Question 1

James is the sole proprietor of an automobile store. He wishes to pass on his assets to his children after his death. In order to attain the best tax advantage, what will his lawyer most likely advise him to do?
A) Sell the automobile store and pass the money on as cash so that he will only lose about 60 percent of it in estate taxes.
B) Sell the automobile store to the government in order to get twice the market value for it and then pass on the windfall.
C) Convert the sole proprietorship to a limited liability company and list it in his will as handed down to his heirs.
D) List the sole proprietorship in his will as passing to his heirs.

Accepted Answer

By converting the sole proprietorship to a limited liability company, James can reduce the tax burden on his heirs. LLCs offer better tax advantages compared to sole proprietorships, and listing it in his will as handed down to his heirs will ensure a smooth transfer of assets without any legal complications. Selling the store or selling to the government could lead to capital gains taxes or other legal issues, and simply listing it in his will as passing to his heirs could result in higher estate taxes.

Question 2

Marco wishes to be able to run his new business the way he wants and be his own boss. He also wants to keep all of the after­tax earnings for himself. Which of the following forms of business ownership would be most suitable for Marco?
A) Limited partnership
B) Limited liability company
C) C corporation
D) Sole proprietorship

Accepted Answer

A sole proprietorship is the only form of business ownership where the owner has complete control over the business and keeps all after-tax earnings. Limited partnerships have at least one general partner who is responsible for the management and can be held liable, while limited liability companies and C corporations have multiple owners and may have to pay out some earnings to shareholders or members.

Question 3

Sole proprietors have _____ for the debts of their companies.
A) no liability
B) limited liability
C) unlimited liability
D) shared liability

Accepted Answer

Sole proprietors have unlimited liability for the debts of their companies, meaning they are personally responsible for all debts and obligations incurred by the business. This means that their personal assets may be used to pay off any business debts or legal judgments.

Question 4

Thomas started an engineering company as a sole proprietorship two years ago with only three employees. Thomas is finding it hard to acquire new employees. Which of the following is most likely the reason for the company's inability to attract new employees?
A) The company may not be able to pay the high salaries and perks that well­established companies might pay their employees.
B) The company may not be regulated by the government and the federal agencies.
C) The company may impose heavy taxes on employees' salaries.
D) The company may expose the employees to unlimited liability for any debts incurred on the owners of the company.

Accepted Answer

Being a relatively new and small business, the company may not have the resources to pay high salaries and perks that larger and more established companies can offer, which can make it difficult to attract top talent. Choices B, C, and D are not relevant factors in the company's ability to attract new employees.

Question 5

A key advantage of a sole proprietorship is that:
A) it is easy and inexpensive to form this type of business.
B) the owner has limited liability for the debts incurred.
C) it is very easy to raise financial capital for this type of business.
D) the business has perpetual life.

Accepted Answer

Sole proprietorship is the easiest and cheapest business structure to create. It requires minimum legal formalities, does not involve extensive paperwork and legal fees, and has fewer regulations as compared to other business structures.

Question 6

Dana wants to setup a business quickly where she has the freedom to be her own boss and minimize the taxes that can be imposed. But, she is nervous about risking her personal wealth. Which of the following conditions will not be met in a sole proprietorship?
A) Guaranteed security of her personal wealth
B) Ease of setting up the business quickly
C) Freedom to be her own boss
D) Minimization of the taxes that can be imposed

Accepted Answer

A sole proprietorship does not offer guaranteed security of personal wealth as the owner's personal assets are not legally separate from the business's assets. In the event of any legal or financial liability, the owner's personal assets are at risk.

Question 7

A _____ is unaffected by the death or withdrawal of an owner.
A) sole proprietorship
B) general corporation
C) general partnership
D) limited partnership

Accepted Answer

A general corporation is considered a separate legal entity from its owners/shareholders, which means that it is not affected by the death or withdrawal of an owner. This is known as the concept of perpetual existence. In contrast, a sole proprietorship, general partnership, and limited partnership are all tied to the specific individuals who own or operate them, and therefore can be impacted by the departure or death of an owner.

Question 8

The three types of partnerships are:
A) sole, general, and specific.
B) general, unlimited, and specific liability.
C) specific, general, and generic.
D) general, limited, and limited liability.

