Deck 6: Forms of Business Ownership and Buying an Existing Business

Question 1

A ________ partner is a person who makes financial investments in a partnership, does not take an active role in managing the business, and whose liability for the partnerships' debts is limited to the amount they have invested.

A) limited
B) master
C) dormant
D) silent

Answer 1

A

Question 2

The most common form of business ownership that is also the simplest to create is the ________.

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

Answer 2

A

Question 3

In a general partnership, ________.

A) each partner is held responsible for an agreement/decision made by any one of the partners
B) partners can be held responsible only for decisions they make personally
C) no partner can be held legally responsible for decisions since the partnership itself is a legal entity
D) no decision is binding unless all partners agree to it in writing

Answer 3

A

Question 4

In a partnership, the ________ partner(s) has (have) unlimited liability for the partnership's debts.

A) limited
B) dormant
C) nominal
D) general

Question 5

Which of the following is not true of a limited liability partnership?

A) All partners are limited partners.
B) Most states restrict this form of ownership to certain types of professions such as attorneys, physicians, dentists, accountants, etc.
C) Although LLPs have many of the characteristics of partnerships, they are taxed as a corporation.
D) It must involve a general partner, a limited partner, a silent partner, and a dormant partner.

Question 6

Which form of ownership generally has the least ability to accumulate capital?

A) Partnership
B) Sole proprietorship
C) Corporation
D) S corporation

Question 7

Which of the following issues would influence an entrepreneur's choice of a form of business ownership?

A) Tax considerations
B) Management succession plans
C) Liability exposure
D) All of the above

Question 8

Acme Corporation is chartered in Delaware, but its primary area of operation is in South Carolina. In South Carolina, Acme would be considered a(n) ________ corporation.

A) alien
B) domestic
C) foreign
D) local

Question 9

Which of the following issues would a typical partnership agreement address?

A) The contributions of each partner to the business.
B) How the partnership profits (or losses) will be distributed.
C) How a partner can sell her/his ownership in the business.
D) All of the above

Question 10

Marco is opening a new computer repair shop. He is owner and sole employee. He has paid the appropriate fees and licensing costs and begun his business. This is an example of a(n) ________.

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

Question 11

The key to choosing the right form of ownership is ________.

A) envisioning where your business will be in 10 years
B) understanding the characteristics of each form and knowing how they affect your business and personal circumstances
C) forming either an S corporation or a limited liability company since they are the only forms that offer owners liability protection
D) irrelevant since choosing a form of ownership is merely a technicality and has little impact on the business and its owner(s)

Question 12

The most critical disadvantage of the sole proprietorship is ________.

A) the owner's unlimited personal liability
B) limited access to capital
C) lack of continuity
D) limited skills and abilities of the owner

Question 13

A special type of partnership in which all partners, who in many states must be professionals, are limited partners is called ________.

A) general partnership
B) limited partnership
C) silent partnership
D) limited liability partnership

Question 14

________ is a special type of limited partnership in which all partners who, in many states must be considered to be professionals, are limited partners.

A) Limited liability partnership (LLP)
B) Master limited partnership (MLP)
C) General partnership
D) Limited partnership

Question 15

A partnership agreement defines how the partners will be compensated. Normally, ________.

A) partners are not entitled to salaries or wages, but are compensated by a share of the profits of the business
B) the general partner's salary is set at two times the salaries of the limited partners
C) both general and limited partners are permitted salaries, but all silent or dormant partners are compensated only by sharing in the profits
D) while the agreement establishes payout schedules, it does not spell out what constitutes profit

Question 16

A ________ partnership is composed of at least one general partner and at lease one limited partner.

A) general
B) limited
C) silent
D) passive

Question 17

All of the following are advantages of a partnership except ________.

A) partnerships are relatively easy and inexpensive to establish
B) partnerships avoid double taxation since the partnership itself is not subject to federal taxation
C) partnerships have the greatest ability to accumulate capital of all of the forms of ownership
D) partnerships offer the ability to combine the management and business skills of two or more people in a complementary and powerful fashion

Question 18

Probably the most important reason to have a partnership agreement is that ________.

A) it identifies the name of the partnership and protects that name from infringement by others
B) it states the location and the purpose of the business
C) it determines how the partnership and the partners will pay taxes
D) it resolves potential sources of conflict that, if not addressed in advance, could later result in partnership battles and dissolution of an otherwise successful business

Question 19

Which of the following is required to form a partnership?

A) A general partner
B) A limited partner
C) A secret partner
D) A silent partner

Question 20

Changing from one form of ownership to another once a business is up and running can be difficult, expensive, and complicated.

Question 21

Profits earned by a partnership are taxed in the same fashion as those earned by a sole proprietorship.

Question 22

All the profits of a sole proprietorship are taxed as current income of the owner even if they are not withdrawn from the business.

Question 23

There is no limit to the number of general partners a partnership may have, but it must have at least one general partner.

Question 24

The most common form of business ownership in the United States is the partnership.

Question 25

If a sole proprietorship fails, the owner is not liable for its debts since the business is a separate legal entity.

