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Chapter 5 Quiz

The _________ is the most common form of business ownership.
A. partnership

B. corporation

C. joint venture

D. sole proprietorship

D. sole proprietorship
_________ comprise about 20% of all businesses but account for about 80% of the U.S. business receipts.
A. Limited Liability Companies

B. Sole proprietorships

C. Corporations

D. Partnerships

C. Corporations
Two important considerations when choosing a form of business ownership is…
A. number of employees and banking access.

B. number of small businesses vs. large businesses currently formed and percentage of profits that each form brings to the nation’s GDP.

C. liabilities and assets.

D. taxes and liabilities.

D. taxes and liabilities.
The _________ is usually the easiest form of business to start and end.
A. corporation

B. limited partnership

C. general partnership

D. sole proprietorship

D. sole proprietorship
One of the major disadvantages of a sole proprietorship is the…

A. high cost of starting or ending the company.

B. unlimited liability the owner has for the debts of the firm.

C. fact that any income earned by this type of business is taxed twice.

D. possibility of disagreements between owners.

B. unlimited liability the owner has for the debts of the firm
A significant disadvantage of owning a sole proprietorship is the…

A. overwhelming time commitment often required of the owner.

B. heavy tax liability that must be assumed.

C. lack of incentives to motivate the owner.

D. possibility of limited liability.

A. overwhelming time commitment often required of the owner.
Any debts of damages incurred by a firm organized as a sole proprietorship are…

A. normally covered by liability insurance.

B. limited to the amount the owner has invested in the firm.

C. the responsibility of the owner.

D. paid for out of a reserve contingency fund that sole proprietors are required by law to set up.

C. the responsibility of the owner.
In a partnership, a(n) _________ partner (owner) actively manages the company and has unlimited liability for claims against the firms.

A. general

B. unlimited

C. associate

D. limited

A. general
The limited liability provided to limited partners means that they are not responsible for the debts of the business beyond…

A. the firm’s total assets

B. their total personal assets

C. the amount they have invested in the company

D. the percentage of profits they are entitled to earn.

C. the amount they have invested in the company.
Compared to a sole proprietorship, which of the following is considered an advantage of a general partnership?

A. Division of profits among owners

B. Unlimited liability for all owners

C. Ease and flexibility in transferring shares of ownership to others.

D. Ability to pool financial resources

D. Ability to pool financial resources
When entering into a new partnership, a good strategy is to…

A. avoid putting their agreement in writing since this would limit the flexibility of the partnership.

B. agree to put the first year’s profits back into the partnership.

C. plan to incorporate as soon as possible

D. put the partnership agreement in writing.

D. put the partnership agreement in writing.
Which of the following statements about partnerships is most accurate?

A. A partnership is a corporation with fewer than 100 owners.

B. A major advantage of a partnership is that is offers all owners limited liability.

C. Partnerships are taxed at the lowest corporate tax rate.

D. A major drawback of a partnership is that it is difficult to terminate.

D. A major drawback of a partnership is that it is difficult to terminate.
Which of the following is not a disclosure that should be part of a partnership agreement?

A. The way profits will be divided among partners.

B. The salaries and drawing accounts of each partner.

C. The list of personal assets of each partner.

D. The specific responsibilities of each partner.

C. The list of personal assets of each partner.
One way to eliminate some of the risk of your partners making costly mistakes that could jeopardize your personal assets is to set-up a…

A. limit to the amount of time each can actively spend in the business

B. sole proprietorship

C. master limited partnership

D. limited liability partnership

D. limited liability partnership
An owner of a corporation is known as…

A. stockholder

B. general partner

C. limited partner

D. stakeholder

A. stockholder
Which of the following statements about the operation of a corporation is correct?

A. Owners of a corporation have unlimited liability for any claims against their company.

B. A corporation tends to be much easier to set up than a sole proprietorship or partnership.

C. A corporate charter automatically expires 99 years and must be renewed if the corporation wants to remain in business.

D. A corporation receives its charter from a state government

D. A corporation receives its charter from a state government
The form of business ownership best suited to raising large amounts of money for expansion is the…

A. corporation

B. partnership

C. sole proprietorship

D. cooperative

A. corporation
Which of the following is an advantage of the corporate form of business when compared to sole proprietorships and partnerships?

A. Limited liabilities of owners

B. Simplified paper work

C. Lower taxes

D. Ease of formation

A. Limited liabilities of owners
Compared to partnerships and sole proprietorships, a major advantage of the C (conventional) corporation as a form of business ownership is that is….

