Deck 6: Business Formation: Choosing the Form that Fits

Question 1

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.

Answer 1

True

Question 2

Wayne has a great idea for a new business which he believes will help him make a lot 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. Wayne's goals suggest that he would seriously consider operating his business as a sole proprietorship.

Answer 2

True

Question 3

A corporation is a form of business ownership in which:

A)a business is considered a legal entity that is separate from its owners.
B)a single owner actively manages a company.
C)two or more people act as co-owners of a company.
D)the owners of a business have unlimited liability for any claims against the firm.

Answer 3

A

Question 4

Franchising is seldom used to move into foreign markets.

Question 5

A key reason most sole proprietorships remain relatively small is that:

A)they have limited ability to raise the funds necessary to finance growth.
B)they involve extensive paperwork and incur heavy costs.
C)heavy taxes are levied directly on their earnings as a business.
D)their stockholders would rather receive dividends than have earnings reinvested to finance growth.

Question 6

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 7

Michael owns 100 shares of stock in the Samson Electricals Corporation, but as a stockholder he does not have the right to vote in stockholders' meetings. In this scenario, Michael owns common stock.

Question 8

Memphis is the owner of a car performance tuning business. As a sole proprietor, any profit he earns is:

A)taxed as the earnings of a sole proprietorship as a business.
B)treated as Memphis's personal income.
C)not subjected to any tax.
D)taxed only when he withdraws the money from a bank.

Question 9

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

Question 10

The owner of a single-person LLC can avoid paying self-employment taxes by electing to have the LLC treated as a corporation.

Question 11

Which of the following is an advantage of sole proprietorship?

A)Unlimited financial resources
B)Attraction of talented employees
C)Ease of formation
D)Shared workload and responsibilities

Question 12

A partnership:

A) is a form of business ownership with a single owner who usually actively manages the company.
B)is a form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners.
C)is a form of business ownership that offers both limited liability to its owners and flexible tax treatment.
D)is a voluntary agreement under which two or more people act as co-owners of a business for profit.

Question 13

Which of the following is a disadvantage of a sole proprietorship?

A)The owner is personally liable for the debts of the firm.
B)The firm is subject to double taxation.
C)The profits of the firm have to be shared between its members.
D)The costs of formation of the firm are more compared to other business forms.

Question 14

Which of the following would be an example of a corporation?

A)Sparkles is a business firm owned by a single person who takes up complete liability for the business.
B)The owners of Octave Inc. are not personally responsible for the debts and obligations of the firm.
C)The profits earned by Luxe Clothing are legally considered as the income of the firm's owners.
D)The dissolution of Nutrimax Pizzas results in its owners having to repay the debts of the firm.

Question 15

Which of the following is a consequence of a corporation being a separate entity from its owners?​

A)The owners are not personally responsible for the obligations of a company.
B)The articles of incorporation are not required to set up a corporation.
C)A corporation cannot enter into binding contracts in its name.
D)The death or withdrawal of an owner dissolves a corporation.

Question 16

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

Question 17

The locals residing near a small chemical factory file a complaint against it for polluting the environment. The owner of the factory learns that if he loses the case, his personal possessions might also be confiscated.Which of the following types of ownership is the factory functioning under?

A)Limited liability company
B)Corporation
C)Partnership
D)Sole proprietorship

Question 18

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

Question 19

A sole proprietorship is a form of business ownership in which:

A)a business is considered a legal entity that is separate from its owners.
B)a single owner actively manages a company.
C)two or more people act as co-owners of a company.
D)the owners of a business are offered limited liability and flexible tax treatment.

Question 20

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

Question 21

A limited partnership is different from a limited liability partnership in that, in a limited partnership:

A)all members have limited liability.
B)only the members with unlimited liability are allowed to manage the firm.
C)only the members who have the protection of limited liability actively participate in the management of the firm.
D)all members actively participate in the management of the firm.

Question 22

A disadvantage of a general partnership is that:

A)there is difficulty in the formation of the company.
B)it involves double taxation for the partners.
C)there is difficulty in withdrawing from the company.
D)their financial base is usually weaker than that of a sole proprietorship.

Question 23

A Franchise Disclosure Document:

A)contains information about every aspect of the franchise agreement.
B)is a monthly document compiled by a franchisee providing information about its sales and profits.
C)extensively uses legal jargon to explain the procedures and rules of the franchisor to the franchisee.
D)is a document sent to the franchisor by the franchisee indicating that the franchisee will no longer sell products under the franchisor's name.

Question 24

Which of the following is a difference between a C corporation and an S corporation?

A)The members of a C corporation have unlimited liability, whereas the members of an S corporation enjoy limited liability.
B)The members of a C corporation have limited liability, whereas the members of an S corporation have unlimited liability.
C)A C corporation is double taxed, whereas an S corporation is taxed as a partnership.
D)A C corporation is taxed as a partnership, whereas an S corporation is double taxed.

Question 25

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

A)The process of forming a C corporation is simple and inexpensive.
B)The members are entitled to choose the mode of tax treatment.
C)The firm is free from double taxation.
D)The shareholders have limited liability in the firm.

Question 26

Which of the following is an advantage of general partnerships?