Accepted Answer

The three types of partnerships are general, limited, and limited liability. General partnership involves equal sharing of profits and losses and each partner can take part in the management of the business. In limited partnership, there are two types of partners- general partners who have unlimited liability and participate in management, and limited partners who contribute capital but don't participate in management and have limited liability. Limited liability partnership (LLP) combines the advantages of a corporation with those of a partnership. It provides limited liability protection to its partners while also allowing them to participate in management.

Question 9

Which of the following statements is true of formation of general partnerships?
A) It is safer to get everything in writing and to seek expert legal assistance when drawing up an agreement.
B) It is legally not possible to start a partnership on the basis of a verbal agreement.
C) There is a limit on the number of partners who can participate in a general partnership.
D) A general partnership is formed when partners enter into an involuntary partnership agreement.

Accepted Answer

It is important to have a formal written agreement in place to avoid misunderstandings and disputes later on. Seeking legal assistance can also ensure that the partnership agreement is legally binding and covers all necessary aspects such as profit sharing, roles and responsibilities, and dispute resolution mechanisms.

Question 10

Corporations can raise large amounts of financial capital by selling formal IOUs called _____.
A) government bonds
B) corporate bonds
C) common stocks
D) preferred stocks

Accepted Answer

Corporations can raise large amounts of financial capital by selling formal IOUs called corporate bonds. Government bonds are issued by the government to raise funds, while stocks represent ownership in the company rather than debt. Preferred stocks are a type of stock that pays a fixed dividend and has priority over common stock in the event of bankruptcy, but it still represents ownership in the company rather than debt.

Question 11

Compared to a sole proprietorship, a general partnership:
A) has certainty regarding how long a business will last.
B) is likely to have a stronger financial base.
C) has limited ability to attract and maintain employees.
D) is likely to have limited liability.

Accepted Answer

A general partnership is formed by two or more individuals who agree to share profits and losses. Unlike a sole proprietorship, a partnership has the benefit of multiple owners contributing capital and other resources, which can help create a stronger financial base. However, like a sole proprietorship, a general partnership has unlimited liability.

Question 12

Justin decided to operate his own web design firm and is leaning toward organizing it as a sole proprietorship. A factor Justin should realize is that by choosing this form of business he would be:
A) creating a business that is legally separate and distinct from himself.
B) incurring the problem of double taxation.
C) exposing himself to unlimited personal liability for the company's debts.
D) required to fill out special forms and pay proprietorship fees to get the company legally established.

Accepted Answer

By choosing to organize his web design firm as a sole proprietorship, Justin would be exposing himself to unlimited personal liability for the company's debts. This means that if the business were unable to pay its debts, Justin's personal assets could be seized to satisfy those obligations.

Question 13

Tina is the owner of a piano tuning business. As a sole proprietor, any profit she earns is:
A) taxed twice, once as a business and then again as Tina's income.
B) treated as personal income of Tina.
C) not subjected to any tax.
D) taxed only when she withdraws the money from a bank.

Accepted Answer

As a sole proprietor, Tina is classified as a pass-through entity for tax purposes. This means any profit she earns is not taxed at the business level, but rather is reported on her personal tax return as income. Therefore, the profit is treated as personal income of Tina.

Question 14

Which of the following is an advantage of sole proprietorship?
A) Ease of pooling financial resources
B) Ability to attract talented employees
C) Retention of control
D) Limited liability

Accepted Answer

The retention of control is an advantage of sole proprietorship as the owner has full control over decision-making without having to consult with any other partners or shareholders. However, pooling financial resources, attracting talented employees, and limited liability are advantages associated with other types of business structures such as partnerships and corporations.

Question 15

A key reason most sole proprietorships remain relatively small is that:
A) they have limited ability to raise funds needed to finance growth.
B) they involve extensive paperwork and incur heavy costs.
C) heavy taxes are levied directly on their earnings as a business.
D) their stockholders would rather receive dividends than have earnings reinvested to finance growth.

Accepted Answer

Sole proprietorships are operated by one individual who is responsible for all aspects of the business, including financing. Since they do not have the ability to sell stock or attract investors, raising funds can be a challenge, limiting their ability to finance growth. As a result, many sole proprietorships remain relatively small.

