Question 1

The ________ is a form of business organization that is rapidly gaining popularity in the United States. The concept originated in Germany and was first introduced in the United States in the state of Wyoming.

Accepted Answer

The limited liability company (LLC) is the business organization that originated in Germany and was first introduced in the United States in the state of Wyoming. It is a hybrid structure that combines the liability protection of a corporation with the tax benefits of a partnership. It has become very popular in the United States due to its flexibility and simplicity of structure.

Question 2

A subchapter S corporation combines the advantages of a partnership and a C corporation.

Accepted Answer

A subchapter S corporation allows for pass-through taxation like a partnership, but also provides limited liability and ease of ownership transfer like a C corporation.

Question 3

What is meant by the term "piercing the corporate veil"? How can the corporate veil be pierced?

Accepted Answer

The answer of What is meant by the term "piercing...

Question 4

In which form of business ownership are the owners called "members"?

Accepted Answer

In a limited liability company (LLC), the owners are called "members". In a general partnership, the owners are called "partners", while in a limited partnership, there is at least one "general partner" and one "limited partner". Subchapter C and C corporations have shareholders.

Question 5

A disadvantage of a general partnership is that the liquidity of each partner's investment is low.

Accepted Answer

In a general partnership, each partner typically has a right to a portion of the profits, losses, and management responsibilities of the business. However, the ownership interest of each partner cannot be easily sold or transferred without the agreement of all partners. This can make it difficult for a partner to exit the business or obtain cash for their ownership interest if needed, reducing the liquidity of their investment.

Question 6

The major difference between a general and a limited partnership is that a limited partnership includes two classes of owners-general and limited partners.

Accepted Answer

A limited partnership includes both general partners, who have unlimited liability and manage the business, and limited partners, who have limited liability and are not involved in managing the business. A general partnership does not have this distinction between types of partners.

Question 7

Few entrepreneurial firms start as subchapter S corporations.

Accepted Answer

Many entrepreneurial firms start as subchapter S corporations because this structure allows profits and losses to be passed through directly to the owners' personal income without being subject to corporate tax rates, making it a popular choice for small businesses.

Question 8

Describe what is meant by a "general partnership" and a "limited partnership." Describe the major difference between the two.

Accepted Answer

The answer of Describe what is meant by a "general...

Question 9

The limited liability corporation is a form of business organization that is rapidly losing popularity in the United States.

Accepted Answer

This statement is false. The limited liability corporation (LLC) is actually gaining popularity in the United States because of its flexibility and protection of personal assets for owners.

Question 10

Choosing a legal entity for a firm is a one-time event. Once a form of legal entity has been chosen, it cannot be changed.

Accepted Answer

It is possible to change the legal entity of a firm through a process called entity conversion or entity structuring, depending on the laws of the state in which the firm is located. However, this can be a complex and costly process, so it is important to carefully consider the options before choosing a legal entity.

Question 11

Corporations are organized as either C corporations, T corporations, or subchapter S corporations.

Accepted Answer

Corporations are organized as either C corporations or subchapter S corporations; there is no classification for T corporations.

Question 12

The vast majority of corporations in the United States are public corporations.

Accepted Answer

The vast majority of corporations in the United States are actually private corporations, owned by individuals or small groups who are not publicly traded. Public corporations, which issue stocks and are owned by many shareholders, are typically larger and more well-known companies.

Question 13

Stock options are a special form of incentive compensation.

Accepted Answer

Stock options are a form of incentive compensation that give employees the option to purchase company stock at a discounted price, with the hope that the stock will appreciate in value and provide them with a financial gain.

Question 14

It is usually easier for a corporation to raise investment capital than a sole proprietorship or a general partnership because the shareholders are not liable beyond their investment in the firm.

Accepted Answer

This is because a corporation issues shares of stocks to investors, who own a portion of the company based on the number of shares they hold. These shareholders are only liable for their investment in the company, and are not responsible for any debts or legal issues beyond that. In contrast, sole proprietorships and general partnerships are personally liable for all business debts and obligations.

Question 15

A disadvantage of a sole proprietorship is that it is subject to double taxation.

Accepted Answer

A sole proprietorship is not subject to double taxation. In fact, it is considered a pass-through entity where the owner reports the business income or loss on their personal tax return and is only taxed at the individual level. Double taxation is a disadvantage of a corporation, where the corporation is taxed on its profits, and then shareholders are taxed on the dividends they receive from those profits.

Quiz 7: Preparing the Proper Ethical and Legal Foundation