Question 1

Which of the following statements is CORRECT?
A) One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
B) It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
C) One of the advantages of the corporate form of organization is that it avoids double taxation.
D) One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights,i.e. ,"one person,one vote."
E) Corporations of all types are subject to the corporate income tax.

Accepted Answer

This is a true statement. Sole proprietors have unlimited liability, which means they are personally responsible for all the business's debts and obligations. If the business cannot pay its debts, the proprietor's personal assets can be used to satisfy those obligations.

Answer: C
 This is a true statement. One of the advantages of the corporate form of organization is that it can avoid double taxation. This means that a corporation's profits are only taxed once, at the corporate level, and are not taxed again when they are paid out to shareholders as dividends.

Note: The other statements are false. B is generally harder to transfer ownership interest in a partnership than a corporation because a partnership relies on the mutual agreement of all partners, whereas shares in a corporation can be bought and sold freely. D is false because not all corporations have a "one person, one vote" policy; some have multiple classes of stock with different voting rights. Finally, E is false because certain types of corporations, such as S corporations, are not subject to the corporate income tax.

Question 2

One drawback of switching from a partnership to the corporate form of organization is the following:
A) It subjects the firm to additional regulations.
B) It cannot affect the amount of the firm's operating income that goes to taxes.
C) It makes it more difficult for the firm to raise additional capital.
D) It makes the firm's investors subject to greater potential personal liabilities.
E) It makes it more difficult for the firm's investors to transfer their ownership interests.

Accepted Answer

Switching from a partnership to a corporation subjects the firm to additional regulations and reporting requirements, as corporations are subject to greater government oversight than partnerships.

Question 3

Which of the following statements is CORRECT?
A) It is generally more expensive to form a proprietorship than a corporation because,with a proprietorship,extensive legal documents are required.
B) Corporations face fewer regulations than sole proprietorships.
C) One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation,at both the firm level and the owner level.
D) One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.
E) If a regular partnership goes bankrupt,each partner is exposed to liabilities only up to the amount of his or her investment in the business.

Accepted Answer

One advantage of forming a corporation is that shareholders have limited liability, which means they are not personally responsible for the corporation's debts or obligations beyond their investment in the company. This advantage is not present in a regular partnership. A is incorrect because forming a proprietorship generally requires fewer legal documents than forming a corporation. B is incorrect because corporations face more regulations than sole proprietorships. C is incorrect because double taxation is not a disadvantage of a sole proprietorship, but a disadvantage of a corporation. E is incorrect because in a regular partnership, each partner is personally liable for the partnership's debts and obligations, regardless of their investment in the business.

Question 4

Which of the following statements is CORRECT?
A) One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.
B) Sole proprietorships are subject to more regulations than corporations.
C) In any type of partnership,every partner has the same rights,privileges,and liability exposure as every other partner.
D) Sole proprietorships and partnerships generally have a tax advantage over many corporations,especially large ones.
E) Corporations of all types are subject to the corporate income tax.

Accepted Answer

Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones. This is because corporations are subject to the corporate income tax, while sole proprietorships and partnerships are considered pass-through entities where the business income is taxed at the individual level.

Question 5

One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

Accepted Answer

Limited liability limits the financial responsibility of owners in case of a company's bankruptcy or legal liability, which enhances the value of the company by reducing risks for investors.

Question 6

Which of the following statements is CORRECT?
A) The corporate bylaws are a standard set of rules established by the state of incorporation.These rules are identical for all corporations in the state,and their purpose is to ensure that the firm's managers run the firm in accordance with state laws.
B) The corporate charter is a standard document prescribed by the state of incorporation,and its purpose is to ensure that the firm's managers run the firm in accordance with state laws.Procedures for electing corporate directors are contained in bylaws,while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter.
C) Companies must establish a home office,or domicile,in a particular state,and that state must be the one in which most of their business (sales,manufacturing,and so forth)is conducted.
D) Attorney fees are generally involved when a company develops its charter and bylaws,but since these documents are voluntary,a new corporation can avoid these costs by deciding not to have either a charter or bylaws.
E) The corporate charter is concerned with things like what business the company will engage in,whereas the bylaws are concerned with things like procedures for electing the board of directors.

Accepted Answer

The answer of Which of the following statements is CORRECT?
A)...

Question 7

Which of the following statements is CORRECT?
A) It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.
B) Corporate shareholders are exposed to unlimited liability.
C) Corporations generally face fewer regulations than sole proprietorships.
D) Corporate shareholders are exposed to unlimited liability,and this factor may be compounded by the tax disadvantages of incorporation.
E) Shareholders in a regular corporation (not an S corporation)pay higher taxes than owners of an otherwise identical proprietorship.

Accepted Answer

It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship. In a corporation, ownership can be transferred by selling or buying shares, while in a sole proprietorship, the entire business must be sold or transferred.

