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Foundations Of Business- Chapter 6; Mathis (TCU)

As an artificial person, a(n) _____ can legally engage in almost any business activity a natural person can, including owning property, entering into binding contracts, and initiate legal actions.
Corporation
Historically, the three basic forms of business ownership in the United States have been the:
sole proprietorship, partnership, and corporation.
Basil Pappas spent his youth working in the restaurants of several of his close relatives. Now, he wants to venture into his own business and has decided that he will open his own restaurant. Basil needs more money than he can come up with on his own, so he plans to ask his two brothers to put up some money in exchange for a share of ownership. Such an arrangement means that the company CANNOT be formed as a
sole proprietorship.
Hans is considering forming a company that specializes in international consultations. He wants to serve as a liaison between domestic and Chinese toy distributors, offering the U.S. firms access to lower cost labor and offering the Chinese firms access to one of the largest markets in the world. In addition, he will need to capitalize the operation by offering shares of common stock. Which business entity should he choose?
a corporation
I.B. Glowen is an engineer who works in nuclear power plants. He is considering starting his own engineering company. Over the last couple of months he has spent considerable time researching different business ownership options. Due to the type of work performed by his new company, Glowen is most concerned with unlimited liability. If this is the case, which business model would you recommend?
Corporation
Good friends, Bernie Samples and Susan Randle each studied accounting in college. Recently they decided to work together as co-owners of a small accounting firm. This is an example of a
partnership.
A _____ maintains limited liability but offers more flexibility in terms of tax treatment than other forms of business ownership.
limited liability company
Not all corporations are large. In recent years, about 24 percent of corporations have reported less than _____ in total sales revenue
$25,000
Based on data gathered from the U.S. Census Bureau, _____ are less common than _____ but they tend to be larger and more profitable than _____.
partnerships; sole proprietorships; sole proprietorships
The majority of businesses today are formed as
sole proprietorships.
Sole proprietorships make up over _____ of all businesses.
70 percent
Which of the following is NOT an accurate statement about a sole proprietorship?
Legally, the business is considered separate and distinct from its owner.
While sole proprietorships have recently generated a combined revenue figure of over $1 trillion, they do not:
generate the level of net income seen in partnerships and corporations.
His Eminence Lord Tommy Bushwacker the Third, Duke of Tammany Hall, is the sole proprietor of a ship building concern. As he reaches the end of his days and considers his considerable legacy to his children, his mind touches upon those things he wishes to pass on for their benefit after his death. His lawyer is advising him to do what?
Convert the sole proprietorship to a Limited Liability Company and list it in his will as passing to his heirs.
From the standpoint of an owner, a major advantage of the sole proprietorship is the:
retention of control.
A key advantage of a sole proprietorship is that _____
it is easy and inexpensive to form this type of business.
Susan Boyle is the owner of a piano tuning business. As a sole proprietor, any profit she earns is
treated as personal income of Susan Boyle.
Samantha has a talent for making attractive but inexpensive jewelry and wants to set up a small business to sell some of her creations. She asks for your advice about setting up her firm, telling you that she wants to start her business as quickly and inexpensively as possible. In addition, she doesn’t want to share control (or profits) with anyone else. Which form of business ownership would you suggest for Samantha?
sole proprietorship
All of the following are disadvantages of sole proprietorships EXCEPT
double taxation of earnings.
A key reason most sole proprietorships remain relatively small is that
they have limited ability to raise funds needed to finance growth.
Sole proprietors have _____ for the debts of their companies.
unlimited liability
Justin Rolando decided to operate his own web design firm and is leaning toward organizing it as a sole proprietorship. One factor Justin should realize is that by choosing this form of business he would be
exposing himself to unlimited personal liability for the company’s debts.
After finishing college, Dana wants to open her own business. As a fine arts student, she is planning to provide services as a graphic artist. She wants the freedom to be her own boss and doesn’t want to deal with a lot of rules and regulations. But she is nervous about risking her personal wealth. She is thinking about forming a sole proprietorship and asks you for your opinion about this form of business. Which of the following statements is most accurate?
Forming a sole proprietorship will enable you to be your own boss. But if you are really nervous about risking your personal assets, you might want to consider some other form of ownership because it will also expose you to unlimited liability.
Marco Valez is comparing forms of business structure in order to make the best decision for the business he plans to form next month. He plans to be the only investor/owner, and he will also actively manage the business. He is convinced that the company will be profitable, so he wants to keep all of the after-tax earnings for himself. Which of the following forms of business ownership is Marco likely to choose?
sole proprietorship
What are the three types of partnerships?
general, limited, and limited liability
A _____ is a voluntary agreement between two or more people to jointly own a business.
