Question 1

The disadvantages associated with a proprietorship are similar to those under a partnership.One exception to this is due to the formal nature of the partnership agreement and the commitment of the partners' personal assets.As a result, partnerships do not have difficulty raising large amounts of capital.

Accepted Answer

The statement is incorrect. Proprietorships do not have the formal partnership agreement and the commitment of personal assets, but they also have difficulty raising large amounts of capital due to their structure and limited liability.

Question 2

Although corporations only represent 18% of the number of businesses they account for about 82% of the dollar value of sales.

Accepted Answer

This statement is true, according to data from the U.S Census Bureau.

Question 3

The U.S.corporate tax rate is lower than most industrialized nations.

Accepted Answer

The U.S. corporate tax rate is higher than most industrialized nations, according to data from the Organization for Economic Cooperation and Development (OECD). As of 2021, the U.S. has a corporate tax rate of 21%, while the OECD average is 23.5%. However, some countries have significantly lower corporate tax rates than the U.S., such as Ireland with a rate of 12.5%.

Question 4

Individual taxpayers can itemize allowed expenses if they have income of over $250,000, but they must take the standard deduction if their income is below $250,000.

Accepted Answer

The income threshold for itemizing deductions changes each year, and for the 2021 tax year, the threshold is $12,550 for single filers and $25,100 for married couples filing jointly. There is no $250,000 income threshold for itemizing deductions.

Question 5

Stock price maximization should be the most important goal for the managers of a corporation.

Accepted Answer

Maximizing stock price is often seen as the primary goal for corporations as it supports the interests of shareholders and can attract more investors. However, businesses may also prioritize other goals such as long-term sustainability, ethical practices, or social responsibility. Ultimately, the specific goals of a corporation depend on its values, industry, and stakeholders.

Question 6

Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible.This treatment, other things held constant, tends to encourage the use of debt financing by corporations.

Accepted Answer

The fact that interest paid by a corporation is tax deductible while dividends paid are not encourages corporations to use debt financing instead of equity financing, as the interest on debt reduces the corporation's taxable income, resulting in a lower tax liability.

Question 7

In a limited partnership, the liability of the limited partners generally is restricted to the amount of funds that they have invested in the company but the general partners have unlimited liability.

Accepted Answer

In a limited partnership, the limited partners have limited liability and are only liable for the amount they have invested in the company. The general partners, however, have unlimited liability and are personally responsible for any debts or legal issues of the company.

Question 8

Although over half of all corporations select the S corporation status when filing taxes, these firms generate only around 25 percent of the total revenues provided by corporations.

Accepted Answer

S corporations are chosen by many small businesses for their tax benefits, but larger corporations, which generate a significant portion of total corporate revenue, often operate as C corporations, leading to a disproportionate revenue generation compared to the number of S corporations.

Question 9

In order to avoid double taxation and to escape the frequently higher tax rate applied to capital gains, stockholders generally prefer to have corporations pay dividends rather than to retain their earnings and reinvest the money in the business.Thus, earnings should be retained only if the firm needs capital very badly and would have difficulty raising it from external sources.

Accepted Answer

While it is true that taxes can be a factor in a company's decision to pay dividends or retain earnings, there are other factors at play such as the company's growth prospects and investment opportunities. Retaining earnings may be beneficial for a company that needs to invest in future growth or has limited external financing options. Additionally, some shareholders may prefer a company that reinvests in the business rather than paying dividends.

Question 10

A firm's current value is related to its future growth opportunities, and corporations can attract funds more easily than unincorporated businesses to take advantage of growth opportunities.

Accepted Answer

This statement is true. Incorporation provides a legal structure that allows corporations to issue stocks and bonds to raise funds for expanding their business and taking advantage of growth opportunities. Additionally, the value of a corporation is closely related to its potential to generate future profits and growth, which can attract investors and lenders.

Question 11

Actions that maximize the firm's current earnings per share will maximize the price of the firm's stock.

Accepted Answer

Maximizing current earnings per share (EPS) does not necessarily maximize the stock price because investors value a firm based on its future earnings potential, risk, and growth prospects, not just current earnings. Actions that boost short-term EPS might harm long-term value, such as underinvesting in research and development or taking on excessive risk.

Question 12

Voluntary socially responsible acts by businesses that raise costs are more likely in highly competitive industries.

Accepted Answer

In highly competitive industries, businesses are more focused on reducing costs and increasing efficiency to maintain or improve their competitive position, making them less likely to engage in voluntary socially responsible acts that would raise their costs.

Question 13

Most legal experts would recommend that partnership agreements should be written formal agreements filed with the secretary of state in which the partnership does business.

Accepted Answer

This is because written and formal partnership agreements provide clear guidance on the responsibilities, liabilities, and rights of the partners. Additionally, filing the agreement with the secretary of state helps to protect the agreement and provides evidence of its existence.

Question 14

Although firms have ethical responsibilities to their employees and customers, they do not have a parallel social responsibility because socially responsible actions involve costs without corresponding benefits which are not wealth maximizing.

Accepted Answer

Firms do have social responsibilities beyond their financial bottom line, as their actions can have wide-ranging impacts on society and the environment. While these actions may involve costs, they can also lead to long-term benefits such as improved public relations, brand loyalty, and a healthier society and planet. Therefore, socially responsible actions can also contribute to wealth maximization in the long run.

Question 15

In a limited liability partnership only the general partner can participate in the management of the business.

Accepted Answer

The answer of In a limited liability partnership only the...

Question 16

The two major advantages of a limited liability company are flexibility of ownership structure and the ability to elect to be taxed either as a corporation or as a partnership while maintaining limited liability for the owners.

Accepted Answer

Limited liability companies allow for flexible ownership structures and give owners the option to choose how they want to be taxed while still providing limited liability protection.

Quiz 6: Business Organizations and the Tax Environment