BUSN 6 6th Edition Kelly Test Bank 1

BUSN 6 6th Edition Kelly
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TEST PLANNING TABLE FOR CHAPTER 6
Moderate:
Easy: Understands
Knows Basic Concepts and Challenging:
Learning Objective Terms and Facts Principles Applies Principles
6-1: Describe the 1, 3, 4, 5, 7, 8, 9, 6, 10, 11, 13, 94, 2, 12, 96, 97, 98,
characteristics of 100, 101, 102, 95, 104, 105, 106 99, 107, 187
the four basic 103
forms of business
ownership
6-2: Discuss the ad- 108, 109, 114 14, 15, 16, 18, 17, 19, 20, 110,
vantages and dis- 112, 113 111, 115, 116, 117,
advantages of a 188
sole proprietor-
ship
228
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6-3: Evaluate the pros 22, 23, 25, 118, 21, 24, 26, 27, 28, 30, 126, 127, 129,
and cons of the 119, 120, 124 29, 121, 122, 123, 131, 189, 190, 191
partnership as a 125, 128, 130
form of owner-
ship
6-4: Explain why cor- 31, 32, 33, 34, 35, 38, 40, 44, 45, 37, 42, 43, 48, 50,
porations have 36, 39, 41, 46, 47, 49, 58, 59, 60, 51, 52, 53, 72, 73,
become the dom- 54, 55, 56, 57, 62, 65, 69, 70, 71, 137, 140, 141, 145,
inant form of 61, 63, 64, 66, 134, 139, 148, 146, 151, 155, 159,
business owner- 67, 68, 132, 133, 152, 154, 163, 165, 166, 192, 193,
ship
135, 136, 138, 164, 167 194, 195, 196, 197,
142, 143, 144, 198
147, 149, 150,
153, 156, 157,
158, 160, 161,
162
6-5: Explain why lim- 74, 75, 78, 173 76, 77, 79, 81, 80, 168, 169, 170,
ited liability com- 171, 174, 175 172, 199
panies are be-
coming an in-
creasingly popu-
lar form of owner-
ship
6-6: Evaluate the ad- 82, 83, 84, 85, 86, 88, 89, 90, 92, 91, 179, 183, 184,
vantages and dis- 87, 93, 176, 177, 180, 181, 182 185, 186, 200
advantages of 178
franchising
229
True/False questions are in plain text.
Multiple choice questions are in bold text.
Essay questions are in bold underlined text
The answers are displayed:

ANS: B DIF: Easy REF: Page 7 OBJ: 6-1 NAT: BUSPROG: Communication
TOP: The Economic Environment KEY: Bloom’s Comprehension
ANS: Answer is B
DIF: Difficulty Level - Easy
REF: Page number of the book where the answer can be found
OBJ: Learning Objective 1 in chapter 6
NAT: Tier 1 Standards (Interdisciplinary Learning Outcomes)
TOP: Topic – A Head/B Head of where the answer can be found
KEY: Bloom’s Taxonomy Tags
230
Chapter 6: Business Formation: Choosing the Form that Fits
TRUE/FALSE
1. Owners of sole proprietorships are personally responsible for any debts incurred by their business.
ANS: T DIF: Easy REF: Page 83 OBJ: 6-1

NAT: BUSPROG: Communication TOP: Business Ownership Options: The Big Four
KEY: Bloom’s Comprehension
2. One advantage of a sole proprietorship is that as a separate legal entity, the owner is not personally
responsible for the debt and obligations of the company.
ANS: F DIF: Challenging REF: Page 83 OBJ: 6-1

NAT: BUSPROG: Reflective Thinking TOP: Business Ownership Options: The Big Four
KEY: Bloom’s Evaluation
3. As business entities, corporations may engage in virtually any business activity a natural person
can, including buying and selling property, and entering into binding contracts.

KEY: Bloom’s Knowledge
4. One advantage of a general partnership is that partners maintain unlimited liability for any debts
the company incurs.
ANS: F DIF: Easy REF: Page 83 OBJ: 6-1

5. A sole proprietorship is a business that is owned, and usually managed, by a single individual.

6. Choice of ownership determines the degree to which each owner has personal liability for the
firm’s debts and the sources of funds available to the firm to finance future exansion.
ANS: T DIF: Moderate REF: Page 83 OBJ: 6-1

NAT: BUSPROG: Analytic TOP: Business Ownership Options: The Big Four
KEY: Bloom’s Analysis
7. A corporation is the most common type of business organization in the United States.

231
232 Chapter 6: Business Formation: Choosing the Form that Fits
8. In terms of total sales income, all corporations are large.

9. In terms of total net income by form of ownership, the sole proprietorship is the largest form of
business ownership, partnerships follow, and corporations are the smallest form.

10. The general partnership is the dominant form of business ownership, with the vast majority of
large business organizations using this form of ownership.
ANS: F DIF: Moderate REF: Page 84 OBJ: 6-1

11. Despite the fact that partnerships in the U.S. were over 3 million in 2007, sole proprietorships still
out number them eight to one.

12. One benefit to a limited liability company is that it offers the flexibility of a corporation in terms
of tax treatment, allowing the owners to elect to have their business taxed either as a corporation or
a partnership.
ANS: T DIF: Challenging REF: Page 84 OBJ: 6-1

13. Most sole proprietorships are small businesses with net incomes that lag far behind those of
partnerships and corporations.

14. The sole proprietorship is subject to double taxation in that any earnings are taxed both as income
to the business and as income to the owner of the business.

NAT: BUSPROG: Communication TOP: Advantages
Chapter 6: Business Formation: Choosing the Form that Fits 233
15. The owner of a sole proprietorship must share any after-tax profits with the company’s
shareholders.

NAT: BUSPROG: Analytic TOP: Advantages
16. The first step in forming a sole proprietorship is filing the appropriate paperwork and paying the
necessary filing fees with the secretary of state in the state where the business will operate.

17. Rennie Hanks has a great idea for a new business—one he is sure will make a ton of money. He’s
eager to get started, so he wants to form his business with a minimum of hassle, expense, and red
tape. He also wants to be his own boss and have complete control over the company. Rennie’s
goals suggest that he would seriously consider operating his business as a sole proprietorship.

NAT: BUSPROG: Reflective Thinking TOP: Advantages
KEY: Bloom’s Synthesis
18. Sole proprietorships generally have a distinct advantage over other forms of business ownership
when it comes to raising large sums of financial resources.

NAT: BUSPROG: Communication TOP: Disadvantages
19. Suzie Kew just graduated with honors from a leading university with a degree in financial
management. She wants (and expects) to get a job with excellent pay and benefits, as well as the
opportunity for growth and advancement. Suzie is likely to be very interested in working for a
company that is organized as a sole proprietorship.

NAT: BUSPROG: Reflective Thinking TOP: Disadvantages
20. Ralph Flores owns and operates his own business as a sole proprietor. Recently his company was
sued. The fact that Ralph has organized his business as a sole proprietorship means that Ralph is
personally protected against any financial loss if the company loses the lawsuit.

21. Limited partnerships and limited liability partnerships are just two names for exactly the same type
of business organization.
ANS: F DIF: Moderate REF: Pages 85-86 OBJ: 6-3

NAT: BUSPROG: Communication
TOP: Partnerships: Two Heads (and Bankrolls) Can Be Better Than One
22. A verbal agreement is the simplest and safest way to form a general partnership.

NAT: BUSPROG: Communication TOP: Formation of General Partnerships
23. A general partnership is a voluntary partnership in which all partners can take an active role in
managing the business and have unlimited liability for any claims against the firm.

TOP: Advantages of General Partnerships|Disadvantages of General Partnerships
24. In a general partnership, each partner incurs unlimited liability only for claims resulting from his
or her own negligence.

