Question 1

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

This statement is false. A firm can change its legal entity by going through a process such as reorganizing or incorporating in a different jurisdiction. However, changing legal entity can have tax and regulatory consequences, and should be done with careful consideration and consultation with experts.

Question 2

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 3

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 two classes of owners: general partners, who have management control and unlimited personal liability for the partnership's debts and obligations, and limited partners, who have limited liability but no management control. A general partnership, on the other hand, has only general partners who share management control and unlimited personal liability for the partnership's debts and obligations.

Question 4

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

Accepted Answer

In a limited liability company (LLC), the owners are referred to as "members."

Question 5

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

Accepted Answer

Corporations are typically organized as either C corporations or subchapter S corporations. There is no such thing as a T corporation.

Question 6

Stock options are a special form of incentive compensation.

Accepted Answer

Stock options are a type of incentive compensation that gives employees the opportunity to buy company stock at a discounted price in the future. Employees can benefit if the stock price rises above the option price, as they can sell the shares for a profit. This is a way to incentivize employees to work hard and contribute to the company's success.

Question 7

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 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.

Question 8

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 9

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's investment is tied up in the business and cannot be easily sold or transferred, making it less liquid.

Question 10

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) continues to be a very popular form of business organization in the United States, due to its flexibility and liability protection for owners.

Question 11

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 shareholders in a corporation have limited liability, meaning they are only liable for the amount of money they have invested in the company. In contrast, in a sole proprietorship or general partnership, the owners are personally liable for the debts and obligations of the business. This makes it more risky for investors to give money to a sole proprietorship or general partnership, and therefore, it may be more difficult for them to raise investment capital.

Question 12

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

Accepted Answer

According to the U.S. Securities and Exchange Commission, the vast majority of corporations in the United States are actually privately held. Public corporations are typically the larger, well-known companies whose shares are traded publicly on stock exchanges.

Question 13

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 14

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. It is a pass-through entity, which means that the business's income is reported on the owner's personal tax return and taxed at their personal income tax rate. This avoids the double taxation that can occur with corporations.

Question 15

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, meaning that the corporation's income is only taxed once on the individual shareholders' personal tax returns, while also providing limited liability protection and the ability to raise capital through the issuance of stock like a C corporation.

Quiz 7: Preparing the Proper Ethical and Legal Foundation