Question 1

Limited partners do not participate in the management of the business.

Accepted Answer

Limited partners do not participate in the management of the business but share in the profits in accordance with the terms of the partnership agreement. The limited partners' losses are limited to their initial investment, and the general partner receives a larger share of the profits once the limited partners have received their initial investment back.

Question 2

An S corporation is taxed just like any other corporation.

Accepted Answer

An S corporation is a form of business ownership that is taxed as though it were a partnership with restrictions on shareholders. Net profits or losses of the corporation pass to the owners, thus eliminating double taxation.

Question 3

A strategic alliance occurs when one company purchases another company by buying most of its stock.

Accepted Answer

An acquisition occurs when one company purchases another, generally by buying most of its stock. The acquired company may become a subsidiary of the buyer, or its operations and assets may be merged with those of the buyer.

Question 4

Marco is an independent contractor who prepares architectural plans for building contractors; however, he is not an employee of any of the contractors for which he works. Marco is a(n)

Accepted Answer

This is an example of a sole proprietor, which includes independent contractors who complete projects or engage in entrepreneurial activities for different organizations but who are not employees.

Question 5

Carmen owns a small gift shop and is solely responsible for its debts and liabilities. She is also entitled to all the profits the shop makes after paying off taxes and other expenses. Her business is an example of a(n)

Accepted Answer

Carmen's business is an example of a sole proprietorship. Sole proprietorships are typically small businesses employing fewer than 50 people. The sole proprietor has unlimited liability in meeting the debts of the business but is also entitled to all the profits after paying taxes and other expenses.

Question 6

All of the following are ways technology is helping today's sole proprietors succeed EXCEPT

Accepted Answer

Computers, personal copiers, scanners, and websites have been a boon for home-based businesses, permitting them to interact quickly with customers, suppliers, and others. Many independent salespersons and contractors can perform their work using a smartphone or tablet computer as they travel. E-mail and social networks have made it possible for many proprietorships to develop in the services area. Internet connections allow small businesses to establish websites to promote their products and even to make low-cost or free long-distance calls using Voiceover Internet Protocol technology.

Question 7

Angelica owns a small hair salon. When a chain hair salon opened across the street from her business, Angelica lowered her prices and added more specialty services, like manicures and facials. Her ability to make these decisions on the spot without anyone else's approval gave her a

Accepted Answer

The sole proprietor has complete control over the business and can make decisions on the spot without anyone else's approval. This control allows the owner to respond quickly to competitive business conditions or to changes in the economy. The ability to quickly change prices or products can provide a competitive advantage for the business.

Question 8

Nathan is a sole proprietor. How is the income earned in his business taxed?

Accepted Answer

Profits from sole proprietorships are considered personal income and are taxed at individual tax rates. The owner, therefore, pays one income tax that includes the business and individual income.

Question 9

Ritesh wants to open his own bowling alley that will also serve alcoholic beverages and food. What will Ritesh have to do to start his business?

Accepted Answer

Proprietorships, such as restaurants, may require state and local licenses and permits because of the nature of the business. The cost of these permits may run from $25 to $100. Lawyers are not usually needed to create such enterprises, and the owner can usually take care of the required paperwork without much assistance.

Question 10

Which form of business ownership has the most freedom from government regulation?

Accepted Answer

Sole proprietorships have the most freedom from government regulation. Many government regulations-federal, state, and local-apply only to businesses that have a certain number of employees, and securities laws apply only to corporations that issue stock. Sole proprietors must follow all laws that apply to their business, including employee and consumer protection regulation.

Question 11

In sole proprietorships, owners

Accepted Answer

Among the relatively few sources of money available to the sole proprietorship are banks, friends, family, the Small Business Administration, or his or her own funds. Additionally, sole proprietorships may have to pay higher interest rates on funds borrowed from banks than do large corporations because they are considered greater risks.

