Question 1

Keesha, Mandy, and Isabel are starting their own pet grooming business, and they are drafting articles of partnership. What item should they be sure to include in their articles of partnership?

Accepted Answer

Some of the issues to consider in articles of partnership include what to do if a partner dies, how to handle the sale of partnership interest, how to resolve disputes, what actions should be required or prohibited, what to do if a partner is absent or becomes disabled, whether there should be any restrictive covenants, and what should be included in buying and selling agreements.

Question 2

Lawyers, Inc. is a large law practice with partners that specialize in real estate closings, estate planning, and divorce proceedings. Since each partner specializes in a different area of law, clients would be likely to

Accepted Answer

Service-oriented partnerships in fields such as law, financial planning, and accounting may attract customers because clients may think that the service offered by a diverse team is of higher quality than that provided by one person. Larger law firms, for example, often have individual partners who specialize in certain areas of the law-such as family, bankruptcy, corporate, entertainment, and criminal law.

Question 3

Ken is a partner in a local hardware store. He decides to sell his partnership interest. What is one challenge that Ken will face?

Accepted Answer

The challenge a partner faces when selling a partnership interest is that it is difficult to place a value on a partner's share of the partnership. No public value is placed on the partnership, as there is on publicly owned corporations. Coming up with a fair value that all partners can agree to is not easy.

Question 4

Isaac starts a consulting firm with his friend Arnie. They decide to equally share the profits and have unlimited liability for the debts of their business. Such unlimited liability can be a distinct disadvantage for Isaac if he has

Accepted Answer

In general partnerships, like this one, the general partners have unlimited liability for the debts incurred by the business. This can be a distinct disadvantage to one partner if his or her personal financial resources are greater than those of others. A potential partner should make sure that all partners have comparable resources to help the business in time of trouble.

Question 5

Sarah is a partner in a local coffee shop. Without consulting her partners, she ordered some expensive, specialty roasted coffee beans that she thought would greatly improve their business. However, their customers felt the coffee had a bitter taste and are no longer buying it. What impact will Sarah's decision have on her partners?

Accepted Answer

In a partnership, all partners are responsible for the business actions of others. A bad decision by one partner may put the other partners' personal resources in jeopardy.

Question 6

Pipes R Us, a small plumbing company, decides to incorporate. It wants to have greater flexibility than traditional corporations. What type of corporation would work best for this company?

Accepted Answer

Many smaller firms, like this one, elect to incorporate as S corporations, which operate under slightly different rules and have greater flexibility than do traditional C corporations.

Question 7

When a business decides to incorporate, it will do so according to the laws of the ________ in which it incorporates.

Accepted Answer

A corporation is created, or incorporated, under the laws of the state in which it incorporates.

Question 8

Frank, Martin, and Paul secure a charter for their business. They hold an organizational meeting to establish the corporation's bylaws and elect a board of directors. What is one thing the bylaws might do?

Accepted Answer

The bylaws might set up committees of the board of directors and describe the rules and procedures for their operation.

Question 9

The Food Palace, Inc. is a large grocery chain that was incorporated in the United States. Over the years, the corporation has grown, and it has now opened locations in five other nations. In those nations, The Food Palace is considered to be a(n)

Accepted Answer

This is an example of an alien corporation because it is doing business outside the nation in which it was incorporated.

Question 10

Brewer Bikes, Inc. is a company that sells bicycles and accessories. It has been owned and operated by the Brewer family for 25 years. The Brewers own all the corporation's stock, and they are not required to disclose financial information publicly. What type of business is this?

Accepted Answer

This is a private corporation, which is owned by just one or a few people, often a family, who are involved in managing the business and who own all the corporation's stock. Privately owned corporations are not required to disclose financial information publicly.

Question 11

Mountain Outfitters is a large company that manufactures durable outdoor clothing. The company has stock that anyone can buy, sell, or trade, but since it is a large company, its stockholders are far removed from its management. What type of business is this?

