Question 1

S-type corporations and limited liability companies are taxed like partnerships,but have the advantage of limited liability for their owners.

Accepted Answer

S-type corporations and limited liability companies are pass-through entities, meaning they are not taxed at the entity level but instead their profits and losses are passed through to the individual owners' tax returns. This is similar to partnership taxation. Additionally, both S-corps and LLCs offer limited liability protection to their owners, which is a key advantage over sole proprietorships and general partnerships.

Question 2

Which of the following statements about the corporate form of business organization is true?
A) The corporate form has the disadvantage of double taxation relative to a sole proprietorship.
B) The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation.
C) Sole proprietorships are the most common form of business organization because liability is limited to the amount invested in the business by the sole proprietor.
D) The corporate form has the advantage of unlimited liability.

Accepted Answer

The corporate form of business organization has the disadvantage of double taxation, meaning that the corporation pays taxes on its profits, and then shareholders pay taxes on the dividends they receive from those profits.

Question 3

The procedure by which significant changes may be made to a partnership,such as admission of a new partner or termination of the partnership,are governed by each state so no partnership agreement is needed.

Accepted Answer

Although each state does have laws governing the changes that may be made to a partnership, having a partnership agreement in place can provide more clarity and specificity on the procedures and terms for making these changes.

Question 4

S-type corporations have all of the following advantages EXCEPT
A) they are taxed as partnerships.
B) the owners have limited liability.
C) distributions are taxed twice, similar to corporate dividend payments.
D) all owners must be people, no corporations.

Accepted Answer

S-type corporations are not taxed twice on distributions. The profits are only taxed once at the personal income tax level of the owners.

Question 5

Bill,a local inventor,developed a diet pill that he believes will solve the obesity problem in the United States.Bill wants to create a new company,50% owned by Bill and 50% owned by a major drug company.Although he believes the pills are safe,Bill is concerned about liability if someone becomes sick or dies.The best form of business organization for the new company is
A) sole proprietorship with Bill as owner and the drug company as creditor.
B) general partnership with Bill and the drug company as equal partners.
C) S-type corporation with Bill and the drug company owning equal shares.
D) limited liability company with Bill and the drug company owning equal shares.

Accepted Answer

A limited liability company (LLC) would provide liability protection for both Bill and the drug company, while allowing them to own equal shares of the business. This means that neither party would be personally responsible for the debts or liabilities of the company. Additionally, an LLC offers more flexibility in terms of management and taxation compared to a corporation or a partnership.

Question 6

The owners of a corporation enjoy limited liability.

Accepted Answer

The owners of a corporation enjoy limited liability, which means they are not personally liable for the debts and liabilities of the corporation. This is one of the advantages of choosing to incorporate a business.

Question 7

Its ability to raise capital by selling stock makes the corporation the best form of organization in terms of raising capital.

Accepted Answer

The ability to raise capital by selling stock is one of the key advantages of a corporation over other forms of organization, such as sole proprietorships and partnerships. When a company issues stock, it offers ownership in the company to investors, who are willing to contribute capital in exchange for a share of the profits. This allows corporations to raise significant amounts of capital from a large pool of investors, which can be used to fund growth and expansion initiatives.

Question 8

Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against it.If Joe invests and the business loses the lawsuits,the most Joe can lose is
A) $10,000 if Joe is a general partner.
B) $10,000 if Joe is a sole proprietor.
C) $10,000 if Joe is a limited partner.
D) $10,000 plus his share of the lawsuits if Joe is a limited partner.

Accepted Answer

As a limited partner, the most Joe can lose is the amount of his investment, which is $10,000. He is not personally liable for any additional debts or liabilities of the business beyond his investment.

Question 9

Which of the following is an advantage of the sole proprietorship?
A) limited liability for its owners
B) double taxation for its owners
C) no significant legal requirements for starting the business
D) easily transferred ownership

Accepted Answer

A sole proprietorship has no significant legal requirements for starting the business, making it easy and inexpensive to set up.

Question 10

The corporation is a legal entity separate from its owners; thus it is possible for the corporation to continue even upon the death of one or more shareholders.

Accepted Answer

As a separate legal entity, the corporation can continue to exist even if one or more shareholders pass away or sell their shares. The corporation can also enter into contracts, own assets, and be sued or sue others.