Question 26

Although not required by law, a written partnership agreement that spells out the terms of operating the partnership and the status of each partner should be developed.

Question 27

The sole proprietorship is the form of ownership with the least ability to accumulate capital.

Question 28

In a partnership, profits (and losses) must be shared according to the ratio of capital originally invested in the partnership.

Question 29

Defining the duties, responsibilities, contributions, and roles of the partners in a partnership agreement is not necessary since the law covers these provisions automatically.

Question 30

If a partnership agreement does not exist, the partnership will be governed by the Uniform Partnership Act.

Question 31

In a partnership, the business itself is subject to federal income tax.

Question 32

Some forms of ownership are much more costly and involved to create.

Question 33

The sole proprietorship is the easiest form of ownership to create, but once formed, it is subject to the greatest number of regulations.

Question 34

In a sole proprietorship, the owner has limited liability.

Question 35

The sole proprietorship is the best form of ownership for entrepreneurs launching their first businesses.

Question 36

State law requires that individuals creating a partnership file the Articles of Partnership with the Secretary of State.

Question 37

Of all U.S. business firms, sole proprietorships are the most common, accounting for approximately 71 percent of businesses.

Question 38

The partnership, like the proprietorship, avoids the disadvantage of double taxation.

Question 39

Entrepreneurs should not spend much time selecting a form of ownership for their businesses because making the choice is merely a technicality, which has little impact on the business and its owner(s).

Question 40

If a sole proprietor dies, retires, or becomes incapacitated, the business automatically terminates.

Question 41

What is a partnership? Explain the advantages and the disadvantages of a partnership.

Question 42

One disadvantage of the partnership form of ownership is the great potential for personality and authority conflicts.

Question 43

Most states do not require a Certificate of Incorporation or a charter to be filed for a new corporation.

Question 44

What is a sole proprietorship? Explain the advantages and the disadvantages of a sole proprietorship.

Question 45

A corporation formed in Taiwan doing business in the United States is a foreign corporation.

Question 46

Mini Case 6-1: "Today, You Gotta' Be a Corporation"
Duke has been a successful used car dealer for 25 years in the same location, operating as a proprietorship. In those 25 years, he has expanded his operation and become the largest independent car dealer in a city of 85,000 people. Few people in town can boast of a business reputation better than Duke's. As he says, "I've always done business in a fair and honest fashion, and I've tried to give my customers an honest deal. The public has responded well, and last year the business revenue increased to an all-time high of $830,000."
As the business has grown, so have Duke's liabilities. On a given day, Duke will have cars worth from $350,000 to $450,000 as inventory on the lot. "Twenty years ago, if I'd asked the bank for a line of credit of $200,000, they'd have tossed me out the front door. There is no question that today business is different."
Duke's only daughter recently married a garage mechanic who has worked in the area for the past three years. Though Duke thinks the boy is certainly nice enough, he does not believe he is very smart. "The kid sure knows how to fix a car, but that's as far as it goes," says Duke. "On my last visit to the accountant, he suggested I consider incorporating. I guess he knows what he's talking about. That's all you hear today - 'you gotta be a corporation.' I guess he's right. But, to tell you the truth, I don't know."
Should Duke incorporate or should he remain a proprietorship? Why?

Question 47

The "Das Spelunker" corporation, formed in Germany and conducting business in the U.S., is considered to be a(n) ________ corporation.

A) alien
B) domestic
C) foreign
D) distant

Question 48

A corporation formed and chartered in Kansas is considered a domestic corporation when doing business in Kansas, and a foreign corporation when doing business in Missouri.

Question 49

Which of the following is true regarding the corporate form of ownership?

A) Generally has the greatest ability to accumulate capital.
B) Most complex form of ownership.
C) Separate legal entity in the eyes of the law.
D) All of the above

Question 50

One of the advantages of a partnership over a proprietorship is the increased sources of capital and credit it offers.

Question 51

A limited partner is personally liable only for the amount of money she/he has invested in the partnership.

Question 52

If a limited partner withdraws, sells his ownership in the partnership, or dies, the partnership is not forced into dissolution.

Question 53

Each partner in a limited liability partnership is a limited partner; there are no general partners.

Question 54

A corporation receives its charter from ________.

A) the federal government
B) the state
C) the board of directors
D) the stockholders

Question 55

A common denominator in many partnership disputes is the lack of a written agreement clearly spelling out the roles, rights, and responsibilities of each partner.

Question 56

A limited partner is treated as an investor in a business venture and does not take an active role in managing it.

Question 57

Which of the following generally is not required by a Certificate of Incorporation?

A) The names and the addresses of the incorporators.
B) A statement of the corporation's purpose.
C) A statement of how stock proceeds will be used.
D) The corporation's bylaws.

Question 58

A general partner is personally liable only for the amount of money he has invested in the partnership.

Question 59

What factors should an entrepreneur consider when choosing a form of ownership?

Question 60

Limited liability partnerships (LLP) are where all partners in a business are limited partners, which offers the advantage of limited liability for the debts of the partnership.

Question 61

Which of the following documents must an entrepreneur file to create a limited liability company?