Partnership
The most effective way to form a general partnership is
to develop a written partnership agreement.
A well-written partnership agreement for a general partnership can help the partners deal with all of the following issues EXCEPT how to
avoid unlimited liability.
The general partnership avoids the problem of double taxation experienced by _____, because earnings of partnerships are taxed only as income of the _____, with no separate tax on the income of the _____.
corporations; partners; business
Compared to a sole proprietorship, an advantage of a general partnership is that it is
able to take advantage of complementary skills and shared workload.
All of the following are drawbacks of general partnerships EXCEPT
inability to pool financial resources.
Limited partners
have limited liability for the debts of their company as long as they do not actively participate in management.
Zane and Blaine want to start up a clothing business in California. Zane is the accountant and Blaine is the entrepreneur, though Blaine has little respect for the concept of fiscal responsibility. How should they proceed?
They should form a limited partnership with Zane as general partner and Blaine as limited partner.
Sue has a great idea for a business but has limited financial assets. She wants to retain control over the management of the company, but she needs someone to provide additional financing. Her friend Tom has some money to invest and likes Sue’s idea. He would like to share in any profits, but he doesn’t have the time or interest to manage the company and is nervous about the liability involved in running a business. A _____ would probably match the needs of both Sue and Tom.
limited partnership
The _____ allows all partners to participate in management while also offering them limited liability.
limited liability partnership
________ is a form of partnership in which all partners have the right to participate in management and have limited liability for company debts.
Limited liability partnership, LLP
A limited liability partnership (LLP) is attractive to partners because
there is no distinction between limited and general partners.
Cathy and Denise open a business as a limited liability partnership in a state that offers partial shield protection. From Cathy’s perspective, this means that she
has unlimited liability for most types of debts the firm incurs, but she is protected from any debts that result from Denise’s negligence or malpractice.
Walmart, ExxonMobil, Intel, and virtually all other large companies in the U.S. are organized as
C corporations.
A _____ is a legal entity created by permission of a state or federal government.
corporation
Sixty-three percent of Fortune 500 firms have filed articles of incorporation in the state of
Delaware.
In most states, the document that owners must file in order to form a corporation is referred to as the
articles of incorporation.
Stockholders are _____ of a corporation. They have the right to vote on issues affecting the operation of the business.
Owners
Mike’s Motorcycles, Inc., has operated for the last 20 years as a partnership. Recently, the partners agreed to change the structure of the business and decided to incorporate in Delaware. John Littleton, a partner, now becomes a
shareholder.
_____ are organizations, such as mutual funds, insurance companies, or pension funds, that pool contributions from a large number of investors, clients, or depositors to buy stock and other securities.
Institutional investors
Stockholders in a corporation elect the _____ to oversee the operation of the company and ensure that their interests are protected.
board of directors
Suzanne Limley was just elected to the board of directors at United Bank Corporation. As a board member, she is expected to represent the interests of
shareholders.
What is the role of the board of directors?
They are elected by the stockholders and serve to manage the big picture elements of the company. They in turn appoint executives to handle daily concerns.
All of the following are duties of a company’s board of directors EXCEPT
take an active role in the daily operations.
A key advantage of a corporation is that
the owners maintain limited liability.
In the United States, _____ are the dominant form of business ownership in terms of net income.
Corporations
Benny’s Bumpers is incorporated in Ohio but also conducts business in Florida. Benny’s Bumpers is a _____ in Ohio but is a _____ in Florida.
domestic corporation; foreign corporation
You are in a group of investors that is considering taking over Sips and Chips, the cybercafé in town. Several investors favor reorganizing the cafe by forming a C corporation. You want to make sure these investors are aware of the possible drawbacks of this form of ownership, so you point out that
after-tax earnings that the investors receive would be taxed both as corporate income and as income to the investors.
A company must register as a foreign corporation if they
plan on doing business in another state.
As a form of ownership, a disadvantage of general corporations is that
they are more expensive and complex to form than most other types of business.
A corporation must register as a _____ in every state in which it operates other than its state of incorporation.
foreign corporation
A statutory close (or closed) corporation gives its shareholders
limited liability and opportunities to participate in management.
Elaine and several friends want to start a business. They like the idea of limited liability. However, they want to keep their organization simple and avoid the need to have formal meetings. Each member of the group wants to actively participate in managing the business and share in any profits. Which of the following forms of business ownership would best satisfy the goals of Elaine and her friends?
statutory close corporation
Individuals who make contributions to _____ will receive a tax-deduction, making it easier for these organizations to raise funds from donations.
nonprofit corporations
Types of corporations include
general, S, statutory close, and nonprofit.