NAT: BUSPROG: Communication TOP: Disadvantages of General Partnerships
25. A limited partnership is an agreement between two or more individuals to operate a business as co-
owners for a limited period of time.

NAT: BUSPROG: Communication TOP: Limited Partnerships
26. In a limited partnership, all owners have limited liability for the debts and obligations of their
company.

NAT: BUSPROG: Analytic TOP: Limited Partnerships
27. A major advantage of limited liability partnerships (LLP) is that they offer all partners “full
shield” liability protection in every U.S. state.

NAT: BUSPROG: Communication TOP: Limited Liability Partnerships
28. A limited partnership allows one partner to contribute financially to a company without having to
participate in the daily management.

NAT: BUSPROG: Analytic TOP: Limited Liability Partnerships
29. In a limited liability partnership there is no need to distinguish between limited or general partners,
because they share the management responsibilities.

30. Bailey Nix is a limited partner in his company. A general partner in his company is going on an
extended vacation and has asked Bailey to run the company while he is gone. If Bailey agrees to
do so, he will no longer qualify as a limited partner.

NAT: BUSPROG: Reflective Thinking TOP: Limited Liability Partnerships
31. Corporate bylaws are the basic rules governing how a corporation is organized and how it
conducts its business.

NAT: BUSPROG: Communication TOP: Forming a C Corporation
32. The formation of a corporation requires filing articles of incorporation and paying filing fees.

33. Many of the largest corporations in the United States are incorporated in Delaware.

34. Examples of institutional investors are mutual funds, insurance companies, and pension funds.

NAT: BUSPROG: Communication TOP: Ownership of C Corporations
35. Stockholders are required to purchase common stock before they can purchase preferred stock.

NAT: BUSPROG: Analytic TOP: Ownership of C Corporations
36. Owners of corporations are known as stockholders.

37. Liza owns 1,000 shares of common stock in Bigbux, Inc. As a stockholder in the company, she
may vote in the election of Bigbux’s board of directors.

NAT: BUSPROG: Reflective Thinking TOP: Ownership of C Corporations
38. The board of directors’ primary responsibilities include establishing the corporation’s mission,
determining broad objectives for the corporation, and setting the level of compensation for the
CEO.

NAT: BUSPROG: Analytic TOP: The Role of the Board of Directors
39. Most stockholders in large corporations take an active role in managing their companies.

NAT: BUSPROG: Communication TOP: The Role of the Board of Directors
40. Most state governments grant corporations the right to operate under a corporate charter for no
more than 100 years, after which the corporation must be dissolved.

NAT: BUSPROG: Analytic TOP: Advantages of C Corporations
41. A corporation is a form of business ownership in which the business is considered a legal entity
separate and distinct from its owners.

NAT: BUSPROG: Communication TOP: Disadvantages of C Corporations
42. Bea Richie owns 500 shares of stock in the Megabux Corporation. She is pleased to learn that the
company earned a very nice profit over the most recent operating period. The company has
announced that it will pay each shareholder a dividend of $1 per share out of its after-tax profits.
Because Megabux has already paid taxes on this profit, this payment will represent tax-free
income for Bea.

NAT: BUSPROG: Reflective Thinking TOP: Disadvantages of C Corporations
43. Nash Games, Inc. is incorporated in Illinois but also does business in Missouri. Nash would be
classified as a domestic corporation in Illinois and as a foreign corporation in Missouri.

44. States cannot impose separate income taxes on C corporations because the dividends paid to
stockholders are taxed as personal income.

NAT: BUSPROG: Analytic TOP: Disadvantages of C Corporations
45. A corporation must register as a foreign corporation if they wish to solicit sales through the mail in
a state other than where their corporate home is located.

46. One advantage of a general corporation is that it is easy and inexpensive to form.

47. Corporations are more closely regulated than other forms of business ownership; they are required
to file more paperwork than other forms of business.

48. Corporations are required to file more paperwork than any other form of business because of an
increase in government regulations. Because of this increase in paperwork, corporations are
finding it easier to hide key information from their competitors.

49. A closed corporation is also known as a not-for-profit corporation.

TOP: Other Types of Corporations: Same but Different
50. The earnings of S corporations and closed corporations are NOT exempt from federal and state
income taxes.

NAT: BUSPROG: Reflective Thinking
51. S corporations, closed corporations, and nonprofit corporations’ earnings are exempt from federal
and state income taxes based on a commitment to reinvest in local communities.

52. Moe Chow owns stock in an S corporation. He’s told his buddy Juan about the company, and now
Juan wants to invest in it, too. Juan is a Mexican citizen who lives in northern Mexico, just across
the border from El Paso, Texas. Juan can own stock in the company, but it must be purchased in
the United States and he must pay U.S. income taxes on any dividends he receives.

53. Music and Memories™ a nonprofit corporation serving in a two-state area must pay federal and
state income tax on its earnings due to the fact that it hires musicians to perform at senior care
facilities.

54. Unlike general corporations, nonprofit corporations have no stockholders and pay no dividends.

55. A statutory close (or closed) corporation cannot have more than 100 stockholders. And with only a
few rare exceptions, each stockholder must be a U.S. citizen or permanent resident of the United
States.

56. S corporations cannot have more than 100 stockholders.

57. The earnings of a nonprofit corporation are exempt from federal and state income tax.

58. In order to qualify as an S corporation, a firm must meet several criteria, including limits on the
number and types of stockholders.

NAT: BUSPROG: Analytic
59. Individuals who contribute money or property to a nonprofit organization can take a tax deduction,
making it easier for these organizations to raise funds from donations.

60. One drawback of an S corporation is that its earnings are taxed by the IRS, which also taxes the
dividends it pays to its stockholders. This results in the double taxation of an S corporation’s
earnings.

61. Unlike C corporations, members of S corporations have unlimited liability.

62. Mergers and acquisitions basically mean the same thing; the only difference is the size of the
companies involved.
ANS: F DIF: Moderate REF: Pages 91-92 OBJ: 6-4

NAT: BUSPROG: Analytic TOP: Corporate Restructuring
63. An acquisition is a corporate restructuring in which one firm buys another. After the acquisition,
the target firm ceases to exist as an independent entity, while the acquiring firm continues to
operate.

NAT: BUSPROG: Communication TOP: Corporate Restructuring
64. A merger is a corporate restructuring that occurs when one firm, called the acquiring firm, buys
another firm, called the target firm.

65. In an acquisition, the firm who is doing the buying is called the target firm.

66. A horizontal merger is a merger of two firms that are in the same industry.

67. A vertical merger is a combination of firms at different stages in the production of a good or
service, creating a “buyer-seller” relationship between the two merging firms.

68. A conglomerate merger is a combination of two firms in unrelated industries.

69. A key goal of horizontal mergers is to achieve tighter integration of production and increased
control over supply of crucial inputs.

70. If an oil company merged with a company that produced motion pictures, the result would be a
vertical merger.

71. One reason given to justify a conglomerate merger is the desire to diversify into new markets, thus
reducing the risk associated with adverse conditions in any single market.

72. Fly By Knight and Air Pockets are two mid-sized regional airlines that serve much the same
territory. If these two airlines merged, the result would be a horizontal merger.

NAT: BUSPROG: Reflective Thinking TOP: Corporate Restructuring
73. If Generations Autos, Inc. (an auto manufacturer and assembler of exclusively hybrid vehicles)
merges with a seat belt manufacturer, Generations will significantly increase its market share.

74. Owners of limited liability companies are known as limited partners.

NAT: BUSPROG: Communication TOP: Forming and Managing an LLC
75. Limited liability companies were very popular in the middle of the 20th century, but they have
become much less popular with the rise of other forms of business ownership such as the limited
partnership and S corporation.

