Question 1

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

Accepted Answer

When a partnership is converted into a corporation, the firm becomes subject to additional regulations such as filing annual reports and holding shareholder meetings. These regulations are in place to protect the interests of shareholders and ensure transparency in corporate practices.

Question 2

Which of the following statements is CORRECT?

Accepted Answer

The corporate charter outlines the business activities and structure, while the bylaws detail the internal governance procedures, such as electing the board of directors.

Question 3

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?

Accepted Answer

The reason why a business might choose to operate as a corporation rather than as a sole proprietorship or partnership is that corporate shareholders escape liability for the firm's debts, which is not the case for sole proprietorship or partnership. However, the tax disadvantages of the corporate form of organization may offset this advantage.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship. In a corporation, ownership can be transferred by selling or buying shares, while in a sole proprietorship, the entire business must be sold or transferred.

Option B is incorrect because corporate shareholders have limited liability, meaning their personal assets are not at risk for the corporation's debts or liabilities.

Option C is incorrect because corporations generally face more regulations than sole proprietorships due to their larger size and legal structure.

Option D is partially true about corporate shareholders being exposed to unlimited liability, but the tax advantages of incorporation often outweigh this risk.

Option E is incorrect because shareholders in a regular corporation generally pay lower taxes than owners of a sole proprietorship due to the ability to deduct business expenses and the potential for tax deferral.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

Statement C correctly defines a corporation as a legal entity created by a state with a separate existence from its owners and managers. Statements A, B, D, and E are incorrect:
A) Hostile takeovers are not the main method of transferring ownership interest in a corporation.
B) Unlimited liability is a disadvantage, not an advantage, of other forms of business organization compared to the limited liability of the corporate form. Limited life is an advantage of the corporate form, but not a key advantage compared to unlimited liability.
D) Limited liability is an advantage of the corporate form and corporations can raise money easier than other forms of organization because of their ability to issue stock.
E) The legal status of a corporation protects both stockholders and managers from personal liability, but managers can still be held responsible for poor management decisions.

Question 6

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

Accepted Answer

Limited liability protects owners from being personally held responsible for the company's debts or legal issues, which reduces their financial risk. This can increase the owners' willingness to invest in the firm and can attract more investors, ultimately leading to increased value for the company.

Question 7

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?

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.

Question 8

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 do not have limited liability; they are personally responsible for the debts of the business, similar to a sole proprietorship. It is corporations that offer limited liability to their owners (shareholders).

Question 9

Which of the following statements is CORRECT?

Accepted Answer

Partnerships have unlimited liability, which means that partners are personally responsible for the debts and obligations of the partnership. This can make it difficult to attract capital, as potential investors may be hesitant to risk their personal assets. Additionally, partnerships are typically less impermanent than corporations, which can make it challenging to transfer ownership and can also make it difficult to attract investment capital.

Question 10

Which of the following statements is CORRECT?

Accepted Answer

Sole proprietorships and partnerships do not pay corporate income tax, instead the owners report their share of the business's income on their personal tax returns, which may result in lower tax rates than large corporations.

Question 11

Which of the following statements is CORRECT?

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 for their owners and ease of transferring ownership, which are particularly valuable for large-scale operations. Despite sometimes facing less favorable tax treatment compared to sole proprietorships and partnerships, the legal advantages of corporations, such as their ability to continue indefinitely and the limited liability they offer to their shareholders, make them the preferred structure for large businesses.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

The statement that is correct is that one of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. This means that the owner is personally responsible for all debts and obligations of the business, and if the business cannot pay its debts, the owner's personal assets may be seized to satisfy those debts. The other statements are incorrect. B is false because it is generally easier to transfer ownership interest in a corporation than in a partnership. C is false because the corporate form of organization is subject to double taxation, meaning that both the corporation and its shareholders must pay taxes on corporate profits. D is false because not all corporations have equal voting rights. Some corporations have different classes of stock with different voting rights attached to each class. E is false because some corporations, such as S corporations, are not subject to the corporate income tax.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

Partnerships have unlimited liability, which means that partners are personally responsible for the partnership's debts and obligations. Additionally, partnerships can face difficulties in attracting large amounts of capital due to factors such as the need for reorganization when a partner dies and the illiquidity of partnership interests. Corporations, on the other hand, have limited liability and are able to issue stocks and bonds to raise large amounts of capital.

Question 14

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

Proprietorships do not pay separate corporate income tax, as the profits and losses are reported on the owner's personal tax return. Additionally, they are relatively easy and inexpensive to form, as they do not require filing with the state or creation of formal governing documents.

Question 15

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

The statement accurately describes the three primary disadvantages of a regular partnership and how they can hinder the ability to attract large amounts of capital and grow to a large size.

Question 16

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?

Accepted Answer

An S corporation would provide Jane with limited liability protection and allow her to pass income and losses through to her personal tax return, which can be beneficial given the expected initial losses.

Question 17

Which of the following statements is CORRECT?

Accepted Answer

In a regular partnership, each partner is personally liable for the debts and obligations of the business. However, in a corporation, equity investors are only exposed to the amount of their investment and do not have personal liability for the corporation's debts. This is known as limited liability, which is a key advantage of forming a corporation. The other options are incorrect.

Question 18

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

This statement is incorrect. Proprietorships and partnerships both have difficulty raising large amounts of capital because they rely on the personal assets of the owner or partners. However, partnerships may have a more formal agreement in place which can provide more commitment and structure for the business.

Question 19

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 for a business can have significant impact on the income and wealth of the firm's owners. Factors such as taxes, liability, governance, and access to capital can all be influenced by the choice of organizational form.

Question 20

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

Proprietorship is a business owned by one person who is responsible for all aspects of the business. Two major disadvantages of proprietorship are difficulty in raising capital and unlimited personal liability for business's debts. Therefore, the statement is true.

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:

Which of the following statements is CORRECT?

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

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?

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 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?

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.

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 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.

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.