Question 12

Mel owns an auto repair shop. He started the business with a personal loan and is wholly responsible for repaying it. Mel also needs to pay personal income tax on the profits generated from the business. Mel's business is an example of a(n)

Accepted Answer

Mel's business is an example of a sole proprietorship. Sole proprietorships are typically small businesses employing fewer than 50 people. The sole proprietor has unlimited liability in meeting the debts of the business. Profits from sole proprietorships are considered personal income and are taxed at individual tax rates.

Question 13

When it comes to borrowing funds, a sole proprietor

Accepted Answer

Sole proprietors have relatively few sources of money, including banks, friends, family, the Small Business Administration, and his or her own funds. Often, the only way a sole proprietor can borrow for business purposes is to pledge a car, a house, other real estate, or other personal assets to guarantee a loan.

Question 14

When Dr. Hamilton, a local physical therapist, dies, her children sell her physical therapy practice to a young, new therapist who just moved to the area. What advantage will this new therapist gain by buying a business rather than starting a new one?

Accepted Answer

When selling a sole proprietorship like a physical therapy practice, the challenge is that the business's major asset is its clients. Thus, the new owner must assure customers that the business will continue to meet their needs.

Question 15

Why is it difficult for sole proprietorships to hire qualified employees?

Accepted Answer

It is sometimes difficult for a small sole proprietorship to match the wages and benefits offered by a large competing corporation because the proprietorship's profits may not be as high. Also, there is less room for advancement within a sole proprietorship. The trend of large corporations downsizing and outsourcing tasks has actually created renewed opportunities for small businesses to acquire well-trained employees.

Question 16

All of the following are keys to a successful partnership EXCEPT partners must

Accepted Answer

The keys to a successful partnership include keeping profit sharing equitable based on contributions, having different skill sets or resource contributions, maintaining ethics and compliance, maintaining effective communication skills, maintaining transparency with stakeholders, being realistic in resource and financial management, having previous experience related to business, maintaining life balance in time spent on business, focusing on customer satisfaction and product quality, and maintaining resources in line with sales and growth expectations and planning.

Question 17

Smith, Taylor, and Jones is a law firm specializing in medical malpractice. Each owner has unlimited liability for the debts of the business and all owners share in the management of the firm. This law firm is an example of a

Accepted Answer

A general partnership involves a complete sharing in the management of a business. In a general partnership, each partner has unlimited liability for the debts of the business. Professionals such as lawyers, accountants, and architects often join together in general partnerships.

Question 18

Victor is asked to be a part of a new business venture for a revolutionary mechanism to repair Internet cables that are placed on the ocean floor. Since the business involves high risk, Victor does not want to be held completely liable for the firm's debts if the project fails. In this case, Victor is most likely to prefer to participate as a(n)

Accepted Answer

In this case, Victor is most likely to prefer to participate as a limited partner. A limited partner's liability is limited to his or her initial investment in the business. Limited partnerships are most often used for risky investments where the chance for loss is great.

Question 19

GasSource, a national provider of natural gas, is a partnership that is traded on securities exchanges. This allows it to have the tax benefits of a limited partnership but the liquidity of a corporation. GasSource is an example of a(n)

Accepted Answer

This is an example of a master limited partnership (MLP), which is a limited partnership that is traded on securities exchanges. MLPs have the tax benefits of a limited partnership but the liquidity (ability to convert assets into cash) of a corporation.

Question 20

David, Shannon, and Greg are starting a new accounting firm together, and they are drafting articles of partnership. All of the following are items they should include EXCEPT

Accepted Answer

Articles of partnership usually include the name, purpose, and location of the business; the duration of the agreement; the authority and responsibility of each partner; the character of the partners (i.e., general or limited, active or silent); the amount of contribution from each partner; the division of profits or losses; salaries of each partner; how much each partner is allowed to withdraw; death of partner; sale of partnership interest; arbitration of disputes; required and prohibited actions; absence and disability; restrictive covenants; and buying and selling agreements.

Quiz 4: Options for Organizing Business