A. creates unlimited liability for its owners

B. has the ability to raise more money

C. is easier and less expensive to form

D. qualifies for simplified tax treatment

B. has the ability to raise more money
Which of the following is normally considered a disadvantage of the corporate form of business?

A. Limited life

B. Double taxation of earnings

C. Difficult transfer of ownership

D. Unlimited liability of owners

B. Double taxation of earnings
The board of directors for a corporation is elected by its…

A. creditors

B. managers

C. employees

D. stockholders

D. stockholders
A separation between ownership and management is most likely to occur in a…

A. limited liability partnership

B. general partnership

C. corporation

D. sole proprietorship

C. corporation
The form of business ownership that usually requires the most detailed record keeping is the…

A. corporation

B. general partnership

C. sole proprietorship

D. limited liability partnership

A. corporation
A major advantage of S corporations is that they…

A. can have more stockholders than a C corporation

B. require less paperwork to set up than a C corporation does.

C. avoid the problem of double taxation associated with conventional corporations

D. can operate in foreign nations as it they were domestic corporations

C. avoid the problems of double taxation associated with conventional corporations
To qualify as an S corporation, a company must…

A. have shareholders who are individuals or estates, and qualify as permanent residents of the U.S.

B. have a different class of stock for each owner

C. have no more than 5 percent of income derived from passive sources

D. have no more than 50 shareholders

A. have shareholder who are individuals or estates and qualify as permanent residents of the U.S.
The income generated by S-Corporations…

A. must be reinvested in the business. Owners should not expect dividends

B. is provided to non-profit organizations, so it is considered a tax-free source of funds

C. passes through to its owners, and each it taxed individually for this income

D. is taxed separately from its owners

C. passed through to its owners, and each is taxed individually for this income.
_________ are companies that are similar to S-Corporations but are not restricted with similar eligibility requirements.

A. Limited Liability Companies

B. Sole proprietorship

C. Limited partnership

D. Franchises

A. Limited Liability Companies
One disadvantage of a limited liability company is that it…

A. requires all earnings of the business be taxed at the corporate rate

B. has a limited life span

C. has a more restrictive ownership requirement than S-corporations

D. requires the owners to divide up profits and losses in a fixed proportion.

B. has a limited life span
One reason limited liability companies have become so popular is that they…

A. have unlimited life

B. permit owners to avoid paying self-employment taxes on the company’s profits

C. can be taxed either as a corporation or as a partnership, so owners can choose the tax treatment that is most advantageous for their situation

D. allow owners to sell their interests in the company without requiring approval from other owners

C. can be taxed either as a corporation or as a partnership, so owners can choose the tax treatment that is most advantageous for their situation
Earning of C (conventional) corporations can be…

A. taxed twice if they are distributed as dividends to stockholders

B. taxed by the federal government, but exempt from state taxes if the corporation owns any facilities within that state

C. taxed at twice the going rate of a partnership or sole proprietorship

D. taxed the same as a partnership

A. taxed twice if they are distributed as dividends to stockholders
Which of the following is an attractive benefit of a corporation?

A. Corporations can protect its owners with unlimited liability.

B. Corporations can attract employees by offering stock options.

C. Unlike limited partnerships, all owners of corporations are passive investors

D. Corporations can enjoy double taxation.

B. Corporations can attract employees by offering stock options.
The reason a professional, such as a lawyer or doctor, would incorporate his/her business is…

A. to protect his/her other assets with limited liability

B. to be assured that another professional firm would not take over and make decisions – similar to a hostile takeover

C. to protect his/her assets with unlimited liability

D. to comply with the law because insurance companies require that they be corporations

A. to protect his/her other assets with limited liability
Which of the following statements about S-Corporations is most accurate?

A. Only large corporations with operations in more than one state can qualify to be classified as S-Corporations.

B. Any corporation willing to pay the necessary fees and fill out the required paperwork can become an S-Corporation.

C. The major attraction of S-Corporations is that they avoid the problem of double taxation.

D. S-Corporations are similar to C-Corporations, except that the majority of owners are foreign investors.

C. The major attraction of S-Corporations is they avoid the problem of double taxation.
The S-Corporation is likely to be less popular in the future because…

A. many states significantly increased the annual fee that S-Corporations must pay to maintain their tax status, thus eliminating the financial advantages of this form of ownership.

B. congress repealed the limited liability protection of S-corporations and limited them to companies with earnings of less than $3 million per year.

