) partnerships
B) limited liability companies (LLCs)
C) corporations
D) sole proprietorships
E) N one of these are correct.

Question 7

Which of the following is an advantage of a sole proprietorship?

A) Sole proprietors are attractive candidates for investor capital.
B) The sole proprietor has limited liability for all claims against the business.
C) Capital can be raised through the sale of stock up to the amount authorized in the corporate charter.
D) The income from the business is taxed only once at the owner's personal income tax rate.
E) It is easier for sole proprietors to raise debt capital.

Question 8

_____ partners typically provide capital but do not actively participate in the management of a business.

A) Secret
B) Silent
C) Dormant
D) Limited
E) General

Question 9

Limited liability companies (LLCs) do not permit foreign ownership by nonlegal residents.

Question 10

The law mandates a partnership to draw up a written partnership agreement, based on the Uniform Partnership Act, which spells out business responsibilities, profit sharing, and transfer of interest.

Question 11

A(n) _____ is chartered in a state other than in the one in which it will do business.

A) closely held  corporation
B) sole proprietorship
C) foreign  corporation
D) S- corporation
E) C- corporation

Question 12

Common stockholders are entitled to vote at stockholders' meetings.

Question 13

In a(n) _____, all partners assume unlimited personal liability and responsibility for management of the business.

A) limited partnership
B) general partnership
C) S-corporation
D) sole proprietorship
E) limited liability company (LLC)

Question 14

To operate as a sole proprietor requires very little-only a DBA (doing business as), and not even that if you use your own name as the name for the business.

Question 15

_____ pay taxes on profits they earn,  and their shareholders pay taxes on dividends they receive, resulting in double taxation.

A) S-corporations
B) C-corporations
C) Limited liability companies (LLCs)
D) Foreign corporations
E) B-corporations

Question 16

As per the doctrine of _____, if one partner signs a contract with a supplier in the name of the partnership, the other partners are also bound by the terms of the contract.

A) l imited partnership
B) general partnership
C) ostensible authority
D) s ole proprietorship
E) l imited liability

Question 17

If a nonprofit corporation meets the Internal Revenue Service (IRS) test for tax-exempt status, it is not allowed to make profits.

Question 18

In terms of its treatment of income, expenses, and taxes, a general partnership is essentially a sole proprietorship consisting of more than one person so each partner pays taxes and receives income based on their proportionate interest in the partnership.

Question 19

In forming a(n) _____, the entrepreneur gives up proprietary interest in the corporation and dedicates all the assets and resources of the corporation to tax-exempt activities.

A) B-corporation
B) l imited liability company (LLC)
C) C-corporation
D) S-corporation
E) nonprofit corporation

Question 20

A high-growth venture cannot be started as a sole proprietorship.

Question 21

By creating a corporation and issuing stock, an entrepreneur gives up a measure of control to

A) creditors.
B) the  government.
C) its members.
D) a  board of directors.
E) the  Securities and Exchange Commission (SEC).

Question 22

Often small businesses such as restaurants, boutiques, and consulting firms are run as

A) sole proprietorships.
B) silent partnerships.
C) general partnerships.
D) B-corporations.
E) limited liability companies (LLCs).

Question 23

Under the Internal Revenue Code, a limited liability company (LLC) exhibits all four characteristics of a corporation. Which of the following is NOT one of the four characteristics?

A) Limited liability
B) Tax-exempt status
C) Continuity of life
D) Free transferability of interests
E) Centralized management

Question 24

Which of the following is NOT an advantage of a sole proprietorship?

A) It is easy and inexpensive to create.
B) It gives the owner 100 percent of the company and 100 percent of the profits and responsibility for the losses.
C) The income from the business is taxed at a rate lower than the owner's personal income tax rate.
D) The owner has complete authority to make decisions about the direction of the business.
E) There are no major reporting requirements such as those imposed on corporations.

Question 25

To help mitigate the risk of lawsuits, a sole proprietor should

A) sign a doctrine of ostensible authority.
B) sign a buy-sell agreement.
C) draw up a corporate charter.
D) obtain business liability insurance.
E) file articles of organization.

Question 26

A corporation that is created by filing a certificate of incorporation with the state in which the company will do business and by issuing stock is a(n) _____ corporation.

A) foreign
B) domestic
C) open
D) alien
E) closely held

Question 27

Each business partner owns and has use of the property acquired by the partnership, unless otherwise stated in

A) the corporate charter.
B) the partnership agreement.
C) the commercial code.
D) proprietary bylaws.
E) the certificate of incorporation.

