Question 1

One drawback of switching from a partnership to the corporate form of organization is the following:
A) It subjects the firm to additional regulations.
B) It cannot affect the amount of the firm's operating income that goes to taxes.
C) It makes it more difficult for the firm to raise additional capital.
D) It makes the firm's investors subject to greater potential personal liabilities.
E) It makes it more difficult for the firm's investors to transfer their ownership interests.

Accepted Answer

Switching to a corporate form of organization typically entails additional regulations, such as filing articles of incorporation and annual reports, holding regular shareholder meetings, and complying with securities laws. This can increase administrative and compliance costs for the firm.

Question 2

Cheers Inc.operates as a partnership.Now the partners have decided to convert the business into a regular corporation.Which of the following statements is CORRECT?
A) Assuming Cheers is profitable, less of its income will be subject to federal income taxes.
B) Cheers will now be subject to fewer regulations.
C) Cheers' shareholders (the ex-partners) will now be exposed to less liability.
D) Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.
E) Cheers will find it more difficult to raise additional capital.

Accepted Answer

C) Converting a partnership into a corporation generally limits the liability of the shareholders (the ex-partners) to the amount they have invested in the company, protecting their personal assets from the company's debts and obligations. This is a key advantage of the corporate structure over a partnership.

Question 3

Which of the following statements is CORRECT?
A) The corporate bylaws are a standard set of rules established by the state of incorporation.These rules are identical for all corporations in the state, and their purpose is to ensure that the firm's managers run the firm in accordance with state laws.
B) The corporate charter is a standard document prescribed by the state of incorporation, and its purpose is to ensure that the firm's managers run the firm in accordance with state laws.Procedures for electing corporate directors are contained in bylaws, while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter.
C) Companies must establish a home office, or domicile, in a particular state, and that state must be the one in which most of their business (sales, manufacturing, and so forth) is conducted.
D) Attorney fees are generally involved when a company develops its charter and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have either a charter or bylaws.
E) The corporate charter is concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors.

Accepted Answer

The corporate charter indeed outlines the fundamental aspects of a company, such as its business activities, while the bylaws focus on internal procedures, including how the board of directors is elected. This distinction correctly reflects the roles of these documents in corporate governance.

Question 4

Which of the following statements is CORRECT?
A) It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.
B) Corporate shareholders are exposed to unlimited liability.
C) Corporations generally face fewer regulations than sole proprietorships.
D) Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.
E) Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.

Accepted Answer

It is generally easier to transfer ownership in a corporation than in a sole proprietorship because ownership of a corporation is represented by shares of stock, which can be easily bought and sold. In contrast, ownership of a sole proprietorship is tied to the individual who owns and operates the business, making it more difficult to transfer ownership.

Answers B, C, D, and E are all incorrect. B is incorrect because corporate shareholders have limited liability, meaning they are not personally responsible for the debts and obligations of the corporation. C is incorrect because corporations generally face more regulations than sole proprietorships due to their larger size and greater public impact. D is incorrect because, as stated above, corporate shareholders have limited liability and therefore are not personally exposed to unlimited liability. E is incorrect because owners of a regular corporation may actually pay less in taxes than owners of a sole proprietorship due to the ability to deduct various expenses and the potential for lower tax rates on corporate profits. However, the tax advantages and disadvantages of incorporation vs. sole proprietorship can vary based on individual circumstances.

Question 5

Which of the following statements is CORRECT?
A) The main method of transferring ownership interest in a corporation is by means of a hostile takeover.
B) Two key advantages of the corporate form over other forms of business organization are unlimited liability and limited life.
C) A corporation is a legal entity that is generally created by a state; its life and existence is separate from the lives of its individual owners and managers.
D) Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.
E) Although its stockholders are insulated by limited legal liability, the corporation's legal status does not protect the firm's managers in the same way; i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions.

Accepted Answer

A corporation is a legal entity that is created by state law and has a separate legal existence from its owners and managers. This is known as the "separation of ownership and management."

Question 6

Which of the following statements is CORRECT?
A) Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies, including the Securities and Exchange Administration, even if they are not publicly owned.
B) In a regular partnership, liability for the firm's debts is limited to the amount a particular partner has invested in the business.
C) A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company.
D) Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of impermanence of the organization, and difficulty in transferring ownership.
E) A major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation.

Accepted Answer

Partnerships have unlimited liability, which means the partners are personally liable for the debts of the firm. This is a major disadvantage for partnerships because it can be difficult to attract capital as investors may not want to risk their personal assets. Additionally, partnerships do not have the same flexibility as corporations when it comes to transferring ownership, which can make it difficult to raise capital.

Question 7

There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership.These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

Accepted Answer

These are indeed the three primary disadvantages of a regular partnership, which can hinder its growth potential in terms of attracting capital and expanding to a larger size.

Question 8

Which of the following statements is CORRECT?
A) In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
B) Attracting large amounts of capital is more difficult for partnerships than for corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.
C) A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company.
D) The limited partners in a limited partnership have voting control, while the general partner has operating control over the business.Also, the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy.
E) A major disadvantage of all partnerships compared to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

Accepted Answer

Partnerships have unlimited liability, and when a partner dies, the partnership usually must be reorganized. Additionally, partnership interests are often illiquid, which can make it more difficult to attract large amounts of capital. These factors make it more difficult for partnerships to attract capital compared to corporations. The other statements are incorrect.

Question 9

The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not.

Accepted Answer

In a regular partnership, the partners have unlimited liability, similar to a sole proprietorship. It is corporations that offer limited liability to their owners (shareholders), protecting their personal assets from business debts and obligations.