A)Partners can share the burden of running the business.
B)All partners have limited liability.
C)If a partner withdraws, his investment stays with the company.
D)Partnerships have no scope for disagreements.

Question 27

Beany Corp. and Kaffe Inc.are leading producers and distributors of coffee beans and have joined together to become the world's largest distributor of coffee. This is an example of a(n)_____.

A)vertical merger
B)horizontal merger
C)conglomerate merger
D)upward merger

Question 28

Which of the following is an advantage of limited liability companies?​

A)Limited liability companies can have any number of owners.
B)The process of formation of limited liability companies is simple and fast.
C)Limited liability companies have a limited number of owners.
D)The foreign status in states other than the ones in which they are organized is not applicable to limited liability companies.

Question 29

One reason a firm would consider a _____ merger would be to increase size and market power in its industry.

A)hostile
B)conglomerate
C)vertical
D)horizontal

Question 30

Which of the following is a characteristic of limited liability companies (LLCs)?

A)They are made to pay an annual franchise tax in many states.
B)They are subject to double taxation.
C)They are required to hold timely board meetings.
D)They are required to produce a larger amount of paperwork than corporations.

Question 31

Which of the following aspects of a limited partnership differentiates general partners from limited partners?

A)Duration of the partnership in a company
B)Sharing of profits of a company
C)Financial contribution to a company
D)Participation in management of a company

Question 32

The individuals who are elected by stockholders of a corporation to represent their interests are known as _____.

A)sole proprietors
B)a board of directors
C)limited liability partners
D)conglomerates

Question 33

Which of the following is a disadvantage of franchising?

A)The franchisee seldom receives any support or training from the franchisor about running the business.
B)The franchisee faces the task of establishing brand recognition among customers.
C)The franchisee has no flexibility as it is required to follow the franchisor's procedures to the letter.
D)The franchisee faces funding challenges as bankers are often reluctant to fund franchisees.

Question 34

Red Tide Inc., an electronics manufacturer, merges with Dew Corp., a food brand, to make the firms less susceptible to unfavorable market conditions in any single market. This is an example of a _____ merger.

A)horizontal
B)vertical
C)conglomerate
D)macro

Question 35

Cella, a clothing manufacturer, has licensed Crux Corp. to market and sell its products. This is an example of a _____.

A)divestiture
B)distributorship
C)conglomerate merger
D)spin-off

Question 36

In a carve-out, a firm:

A)distributes the stock of its new company to existing shareholders.
B)distributes the stock of its new company to outside investors.
C)purchases a company in a new industry and sells its shares to existing shareholders.
D)purchases a company in a new industry and sells its shares to outside investors.

Question 37

Which of the following best describes a business format franchise?

A)It is a broad franchise agreement in which a franchisee pays for the right to use the name, trademark, and production methods of a franchisor.
B)It is a type of franchising arrangement in which a franchisor makes a product and licenses a franchisee to sell it.
C)It is a type of franchising arrangement in which a franchisor shares ownership with a franchisee by selling a number of its shares.
D)It is a broad franchising agreement in which a franchisee pays a franchisor for the right to use the production methods of the franchisor and functions under a different name and identity.

Question 38

A _____ is a type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it.

A)business format franchise
B)conglomerate merger
C)distributorship
D)divestiture

Question 39

Which of the following statements is true of formation of general partnerships?

A)It is safer to get everything in writing and to seek expert legal assistance when drawing up an agreement than verbally agreeing.
B)It is legally not possible to start a partnership on the basis of a verbal agreement.
C)There is a limit on the number of partners who can participate in a general partnership.
D)A general partnership is formed when partners enter into an involuntary partnership agreement.

Question 40

The nature of work and the work schedule in the animation department of a movie production company differ from that of other departments of the company. Hence, the company decides to branch this department out into a new company by selling the stock to outside investors. In this scenario, the company is using a strategy called a(n):

A)conglomerate merger.
B)acquisition.
C)carve-out.
D)telecommuting.

Question 41

A _________ is a contractual arrangement between a franchisor and franchisee that spells out the duties and responsibilities of both parties.

A)Franchise Disclosure Document (FDD)
B)franchise agreement
C)business format agreement
D)dealership agreement

Question 42

The basic rules governing how a corporation is organized and how it conducts its business are known as _________.

A)corporate bylaws
B)articles of incorporation
C)certificates of organization
D)prospectuses

Question 43

Identify and explain two advantages and two disadvantages of sole proprietorships.

Question 44

Mention the advantages and limitations of nonprofit (or not-for-profit)corporations.

Question 45

Sole proprietors have _________ for the debts of their companies.

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

Question 46

As an artificial person, a _________ can legally engage in virtually any business activity a natural person can pursue, including owning property, entering into binding contracts, and initiating legal actions.

A)partnership
B)corporation
C)limited liability company
D)sole proprietorship

Question 47

Describe the basic features of limited partnerships and limited liability partnerships.

Question 48

A general partnership avoids the problem of _________ endemic to corporations.

A)disagreements
B)unlimited liability
C)double taxation
D)withdrawal

Question 49

List and describe any two forms of business ownership.

Question 50

Describe at least one advantage and one disadvantage of franchising for the franchisor, and at least one advantage and disadvantage for the franchisee.