Option B is incorrect because corporate shareholders have limited liability, meaning their personal assets are not at risk for the corporation's debts or liabilities.

Option C is incorrect because corporations generally face more regulations than sole proprietorships due to their larger size and legal structure.

Option D is partially true about corporate shareholders being exposed to unlimited liability, but the tax advantages of incorporation often outweigh this risk.

Option E is incorrect because shareholders in a regular corporation generally pay lower taxes than owners of a sole proprietorship due to the ability to deduct business expenses and the potential for tax deferral.

Question 8

Cheers Inc.operates as a partnership.Now the partners have decided to convert the business into a regular corporation.Which of the following statements is CORRECT?
A) Assuming Cheers is profitable,less of its income will be subject to federal income taxes.
B) Cheers will now be subject to fewer regulations.
C) Cheers' shareholders (the ex-partners)will now be exposed to less liability.
D) Cheers' investors will be exposed to less liability,but they will find it more difficult to transfer their ownership.
E) Cheers will find it more difficult to raise additional capital.

Accepted Answer

Converting from a partnership to a regular corporation means that the shareholders (ex-partners) will now have limited liability, meaning their personal assets are protected in the event that the corporation incurs debts or legal issues. However, the other statements are incorrect - converting to a corporation does not necessarily mean less income is subject to taxes, it does not result in fewer regulations, and it does not necessarily make it more difficult to raise capital. The answer D is partially correct - investors may have limited liability but it may be harder to transfer ownership depending on the corporation's bylaws and structure.

Question 9

The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability,whereas proprietorships do not.

Accepted Answer

In a regular partnership, the partners do not have limited liability; they are personally responsible for the debts of the business, similar to a sole proprietorship. It is corporations that offer limited liability to their owners (shareholders).

Question 10

The form of organization for a business is not an important issue,as this decision has very little effect on the income and wealth of the firm's owners.

Accepted Answer

The form of organization for a business can greatly impact the income and wealth of the firm's owners. Different forms, such as sole proprietorship, partnership, and corporation, have different tax implications, liability protections, and options for raising capital, which can all affect the business's financial success.

Question 11

The disadvantages associated with a proprietorship are similar to those under a partnership.One exception relates to the more formal nature of the partnership agreement and the commitment of all partners' personal assets.As a result,partnerships do not have difficulty raising large amounts of capital.

Accepted Answer

The statement is incorrect as partnerships also face difficulty raising large amounts of capital, as they still have limited sources of funding compared to corporations.

Question 12

Two disadvantages of a proprietorship are (1)the relative difficulty of raising new capital and (2)the owner's unlimited personal liability for the business' debts.

Accepted Answer

Proprietorships are typically financed by the personal funds of the owner or loans from family and friends. It can be challenging to raise significant amounts of capital through these means. Additionally, the owner is personally responsible for all debts and legal obligations of the business, which can put their personal assets at risk.

Question 13

There are three primary disadvantages of a regular partnership: (1)unlimited liability, (2)limited life of the organization,and (3)difficulty of transferring ownership.These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

Accepted Answer

The statement accurately describes the disadvantages of a regular partnership.

Question 14

The facts that a proprietorship,as a business,pays no corporate income tax,and that it is easily and inexpensively formed,are two key advantages to that form of business.

Accepted Answer

A proprietorship is not subject to corporate income tax, as the owner reports the business's profits and losses on their personal tax return. Additionally, a proprietorship can be easily formed and has low start-up costs as it does not require the formalities of incorporation.

Question 15

Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?
A) Corporations generally find it relatively difficult to raise large amounts of capital.
B) Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.
C) Corporate shareholders escape liability for the firm's debts,but this factor may be offset by the tax disadvantages of the corporate form of organization.
D) Corporate investors are exposed to unlimited liability.
E) Corporations generally face relatively few regulations.

Accepted Answer

By operating as a corporation, shareholders are protected from the firm's debts and liabilities. However, corporations are often subject to double taxation, which can be a tax disadvantage.

Question 16

Which of the following statements is CORRECT?
A) Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies,including the Securities and Exchange Administration,even if they are not publicly owned.
B) In a regular partnership,liability for the firm's debts is limited to the amount a particular partner has invested in the business.
C) A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company.
D) Partnerships have difficulty attracting capital in part because of their unlimited liability,the lack of impermanence of the organization,and difficulty in transferring ownership.
E) A major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation.

Accepted Answer

Partnerships have unlimited liability, meaning that the personal assets of the partners can be used to pay off the debts of the business. This can make it difficult for partnerships to attract capital, as investors may be hesitant to take on such risks. Additionally, partnerships can have difficulties with transferring ownership and maintaining continuity as partners come and go. Corporations, on the other hand, have limited liability and are more easily able to raise capital and transfer ownership.