Question 28

The U.S. Supreme Court has defined the _____ "as an artificial being, invisible, intangible, and existing only in contemplation of the law."

A) corporation
B) sole proprietorship
C) partnership
D) joint venture
E) limited liability company (LLC)

Question 29

Which of the following is NOT an example of a nonprofit corporation?

A) A church
B) A novelty shop
C) A community health care facility
D) A soup kitchen
E) A homeless  shelter

Question 30

When two or more people agree to share the assets, liabilities, and profits of a business, the legal structure is termed a

A) sole proprietorship.
B) corporation.
C) partnership.
D) limited liability company (LLC).
E) N one of these are correct.

Question 31

Which of the following is an advantage of a nonprofit corporation?

A) Profits earned by the nonprofit corporation can be distributed as dividends.
B) A nonprofit can apply for grants from government agencies and private foundations.
C) Corporate money can be contributed to political campaigns or used to engage in lobbying.
D) A nonprofit does not have to pay taxes on the profits it makes from unrelated activities.
E) The nonprofit form is suitable for ventures that need to access the capital markets, either public or private.

Question 32

Which of the following statements about the B-corporation is true?

A) A B-corporation is a corporation established for charitable, public, or religious purposes, or for mutual benefit, as recognized by federal and state laws.
B) The B-corporation is known as a benefit corporation, a nonprofit entity with a social mission.
C) B-corporations are not allowed to make a profit.
D) The B-corporation legal form is recognized in all 50 U.S. states.
E) None of these are correct.

Question 33

A DBA (doing business as) certificate is sometimes referred to as a(n)

A) "doctrine of ostensible authority."
B) "fictitious business name statement."
C) "buy-sell agreement."
D) "fictitious entity certificate."
E) "employer identification number."

Question 34

Traditionally, professionals such as lawyers, doctors, and accountants frequently employed the legal structure of a(n) _____, but more and more have gone to the _____ structure.

A) sole proprietorship; partnership
B) S-corporation; C-corporation
C) partnership; limited liability company (LLC)
D) C-corporation; S-corporation
E) limited liability company (LLC); partnership

Question 35

In a(n) _____, the corporate stock is owned privately by a few individuals and is not traded publicly on a securities exchange.

A) general  partnership
B) sole proprietorship
C) closely held corporation
D) open corporation
E) limited partnership

Question 36

If a nonprofit corporation is ever dissolved, its assets must be

A) divided among the owners.
B) auctioned to the general public.
C) distributed  to another tax-exempt organization.
D) divided among the shareholders.
E) consigned to the government.

Question 37

The _____ is the most commonly chosen legal structure for a growing company that seeks outside capital in the form of equity or debt.

A) C-corporation
B) S-corporation
C) B-corporation
D) limited liability company (LLC)
E) nonprofit corporation

Question 38

Income derived from for-profit activities in a nonprofit corporation is subject to

A) withholding.
B) distribution.
C) income tax.
D) reinvestment.
E) dividend payment.

Question 39

Which of the following is NOT a key rule for election of the S-corporation option?

A) The S-corporation may have no more than 100 shareholders.
B) Shareholders must be U.S. citizens or residents.
C) Profits and losses must be allocated in proportion to each shareholder's interest.
D) Both active and passive S-corporation shareholders are subject to payroll tax.
E) A shareholder may not deduct losses in an amount greater than the original investment.

Question 40

Which of the following is an advantage of C-corporations?

A) C-corporations are subject to less governmental regulation than partnerships.
B) Shareholders of C-corporations receive the pass-through benefit of losses.
C) Capital can be raised through the sale of stock up to the amount authorized in the corporate charter.
D) C-corporations avoid the double taxation found in the S-corporation structure.
E) C-corporations cannot be sued without the signature of the owners.

Question 41

What are the disadvantages of a nonprofit corporation?

Question 42

What are the disadvantages of a limited liability company (LLC)?

Question 43

What are the disadvantages of a sole proprietorship?

Question 44

What are the advantages of a C-corporation?

Question 45

Describe the two types of partnerships.

Question 46

What are the added advantages of a partnership over a sole proprietorship?

Question 47

What issues do the three primary clauses in a buy-sell agreement govern?

Question 48

What questions should an entrepreneur ask him- or herself when deciding what type of legal form to choose for his or her venture?

Question 49

What are the two hurdles an entrepreneur must overcome to operate as a nonprofit corporation and enjoy tax-exempt status?

Question 50

What are the advantages of a sole proprietorship?