Question 11

Limited partnerships are not as prevalent as corporations because
A) limited partners can lose up to three times the amount they invested in the partnership if the business goes bankrupt.
B) limited partnerships have the disadvantage of double taxation.
C) the general partner has no liability, making it difficult for the partnership to borrow money.
D) it is easier to transfer ownership by selling common stock than it is to sell partnership.

Accepted Answer

Limited partnerships usually have a limited life span and are not as easy to transfer ownership as selling common stock in a corporation. Additionally, limited partnerships have additional complexities with respect to taxation and liability, which can make it less attractive for investors and potential partners.

Question 12

All of the following business organizations provide limited liability to their owners EXCEPT
A) general partnership.
B) S-type corporation.
C) corporation.
D) limited liability company.

Accepted Answer

General partnership does not provide limited liability protection to the owners. In this type of business organization, each partner is personally liable for the debts and obligations of the partnership. The other options mentioned in the question, S-type corporation, corporation, and limited liability company all provide limited liability protection to their owners.

Question 13

In a sole proprietorship,the owner is personally responsible without limitation for the liabilities incurred.

Accepted Answer

In a sole proprietorship, the owner is personally responsible for all the liabilities incurred by the business. There is no separate legal entity between the owner and the business, so the owner's personal assets can be used to satisfy any business debts or legal judgments.

Question 14

Limited liability companies are more flexible than S-type Corporations because limited liability companies operate under state laws.

Accepted Answer

The answer of Limited liability companies are more flexible than...

Question 15

In a limited partnership at least one general partner must exist; that general partner has unlimited liability.

Accepted Answer

This is true. In a limited partnership, there must be at least one general partner who has unlimited liability for the partnership's debts and obligations. The limited partners, on the other hand, have limited liability and their personal assets are not at risk beyond their initial investment in the partnership.

Question 16

There is no legal distinction made between the assets of the business and the personal assets of any of the owners in the limited partnership.

Accepted Answer

In a limited partnership, there is a legal distinction made between the assets of the business and the personal assets of the limited partners. The limited partners are not personally liable for the debts and obligations of the partnership. However, the general partner may have unlimited personal liability.

Question 17

A limited partnership provides limited liability to
A) all general partners.
B) only limited partners responsible for day to day management of the firm.
C) only to limited partners who do not participate in the management of the business.
D) all partners.

Accepted Answer

Limited partners have limited liability in that they are only liable for the amount of their investment and are not responsible for the debts and obligations of the partnership. However, if a limited partner is actively involved in the management of the business, they may lose their limited liability protection. Therefore, limited liability only applies to limited partners who do not participate in the management of the business. General partners, on the other hand, have unlimited personal liability for the debts and obligations of the partnership.

Question 18

A general partnership,unlike a limited partnership,is an entity that legally functions separate and apart from its owners.

Accepted Answer

A general partnership is not a separate legal entity and the owners are personally liable for the debts and obligations of the partnership.

Question 19

The best form of business entity to attract new capital is the sole proprietorship because investors only need to deal with one owner.

Accepted Answer

The statement is false. The best form of business entity to attract new capital is not a sole proprietorship because it only has one owner, which may limit its ability to raise capital. Other forms of business entities such as partnerships, limited liability companies (LLCs), and corporations may be more attractive to investors because they offer different options for raising capital and sharing ownership.

Question 20

A limited liability company (LLC)is taxed like a partnership but provides limited liability for its owners,similar to a corporation.

Accepted Answer

An LLC is generally taxed like a partnership, with the profits and losses flowing through to the individual owners' personal tax returns. However, one of the main advantages of an LLC is that it provides limited liability protection for its owners, similar to a corporation.

Quiz 1: An Introduction to the Foundations of Financial Management

S-type corporations and limited liability companies are taxed like partnerships,but have the advantage of limited liability for their owners.

Which of the following statements about the corporate form of business organization is true?

The procedure by which significant changes may be made to a partnership,such as admission of a new partner or termination of the partnership,are governed by each state so no partnership agreement is needed.

S-type corporations have all of the following advantages EXCEPT

The owners of a corporation enjoy limited liability.

Its ability to raise capital by selling stock makes the corporation the best form of organization in terms of raising capital.

Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against it.If Joe invests and the business loses the lawsuits,the most Joe can lose is

Which of the following is an advantage of the sole proprietorship?