Deck 5: Business Formation: Choosing the Form That Fits

Question 1

There are attractive advantages and no significant drawbacks to starting a sole proprietorship.

Answer 1

False

Question 2

Henry Hanks has a great idea for a new business-one he is sure will make a ton of money. He's 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. Henry's goals suggest that he should seriously consider operating his business as a sole proprietorship.

Answer 2

True

Question 3

The owners of a corporation have limited liability.

Answer 3

True

Question 4

In terms of total revenue by form of ownership, the sole proprietorship is the largest form of business ownership; partnerships follow, with corporations being the smallest form.

Question 5

The first step in forming a sole proprietorship is filing the appropriate paperwork and paying the necessary filing fees.

Question 6

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 7

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

Question 8

A sole proprietorship is a business that is owned, and usually managed, by a single individual.

Question 9

As far as the law is concerned, a sole proprietorship is a legal separate entity.

Question 10

If the owner of a sole proprietorship dies, the company legally ceases to exist.

Question 11

In a general partnership, all owners have unlimited liability for the debts and obligations of their firm.

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

A limited partnership is a partnership that includes at least one general partner and one limited partner.

Question 17

Suzie Xu just graduated with honours from a leading university with a degree in financial management. She wants (and expects) to get a job with excellent pay and benefits, as well as the opportunity for growth and advancement. Suzie is likely to be very interested in working for a company that is organized as a sole proprietorship.

Question 18

The 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 19

A disadvantage of a sole proprietorship is that it is relatively expensive and complex to form.

Question 20

Most sole proprietorships are unable to attract and maintain talented employees.

Question 21

Most shareholders in large corporations take an active role in managing their companies.

Question 22

Owners of corporations are known as shareholders.

Question 23

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

Question 24

Limited liability partnerships (LLP) are generally available only to professional groups, such as accountants, architects, doctors, and lawyers.

Question 25

Corporations that operate in two provinces must incorporate under federal incorporation.

Question 26

Families may be able to protect their personal assets from lawsuits and creditors by forming limited partnerships, with the parents as general partners and the children as limited partners.

Question 27

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

Question 28

A corporation is a form of business ownership in which the business is considered a legal entity separate and distinct from its owners.

Question 29

In a limited partnership, all owners have limited liability for the debts and obligations of their company.

Question 30

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

Question 31

The Limited Member Partnership (LMP) is another form of partnership.

Question 32

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

Question 33

Preferred shareholders usually have the right to vote, while common shareholders normally do not.

Question 34

Bailey Nix 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 35

In a general partnership, each partner incurs unlimited liability only for claims resulting from his or her own negligence.

Question 36

General corporations normally are at a distinct disadvantage compared to other forms of business ownership when it comes to raising financial capital.

Question 37

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

Question 38

Liza owns 1000 shares of common stock in Bigbux Inc. As a shareholder in the company, she may vote in the election of Bigbux's board of directors.

Question 39

The formation of a corporation requires filing a special form with the provincial or federal government.

Question 40

Corporations are more closely regulated and required to file more paperwork than other forms of business.

Question 41

A merger is a corporate restructuring that occurs when one firm, called the acquiring firm, buys another firm, called the target firm.

Question 42

Each member in a cooperative has equal ownership of the co-op and has an equal voice in how the co-op is run.

Question 43

Unlike a sole proprietorship or general partnership, a general corporation is unaffected by the death or withdrawal of an owner.

Question 44

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

Question 45

In an acquisition, the firm who is doing the buying is called the target firm.

Question 46

Acquisition is a corporate restructuring in which one firm buys another. After the acquisition, the target firm ceases to exist as an independent entity, while the acquiring firm continues to operate.

Question 47

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

Question 48

When the acquiring firm buys the target firm despite the opposition of the target's board and top management, the result is called an unapproved takeover.

Question 49

If an oil company merged with a company that produced motion pictures, the result would be a vertical merger.

Question 50

Joe owns 500 shares of stock in the Megabux Corporation. He is pleased to learn that the company earned a very nice profit over the most recent operating period. The company has announced that they will pay each shareholder a dividend of $1 per share out of the after-tax profits. This payment will represent tax-free income to Joe.