C. limited liability companies, which do not have the restrictive eligibility requirements of S-corporations.

D. S-corporations have been made illegal in several states as a reaction to widespread abuse of the special benefits available to this type of business.

C. limited liability companies, which do not have the restrictive eligibility requirements of S-corporations
“Double taxation” means…

A. if the corporation doubles its profits from the previous year, the firm’s tax rate (the percentage it pays in taxes) will also double.

B. corporations pay taxes on their profits. If they distribute after-tax profits to the stockholders, the stockholders also pay taxes on the distribution.

C. as the owner of the company, you pay twice the amount in employment taxes on yourself, as you do on your employees.

D. if stockholders decide to sell their shares, they are subject to paying twice the amount of taxes on any capital gains.

B. corporations pay taxes on their profits. It they distribute after-tax profits to the stockholders, the stockholders also pay taxes on the distribution.
One reason that companies participate in mergers and acquisitions is…

A. to expand within their own field or enter new markets

B. to convert a sole proprietorship into a partnership

C. to do the same thing as the competition because it makes for a highly leveraged company

D. to take the first step toward a join venture

A. to expand within their own field or enter new markets
A(n) _________ occurs when one company buys the property and obligations of another company.

A. hostile takeover

B. leverage buyout

C. cooperative

D. acquisition

D. acquisition
Three types of corporate mergers are…

A. economic, geographic, and financial

B. vertical, horizontal, and conglomerate

C. flexible, differentiated, and conditional

D. explicit, implicit, and intrinsic

B. vertical, horizontal and conglomerate
An attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing is…

A. leveraged buyout

B. strike

C. golden parachute

D. downsize

A. leveraged buyout
If a group of stockholders or management obtain all the stock of a previously publicly traded firm for themselves, this is referred to as…

A. stock turning

B. capitalizing

C. turning the equity

D. taking the firm private

D. taking the firm private
The difference between a merger and an acquisition is…

A. a merger is the joining of resources of two companies, whereas an acquisition is a buyout of one firm by the other. The new company concerns itself with merging or resources

B. a merger does not combine the assets and liabilities of firms, whereas an acquisition combines assets and liabilities.

C. a merger is always something smaller tagging onto something larger, like a merging lane onto an interstate, whereas an acquisition is two firms that are relatively the same size agreeing to continue as one – more like two major interstates that come together and travel as one for several miles.

D. a merger combines the assets of the two firms, but each company continues to assumes its own liabilities, whereas an acquisition is a total buyout of one firm by another.

A. a merger is the joining of resources of two companies, whereas an acquisition is a buyout of one firm by the other. The new company concerns itself with merging or resources.
The strategy of investors who are attempting a leveraged buyout is…

A. shape up the company for quick resale

B. use investment tax credits from the government to acquire all of the physical assets owned by the firm

C. secure ownership of all of the existing stock in a company by issuing and selling large amounts of new stock

D. use debt to finance the buyout of the firm’s stockholders and gain control of the firm themselves.

D. use debt to finance the buyout of the firm’s stockholders and gain control of the firm themselves
A _________ is an arrangement whereby someone with proven idea for a business sells the rights to use the business model, to sell a product or service to others in a given territory.

A. trade contract

B. extended ownership agreement

C. franchise agreement

D. conditional grant

C. franchise agreement
A person who buys the right to use a business name and sell a product within given territory is called a…

A. stockholder

B. venture capitalist

C. franchisee

D. limited partner

C. franchisee
A franchise can be formed…

A. can be corporation, partnership or sole proprietorship

B. only as a general partnership

C. either corporation or partnership, but never sole proprietorship

D. only as a corporation

A. can be corporation, partnership or sole proprietorship
Which of the following statements about buying a franchise is most accurate?

A. Buying a franchise is the simplest and least expensive way to set up a business, since the franchisor has already worked out all of the details for setting up and running the business

B. Franchise agreements are simple to evaluate, since federal law requires that all such agreements must be written in English with all fees and terms clearly explained

C. Before purchasing a franchise, the buyer should carefully evaluate the franchise, the franchisor, his or her situation, and the nature of the market.

D. one of the advantages of buying a franchise is that franchisors are so closely regulated that there is virtually no chance for scams to succeed.

C. Before purchasing a franchise, the buyer should carefully evaluate the franchise, the franchisor, his or her situation, and the nature of the market
In a cooperative, members/customers…

A. each have unlimited liability for the debts of the firm

B. democratically control their businesses by electing a board of directors

C. are known as limited partners

D. take turns serving on the board that manages the company.

B. democratically control their businesses by electing a board of directors

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