Question 1

Lauren, a partner in Jales & Jales Bonding Company, manages its day-to-day operations. She is considered to be a _____ partner.

Accepted Answer

A general partner in a partnership is involved in the day-to-day operations of the business, which aligns with Lauren's role in managing the day-to-day operations of Jales & Jales Bonding Company.

Question 2

One benefit of an S Corporation is that it allows shareholders to receive dividends without

Accepted Answer

An S Corporation allows for pass-through taxation, meaning the corporation itself is not taxed on its income, but instead, the shareholders are taxed on their proportionate share of the corporation's income. By avoiding double taxation (once at the corporate level and again at the shareholder level), S Corporation shareholders can receive dividends without paying taxes on them. However, it is important to note that shareholders must still pay taxes on any income they receive from the corporation through salaries or wages.

Question 3

A basic legal principle involving stockholders is that

Accepted Answer

Stockholders have the right to elect the board of directors and to receive dividends, but do not have the right to manage the corporation's day-to-day activities. This principle is known as the separation of ownership and control.

Question 4

Emile has very little money with which to start his business so he wants to keep the cost or forming his company as low as possible. Which for of ownership would you recommend for Emile?

Accepted Answer

A sole proprietorship is the simplest and least expensive form of business ownership. It requires no formal documentation or registration, and the owner has complete control over the business. Additionally, all profits and losses are the responsibility of the owner and are reported on their personal tax return, so there are no additional tax filings or fees. This would be the best choice for Emile in order to keep his costs low.

Question 5

Ownership in a corporation

Accepted Answer

Ownership in a corporation is typically represented by shares of stock, which can be easily transferred between individuals by buying and selling on stock exchanges or through private transactions. This is in contrast to ownership in other forms of organization, such as partnerships or sole proprietorships, where transfer of ownership can be more complex and require significant legal paperwork. Ownership in a corporation also affects the operation of the business, as the shareholders have the ability to elect a board of directors and vote on major business decisions.

Question 6

Stockholders have limited liability unless they

Accepted Answer

Stockholders have limited liability, which means that their personal assets are not at risk in case the corporation goes bankrupt or cannot pay its debts. However, if a stockholder personally endorses company notes, they become liable for the debt just like any other debtor. The other choices are incorrect. Active participation in the management of the corporation does not affect the stockholder's liability, owning preferred stock does not make them more liable than owning common stock, and shares cannot be converted to partnership status as a corporation is a separate legal entity from its shareholders.

Question 7

Because the corporation is a legal entity, one of its responsibilities is to:

Accepted Answer

As a legal entity, a corporation is required by law to file annual tax returns just like individuals.

Question 8

Upon the death of the majority stockholder in a corporation, direct control may pass to

Accepted Answer

When a majority stockholder dies, direct control of the corporation usually passes to the executor named in their will or appointed by a court. This person is responsible for managing the deceased's estate, including any stocks or other assets owned by the individual. It is possible for the executor to transfer ownership of the stocks to heirs or other parties, but this would not necessarily result in direct control of the corporation passing to them.

Question 9

Jane and Randy have a partnership with their company of JR Enterprises. Which statements reflect how the partnership pays taxes?

Accepted Answer

The answer of Jane and Randy have a partnership with...

Question 10

The two dimensions of management control of a small corporation usually involves which individuals?

Accepted Answer

Management control in a small corporation usually involves both stockholders and corporate officers, as they work together to make decisions and conduct daily operations. The stockholders, who own the majority of the voting common stock, have the ultimate control and authority over the corporation and its direction. The corporate officers, on the other hand, are responsible for implementing the policies and strategies set by the stockholders and managing the day-to-day operations of the company. Both groups play important roles in managing and controlling the corporation.

Question 11

Frank would like to avoid personal financial loss if his business idea does not work. Which form of ownership would you suggest?

Accepted Answer

A corporation provides limited liability for its shareholders, meaning that Frank's personal financial loss would be limited to his investment in the corporation. This is the best choice for Frank to avoid personal financial loss.

Question 12

Which organizational type results in the business owner having unlimited liability?

Accepted Answer

A sole proprietorship is a business owned and operated by one individual, and as such, the owner has unlimited liability for the business's debts and obligations.

Question 13

The right to buy new shares of stock in proportion to stock already owned is called a

Accepted Answer

The right to buy new shares of stock in proportion to stock already owned is called a pre-emptive right. This allows existing shareholders to maintain their percentage ownership in the company and can help prevent dilution of their shares. Stock rights and stock options refer to different types of financial instruments, and Section 1244 pertains to tax treatment of losses on small business stock.

Question 14

To maintain status as a corporation, the corporation must:

Accepted Answer

In order to maintain status as a corporation, the corporation must hold annual meetings of both the shareholders and the board of directors. This is required by law and failure to do so could result in the corporation losing its legal status as a corporation. While submitting bylaws and declaring dividends may also be important for the corporation, they are not necessary for maintaining corporate status. Reapplying for a charter annually is not required once the corporation has been properly formed and registered.

Question 15

In a limited partnership, which partner remains bound by all debts of the business?

Accepted Answer

The general partner remains bound by all debts of the business in a limited partnership. Limited partners have limited liability and are not personally responsible for business debts beyond their investment, while special partners are not recognized in limited partnership structures. The amount of capital investment does not determine liability in a limited partnership.

Question 16

Evan has received permission from his state to form a corporation for his startup, expecting his liability would be limited to the amount of his investment. But his bank asked him to assume personal liability before it would grant him a business loan. Why would the bank make this demand?

Accepted Answer

The bank is likely concerned about the lack of credit history for Evan's business and wants someone to assume personal liability in case the business is unable to repay the loan. This is a common practice for new businesses or businesses with limited credit history.

Question 17

Ralph formed a corporation as a fund manager. He accepted money from his customers promising to invest it and build cash value for them. Instead he kept the money for himself to enjoy a lavish lifestyle. The court removed liability protection from his corporate entity because the incorporation had been used to perpetuate fraud. This is an example of:

Accepted Answer

Piercing the corporate veil occurs when a court removes the liability protection from a corporation and holds the individual shareholders or members personally responsible for the corporation's actions. This typically occurs when the corporation is being used to perpetuate fraud or other illegal activities. Unlimited liability is when an individual is personally responsible for all debts and liabilities of a business, regardless of whether it is incorporated or not. Reciprocation refers to an exchange of goods or services between two parties, and a pre-emptive right is the right of existing shareholders to purchase newly issued shares of stock before they are offered to the public.

Question 18

Harvey would like to support his friend's new business financially but also wants to protect his assets in case the business fails. Which form of ownership would you recommend?

Accepted Answer

Limited partnership would be the best option for Harvey because it allows him to invest in the business as a limited partner, providing financial support, while limiting his liability for the business's debts and obligations. This means that Harvey's personal assets will be protected in case the business fails.

Question 19

Glenda, an employee of a corporation, caused a traffic accident while on company business. Who will pay for the damages?

Accepted Answer

The corporation is responsible for the actions of its employees while conducting company business, including any damages that may occur. This is known as vicarious liability or respondeat superior. The corporation may have insurance to cover such incidents, but ultimately it is responsible for paying for the damages. The stockholders, board of directors, and founder are not typically held personally liable for the actions of an employee in this scenario.

Question 20

A typical common stockholder of a corporation

Accepted Answer

A typical common stockholder of a corporation has the right to receive declared dividends, but does not have the right to act for the firm or fire employees of the corporation. The ability to buy new stock in proportion to stock already owned may depend on the specific terms of the stock offering.

Quiz 8: The Organizational Plan: Teams, Legal Structures, Alliances, and Directors