Question 1

A sole proprietorship tends to be both larger and more profitable than a partnership.

Accepted Answer

A sole proprietorship is typically smaller and less profitable than a partnership, as it is owned and operated by a single individual, limiting resources and capital compared to a partnership which involves multiple individuals.

Question 2

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

Accepted Answer

A corporation is a legal entity that is separate from its owners, who are shareholders. The description given is more accurate for a partnership, not a corporation.

Question 3

One of the disadvantages of general partnerships is the lack of continuity.

Accepted Answer

In a general partnership, the business may dissolve if one partner leaves or passes away, leading to a lack of continuity.

Question 4

Choice of ownership determines the degree to which each owner has personal liability for the firm's debts.

Accepted Answer

The type of business ownership (e.g., sole proprietorship, partnership, corporation) affects the extent of personal liability owners have for the firm's debts.

Question 5

A disadvantage of an S corporation is that it can have no more than 50 stockholders.

Accepted Answer

An S corporation can have up to 100 stockholders, not 50.

Question 6

The Internal Revenue Service classifies each limited liability company (LLC) based on the tax treatment the company selects.

Accepted Answer

The IRS allows LLCs to choose their tax classification, such as being taxed as a sole proprietorship, partnership, or corporation, depending on the number of members and elections made.

Question 7

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

Accepted Answer

In a general partnership, there is no legal limit on the number of partners who can participate.

Question 8

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

Accepted Answer

A corporation requires formal legal procedures, including filing articles of incorporation with the state and adhering to specific regulatory requirements, which cannot be accomplished through a simple verbal agreement.

Question 9

A corporation can be a partner in a partnership.

Accepted Answer

Corporations can enter into partnerships with other entities, including individuals, other corporations, or partnerships, as long as the partnership agreement allows it.

Question 10

One of the advantages of a C corporation is ease of formation.

Accepted Answer

Forming a C corporation is more complex and involves more regulatory requirements compared to other business structures like sole proprietorships or partnerships.

Question 11

Common stock represents the basic ownership interest in a corporation.

Accepted Answer

Common stockholders have voting rights and a residual claim on the corporation's assets, representing the basic ownership interest in a corporation.

Question 12

Corporations are by far the most common type of business organization in the United States.

Accepted Answer

Sole proprietorships are the most common type of business organization in the United States, not corporations.

Question 13

A corporation is a business entity created by filing a form, which is known in most states as the
articles of incorporation.

Accepted Answer

Corporations are legally formed by filing articles of incorporation with the state government, which outlines the corporation's basic information and structure.

Question 14

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

Accepted Answer

A sole proprietorship is owned by a single individual, so there are no shareholders to share profits with.

Question 15

In the context of limited partnerships, the general partners of a company assume limited personal liability for any of the company's debts.

Accepted Answer

In a limited partnership, general partners have unlimited personal liability for the company's debts, while limited partners have liability only up to the amount they invested.

Question 16

A corporation offers more flexibility than a limited liability company (LLC) in terms of tax treatment.

Accepted Answer

A limited liability company (LLC) generally offers more flexibility in tax treatment than a corporation, as it can choose to be taxed as a sole proprietorship, partnership, S corporation, or C corporation.

Question 17

A limited partnership is an agreement between two or more individuals to operate a business as co-owners for a limited period of time.

Accepted Answer

A limited partnership is a business structure where at least one partner has limited liability and does not participate in management, while at least one other partner has unlimited liability and manages the business. It is not defined by a limited period of time.

Question 18

The most basic form of a partnership is known as a general partnership.

Accepted Answer

A general partnership is the simplest form of partnership where all partners share equal responsibility and liability for the business.

Question 19

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

Accepted Answer

Preferred stockholders typically do not have voting rights in stockholders' meetings, unlike common stockholders.

Question 20

The most common type of corporation is an S corporation.

Accepted Answer

The most common type of corporation is a C corporation, not an S corporation. C corporations are the standard corporation type, while S corporations have specific tax advantages and restrictions.

Quiz 6: Business Formation: Choosing the Form That Fits