Question 1

What is the term for ownership structures where profits go straight to the owners and taxes are reported on each owner's individual tax return?
A) pass-through taxation
B) double taxation
C) corporate taxation
D) flat taxation

Accepted Answer

Pass-through taxation refers to the type of ownership structure where profits are not taxed at the corporate level but are instead passed through to the owners' individual tax returns, avoiding double taxation. This type of structure is most commonly found in partnerships, LLCs, and S corporations.

Question 2

You are 50% partner in a general partnership. The business has outstanding debts of $250,000 and is closing due to the death of your only partner. What is your personal liability?
A) $0
B) $125,000
C) $250,000
D) $500,000

Accepted Answer

In a general partnership, each partner is personally liable for the full amount of the business's debts. Therefore, you would be personally liable for the entire $250,000, not just a portion of it.

Question 3

Which of the following ownership structures holds a business owner personally responsible for all debts of the business?
A) private corporation
B) public corporation
C) sole proprietorship
D) LLP

Accepted Answer

A sole proprietorship is a business owned by a single individual, who is personally responsible for all debts and liabilities of the business. This means that in the event that the business cannot repay a debt or is sued, the owner's personal assets can be used to satisfy the debt or judgment.

Question 4

Nastasia is 50% owner in a manufacturing company that runs as an LLP. She invested $25,000 when the business started and has received no money from the business since then. The company just lost a $1,000,000 patent infringement lawsuit and will have to shut down. What is Nastasia's personal loss on this business?
A) $0
B) $25,000
C) $1,000,000
D) $1,025,000

Accepted Answer

Nastasia's personal loss is limited to her initial investment of $25,000 because, in a Limited Liability Partnership (LLP), partners are not personally liable for the business debts beyond their investment in the company.

Question 5

Rachelle owns a business with her brother, Ryan. Last year their company earned a profit of $200,000. Which type of business do they own if Rachelle paid taxes on her $100,000 share on her individual tax return?
A) a partnership that has pass-through taxation
B) a partnership that has corporate taxation
C) a partnership where the partners pay taxes only on dividends received from the company
D) a corporation where the owners pay taxes only on their initial investment in the company

Accepted Answer

Partnerships with pass-through taxation means that the profits or losses of the partnership are divided among the partners who then report it on their individual tax returns. This is consistent with Rachelle paying taxes on her share of the profit on her individual tax return. Option B is incorrect because corporate taxation means the business pays taxes on its profits, not the individual partners. Option C is incorrect because partners pay taxes on their individual share of the profits, not just on dividends. Option D is incorrect because corporations have separate legal entities from their owners, so the owners (shareholders) pay taxes on their dividends and capital gains, not on their initial investment in the company.

Question 6

Sam opened the restaurant of her dreams two years ago. It is a sole proprietorship. The business lost a lawsuit for $250,000 due to a customer getting sick. This legal liability is not covered by Sam's insurance and the restaurant has to close down. What is Sam's personal liability for this lawsuit?
A) $0
B) $250,000
C) $300,000
D) $500,000

Accepted Answer

As a sole proprietor, Sam is personally responsible for the debts and liabilities of the business. Therefore, she is personally liable for the lawsuit settlement of $250,000, which is not covered by insurance. This means that her personal assets may be seized to cover the debt.

Question 7

Karissa is 25% owner in a corporation that builds custom machinery. Last year the corporation suffered due to intense competition. After losing $1,000,000 last year, the business is shutting its doors. The business has unpaid debts of $9,000,000. What is Karissa's personal liability?
A) $0
B) $1,000,000
C) $9,000,000
D) $10,000,000

Accepted Answer

As a shareholder in a corporation, Karissa's personal liability is limited to her investment in the company. She is not personally liable for the corporation's debts.

Question 8

If a corporation makes $100,000 in profit, how will that profit be taxed if the money is all distributed to the owners?
A) $100,000 will be taxed at the individual tax rate of each owner.
B) $100,000 will be taxed at the corporate rate only.
C) $100,000 will be taxed at the corporate rate; then those after-tax profits will be taxed again as dividends when distributed to each owner.
D) $100,000 will be taxed at the corporate rate; then those after-tax profits will be taxed again at the corporate rate when distributed to each owner.

Accepted Answer

When profits are distributed to the owners, they are considered dividends and are taxed at the individual tax rate of each owner. However, before being distributed, the profits are first taxed at the corporate rate, so they are effectively taxed twice - once at the corporate level and once at the individual level. This is known as double taxation, and it is a major criticism of the corporate tax system.