A key difference between S Corporations and C Corporations is that
S corporations may have no more than 100 shareholders who must all be citizens or permanent residents of the United States, while C corporations do not have these restrictions on ownership.
Sandra Harper is a Canadian citizen. Three friends in the United States recently told her about an S corporation in which they own stock. She would like to own stock in this company. Is this possible?
No, because she is not a citizen of the United States.
A nonprofit corporation enjoys the benefit of
earnings that are exempt from state and federal taxes.
A(n) _____ occurs when one firm buys another firm.
acquisition
A(n) _____ occurs when two companies agree to combine operations to form a new company.
merger
Which of the following is a hostile takeover?
Happy Camper Corp. arranges to buy, on the open market, a controlling interest in Sad Puppy Accessories Inc. in spite of Sad Puppy’s board voting the deal down.
In an acquisition, the firm being purchased is the _____ and the firm which is purchasing the other firm is the _____.
target firm; acquiring firm
A _____ merger is the combination of firms in the same industry.
horizontal
A(n) _____ merger is the combination of two or more firms at different stages of production of a given product or service, so the firms have a buyer-seller relationship.
Vertical
One reason a firm would consider a _____ merger would be to increase size and market power in its industry
horizontal
Firms that want to improve the integration of production activities or increase their control over the supply of inputs would be likely to consider a _____ merger.
vertical
Although currently no longer part of the Kraft portfolio of companies, in 1988, Philip Morris, the leading cigarette manufacturer in the United States, merged with Kraft, Inc., the maker of several leading food brands, such as Miracle Whip, Velveeta, and Maxwell House. This combination would be classified as a _____ merger.
Conglomerate
To increase production capacity and provide consumers with market stability, Exxon and Mobil created ExxonMobil. This would be an example of a _____ merger.
horizontal
To reduce risk of vulnerability to downturns in single markets, corporations would consider a _____ merger
conglomerate
How is forming an LLC similar to forming a corporation?
Organizers of most LLCs also draft an operating agreement, which is similar to the bylaws of a corporation.
Tim, Bob, and Sal want to start a business to rehab homes. Each wants to take an active role in managing their company while also protecting their personal assets from unlimited liability. They are likely to find that forming a _____ will meet their needs.
limited liability company
Like a statutory close corporation, a limited liability company (LLC)
is not required to elect a board of directors or hold annual stockholders’ meetings.
Which statement is true about limited liability companies (LLCs)?
LLCs are taxed like partnerships, and each member’s income is accounted for with his or her personal income tax.
Compared to C corporations, an advantage of an LLC is that
after-tax earnings of C corporations that are distributed to owners are subject to double taxation, but the earnings of LLCs pass through the company and are taxed only as personal income.
The _____is a relatively new and increasingly popular form of business ownership that is like a corporation in some ways and like a partnership in others.
limited liability company
All of the following are advantages of limited liability companies EXCEPT
uniform state laws.
Some states do not permit banks, insurance companies, and nonprofit organizations to form as
limited liability companies.
_____ is the contractual relationship in which an established firm supplies another business with unique resources in exchange for payment and other considerations.
Franchising
The _____ is the business entity in a franchise relationship that allows others to operate a business using resources it supplies in exchange for money and other considerations.
franchisor
The party in a franchise relationship that pays for the right to use resources supplied by another business entity is known as the
franchisee
Which choice best describes what kind of relationship Ford has with the local Ford dealer?
distributorship
The most common type of franchise agreement is the
business format franchise agreement.
Which of the following statements about recent franchising trends is most accurate?
Many franchisors are finding that opportunities are greater in foreign countries than in the United States.
For the franchisee, the advantages of a franchise arrangement often include
less risk and easier access to funding.
Jane wants to start up a sandwich shop in Oklahoma City as a badly needed career change, after having spent seventeen years as a deckhand in a Tuna fleet based out of Guam. She doesn’t have enough money to get started, so she’ll have to borrow most of what she’ll need. What should she do?
She should buy a Subway franchise. Though it will be expensive up front, it is more than likely that the added clout of the franchise will provide the loan officer at the bank with the necessary comfort in order to sign off on the loan.
In a typical business format franchise, the franchisor
provides the franchisees with management training and support.
Successful franchisors are particularly vigilant in avoiding the _____, a situation where the behavior of an incompetent or irresponsible franchisee harms the reputation of the franchisor and other franchisees.
negative halo effect
Kale wants to open up a new franchise. He wants to stake out a sector of Idaho for his business selling auto parts B2B to the repair shops in the area. As it grows, he wants to expand his territory accordingly. Why is a franchise maybe NOT the best idea for Kale?
Some franchise agreements may limit him to a specific territory. If he wishes to expand at some future date it may cost him more than it’s worth.

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