NAT: BUSPROG: Communication TOP: Advantages of LLCs
76. Compared to a general corporation, the LLC offers simplicity of management and operations and
the tax pass-through, which eliminates the problem of double taxation.

NAT: BUSPROG: Analytic TOP: Advantages of LLCs
77. Like corporations, LLCs are required to hold regular board meetings.

78. LLCs are as easy to form as a partnership or sole proprietorship.

NAT: BUSPROG: Communication TOP: Limitations and Disadvantages of LLCs
79. The formation of an LLC requires filing a document, usually called the articles of organization,
and paying filing fees in the state where the business is organized.

80. Jerry and Lenny are general partners in an automotive shop. Their business has grown
tremendously over the last two years, and they now want to reorganize their business as either a
corporation or a limited liability company to facilitate continued growth. One advantage of
forming an LLC is that, unlike a corporation, it doesn’t require them to file any special paperwork
or pay any fees.

NAT: BUSPROG: Reflective Thinking TOP: Limitations and Disadvantages of LLCs
81. Some states do not permit certain types of businesses, such as banks, insurance companies, and
nonprofit organizations to operate as LLCs.

82. Franchising is a contractual relationship in which an established business entity allows others to
operate a business using the unique resources it supplies in exchange for monetary payments and
other considerations.

NAT: BUSPROG: Communication TOP: Franchising: Proven Methods for a Price
83. A business entity that allows others to operate a business using its name, trademark, business
methods, and products in exchange for money and other considerations is called a franchisee.

84. In 2010 the Bureau of Census found that franchisees preferred to open fast food places, auto
dealerships, convenience stores, and private mail distribution centers.

85. Franchisors seldom succeed in their attempts to move into foreign markets.

NAT: BUSPROG: Communication TOP: Franchising in Today’s Economy
86. Due to low participation among minorities in franchised businesses, initiatives such as the
National Minority Franchising Initiative are addressing this concern.

87. One of the biggest trends in franchising over the past several years has been a rapid expansion into
foreign markets.

88. As a result of decreased competition and less saturated markets, Mc Donald’s foreign franchise
outlets in 2010 were greater than in the U.S.

NAT: BUSPROG: Analytic TOP: Franchising in Today’s Economy
89. By late 2010, MinorityFran had assisted over 100 participating franchisors, and this effectively
decreased their number of minority franchisees.

90. One drawback of operating a franchise is the greater risk of failure relative to independently-
owned businesses.

NAT: BUSPROG: Analytic TOP: Advantages of Franchising
91. Lakesia Wiley is a bright, hardworking, and responsible young woman who has always wanted to
own a business. However, she realizes that she lacks training and experience in some areas of
running a business and doesn’t have confidence in her ability to start a new company from scratch.
She also is nervous about the amount of risk involved in business ownership. These concerns
suggest that Lakesia might be interested in becoming a franchisee.
ANS: T DIF: Challenging REF: Pages 96-97 OBJ: 6-6

TOP: Advantages of Franchising|Disadvantages of Franchising
92. Individuals who want to be their own boss and use their own methods are likely to have difficulty
accepting the terms of a typical franchise agreement.

NAT: BUSPROG: Analytic TOP: Disadvantages of Franchising
93. A franchise agreement is the contractual arrangement between a franchisor and franchisee that
details the duties and responsibilities of both parties.

NAT: BUSPROG: Communication TOP: Entering into a Franchise Agreement
MULTIPLE CHOICE
94. 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.
a) partnership
b) corporation
c) enterprise
d) sole proprietorship
ANS: B DIF: Moderate REF: Page 83 OBJ: 6-1
NAT: BUSPROG: Analytic TOP: Business Ownership Options: The Big Four
95. Historically, the three basic forms of business ownership in the United States have been the:
a) sole proprietorship, partnership, and corporation.
b) full partnership, nominal partnership, and silent partnership.
c) joint venture, cooperative, and holding company.
d) monopoly, duopoly, and oligopoly.
ANS: A DIF: Moderate REF: Page 83 OBJ: 6-1
96. 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
a) general partnership.
b) sole proprietorship.
c) limited partnership.
d) statutory close corporation.
ANS: B DIF: Challenging REF: Page 83 OBJ: 6-1
97. 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) a corporation
b) an LLP
c) an LLC
d) a sole proprietorship
ANS: A DIF: Challenging REF: Page 83 OBJ: 6-1
98. 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?
a) sole proprietorship
b) partnership
c) corporation
d) cooperative
ANS: C DIF: Challenging REF: Page 83 OBJ: 6-1
99. 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
a) sole proprietorship.
b) partnership.
c) limited liability corporation.
d) corporation.
100. A _____ maintains limited liability but offers more flexibility in terms of tax treatment than other
forms of business ownership.
a) limited liability company
b) sole proprietorship
c) corporation
d) limited liability partnership
ANS: A DIF: Easy REF: Page 83 OBJ: 6-1
101. Not all corporations are large. In recent years, about 24 percent of corporations have reported less
than _____ in total sales revenue.
a) $100,000
b) $25,000
c) $1,000,000
d) $50,000
ANS: B DIF: Easy REF: Page 84 OBJ: 6-1
102. Based on data gathered from the U.S. Census Bureau, _____ are less common than _____ but they
tend to be larger and more profitable than _____.
a) corporations; sole proprietorships; sole proprietorships
b) partnerships; sole proprietorships; sole proprietorships
c) partnerships; sole proprietorships; corporations
d) limited liability companies; sole proprietorships; corporations
103. The majority of businesses today are formed as

a) sole proprietorships.
b) corporations.
c) limited liability partnerships.
d) partnerships.
104. Sole proprietorships make up over _____ of all businesses.

a) 5 percent
b) 25 percent
c) 70 percent
d) 95 percent
ANS: C DIF: Moderate REF: Page 84 OBJ: 6-1
105. Which of the following is NOT an accurate statement about a sole proprietorship?
a) A sole proprietorship is easy and inexpensive to form.
b) Legally, the business is considered separate and distinct from its owner.
c) Most sole proprietorships are small businesses.
d) Sole proprietorships are the most common form of business ownership.
106. While sole proprietorships have recently generated a combined revenue figure of over $1 trillion,
they do not:
a) outnumber the corporations and partnerships combined.
b) generate the level of net income seen in partnerships and corporations.
c) expand at the rate of corporations.
d) grow financially.
107. 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?
a) Sell the ship building concern and pass the money on as cash. He’ll only lose about 60%
of it in estate taxes.
b) Sell the ship building concern to the government in order to get twice the market value for
it, then pass on the windfall.
c) Convert the sole proprietorship to a Limited Liability Company and list it in his will as
passing to his heirs.
d) List the sole proprietorship in his will as passing to his heirs.
108. From the standpoint of an owner, a major advantage of the sole proprietorship is the:
a) ability to pool financial resources.
b) ability to capitalize on complementary skills.
c) retention of control.
d) permanence of the business.
ANS: C DIF: Easy REF: Page 85 OBJ: 6-2
109. A key advantage of a sole proprietorship is that _____

a) it is easy and inexpensive to form this type of business.
b) the owner has limited liability for the debts for this type of business.
c) it is very easy to raise financial capital for this type of business.
d) the business has perpetual life.
110. Susan Boyle is the owner of a piano tuning business. As a sole proprietor, any profit she earns is
a) taxed twice, once as a business and then taxed again as Susan Boyle’s income.
b) treated as personal income of Susan Boyle.
c) tax free.
d) taxed only when she withdraws the money from a bank.
111. 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?
a) general partnership
b) C corporation
c) sole proprietorship
d) limited liability company (LLC)
112. All of the following are disadvantages of sole proprietorships EXCEPT