Question 9

Mei's coffee shop made $250,000 profit last year. Mei and her partner will report their share of profits on their individual tax return. What is the term for this type of taxation?
A) double taxation
B) corporate taxation
C) flat taxation
D) pass-through taxation

Accepted Answer

Pass-through taxation is the term used when profits (or losses) of a business entity are reported on the individual tax returns of the business owners. In this case, Mei and her partner will report their share of the $250,000 profit on their individual tax returns, rather than filing a separate corporate tax return. Double taxation refers to the concept of a corporation paying tax on its profits and then the shareholders paying tax on the dividends they receive. Corporate taxation refers to the taxation of profits at the corporate level. Flat taxation is a tax system where everyone pays the same amount, regardless of their income level.

Question 10

In terms of business ownership, what is meant by unlimited liability?
A) there is no limit on the amount an owner can borrow
B) the business can borrow money for any type of purchase
C) the owner is responsible for all business debts and legal liabilities
D) shareholders can borrow money from the business

Accepted Answer

Unlimited liability means that the owner of a business is personally responsible for all the debts and legal liabilities of the business, which means that there is no limit to the amount that the owner may have to pay out of their own pocket to cover these expenses. This is in contrast to limited liability, where the owners' personal assets are protected from the debts of the business.

Question 11

Derek and his friend Tim own a bicycle shop. Tim works at the store full-time, whereas Derek only works on the weekends. Derek invested $5,000 in the business to get it started, plus he owned the building the shop is housed in, which is worth $50,000. Derek invested $15,000 in the business. Which of the following explains why Derek and Tim will split this year's profits of $130,000 with Tim getting 40% of the profits and Derek getting 60%?
A) Their business is a corporation, and they will split the profits according to each owner's percentage of ownership.
B) Their business is a corporation, and Tim's investment in the company is equal to 40%.
C) Their business is a partnership, and Tim works more hours at the shop than Derek.
D) Their business is a partnership, and they will distribute the profits according to the terms of the partnership agreement.

Accepted Answer

The answer of Derek and his friend Tim own a...

Question 12

What is the primary disadvantage of a sole proprietorship that a corporation overcomes?
A) tax complications
B) unlimited liability
C) ease of start-up
D) lack of secrecy

Accepted Answer

The primary disadvantage of a sole proprietorship is unlimited liability, which means that the owner is personally responsible for any financial losses or legal issues that the business may face. In a corporation, shareholders have limited liability, which means they are only responsible for the amount of money they have invested in the company. This is a significant advantage as it protects shareholders' personal assets from being at risk due to the company's liabilities.

Question 13

You invested $50,000 to start an LLP business, but things haven't gone as planned. After two years of no profits, you have to shut the doors. The business owes creditors $75,000 for bills you haven't paid. How much money will you personally lose as a result of this business?
A) $0
B) $50,000 initial investment, but nothing more
C) $50,000 initial investment plus the $75,000 in unpaid business debt
D) $75,000 in unpaid business debt

Accepted Answer

In a Limited Liability Partnership (LLP), partners are not personally liable for the debts of the business beyond their initial investment. Therefore, you would lose your initial investment of $50,000, but you would not be personally responsible for the $75,000 in unpaid business debt.

Question 14

Zach inherited a large amount of money from his uncle. Zach wishes to start a business with his college friend, and his lawyers encourage him to make it a corporation. What is the advantage of forming a corporation instead of a partnership?
A) limited liability
B) ease of start-up and administration
C) pass-through taxation
D) double taxation

Accepted Answer

The advantage of forming a corporation instead of a partnership is limited liability. With a corporation, the owners (shareholders) are not personally liable for the debts and obligations of the business. This means that their personal assets are protected in case the business fails or faces legal action. In contrast, in a partnership, the partners are personally liable for the debts and obligations of the business.

Question 15

Namra and her brother, Faisal, took over the family-owned pet store when her father retired. Sales have been sluggish due to a larger pet store opening in the area. Namra is panicked because the pet store owes various creditors $25,000. If the business closes, she will have to sell her car to pay back the debt. Faisal tells her, "Don't worry! There is no way the creditors can come after your personal property." How can Faisal be so sure?
A) Faisal knows that his father formed the business as a sole proprietorship, which means they have limited liability and will not need to pay back business debts.
B) Faisal knows that companies formed as corporations only have to pay back business debts over $30,000.
C) Faisal knows that the company is a partnership, which means they have limited liability and will not need to pay back business debts.
D) Faisal knows that the company is owned as an LLP, which means that he and Namra have limited liability and will not need to pay back business debts.

Accepted Answer

Faisal knows that the company is owned as an LLP, which means that he and Namra have limited liability and will not need to pay back business debts. In an LLP, the owners are not personally liable for the debts of the company. Therefore, creditors cannot go after Namra's personal property to pay off the business debts.

Question 16

Which of the following statements about corporations is true?
A) Corporations must distribute profits at the end of each year.
B) Corporate tax rates are always higher than individual tax rates.
C) Corporations utilize pass-through taxation.
D) Corporations can deduct certain business expenses that other forms of business can't, which could lower the amount of money subject to taxes.

