Question 1

Large firms like Apple, Facebook, General Electric, and Microsoft, that trade on organized stock exchanges, are ________.

Accepted Answer

Large firms that trade on organized stock exchanges are typically C corporations, which offer limited liability protection to their shareholders and have the ability to issue publicly traded stocks. Limited partnerships, limited liability companies, subchapter S corporations, and general partnerships are all different types of business entities that have different legal and tax implications.

Question 2

Which of the following is a disadvantage of a C Corporation?

Accepted Answer

The disadvantage of a C Corporation is that income is subject to double taxation. This means that the corporation pays taxes on its profits, and then shareholders also pay taxes on any dividends they receive.

Question 3

A ________ combines the advantages of a partnership and a C corporation.

Accepted Answer

A subchapter S corporation is a type of corporation that offers the legal liability protection of a C corporation, but is taxed similarly to a partnership. This means that the corporation's profits and losses are passed through to its shareholders and reported on their personal tax returns. This avoids the double taxation of C corporations and offers the same level of protection as a partnership.

Question 4

A ________ sets forth the rights and duties of the general and limited partners, along with the details of how the partnership will be managed and eventually dissolved.

Accepted Answer

A limited partnership agreement sets forth the rights and duties of the general and limited partners, along with the details of how the partnership will be managed and eventually dissolved. A partnership accord, restricted partnership agreement, business partnership agreement, and limited partnership concurrence are not commonly used terms in reference to partnerships, and do not accurately describe the document in question.

Question 5

Most C corporations have two classes of stock- ________ and ________.

Accepted Answer

The most common classes of stock for C corporations are common and preferred. Common stock represents ownership in the company and typically grants the shareholder voting rights. Preferred stock usually does not carry voting rights but provides other benefits, such as fixed dividends or priority in the distribution of assets in the event of a company's bankruptcy.

Question 6

Which of the following is true regarding common and preferred stock?

Accepted Answer

Common stock is typically issued more broadly than preferred stock. Common stock represents ownership in a company and typically carries voting rights, whereas preferred stock represents a fixed claim on a company's earnings and cash flows but does not carry voting rights. As a result, companies may issue preferred stock to a smaller group of investors who are seeking a fixed return, while issuing common stock more broadly to raise capital and allow for greater investor participation in the company's governance.

Question 7

Which of the following statements about limited partnerships is incorrect?

Accepted Answer

Limited partners are not responsible for the debts and obligations of the partnership beyond their initial investment. This is one of the main advantages of a limited partnership over a general partnership.

Question 8

Which of the following is NOT one of the standards that a business must meet to qualify for status as a subchapter S corporation?

Accepted Answer

The business being a subsidiary of another corporation is not a requirement for subchapter S status. The other options are all requirements, including shareholder agreement, limited number of members, one class of stock, and U.S. citizenship of shareholders.

Question 9

Corporations that trade their stock on organized exchanges like the New York Stock Exchange and the NASDAQ are called ________ corporations.

Accepted Answer

Corporations that trade their stock on organized exchanges are called public corporations. This means their stock is available to be purchased by the public. The other choices are not the proper terms used to describe these corporations.

Question 10

A disadvantage of C corporations is that they are subject to ________, which means that a corporation is taxed on its net income and when the same income is distributed to shareholders in the form of dividends it is taxed again on shareholders' personal income tax returns.

Accepted Answer

C corporations are subject to double taxation where they are taxed on their net income and when the same income is distributed to shareholders in the form of dividends, it is taxed again on shareholders' personal income tax returns. This can lead to a decrease in profits and dividends received by shareholders.

Question 11

________ are a special form of incentive compensation. These plans provide employees the option or right to buy a certain number of shares of their company's stock at a stated price over a certain period of time.

Accepted Answer

Stock options are a special form of incentive compensation that grants employees the right to buy a certain number of shares of their company's stock at a fixed price during a specific time period. This can provide employees with a potential incentive to work harder and contribute to the success of the company, as they have a vested interest in the company's performance.

Question 12

If the owners of a corporation don't file their annual paperwork, neglect to pay their annual fees, or commit fraud, a court could ignore the fact that a corporation has been established and the owners could be held personally liable for the actions of the corporation. This chain of events is referred to as ________.

Accepted Answer

Piercing the corporate veil is the legal term for holding the owners of a corporation personally liable for the actions of the corporation when they have not properly maintained the separation between themselves and the corporation. This can happen when the owners fail to file the necessary paperwork or engage in fraudulent activities, causing the court to "pierce" the corporate veil and hold them accountable. The other answer choices do not accurately reflect this concept.

Question 13

A corporation is formed by filing ________ with the Secretary of State's office in the state of incorporation.

Accepted Answer

A corporation is created by filing articles of incorporation with the Secretary of State's office in the state of incorporation. This document typically includes basic information about the company, such as its name, purpose, and structure.

Question 14

A separate legal entity organized under the authority of a state is referred to as a ________.

Accepted Answer

The definition provided fits that of a corporation. A corporation is a legal entity that is separate and distinct from its owners and is authorized by the state in which it is registered. A limited partnership and general partnership are forms of businesses that are not separate legal entities, while a conglomerate is a group of different companies operating under one parent company. A sole proprietorship is a business owned by a single individual and is not considered a separate legal entity.

Question 15

Corporations are organized as either ________ corporations or ________ corporations.

Accepted Answer

Corporations are typically organized as C corporations or subchapter S corporations, which are classifications under the U.S. tax code.

Question 16

In a ________ corporation, the voting stock is held by a small number of individuals and is very thinly or infrequently traded.

Accepted Answer

The term "closely-held" is often used to describe a corporation in which the voting stock is held by a small number of individuals and is not traded frequently on the open market. This type of corporation is also sometimes referred to as a "close corporation." Therefore, option E is the correct answer. The term "narrow" is not commonly used to describe this type of corporation, while options A and D refer to public corporations, which are more widely held and traded. Private corporations may also have a small number of shareholders, but the term "closely-held" is a more specific descriptor for this type of ownership structure.

Question 17

________ stock is typically issued to conservative investors who have preferential rights over common stockholders in regard to dividends and to the assets of the corporation in the event of liquidation.

Accepted Answer

Preferred stock is typically issued to conservative investors who have preferential rights over common stockholders in regard to dividends and to the assets of the corporation in the event of liquidation.

Question 18

Which of the following statements is incorrect regarding common stock?

Accepted Answer

Common stock is typically issued more widely than preferred stock, as it is the primary form of stock ownership in a corporation.

Question 19

According to the textbook, ________ are common in real estate development, oil and gas exploration, and motion picture ventures.

Accepted Answer

Limited partnerships are commonly used in real estate development, oil and gas exploration, and motion picture ventures because they allow for investors (limited partners) to contribute capital without being involved in the management of the venture or being personally liable for any losses beyond their investment. The general partner is responsible for managing the venture and is personally liable for any losses.

Question 20

Which of the following is an advantage of a C Corporation?

Accepted Answer

One advantage of a C Corporation is that stock is liquid if traded on a major stock exchange. This means that shareholders can easily buy or sell their shares, making it easier to raise capital for the company.

Quiz 7: Preparing the Proper Ethical and Legal Foundation