a) unlimited liability.
b) heavy workload and responsibilities.
c) lack of permanence.
d) double taxation of earnings.
ANS: D DIF: Moderate REF: Page 85 OBJ: 6-2
113. A key reason most sole proprietorships remain relatively small is that
a) they have limited ability to raise funds needed to finance growth.
b) government regulations limit their ability to expand into new areas of business.
c) the owners often disagree about the need to take on additional risk associated with growth.
d) their stockholders would rather receive dividends than have earnings reinvested to finance
growth.
NAT: BUSPROG: Analytic TOP: Disadvantages
114. Sole proprietors have _____ for the debts of their companies.
a) no liability
b) limited liability
c) unlimited liability
d) shared liability
115. 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
a) creating a business that was legally separate and distinct from himself.
b) incurring the problem of double taxation.
c) exposing himself to unlimited personal liability for the company’s debts.
d) required to fill out special forms and pay proprietorship fees to get the company legally
established.
116. 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?
a) 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.
b) Forming a sole proprietorship is a bad choice. Not only is a sole proprietorship subject to
extensive government regulation that will limit your ability to run your business, it also
exposes you to unlimited liability.
c) Forming a sole proprietorship is a great idea. It gives you the ability to be your own boss
while also protecting your personal assets from loss.
d) Forming a sole proprietorship can help you protect your personal assets, but it is a poor
choice for individuals who want to be their own boss, because this form of business is
heavily regulated.
TOP: Advantages and Disadvantages of Sole Proprietorships
117. 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?
a) limited partnership
b) limited liability company
c) C corporation
ANS: D DIF: Challenging REF: Page 85 OBJ: 6-2
TOP: Advantages and Disadvantages of Sole Proprietorships
118. What are the three types of partnerships?

a) sole, general, and specific
b) general, unlimited, and general liability
c) specific, general, and generic
d) general, limited, and limited liability
ANS: D DIF: Easy REF: Pages 85-87 OBJ: 6-3
119. A _____ is a voluntary agreement between two or more people to jointly own a business.
a) sole proprietorship
b) partnership
c) corporation
d) limited liability partnership
120. The most effective way to form a general partnership is

a) with a simple handshake.
b) with a verbal agreement.
c) to develop a written partnership agreement.
d) by sending a text message.
121. A well-written partnership agreement for a general partnership can help the partners deal with all
of the following issues EXCEPT how to
a) share the profits.
b) handle disagreements among partners.
c) handle the withdrawal of a partner.
d) avoid unlimited liability.
NAT: BUSPROG: Analytic TOP: Formation of General Partnerships
122. 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 _____.
a) sole proprietorships; partners; business
b) sole proprietorships; business; partners
c) C corporations; partners; business
d) C corporations; business; partners
NAT: BUSPROG: Communication TOP: Advantages of General Partnerships
123. Compared to a sole proprietorship, an advantage of a general partnership is that it is

a) considered to be a permanent business organization.
b) able to take advantage of complementary skills and shared workload.
c) easier and less expensive to form.
d) able to completely avoid the problem associated with unlimited liability.
NAT: BUSPROG: Communication TOP: Advantages of General Partnerships
124. All of the following are drawbacks of general partnerships EXCEPT

a) lack of continuity.
b) unlimited liability.
c) inability to pool financial resources.
d) potential for disagreements among owners.
ANS: C DIF: Easy REF: Pages 86-87 OBJ: 6-3
NAT: BUSPROG: Communication TOP: Disadvantages of General Partnerships
125. Limited partners

a) have limited liability for the debts of their company as long as they do not actively
participate in management.
b) risk their personal wealth in exchange for a controlling share of ownership.
c) agree to invest their money in the company for a limited time period.
d) cannot own more than 10 percent of the company’s stock.
NAT: BUSPROG: Communication TOP: Limited Partnerships
126. 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?
a) They should form a general partnership because it is easy to form and could benefit them
at tax time.
b) They should form a limited partnership with Zane as general partner and Blaine as limited
partner.
c) They should form an limited liability partnership.
d) They should form a limited partnership with Blaine as the general partner and Zane as the
limited partner.
NAT: BUSPROG: Reflective Thinking TOP: Limited Partnerships
127. 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.
b) limited partnership
c) sole proprietorship
d) foreign corporation
NAT: BUSPROG: Reflective Thinking TOP: Limited Partnerships
128. The _____ allows all partners to participate in management while also offering them limited
liability.
a) nominal partnership
b) general partnership
c) limited liability partnership
d) limited partnership
NAT: BUSPROG: Communication TOP: Limited Liability Partnerships
129. ________ is a form of partnership in which all partners have the right to participate in
management and have limited liability for company debts.
a) General partnership
b) Governmental partnership
c) Limited partnership
d) Limited liability partnership, LLP
130. A limited liability partnership (LLP) is attractive to partners because

a) it allows “full shield” protection no matter in what state you operate.
b) there is no distinction between limited and general partners.
c) only the partner who provides the capital has limited liability.
d) professional businesses can form LLPs in any state.
131. 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
a) 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.
b) is protected from any debts that arise from her own negligence or business errors but has
unlimited liability for any other business debts.
c) may lose any money she initially invests in the company but has no further liability.
d) will split responsibility for any company debts evenly with Denise, so she can never be
held responsible for more than 50 percent of any claims against their business.
132. Walmart, ExxonMobil, Intel, and virtually all other large companies in the U.S. are organized as
a) C corporations.
b) general partnerships.
c) limited liability companies.
d) limited partnerships.
TOP: Corporations: The Advantages and Disadvantages of Being an Artificial Person
133. A _____ is a legal entity created by permission of a state or federal government.

a) limited partnership
b) sole proprietorship
c) general partnership
d) corporation
ANS: D DIF: Easy REF: Page 88 OBJ: 6-4
134. Sixty-three percent of Fortune 500 firms have filed articles of incorporation in the state of
a) California.
b) Maryland.
c) Delaware.
d) Texas.
135. In most states, the document that owners must file in order to form a corporation is referred to as the
a) articles of incorporation.
b) prospectus.
c) registration statement.
d) election of incorporation certificate.
136. Stockholders are _____ of a corporation. They have the right to vote on issues affecting the
operation of the business.
a) creditors
b) employees
c) buyers
d) owners
137. 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
a) shareholder.
b) CEO.
c) management trainee.
d) board member.
NAT: BUSPROG: Reflective Thinking TOP: Ownership of C Corporations
138. _____ 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.
a) C corporations
b) Institutional investors
c) Conglomerates
d) ETFs
139. Stockholders in a corporation elect the _____ to oversee the operation of the company and ensure
that their interests are protected.
a) board of proprietors
b) senior staff
c) board of directors
d) audit committee
140. 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
a) senior bank management.
b) shareholders.
c) creditors.
d) customers.
NAT: BUSPROG: Reflective Thinking TOP: The Role of the Board of Directors
141. What is the role of the board of directors?