Accepted Answer

Corporations can deduct certain business expenses that other forms of business can't, which could lower the amount of money subject to taxes.

Question 17

The gift shop chain that Althea started has since been incorporated. Which of the following best describes the liability that Althea has as the primary shareholder in this corporation?
A) Althea may have to give up her car and house if the corporation fails in order to cover the debts of the corporation.
B) The other shareholders will be able to seize Althea's personal money but not her primary residence in the event that the business fails.
C) Althea's personal assets will be protected in the event that the corporation fails, although she could lose her entire initial investment.
D) Althea will be liable only for losses that develop from decisions she made about the daily business operations.

Accepted Answer

As the primary shareholder in a corporation, Althea's personal assets will generally be protected in the event that the corporation fails, although she could lose her entire initial investment. This is because a corporation is a separate legal entity from its owners, and it assumes its own risks and liabilities. Althea may only lose the money that she invested in the corporation and any obligations that she personally guaranteed, but she will not be personally liable for the corporation's debts and obligations.

Question 18

Tasha's T-Shirts Inc. made $500,000 profit last year. That profit will be taxed at the company's tax rate. Tasha will then reinvest those after-tax profits back into the business to avoid paying an additional tax on dividends. What is the term for this type of taxation?
A) sales taxation
B) corporate taxation
C) flat taxation
D) pass-through taxation

Accepted Answer

This is known as corporate taxation, where the profits of a corporation are taxed before being distributed as dividends to shareholders. By reinvesting the after-tax profits back into the business, Tasha is avoiding paying additional tax on dividends.

Question 19

Doctors, lawyers, accountants, and tradespeople like plumbers and electricians often set themselves up as what form of business?
A) one-person corporation
B) a public corporation
C) a partnership
D) a private corporation

Accepted Answer

The answer of Doctors, lawyers, accountants, and tradespeople like plumbers...

Question 20

Manuel owns a mobile pet-grooming business. Last year as he was grooming a poodle Manuel accidentally dropped the clippers, causing a gash on the poodle's back. The poodle's owner then sued Manuel for the veterinarian bills. The court determined that Manuel owed the poodle's owner $2,000. Which of the following describes the likely form of Manuel's pet-grooming business and his liability?
A) a sole proprietorship, which means he has unlimited liability
B) a corporation, which means he has unlimited liability
C) a partnership, which means he has limited liability and paid only a portion of the veterinarian bills
D) a corporation, which means he has limited liability

Accepted Answer

Manuel's mobile pet-grooming business is likely a sole proprietorship since it is owned by one individual. As a sole proprietor, Manuel has unlimited liability, which means he is personally responsible for all debts and legal obligations of the business. Therefore, he will be responsible for paying the full $2,000 in veterinarian bills.

Quiz 4: Choosing a Form of Business Ownership

What is the term for ownership structures where profits go straight to the owners and taxes are reported on each owner's individual tax return?

You are 50% partner in a general partnership. The business has outstanding debts of $250,000 and is closing due to the death of your only partner. What is your personal liability?

Which of the following ownership structures holds a business owner personally responsible for all debts of the business?

Rachelle owns a business with her brother, Ryan. Last year their company earned a profit of $200,000. Which type of business do they own if Rachelle paid taxes on her $100,000 share on her individual tax return?

Karissa is 25% owner in a corporation that builds custom machinery. Last year the corporation suffered due to intense competition. After losing $1,000,000 last year, the business is shutting its doors. The business has unpaid debts of $9,000,000. What is Karissa's personal liability?

If a corporation makes $100,000 in profit, how will that profit be taxed if the money is all distributed to the owners?

Mei's coffee shop made $250,000 profit last year. Mei and her partner will report their share of profits on their individual tax return. What is the term for this type of taxation?

In terms of business ownership, what is meant by unlimited liability?

What is the primary disadvantage of a sole proprietorship that a corporation overcomes?

You invested $50,000 to start an LLP business, but things haven't gone as planned. After two years of no profits, you have to shut the doors. The business owes creditors $75,000 for bills you haven't paid. How much money will you personally lose as a result of this business?

Zach inherited a large amount of money from his uncle. Zach wishes to start a business with his college friend, and his lawyers encourage him to make it a corporation. What is the advantage of forming a corporation instead of a partnership?

Which of the following statements about corporations is true?

The gift shop chain that Althea started has since been incorporated. Which of the following best describes the liability that Althea has as the primary shareholder in this corporation?

Tasha's T-Shirts Inc. made $500,000 profit last year. That profit will be taxed at the company's tax rate. Tasha will then reinvest those after-tax profits back into the business to avoid paying an additional tax on dividends. What is the term for this type of taxation?

Doctors, lawyers, accountants, and tradespeople like plumbers and electricians often set themselves up as what form of business?