Question 17

Which of the following statements is CORRECT?
A) The main method of transferring ownership interest in a corporation is by means of a hostile takeover.
B) Two key advantages of the corporate form over other forms of business organization are unlimited liability and limited life.
C) A corporation is a legal entity that is generally created by a state;its life and existence is separate from the lives of its individual owners and managers.
D) Limited liability of its stockholders is an advantage of the corporate form of organization,but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.
E) Although its stockholders are insulated by limited legal liability,the corporation's legal status does not protect the firm's managers in the same way;i.e. ,bondholders can sue its managers if the firm defaults on its debt,even if the default is the result of poor economic conditions.

Accepted Answer

Statement C is correct in that a corporation is a legal entity that is created by a state and has a separate life and existence from its individual owners and managers. This allows for the corporation to enter into contracts, own assets, and incur liabilities in its own name, separate from its stockholders. Statements A, B, D, and E are incorrect. Hostile takeovers are not the main method of transferring ownership interest, but rather stock purchases and sales. The advantages of the corporate form are limited liability for its stockholders and perpetual life, not unlimited liability and limited life. Corporations have an easier time raising money in financial markets due to increased investor confidence in the legal protections offered by this form of organization. Finally, while bondholders can sue a corporation if it defaults on its debt, they cannot typically sue the managers for poor economic conditions.

Question 18

Which of the following statements is CORRECT?
A) In a regular partnership,liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
B) Attracting large amounts of capital is more difficult for partnerships than for corporations because of such factors as unlimited liability,the need to reorganize when a partner dies,and the illiquidity (difficulty buying and selling)of partnership interests.
C) A slow-growth company,with little need for new capital,would be more likely to organize as a corporation than would a faster growing company.
D) The limited partners in a limited partnership have voting control,while the general partner has operating control over the business.Also,the limited partners are individually responsible,on a pro rata basis,for the firm's debts in the event of bankruptcy.
E) A major disadvantage of all partnerships compared to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

Accepted Answer

Partnerships face several disadvantages when it comes to attracting large amounts of capital, such as unlimited liability and the illiquidity of partnership interests. Additionally, reorganizing may be necessary when a partner dies, making it more difficult to obtain capital compared to corporations.

Question 19

Which of the following statements is CORRECT?
A) Most businesses (by number and total dollar sales)are organized as partnerships or proprietorships because it is easier to set up and operate in one of these forms rather than as a corporation.However,if the business gets very large,it becomes advantageous to convert to a corporation,mainly because corporations have important tax advantages over proprietorships and partnerships.
B) Due to limited liability,unlimited lives,and ease of ownership transfer,the vast majority of U.S.businesses (in terms of number of businesses)are organized as corporations.
C) Most business (measured by dollar sales)is conducted by corporations in spite of large corporations' often less favorable tax treatment,due to legal considerations related to ownership transfers and limited liability.
D) Large corporations are taxed more favorably than sole proprietorships.
E) Corporate stockholders are exposed to unlimited liability.

Accepted Answer

Most business, when measured by dollar sales, is indeed conducted by corporations. This is largely because corporations offer benefits such as limited liability for their owners and ease of transferring ownership, which are particularly valuable for large-scale operations. Despite sometimes facing less favorable tax treatment compared to sole proprietorships and partnerships, the legal advantages of corporations, such as their ability to continue indefinitely and the limited liability they offer to their shareholders, make them the preferred structure for large businesses.

Question 20

Jane Doe,who has substantial personal wealth and income,is considering the possibility of starting a new business in the chemical waste management field.She will be the sole owner,and she has enough funds to finance the operation.The business will have a relatively high degree of risk,and it is expected that the firm will incur losses for the first few years.However,the prospects for growth and positive future income look good,and Jane plans to have the firm pay out all of its income as dividends to her once it is well established.Which of the legal forms of business organization would probably best suit her needs?
A) Proprietorship,because of ease of entry.
B) S corporation,to gain some tax advantages and also to obtain limited liability.
C) Partnership,but only if she needs additional capital.
D) Regular corporation,because of the limited liability.
E) In this situation,the various forms of organization seem equally desirable.

Accepted Answer

The answer of Jane Doe,who has substantial personal wealth and...

Quiz 1: An Overview of Financial Management and the Financial Environment

Which of the following statements is CORRECT?

One drawback of switching from a partnership to the corporate form of organization is the following:

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Cheers Inc.operates as a partnership.Now the partners have decided to convert the business into a regular corporation.Which of the following statements is CORRECT?

The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability,whereas proprietorships do not.

The form of organization for a business is not an important issue,as this decision has very little effect on the income and wealth of the firm's owners.

Two disadvantages of a proprietorship are (1)the relative difficulty of raising new capital and (2)the owner's unlimited personal liability for the business' debts.

There are three primary disadvantages of a regular partnership: (1)unlimited liability, (2)limited life of the organization,and (3)difficulty of transferring ownership.These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

The facts that a proprietorship,as a business,pays no corporate income tax,and that it is easily and inexpensively formed,are two key advantages to that form of business.

Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?