A) Articles of Organization
B) Articles of Incorporation
C) Operating Agreement
D) A and C only

Question 62

What is an S corporation? Explain the advantages and the disadvantages of an S corporation.

Question 63

Which of the following would be most likely to benefit from choosing S corporation status?

A) Startup companies anticipating net losses.
B) Corporations where net profits before any compensation to shareholders is less than $100,000 per year.
C) Highly profitable firms with substantial dividends to pay out to shareholders.
D) A and C only

Question 64

Stockholders in the corporation have the same kind of liability as general partners in a partnership.

Question 65

A disadvantage of the corporate form of ownership is when profits are taxed at the corporate rate and at the individual rate and this is referred to as ________.

A) double taxation
B) limited liability
C) double liability
D) single taxation

Question 66

An S corporation form of ownership overcomes which disadvantage of the regular or C corporation form of ownership?

A) The double taxation issue.
B) The expense and difficulty of formation.
C) The amount of regulation and red tape involved in its operation.
D) The potential loss of control by the founder.

Question 67

Carlos founded the "Taco Factory" 20 years ago as a family-oriented restaurant. Over the years as they grew the business, he incorporated and sold stock to outside investors. Recently the stockholders voted to seek liquor licenses and to sell beer and hard liquor in the restaurants. Carlos opposed this, citing the history of the restaurant's "family" environment, but was voted down. Carlos has experienced which drawback of the corporate form of ownership?

A) The inability to accumulate capital.
B) The potential for diminished managerial incentives.
C) Legal requirements and red tape.
D) The potential loss of control.

Question 68

In the ________ form of ownership, the business itself pays income taxes.

A) proprietorship
B) partnership
C) corporation
D) All of the above

Question 69

A limited liability company is most like a(n) ________.

A) general partnership
B) master partnership
C) sole proprietorship
D) S corporation

Question 70

Which of the following is a disadvantage of the corporation form of ownership?

A) An inability to accumulate capital.
B) The unlimited liability to the members of the board.
C) Double taxation on profits.
D) The lack of continuity.

Question 71

Which of the following is not true regarding the limitations of professional corporations?

A) Seventy-five percent of the shares of stock must be owned and held by individuals licensed in the profession of the corporation.
B) At least one of the incorporators, one director, and one officer must be licensed in the profession.
C) The Articles of Incorporation, in addition to all other requirements, must designate the professional services to be provided by the corporation.
D) The professional corporation must obtain from the appropriate licensing board a certification that declares the shares of stock are owned by individuals who are duly licensed in the profession.

Question 72

Outline the incorporation process.

Question 73

Which of the following statement(s) is/are true?

A) Closely held corporations are owned by only a few shareholders - often family members.
B) Most closely held corporations require shareholders interested in selling their stock to offer it first to the corporation. This is known as the right of first refusal.
C) Shares of stock the corporation itself owns are called treasury stock.
D) All of the above

Question 74

Corporations must obtain a federal charter before they can conduct any business.

Question 75

What is a corporation? Explain the advantages and the disadvantages of a corporation.

Question 76

A limited liability company ________.

A) is similar to an S corporation in that it is a cross between a partnership and a corporation
B) prevents owners who want to maintain their limited liability status from actively managing the company
C) can have a maximum of 50 owners
D) All of the above

Question 77

Which of the following statements is not true regarding the liquidation of an S corporation?

A) The owners pay all taxes, debts, and creditors.
B) The owners obtain the written approval of shareholders to dissolve the company.
C) The owners file a statement of intent to dissolve with the secretary of state's office in each state where they conduct business.
D) The owners distribute all assets of the corporation to the shareholders.

Question 78

When filing the corporate charter, a corporation must file in the state in which its headquarters are located.

Question 79

Mini Case 6-1: "Today, You Gotta' Be a Corporation"
Duke has been a successful used car dealer for 25 years in the same location, operating as a proprietorship. In those 25 years, he has expanded his operation and become the largest independent car dealer in a city of 85,000 people. Few people in town can boast of a business reputation better than Duke's. As he says, "I've always done business in a fair and honest fashion, and I've tried to give my customers an honest deal. The public has responded well, and last year the business revenue increased to an all-time high of $830,000."
As the business has grown, so have Duke's liabilities. On a given day, Duke will have cars worth from $350,000 to $450,000 as inventory on the lot. "Twenty years ago, if I'd asked the bank for a line of credit of $200,000, they'd have tossed me out the front door. There is no question that today business is different."
Duke's only daughter recently married a garage mechanic who has worked in the area for the past three years. Though Duke thinks the boy is certainly nice enough, he does not believe he is very smart. "The kid sure knows how to fix a car, but that's as far as it goes," says Duke. "On my last visit to the accountant, he suggested I consider incorporating. I guess he knows what he's talking about. That's all you hear today - 'you gotta be a corporation.' I guess he's right. But, to tell you the truth, I don't know."
Would you recommend Duke establish an S corporation? What conditions would he have to meet?

Question 80

Which of the following is not an advantage of the corporate form of ownership?

A) Limited liability for the owners.
B) It is the easiest and least expensive form of ownership to create.
C) Easy transfer of ownership.
D) Perpetual life.