a) 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.
b) They are special stockholders who get to enjoy company perks in return for aggressively
managing the day-to-day affairs of the company.
c) They are appointed by the CEO to ensure the details of regulatory concerns with agencies
like the SEC are taken care of.
d) They are appointed by the stockholders to help the CEO and other executives run the
company at peak efficiency.
142. All of the following are duties of a company’s board of directors EXCEPT
a) take an active role in the daily operations.
b) set the level of compensation for corporate officers.
c) establish the corporation’s mission.
d) develop broad corporation objectives.
143. A key advantage of a corporation is that

a) the owners maintain limited liability.
b) it is easy to form this type of business.
c) the owners maintain unlimited liability.
d) the business is considered an extension of the owner.
NAT: BUSPROG: Communication TOP: Advantages of C Corporations
144. In the United States, _____ are the dominant form of business ownership in terms of net income.
a) sole proprietorships
b) limited liability partnerships
c) corporations
d) general partnerships
NAT: BUSPROG: Communication TOP: Advantages of C Corporations
145. 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.
a) C corporation; S corporation
b) global; multinational
c) primary corporation; secondary corporation
d) domestic corporation; foreign corporation
146. 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
a) this type of business lacks permanence.
b) after-tax earnings that the investors receive would be taxed both as corporate income and
as income to the investors.
c) all of the investors would be subject to unlimited liability for any debts the firm incurs.
d) all of the items in this list would be legitimate drawbacks of forming a C corporation.
147. A company must register as a foreign corporation if they

a) plan on doing business in another country.
b) plan on doing business in another state.
c) plan on soliciting sales through the mail.
d) have a bank account in another state.
148. As a form of ownership, a disadvantage of general corporations is that

a) they are unable to make use of specialized management.
b) their growth is limited because of difficulties in raising financial capital.
c) they are more expensive and complex to form than most other types of business.
d) they can only be owned by U.S. citizens, creating legal problems when they try to expand
in the global economy.
149. A corporation must register as a _____ in every state in which it operates other than its state of
incorporation.
a) foreign corporation
b) domestic corporation
c) C corporation
d) closed corporation
150. A statutory close (or closed) corporation gives its shareholders

a) an automatic seat on the board of directors.
b) a guaranteed dividend.
c) rights to manage the company in exchange for unlimited liability.
d) limited liability and opportunities to participate in management.
151. 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?
c) nonprofit corporation
d) statutory close corporation
152. Individuals who make contributions to _____ will receive a tax-deduction, making it easier for
these organizations to raise funds from donations.
a) S corporations
b) C corporations
c) general partnerships
d) nonprofit corporations
153. Types of corporations include

a) sole, general, and nonprofit.
b) general, S, statutory close, and nonprofit.
c) limited, general, nominal, and S.
d) general, limited, and limited liability.
154. A key difference between S Corporations and C Corporations is that

a) the owners of C corporations have limited liability while the owners of S corporations
have unlimited liability.
b) 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.
c) C corporations seek profits while S corporations operate as not-for-profit organizations.
d) C corporations have stockholders who have the right to vote in stockholders’ meetings
while S corporations have members with no voting rights.
NAT: BUSPROG: Analytic
155. 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?
a) No, because she is not a citizen of the United States.
b) Yes, because anyone can own stock in an S corporation as long as he or she is willing to
fill out the appropriate paperwork.
c) No, because stock in an S corporation cannot be held by more than three people.
d) Yes, because under the terms of NAFTA, Canadian citizens have the same rights to own
shares of stock in an S corporation as American citizens.
156. A nonprofit corporation enjoys the benefit of

a) earnings that are exempt from state and federal taxes.
b) guaranteed dividends to shareholders.
c) exemption from filing paperwork.
d) limited liability for shareholders.
157. A(n) _____ occurs when one firm buys another firm.
a) conglomeration
b) joint venture
c) merger
d) acquisition
158. A(n) _____ occurs when two companies agree to combine operations to form a new company.
a) limited liability corporation
c) merger
d) acquisition
159. Which of the following is a hostile takeover?

a) Buddyboy International negotiates a price of fifty cents per share with its rival,
Angrygrrrrl Industries, so that Angrygrrrrl can buy them out.
b) 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.
c) ABC123 Company’s board of directors has agreed to a deal with It’s Greek To Me LLC’s
membership for a merger.
d) Cry Me a River Water Co. has acquired Misty Falls Company in what amounts to a
monopolistic coup.
160. In an acquisition, the firm being purchased is the _____ and the firm which is purchasing the other
firm is the _____.
a) target firm; acquiring firm
b) acquiring firm; target firm
c) limited liability partnership; limited liability corporation
d) merged firm; target firm
161. A _____ merger is the combination of firms in the same industry.

a) hostile
b) conglomerate
c) vertical
d) horizontal
162. 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.
a) upward
b) conglomerate
c) vertical
d) horizontal
163. One reason a firm would consider a _____ merger would be to increase size and market power in
its industry
a) generic
b) conglomerate
c) vertical
d) horizontal
164. 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.
a) generic
b) conglomerate
c) vertical
d) horizontal
165. 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.
a) horizontal
b) vertical
c) conglomerate
d) macro
166. To increase production capacity and provide consumers with market stability, Exxon and Mobil
created ExxonMobil. This would be an example of a _____ merger.
a) conglomerate
b) horizontal
c) vertical
d) limited liability
167. To reduce risk of vulnerability to downturns in single markets, corporations would consider a
_____ merger
a) downward
b) conglomerate
c) vertical
d) horizontal
168. How is forming an LLC similar to forming a corporation?

a) As with corporations, there are no documents to file.
b) LLC owners are also called stockholders, just like in a corporation.
c) Organizers of most LLCs also draft an operating agreement, which is similar to the bylaws
of a corporation.
d) Similar to a corporation, all owners of an LLC have unlimited liability.
NAT: BUSPROG: Reflective Thinking TOP: Forming and Managing an LLC
169. 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.
a) nonprofit corporation
c) limited liability company
d) general partnership
ANS: C DIF: Challenging REF: Pages 93-94 OBJ: 6-5
NAT: BUSPROG: Reflective Thinking TOP: Forming and Managing an LLC
170. Like a statutory close corporation, a limited liability company (LLC)

a) files articles of incorporation outlining operational and organizational levels.
b) is not required to elect a board of directors or hold annual stockholders’ meetings.
c) follows the same state laws that C corporations follow.
d) has no more than 50 shareholders.
NAT: BUSPROG: Reflective Thinking TOP: Advantages of LLCs
171. Which statement is true about limited liability companies (LLCs)?

a) LLCs are taxed like partnerships, and each member’s income is accounted for with his or
her personal income tax.
b) LLCs do not pay franchise taxes.
c) LLCs in their most common forms are banks, insurance companies, and nonprofit
organizations.
d) LLCs are the same entities state to state.
NAT: BUSPROG: Analytic TOP: Advantages of LLCs
172. Compared to C corporations, an advantage of an LLC is that

a) C corporations must file paperwork with the state when they are formed, while no
paperwork needs to be filed to form an LLC.
b) C corporations are limited to no more than 100 owners, while LLCs can have an unlimited
number of owners.
c) 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.
d) LLCs are classified as domestic firms in all of the states where they operate, while
corporations are classified as “foreign” business entities in states other than the one in
which they are incorporated.
NAT: BUSPROG: Reflective Thinking TOP: Advantages of LLCs
173. 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.
a) joint venture
b) limited liability company
c) cooperative
174. All of the following are advantages of limited liability companies EXCEPT
a) simple management and operation.
b) uniform state laws.
c) flexible ownership.
d) limited liability.
175. Some states do not permit banks, insurance companies, and nonprofit organizations to form as
a) S corporations.
b) C corporations.
c) limited liability partnerships.
d) limited liability companies.
176. _____ is the contractual relationship in which an established firm supplies another business with
unique resources in exchange for payment and other considerations.
a) Franchising
b) Formalizing
c) Formatting
d) Articles of incorporation
177. 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.
a) general corporation
b) partner
c) franchisor
d) franchisee
178. The party in a franchise relationship that pays for the right to use resources supplied by another
business entity is known as the
a) general corporation.
b) limited partner.
c) franchisor.
d) franchisee.
179. Which choice best describes what kind of relationship Ford has with the local Ford dealer?
a) mutually beneficial product franchise
b) business format franchise
c) distributorship
d) receivership
NAT: BUSPROG: Reflective Thinking TOP: Franchising: Proven Methods for a Price
180. The most common type of franchise agreement is the