Question 51

Unlike general corporations, not-for-profit corporations have no shareholders and pay no dividends.

Question 52

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

Question 53

Crown corporations provide services to Canadians in areas where private industry cannot.

Question 54

One reason for a conglomerate merger when diversifying into new markets is to reduce the risk associated with adverse conditions in any single market.

Question 55

Fly By Knight and Air Pockets are two mid-sized regional airlines that serve much the same territory. If these two airlines merged, the result would be a horizontal merger.

Question 56

A conglomerate merger is a combination of two firms in unrelated industries.

Question 57

A horizontal merger occurs when firms from different industries join.

Question 58

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

Question 59

The board of directors in a corporation is comprised of those who hold the most shares.

Question 60

The board of directors establishes the corporation's mission and sets its board objectives but seldom takes an active role in the day-to-day management of the company.

Question 61

A franchisee is the business entity in a franchise relationship that pays for the right to use resources supplied by the franchisor.

Question 62

One of the biggest trends in franchising for the past several years has been an expansion into overseas markets.

Question 63

From the franchisee's perspective, franchising offers several advantages, one of which is lower costs.

Question 64

Historically, what have been the three basic forms of business ownership in Canada?

A) full partnership, nominal partnership, and silent partnership
B) joint venture, cooperative, and holding company
C) sole proprietorship, partnership, and corporation
D) monopoly, duopoly, and oligopoly

Question 65

Franchising is a contractual relationship in which an established business entity allows others to operate a business using the unique resources it supplies in exchange for monetary payments and other considerations.

Question 66

One drawback of operating a franchise is the greater risk of failure relative to independently owned businesses.

Question 67

Bankers and other lenders may be more willing to loan you money if your business is part of an established franchise.

Question 68

A franchise agreement is the contractual arrangement between a franchisor and franchisee that details the duties and responsibilities of both parties.

Question 69

Which form of business ownership offers its owners limited liability?

A) sole proprietorship
B) partnership
C) corporation
D) partnership

Question 70

From the standpoint of an owner, what is a major advantage of a sole proprietorship?

A) retention of control
B) permanence of the business
C) ability to capitalize on complementary skills
D) ability to pool financial resources

Question 71

A business entity that allows others to operate a business using its name, trademark, business methods, and products in exchange for money and other considerations is called a franchisee.

Question 72

A business format franchise is a broad franchise agreement in which the franchisee pays for the right to use the name, trademark, and business and production methods of the franchisor.

Question 73

What type of liability do sole proprietors have for the debts of their companies?

A) shared liability
B) unlimited liability
C) limited liability
D) no liability

Question 74

Under a business format franchise, the franchisees pay royalties for the right to sell the product of the franchisor, but otherwise they have complete freedom as to how they manage their businesses.

Question 75

Individuals who want to be their own boss and use their own methods are likely to have difficulty accepting the terms of a typical franchise agreement.

Question 76

Laryssa Wu is a bright, hard-working, and responsible young woman who has always wanted to own a business. However, she realizes that she lacks training and experience in some areas of running a business and doesn't have confidence in her ability to start a new company from scratch. She also is nervous about the amount of risk involved in business ownership. These concerns suggest that Laryssa might be interested in becoming a franchisee in a business format franchise.

Question 77

Which of the following is a serious drawback of sole proprietorships?

A) They are heavily regulated by the federal government.
B) They expose their owners to unlimited liability for the company's debts.
C) They are difficult and inexpensive to form.
D) They result in double taxation of the company's earnings.

Question 78

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

A) The owner has limited liability for the debts for this type of business.
B) It is easy and inexpensive to form this type of business.
C) The business has a perpetual life.
D) It is very easy to raise financial capital for this type of business.

Question 79

Franchisors seldom succeed in their attempts to move into foreign markets.

Question 80

The success of a franchisee can be adversely affected by the irresponsible or incompetent behaviour of the franchisor and other franchisees.