Question 16

A general partnership avoids the problem of _____ endemic to corporations.
A) disagreements
B) unlimited liability
C) double taxation
D) withdrawal

Accepted Answer

General partnerships avoid double taxation, which is a common issue in corporations where income is taxed at both the corporate level and again at the individual level when distributed as dividends.

Question 17

A _____ is a voluntary agreement under which two or more people act as co­owners of a business for profit.
A) sole proprietorship
B) partnership
C) corporation
D) limited liability company

Accepted Answer

A partnership is a type of business organization in which two or more people agree to share the profits and losses of a business. It is a voluntary agreement between the partners, who are co-owners of the business. A partnership can be formed as a general partnership or a limited partnership, depending on the level of liability the partners are willing to accept.

Question 18

Which of the following details will a typical partnership agreement contain?
A) The specific details of each partner's personal wealth
B) The number of employees who will work in the partnership firm
C) The specific duties and responsibilities that each partner will assume
D) The state in which the partnership is to be registered

Accepted Answer

A partnership agreement will typically contain the specific duties and responsibilities that each partner will assume. This is important in order to ensure that each partner understands their role in the partnership and to avoid disputes. The agreement may also contain other details such as the state in which the partnership is to be registered, but it would not typically include the specific details of each partner's personal wealth or the number of employees who will work in the partnership firm.

Question 19

Which of the following is a disadvantage of a sole proprietorship?
A) A sole proprietorship is difficult to form because of the extensive paperwork and costs involved.
B) The owner of a sole proprietorship has to manage the business in accordance with the directions of the board of directors.
C) A sole proprietorship is subjected to double taxation of its earnings.
D) A sole proprietorship lacks permanence because it is just an extension of its owners.

Accepted Answer

A sole proprietorship is dependent on the owner's life and cannot exist independently. If the owner dies or is incapacitated, the business may be forced to shut down or undergo significant changes in management.

Question 20

Samantha wants to set up a small business to sell her paintings. She wants to start her business as quickly and inexpensively as possible. She doesn't want to share the profits with anyone else. Which form of business ownership would be suitable for Samantha?
A) A general partnership
B) A C corporation
C) A sole proprietorship
D) A limited liability company

Accepted Answer

A sole proprietorship would be the best form of business ownership for Samantha, as it is the quickest and least expensive way to start a business. As a sole proprietor, she would have full control over her business and would not have to share profits with anyone else. Additionally, there is minimal paperwork involved in setting up a sole proprietorship.

Quiz 6: Business Formation: Choosing the Form That Fits

James is the sole proprietor of an automobile store. He wishes to pass on his assets to his children after his death. In order to attain the best tax advantage, what will his lawyer most likely advise him to do?

Marco wishes to be able to run his new business the way he wants and be his own boss. He also wants to keep all of the aftertax earnings for himself. Which of the following forms of business ownership would be most suitable for Marco?

Sole proprietors have _____ for the debts of their companies.

Thomas started an engineering company as a sole proprietorship two years ago with only three employees. Thomas is finding it hard to acquire new employees. Which of the following is most likely the reason for the company's inability to attract new employees?

A key advantage of a sole proprietorship is that:

Dana wants to setup a business quickly where she has the freedom to be her own boss and minimize the taxes that can be imposed. But, she is nervous about risking her personal wealth. Which of the following conditions will not be met in a sole proprietorship?

A _____ is unaffected by the death or withdrawal of an owner.

The three types of partnerships are:

Which of the following statements is true of formation of general partnerships?

Corporations can raise large amounts of financial capital by selling formal IOUs called _____.

Compared to a sole proprietorship, a general partnership:

Justin decided to operate his own web design firm and is leaning toward organizing it as a sole proprietorship. A factor Justin should realize is that by choosing this form of business he would be:

Tina is the owner of a piano tuning business. As a sole proprietor, any profit she earns is:

Which of the following is an advantage of sole proprietorship?

A key reason most sole proprietorships remain relatively small is that:

A general partnership avoids the problem of _____ endemic to corporations.

A _____ is a voluntary agreement under which two or more people act as coowners of a business for profit.

Which of the following details will a typical partnership agreement contain?

Which of the following is a disadvantage of a sole proprietorship?

Samantha wants to set up a small business to sell her paintings. She wants to start her business as quickly and inexpensively as possible. She doesn't want to share the profits with anyone else. Which form of business ownership would be suitable for Samantha?