Accepted Answer

This is a public corporation because its stock can be bought, sold, or traded by anyone. In large public corporations, the stockholders are often far removed from the management of the company. However, publicly owned corporations must disclose financial information to the public under specific laws that regulate the trade of stocks and other securities.

Question 12

A private corporation sells its stock to raise the money it needs for global expansion. As a result, anyone can now buy, sell, or trade the stocks of the company. This process of "going public" is referred to as

Accepted Answer

A private corporation that needs more money to expand or to take advantage of opportunities may have to obtain financing by "going public"
through an initial public offering (IPO), that is, becoming a public corporation by selling stock so that it can be traded in public markets.

Question 13

Summer Foods is a public corporation that is experiencing difficulty growing its vegetable products during an especially dry summer season. Wanting the flexibility to make decisions for restructuring the company's operations, its managers buy all the stock, which means the company is

Accepted Answer

In this scenario, the managers of Summer Foods are taking the corporation private to give them the flexibility to make decisions for restructuring its operations. Becoming a private company allows the managers to focus on the needs of the company without having to worry about the stock price for investors.

Question 14

Books to Grow, a corporation owned and managed by volunteers, supplies books and educational materials to impoverished children in Latin America. Its focus is not on earning a profit but on serving the community. Books to Grow is an example of a(n)

Accepted Answer

Books to Grow is an example of a nonprofit corporation. Nonprofit corporations focus on providing a service rather than earning a profit but are not owned by a government entity.

Question 15

All of the following are true of 501(c)(3) organizations EXCEPT

Accepted Answer

Nonprofits do not have shareholders, and most are organized as 501(c)(3) organizations, which receive certain tax exemptions. Their donors may reduce their tax deductibility for their donations. These organizations include public charities, private foundations, and private operating foundations that sponsor and fund their own programs.

Question 16

What is a true statement about the board members of a corporation?

Accepted Answer

A board of directors, elected by the stockholders to oversee the general operation of a corporation, sets the long-range objectives of the corporation. It is the board's responsibility to ensure that the objectives are achieved on schedule. Board members have a duty of care and loyalty to oversee the management of the firm or for any misuse of funds.

Question 17

Geraldine is a professor at a local college who serves on the board of directors for a leading academic publisher. She is a valued member of the board because she brings her unique perspective from the field, and she is qualified, knowledgeable, and independent of the company. Geraldine is a(n)

Accepted Answer

Geraldine is an example of an outside director. Outside directors are often top executives from other companies, lawyers, bankers, even professors. They are thought to bring more independence to the monitoring function because they are not bound by past allegiances, friendships, a current role in the company, or some other issue that may create a conflict of interest. They are chosen for their expertise, competence, and ability to bring diverse perspectives to strategic discussions.

Question 18

A difference between common stockholders and preferred stockholders within a corporation is that common stockholders

Accepted Answer

Common stockholders do not receive dividends before preferred stockholders. Although owners of common stock do not get any preferential treatment with regard to dividends, they do get some say in the operation of the corporation.

Question 19

What is a proxy?

Accepted Answer

Common stockholders may vote by proxy, which is a written authorization by which stockholders assign their voting privilege to someone else, who then votes for his or her choice at the stockholders' meeting. It is a normal practice for management to request proxy statements from shareholders who are not planning to attend the annual meeting.

Question 20

Keith wants to buy stock in a large pharmaceutical company. Since he lives in the city where the company is headquartered, he wants to attend its annual meetings and vote for the board of directors. He also wants to maintain a 5 percent ownership of the company, so having priority in purchasing new shares on the marketplace is very important to him. What type of stock should Keith purchase?

Accepted Answer

Since Keith wants to vote for the board of directors and maintain a 5 percent ownership of the company, he should buy common stock. Common stockholders are usually entitled to one vote per share of common stock. Additionally, they have a preemptive right to purchase new shares of the stock from the corporation, which allows them to maintain their original percentage of ownership by buying new shares when they become available.

Quiz 4: Options for Organizing Business