Question 10

Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?
A) Corporations generally find it relatively difficult to raise large amounts of capital.
B) Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.
C) Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.
D) Corporate investors are exposed to unlimited liability.
E) Corporations generally face relatively few regulations.

Accepted Answer

By operating as a corporation, shareholders are not personally liable for the firm's debts, which can be a significant advantage. However, there may be tax disadvantages to operating as a corporation compared to a sole proprietorship or partnership. Additionally, corporations may be subject to more regulations than other forms of business organization. Option A is incorrect because corporations have access to a wider variety of ways to raise capital than sole proprietorships or partnerships. Option B is incorrect because the tax implications of a corporation versus a partnership depend on the specific situation. Option D is incorrect because one of the advantages of a corporation is that investors have limited liability. Option E is incorrect because corporations are often subject to numerous regulations.

Question 11

Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business' debts.

Accepted Answer

This statement is true. Proprietorship is a type of business where there is no legal distinction between the owner and the business entity. As a result, the owner has unlimited personal liability for the business' debts, and it may be difficult to raise new capital as it solely depends on the owner's ability to fund the business personally or borrow from external sources.

Question 12

Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in the chemical waste management field.She will be the sole owner, and she has enough funds to finance the operation.The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years.However, the prospects for growth and positive future income look good, and Jane plans to have the firm pay out all of its income as dividends to her once it is well established.Which of the legal forms of business organization would probably best suit her needs?
A) Proprietorship, because of ease of entry.
B) S corporation, to gain some tax advantages and also to obtain limited liability.
C) Partnership, but only if she needs additional capital.
D) Regular corporation, because of the limited liability.
E) In this situation, the various forms of organization seem equally desirable.

Accepted Answer

The answer of Jane Doe, who has substantial personal wealth...

Question 13

Which of the following statements is CORRECT?
A) Most businesses (by number and total dollar sales) are organized as partnerships or proprietorships because it is easier to set up and operate in one of these forms rather than as a corporation.However, if the business gets very large, it becomes advantageous to convert to a corporation, mainly because corporations have important tax advantages over proprietorships and partnerships.
B) Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S.businesses (in terms of number of businesses) are organized as corporations.
C) Most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less favorable tax treatment, due to legal considerations related to ownership transfers and limited liability.
D) Large corporations are taxed more favorably than sole proprietorships.
E) Corporate stockholders are exposed to unlimited liability.

Accepted Answer

Most business, when measured by dollar sales, is indeed conducted by corporations. This is largely because corporations offer benefits such as limited liability and ease of ownership transfer, which are particularly valuable for large-scale operations, despite the often less favorable tax treatment they receive compared to sole proprietorships and partnerships.

Question 14

Which of the following statements is CORRECT?
A) It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.
B) Corporations face fewer regulations than sole proprietorships.
C) One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level.
D) One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.
E) If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

Accepted Answer

One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership. This is due to the limited liability feature of corporations, which means that the shareholders' personal assets are not at risk if the corporation goes bankrupt or faces legal issues.

Question 15

Which of the following statements is CORRECT?
A) One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
B) It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
C) One of the advantages of the corporate form of organization is that it avoids double taxation.
D) One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote."
E) Corporations of all types are subject to the corporate income tax.

Accepted Answer

One of the disadvantages of a sole proprietorship is that the proprietor is personally responsible for all the business's debts and liabilities, which means that they are exposed to unlimited liability. This can put their personal assets at risk if the business gets into financial trouble. Option B is incorrect because transferring ownership interest in a corporation is easier than in a partnership as it involves the transfer of shares of stock. Option C is correct but incomplete as it avoids double taxation by receiving tax deductions for certain expenses. Option D is incorrect as the voting rights of stockholders depend on the type of stock they own, and not all stockholders have equal voting rights. Option E is incorrect because some types of corporations, such as S corporations, are not subject to the corporate income tax.

Question 16

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

Accepted Answer

The statement is incorrect as it says partnerships do not have difficulty raising large amounts of capital, which is not always true. In fact, partnerships may still face challenges in raising capital, especially if they are a relatively new or small business.

Question 17

The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

Accepted Answer

The form of organization can have a significant impact on the income, wealth, and overall success of a business. Different organizational structures, such as sole proprietorships, partnerships, corporations, and limited liability companies, offer different levels of liability protection, tax implications, and management structures that can directly impact the financial outcomes of the business and its owners.

Question 18

One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

Accepted Answer

Limited liability protects the personal assets of the owners from the risks and debts of the company, which makes investing in the business more attractive to potential shareholders and increases the value of the firm.

Question 19

Which of the following statements is CORRECT?
A) One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.
B) Sole proprietorships are subject to more regulations than corporations.
C) In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
D) Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.
E) Corporations of all types are subject to the corporate income tax.

Accepted Answer

Sole proprietorships and partnerships are taxed as individual entities, meaning that the business income is reported on the owner(s) personal tax returns. This can often result in a lower tax rate compared to larger corporations, which are subject to corporate income tax.

Question 20

The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensively formed, are two key advantages to that form of business.

Accepted Answer

A proprietorship is not taxed as a separate entity, meaning the business owner reports profits and losses on their personal income tax return. This is one of the advantages of a proprietorship. Additionally, because it is an unincorporated business, it is relatively easy and inexpensive to start up compared to other business structures.

Quiz 1: An Overview of Financial Management and the Financial Environment

One drawback of switching from a partnership to the corporate form of organization is the following:

Cheers Inc.operates as a partnership.Now the partners have decided to convert the business into a regular corporation.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership.These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

Which of the following statements is CORRECT?

The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not.

Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?

Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business' debts.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

Which of the following statements is CORRECT?

The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensively formed, are two key advantages to that form of business.