a) business format franchise agreement.
b) general partnership agreement.
c) limited liability corporate agreement.
d) operation agreement.
181. Which of the following statements about recent franchising trends is most accurate?
a) Women own almost half of all franchises.
b) Over 40 percent of all franchisees are now members of minorities.
c) Many franchisors are finding that opportunities are greater in foreign countries than in the
United States.
d) All of the statements in this list are true.
182. For the franchisee, the advantages of a franchise arrangement often include
a) less risk and easier access to funding.
b) unlimited and unrestricted opportunities for growth.
c) low cost of formation.
d) freedom and flexibility in management.
NAT: BUSPROG: Communication TOP: Advantages of Franchising
183. 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?
a) Think up a creative name for the new business, form a corporation, sell stock shares to
raise the needed capital, and launch.
b) 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.
c) She might do better buying her own Tuna boat and sticking with what she knows.
d) Jane should attend culinary school before attempting to start this business—what if she
fails?
NAT: BUSPROG: Reflective Thinking TOP: Advantages of Franchising
184. In a typical business format franchise, the franchisor

a) pays royalties and fees to the franchisees.
b) provides the franchisees with management training and support.
c) allows franchisees to operate loosely, as long as they are profitable.
d) owns all of the franchise outlets but leases them to the franchisees.
NAT: BUSPROG: Reflective Thinking TOP: Advantages of Franchising
185. 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.
a) pie-in-the-sky effect
b) saturated effect
c) negative halo effect
d) restructuring effect
NAT: BUSPROG: Reflective Thinking TOP: Disadvantages of Franchising
186. 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?
a) 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.
b) The auto parts business is cutthroat, and his franchise needs to have a guarantee on the
box—if there’s no guarantee, people just won’t buy.
c) Kale could save a lot of money by concentrating on directly importing one type of part
from China for all makes and models. As a specialist with a narrow focus, he gets to keep
more of what he earns, rather than paying outrageous franchise fees.
d) Kale’s FDD requires him to sell parts even if he doesn’t believe in their quality.
NAT: BUSPROG: Reflective Thinking TOP: Disadvantages of Franchising
ESSAY
187. List and describe the four forms of business ownership.
ANS:
A sole proprietorship is a business that is owned, and usually managed, by a single individual. As
far as the law is concerned, a sole proprietorship is simply an extension of the owner. Any
earnings of the company are treated as income of the owner; likewise, any debts the company
incurs are considered to be the owner’s personal debts.
A partnership is a voluntary agreement under which two or more people act as co-owners of a
business for profit. There are several types of partnerships: general partnership, limited partnership
and limited liability partnership.
A corporation is a business entity created by filing a form (known in most states as the articles of
incorporation) with the appropriate state agency, paying the state’s incorporation fees, and
meeting other requirements. (The specifics vary among states.) Unlike a sole proprietorship or a
partnership, a corporation is considered to be a legal entity that is separate and distinct from its
owners. Because of a corporation’s status as a separate legal entity, the owners of a corporation
have limited liability—meaning they aren’t personally responsible for the debts and obligations of
their company.
A limited liability company (LLC) is a hybrid form of business ownership that is similar in some
respects to a corporation while having other characteristics that are similar to a partnership. Like a
corporation, a limited liability company is considered a legal entity separate from its owners. Also
like a corporation—and as its name implies—an LLC offers its owners limited liability for the
debts of their business. But it offers more flexibility than a corporation in terms of tax treatment; in
fact, one of the most interesting characteristics of an LLC is that its owners can elect to have their
business taxed either as a corporation or a partnership. Many states even allow individuals to form
single-person LLCs that are taxed as if they were sole proprietorships.
DIF: Challenging REF: Page 83 OBJ: 6-1

188. What is a sole proprietorship? Identify and explain two advantages and two disadvantages of sole
proprietorships.
ANS:
A sole proprietorship is a business that is owned, and usually managed, by a single individual.
From a legal perspective, the firm is simply an extension of its owner.
The advantages and disadvantages identified by students should come from the following lists:
Sole proprietorships offer several advantages:
l It is the simplest and least expensive form of ownership to establish.

l It offers the owner the greatest degree of control when it comes to running the business. The sole
proprietor doesn’t have to seek the approval of other owners.
l All of the profits go to the individual owner.
l Many individuals derive a great deal of pride and personal satisfaction from owning and
operating their own business.
l There is no separate tax on the earnings of the business, thus avoiding the problem of double
taxation, one of the major disadvantages of corporations.
But sole proprietorships also have some significant disadvantages:
l Because the firm is simply an extension of the owner, a sole proprietor has unlimited liability for
the debts of the business.
l Sole proprietorships can also face difficulties in raising money to finance growth from banks and
other financial institutions. Suppliers often won’t provide supplies on credit.
l The sole owner often must work long hours and assume heavy responsibilities.
l Sole proprietorships are at a disadvantage when it comes to attracting and keeping highly
qualified, experienced employees; sole proprietors can’t afford to offer them high salaries and
perks.
l Sole proprietorships have a limited life. The death or retirement of the owner means that, from a
legal perspective, the business ceases to exist.

TOP: Advantages and Disadvantages of Sole Proprietorships KEY: Bloom’s Evaluation
189. What is a partnership? Describe the basic features of the three major types of partnerships: general
partnerships, limited partnerships, and limited liability partnerships.
ANS:
A partnership is a voluntary arrangement under which two or more people act as co-owners of a
business for profit. There are three major types of partnerships.
In a general partnership, each partner takes an active role in management, shares in the profits,
and has unlimited liability for the firm’s debts.
A limited partnership consists of at least one general partner, who participates actively in
managing the company and assumes unlimited liability, and at least one limited partner, who gives
up the right to participate in management in exchange for limited liability. Both types of partners
contribute financially to the company and share in its profits.
The limited liability partnership is a relatively new form of partnership that allows all partners to
participate in management while retaining some degree of limited liability. The amount of liability
protection offered by LLPs varies among states.
DIF: Challenging REF: Pages 85-88 OBJ: 6-3

190. Identify and describe the advantages of general partnerships.
ANS:
Ability to pool financial resources: With more people investing in the company, a partnership is
likely to have a stronger financial base than a sole proprietorship.
Ability to share responsibilities and capitalize on complementary skills: Partners can share the
burden of running the business, which can ease the workload. They can also benefit from
complementary skills and interests; the partners can split up the tasks so they use their skills to
best advantage.
Ease of formation: Partnerships are relatively easy to set up. All that’s needed is an agreement
among two or more people to operate a business as co-owners.
Possible tax advantages: Similar to a sole proprietorship, the earnings of a partnership “pass
through” the business, untouched by the Internal Revenue Service (IRS), and are taxed only as the
partners’ personal income. As with a sole proprietorship, this avoids the potential for double
taxation endemic to corporations.

NAT: BUSPROG: Reflective Thinking TOP: Advantages of General Partnerships
191. Explain the similarities and differences between limited partnerships and limited liability
partnerships.
ANS:
A limited partnership is a business arrangement that includes at least one general partner and at
least one limited partner. Both types of partners contribute financially to the company and share in
its profits. But in other respects, they play different roles:
General partners may contribute money, property, and personal services to the partnership. They
assume full responsibility for managing the partnership, and they have unlimited personal liability
for any of its debts, just like the partners in a general partnership.
Limited partners may contribute money and property to the company, but they cannot actively
participate in its management. Limited partners have limited liability; they are liable for the debts
of the firm only to the extent of their actual investment. As long as they do not actively participate
in management, their personal wealth is not at risk.
The limited liability partnership (LLP) is the newest form of partnership. It’s similar to a limited
partnership in some ways, but it has the advantage of allowing all partners to take an active role in
management while also offering all partners some form of limited liability. In other words, there’s
no need to distinguish between limited and general partners in an LLP.

192. Describe how a corporation is formed. Why do so many large firms choose to incorporate in
Delaware?
ANS:
Forming a corporation is more complex than forming a sole proprietorship or partnership. It
requires filing a special form, known in most states as the articles of incorporation, with a specific
state agency. In addition, incorporators must pay filing fees to the state and must establish
corporate bylaws, which are the basic rules and procedures governing the way the corporation will
operate—and file them with the state as well.
When it comes to the specifics of incorporating, every state has its own forms and requirements.
Some states—with Delaware the most prominent among them—are known for their simple forms,
inexpensive filing fees, low corporate tax rates, and “corporation friendly” laws and court systems.
Not surprisingly, many large companies choose to incorporate in states with these favorable
requirements, even if they intend to do the majority of their business in other states. Over 60
percent of the corporations listed on the Fortune 500 are incorporated in Delaware.

NAT: BUSPROG: Reflective Thinking TOP: Forming a C Corporation
193. Describe the role of the board of directors. Explain their duties.
ANS:
The board of directors oversees the operations of their company and protects their interests.
The board of directors establishes the corporation’s mission and sets its broad objectives. But
board members seldom take an active role in the day-to-day management of their company.
Instead, again in accordance with corporate bylaws, the board appoints a chief executive officer
(CEO) and other corporate officers to manage the company on a daily basis. The board also sets
the level of compensation for these officers and monitors their performance to ensure that they act
in a manner consistent with stockholder interests. It also provides advice to these officers on broad
policy issues, approves their major proposals, and ensures that the company adheres to major
regulatory requirements.

194. Explain why general corporations have become the dominant form of the different types of
business ownership.
ANS:
General corporations (sometimes called C corporations) are businesses that are considered legally
separate and distinct from their owners, who are called stockholders. There are several reasons
why general corporations have become the dominant form of business ownership. First of all, this
form of ownership offers limited liability to all owners; stockholders are not personally liable for
their company’s debts. Second, under articles of incorporation, corporations have unlimited life;
general corporations are unaffected by the death or withdrawal of an owner. Third, there is the
ease of transfer of ownership; stockholder of publicly traded corporations can withdraw from
ownership simply by selling their stock. Fourth, corporations have the ability to raise financial
capital through issuing shares of stocks and bonds, giving them an advantage when it comes to
financing growth. Finally, with their greater financial resources and the opportunities for career
advancement they offer, large corporations often find it easier to hire highly qualified, specialized
professional managers.

TOP: Corporations: The Advantages and Disadvantages of Being an Artificial Person
195. List and define the advantages and disadvantages of forming a general corporation.
ANS:
Advantages
Limited liability: Because a corporation is legally separate from its owners, stockholders are not
personally liable for the debts of their company. If a corporation goes bankrupt, the stockholders
might find that their stock is worthless, but their other personal assets are protected.
Permanence: Unless the articles of incorporation specify a limited duration, corporations can
continue operating as long as they remain financially viable and the majority of stockholders want
the business to continue. Unlike a sole proprietorship or partnership, a general corporation is
unaffected by the death or withdrawal of an owner.
Ease of transfer of ownership: It’s easy for stockholders of publicly traded general corporations
to withdraw from ownership—they simply sell their shares of stock.
Ability to raise large amounts of financial capital: Corporations can raise large amounts of
financial capital by issuing shares of stock or by selling long-term IOUs called corporate bonds.
The ability to raise money by issuing these securities gives corporations a major financial
advantage over most other forms of ownership.
Ability to make use of specialized management: Large corporations often find it easier to hire
highly qualified professional managers than proprietorships and partnerships do. Major
corporations can typically offer attractive salaries and benefits, and their permanence and potential
for growth offer managers opportunities for career advancement.
Disadvantages
Expense and complexity of formation and operation: Establishing a corporation is more

complex and expensive than forming sole proprietorships and partnerships. Corporations are also
subject to more formal operating requirements. For example, they are required to hold regular
board meetings and keep accurate minutes.
Double taxation of earnings and additional taxes: The IRS considers a general corporation to
be a separate legal entity, and taxes its earnings accordingly. Then, any dividends (earnings the
corporation distributes to stockholders) are taxed again as the personal income of the stockholders.
In addition to income taxes, states also impose an annual franchise tax on corporations.
More paperwork and more regulation: Corporations are more closely regulated than other
forms of business. Large, publicly traded corporations are required to send annual statements to
all shareholders and to file detailed quarterly and annual reports with the Securities and Exchange
Commission (SEC). Anyone can look at the forms filed with the SEC, making it difficult to keep
financial information secret from competitors.
Possible conflicts of interest: The corporate officers appointed by the board are supposed to further
the interests of stockholders. But some top executives pursue policies that further their own interests
(such as prestige and power, job security, and attractive financial perks) at the expense of the
stockholders. The board of directors is supposed to look out for the interests of stockholders, but
several boards in recent years have been criticized for failure to exercise proper oversight.

NAT: BUSPROG: Reflective Thinking TOP: Advantages of C Corporations
196. Identify and describe the differences between a “domestic corporation” and a “foreign corporation.”
ANS:
When a business that’s incorporated in one state does business in other states, it’s called a
“domestic corporation” in the state where it’s incorporated and a “foreign corporation” in the other
states. A corporation must register (or “qualify”) as a foreign corporation in order to do business in
any state other than the one in which it incorporated. This typically requires additional paperwork,
fees, and taxes. But registration as a foreign corporation is only necessary if the company is
involved in substantial business activities within the state. Businesses that only engage in minor
business activities typically are exempt from the registration requirement. For example, a firm
operating a production facility or maintaining a district office in a state other than its corporate
home would need to register as a foreign corporation, but a firm that simply held a bank account or
solicited sales to customers in that state through the mail would not be required to do so.
197. Describe the advantages and limitations of S corporations, statutory close (or closed) corporations,
and nonprofit (or not-for-profit) corporations.
ANS:
Type Key Advantage Limitations
S Corporation · IRS does not tax earnings of S · Can have no more than 100
corporations separately. Earnings stockholders.
“pass through” the company and · With only a few rare
are taxed only as income to exceptions, each stockholder
stockholders, thus avoiding the must be a U.S. citizen or
problem of double taxation permanent resident of the
associated with C corporations. United States. (No ownership
· Stockholders have limited by foreigners or other
liability. corporations.)
Statutory Close (or · Can operate under simpler · Number of stockholders is
Closed) Corporation arrangements than conventional limited. (The number varies
corporations. For example, among states but is usually
doesn’t have to elect a board of no more than 50.)
directors or hold an annual · Stockholders normally can’t
stockholders’ meeting. sell their shares to the public
· All owners can actively without first offering the
participate in management while shares to existing owners.
still having limited liability. · Not all states allow formation
of this type of corporation.
Nonprofit (or not-for- · Earnings are exempt from federal · Has members (who may pay
profit) Corporation and state income taxes. dues) but cannot have
· Members and directors have stockholders.
limited liability. · Cannot distribute dividends
· Individuals who contribute money to members.
or property to the nonprofit can · Cannot contribute funds to a
take a tax deduction, making it political campaign.
easier for these organizations to · Must keep accurate records
raise funds from donations. and file paperwork to
document tax-exempt status.

198. How does a merger differ from an acquisition. What are the three basic types of mergers, and how
do they differ? Identify a reason why firms might pursue each type of merger.
ANS:
An acquisition occurs when one corporation buys controlling interest in another firm. The firm
being acquired ceases to exist as an independent entity, while the acquiring firm continues to
operate. A merger occurs when two formerly independent firms agree to combine and form a new
business entity.
There are three basic types of mergers: horizontal, vertical, and conglomerate. A horizontal
merger is a combination of firms in the same industry. This type of merger enables the firm to
achieve more power and control within a given market. It may also allow the new firm to be more
efficient through the elimination of duplicate facilities and personnel. A vertical merger is
between firms that are at different stages in the production process for a good or service. This type
of merger may allow tighter integration of production and increased control over the supply of
resources and inputs. A conglomerate merger is between firms that are in unrelated industries. A
key reason cited for this type of merger is the desire to reduce risk by making the firm less
vulnerable to adverse conditions in any single market.

199. List and define the limitations and disadvantages of a limited liability company (LLC).
ANS:
More complex to form than partnerships: LLCs take more time and effort to form than sole
proprietorships and general partnerships. For example, the formation of an LLC requires filing
articles of organization with the appropriate state agency and paying filing fees.
Annual franchise tax: Like corporations, LLCs typically must pay an annual franchise tax to the
state where they’re organized.
Foreign status in other states: Also like corporations, LLCs must file as “foreign” companies
when they do business in states other than where they were organized. This results in more
paperwork and fees.
Limits on types of firms that can form LLCs: Some states do not permit certain types of
businesses—such as banks, insurance companies, and nonprofit organizations—to operate as
LLCs.
Differences in state laws: There are significant differences in the state laws governing LLCs.
This can make operating an LLC in more than one state a complex endeavor.

NAT: BUSPROG: Reflective Thinking TOP: Limitations and Disadvantages of LLCs
200. What is franchising? What is the relationship between a franchisor and franchisee? Describe at
least one advantage and one disadvantage of franchising for the franchisor, and at least one
advantage and disadvantage for the franchisee.
ANS:
Franchising is an ongoing contractual relationship in which an established firm (the franchisor)
allows another business (the franchisee) to use its unique resources in exchange for payments and
other considerations. Both the franchisor and the franchisee benefit from the arrangement.
Franchisors
Students can choose one of the two following advantages for the franchisor:
· Being a franchisor is an opportunity for a business to gain revenue without having to invest its
own money in new outlets.
· Franchisors often find that franchisees—as profit-oriented owners—are more highly motivated
than salaried managers to do whatever it takes to maximize the success of their outlets.
Students can mention the following disadvantage to being a franchisor that is mentioned in the
text: The disadvantage for the franchisor is that they often find dealing with a large number of
semi-independent franchisees can be complex and challenging.
Franchisees
Students can choose one of the following four advantages to franchisees of participating in a franchise:
· Operating a franchise can be considerably less risky than starting a business from scratch.
That’s because franchises offer access to a proven business system and product.
· Franchisees receive training and support from the franchisors.
· Franchisees often have an easier time attracting customers because of the instant brand name
recognition.
· Franchisees often have an easier time obtaining loans than a new, unproven business would
because they are a part of an established franchise.
Students can choose one of the following six disadvantages to franchisees of participating in a
franchise:
· Participating in a franchise can be costly: franchisees usually pay an initial franchise fee as well
as ongoing royalties; in addition, they can be assessed additional fees to cover costs such as
national advertising campaigns.
· Franchisees have limited control over the way they do business; franchise agreements usually
spell out procedures and methods that need to be followed to the letter.
· Franchisees can suffer from a negative halo effect when the irresponsible or incompetent behavior
of a few franchisees creates a negative perception of the entire franchise and all its outlets.
· Franchise agreements can make growth challenging; they usually limit the territory and require
franchisor approval before a franchisee can expand into other areas.
· Franchisees cannot sell their franchises to other investors without prior approval from the franchisor.
· Not all franchisors live up to their promises; for example, they can provide poor quality
training and support.
NAT: BUSPROG: Reflective Thinking TOP: Franchising: Proven Methods for a Price

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TEST PLANNING TABLE FOR CHAPTER 6

The answers are displayed:

ANS: T DIF: Easy REF: Page 83 OBJ: 6-1

ANS: F DIF: Challenging REF: Page 83 OBJ: 6-1

ANS: T DIF: Easy REF: Page 83 OBJ: 6-1

ANS: F DIF: Easy REF: Page 83 OBJ: 6-1

ANS: T DIF: Easy REF: Page 83 OBJ: 6-1

ANS: T DIF: Moderate REF: Page 83 OBJ: 6-1

ANS: F DIF: Easy REF: Page 84 OBJ: 6-1

8. In terms of total sales income, all corporations are large.

ANS: F DIF: Easy REF: Page 84 OBJ: 6-1

ANS: F DIF: Easy REF: Page 84 OBJ: 6-1

ANS: F DIF: Moderate REF: Page 84 OBJ: 6-1

ANS: T DIF: Moderate REF: Page 84 OBJ: 6-1

ANS: T DIF: Challenging REF: Page 84 OBJ: 6-1

ANS: T DIF: Moderate REF: Page 84 OBJ: 6-1

ANS: F DIF: Moderate REF: Page 85 OBJ: 6-2

ANS: F DIF: Moderate REF: Page 85 OBJ: 6-2

ANS: F DIF: Moderate REF: Page 85 OBJ: 6-2

ANS: T DIF: Challenging REF: Page 85 OBJ: 6-2

ANS: F DIF: Moderate REF: Page 85 OBJ: 6-2

ANS: F DIF: Challenging REF: Page 85 OBJ: 6-2

ANS: F DIF: Challenging REF: Page 85 OBJ: 6-2

ANS: F DIF: Moderate REF: Pages 85-86 OBJ: 6-3

ANS: F DIF: Easy REF: Page 86 OBJ: 6-3

ANS: T DIF: Easy REF: Page 86 OBJ: 6-3

ANS: F DIF: Moderate REF: Page 86 OBJ: 6-3

ANS: F DIF: Easy REF: Page 87 OBJ: 6-3

ANS: F DIF: Moderate REF: Page 87 OBJ: 6-3

ANS: F DIF: Moderate REF: Page 87 OBJ: 6-3

ANS: T DIF: Moderate REF: Page 87 OBJ: 6-3

ANS: T DIF: Moderate REF: Page 87 OBJ: 6-3

ANS: T DIF: Challenging REF: Page 87 OBJ: 6-3

ANS: T DIF: Easy REF: Page 88 OBJ: 6-4

ANS: T DIF: Easy REF: Page 88 OBJ: 6-4

ANS: T DIF: Easy REF: Page 88 OBJ: 6-4

ANS: T DIF: Easy REF: Page 88 OBJ: 6-4

ANS: F DIF: Moderate REF: Page 88 OBJ: 6-4

36. Owners of corporations are known as stockholders.

ANS: T DIF: Easy REF: Page 88 OBJ: 6-4

ANS: T DIF: Challenging REF: Page 88 OBJ: 6-4

ANS: T DIF: Moderate REF: Page 88 OBJ: 6-4

ANS: F DIF: Easy REF: Page 88 OBJ: 6-4

ANS: F DIF: Moderate REF: Page 89 OBJ: 6-4

ANS: T DIF: Easy REF: Page 90 OBJ: 6-4

ANS: F DIF: Challenging REF: Page 90 OBJ: 6-4

ANS: T DIF: Challenging REF: Page 90 OBJ: 6-4

ANS: F DIF: Moderate REF: Page 90 OBJ: 6-4

ANS: F DIF: Moderate REF: Page 90 OBJ: 6-4

ANS: F DIF: Easy REF: Page 90 OBJ: 6-4

ANS: T DIF: Moderate REF: Page 91 OBJ: 6-4

ANS: F DIF: Challenging REF: Page 91 OBJ: 6-4

49. A closed corporation is also known as a not-for-profit corporation.

ANS: F DIF: Moderate REF: Page 91 OBJ: 6-4

ANS: T DIF: Challenging REF: Page 91 OBJ: 6-4

ANS: F DIF: Challenging REF: Page 91 OBJ: 6-4

ANS: F DIF: Challenging REF: Page 91 OBJ: 6-4

ANS: F DIF: Challenging REF: Page 91 OBJ: 6-4

ANS: T DIF: Easy REF: Page 91 OBJ: 6-4

ANS: F DIF: Easy REF: Page 91 OBJ: 6-4