M Business 4th Edition Ferrell Test Bank 1

M BUSINESS 4TH EDITION
FERRELL TEST BANK

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Chapter 04
Options for Organizing Business
True / False Questions
1. Most sole proprietorships focus on the manufacturing of goods rather than on services.
True False
2. Compared to other forms of business ownership, sole proprietorships have the greatest degree of
secrecy.
True False
3. The inability to make immediate decisions is a disadvantage of sole proprietorships.
True False
4-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
4. Compared to other forms of business ownership, sole proprietorships have the least freedom
from government regulations.
True False
5. A sole proprietor has limited liability in meeting the debts of the business.
True False
6. Sole proprietorships typically employ less than 50 people.
True False
7. A general partnership involves a complete sharing in the management of a business.
True False
8. In a limited partnership, both the general partner and the limited partner assume unlimited
liability.
True False
9. All states require partnerships to have articles of partnership.
True False
10. Partnerships have fewer regulatory controls than corporations.
True False
11. Limited partners have no voice in the management of the partnership.
True False
12. In a general partnership, each partner is liable only for the debts he or she incurs.
True False
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Education.
13. The assets and liabilities of a corporation are separate from its owners.
True False
14. S Corporations are more flexible than traditional C corporations.
True False
15. In most states, corporations must have "corporation," "incorporated," or "limited" at the end of
their names to show that their owners have limited liability.
True False
16. A public corporation is owned by one or a few people who manage the business.
True False
17. In a corporate form of ownership, there is limited liability for its owners.
True False
18. In a corporation, the preferred stockholders have the advantage of exercising voting rights over
common stockholders.
True False
19. An acquisition occurs when one company purchases another company by buying most its stock.
True False
20. When firms that make and sell similar products to the same customers merge, it is known as a
horizontal merger.
True False
21. A conglomerate merger results when two firms in unrelated industries merge.
True False
4-3
Education.
22. Most tender offers of corporate raiders are hostile.
True False
23. Shark repellant is a method of avoiding a hostile corporate takeover in which management
requires a large majority of stockholders to approve the takeover.
True False
24. A leverage buyout is a technique used to avoid a hostile takeover in which the threatened firm
allows stockholders to buy more shares of stock at prices lower than the current market value.
True False
25. Companies that are victims of hostile takeovers generally streamline their operations, reduce
unnecessary staff, and cut costs.
True False
Multiple Choice Questions
26. Which of the following forms of business ownership is the easiest to establish?
A. Partnership
B. Sole proprietorship
C. S Corporation
D. Joint venture
E. C Corporation
4-4
Education.
27. Which of the following is an advantage of a sole proprietorship?
A. It is heavily regulated by the government.

B. It has limited liability for the debts incurred by the business.
C. It is hard to dissolve.
D. It is unaffected by the death or withdrawal of its owner.
E. It is easy and inexpensive to form.
28. Barber shops, dog kennels, and independent grocery stores are typically:
A. S corporations.
B. nonprofit agencies.
C. sole proprietorships.
D. partnerships.
E. C corporations.
A. Ease of dissolving the business

B. Equally shared profits among owners
C. Limited liability
D. Varied sources of funds
E. Increased life expectancy
30. Judy has realized that she does not like working for others. She wants to open a business in
which she will have maximum control and the least interference from government regulation.
Which of the following forms of business is best suited for Judy's needs?
A. A joint venture
B. An S corporation
C. A sole proprietorship
D. A partnership
E. A C corporation
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Education.
31. According to the U.S. Bureau of the Census, which form of business ownership is the least used
in the U.S.?
A. An S-corporation
B. A joint venture
D. A C-corporation
E. A partnership
32. The income earned in sole proprietorships is:
A. taxed twice.
B. exempted from tax.
C. taxed as personal income.
D. quasi-taxable.
E. taxed as business income.
33. All of the following are advantages of a sole proprietorship EXCEPT:
A. ease of formation.
B. secrecy.
C. unlimited liability.
D. control of the business.
E. limited government regulation.
34. Which of the following is NOT a source of funds for a sole proprietorship?
A. Bank loans
B. Family members
C. Personal funds
D. Selling stock
E. Small Business Administration
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Education.
35. Which of the following is a disadvantage of sole proprietorships?
A. Sharing of profits with major stockholders

B. Lack of continuity
C. Lack of business control
D. Stringent government regulations
E. Absence of a tax-exempt retirement account
36. Which of the following forms of business ownership is directly linked to the life of its owner?
A. A sole proprietorship
B. A limited partnership
C. A corporation
D. A cooperative
E. A joint venture
37. Which of the following forms of business ownership requires owners to perform many functions
and possess diverse skills to make decisions?
A. A corporation
B. A partnership
D. A cooperative
E. A joint venture
38. Which characteristic of a sole proprietorship can be considered both an advantage and a
disadvantage?
A. Secrecy
B. Fund sources
C. Liability
D. Continuity
E. Taxation
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Education.
39. When are limited partnerships generally used?
A. When the firm sells its stock to the public

B. When a project is risky and the chance of loss is great
C. When articles of incorporation are mandatory
D. When all partners wish to share equal liability
E. When articles of partnership are mandatory
40. Josh has been asked to join a new partnership that is developing wind energy technologies. Since
the business involves high risk, he does not want to be held liable for the firm's debts if the
project fails. In this case, Josh might prefer to participate as a(n):
A. a member of a cooperative.
B. limited partner.
C. general partner.
D. owner of an S corporation.
E. sole proprietor.
41. The legal documents that identify the basic agreements between partners are called:
A. articles of proprietorship.
B. partnership charters.
C. articles of incorporation.
D. articles of partnership.
E. partnership bonds.
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Education.
42. Articles of partnership are legal documents that set forth the basic agreement between partners.
The issues covered usually include all of the following EXCEPT:
A. the assets that each partner has contributed.

B. how the profits and losses will be divided.
C. what duties each partners will have.
D. provisions for leaving the partnership.
E. classes of public stock to be issued.
43. It is easier to raise funds in a partnership than in a sole proprietorship because:
A. several partners mean greater earning power and credit.

B. some of the partners have unlimited liability.
C. partnerships have less regulatory controls than sole proprietorship.
D. all the partners have limited liability.
E. a partnership can issue public stock with much less difficulty than a sole proprietorship.
44. The decision-making process in a partnership tends to be faster when:
A. there are numerous partners and a few are involved in the day-to-day activities of the
business.
B. there are two partners and both of them are involved in the day-to-day activities of the
business.
C. the partnership is a foreign corporation that conducts its business outside the state in which it
was incorporated.
D. the partnership is a domestic corporation with numerous partners.
E. there are numerous partners and the firm has issued public stock.
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Education.
45. Which of the following is NOT a disadvantage of forming a partnership?
A. All partners sharing business responsibility

B. Unlimited liability of all the partners
C. Fewer regulatory controls than in a corporation
D. Business continuity when a partner withdraws or dies
E. Limited sources of funds
46. Which of the following is an advantage of a partnership?
A. Unlimited liability
B. Life of partnership
C. Distribution of profits
D. Lack of regulatory control
E. Business responsibility
47. Which of the following is a disadvantage of a partnership?
A. Difficulty in selling ownership

B. Difficulty of forming business
C. Lack of specialization of partners
D. Lack of capital and credit
E. Stringent government regulation
48. Which of the following statements is true of taxation in partnerships?
A. They pay taxes before distributing profits.

B. They report their share of profits as partnership incomes.
C. They are exempted from tax.
D. They pay taxes at the income tax rate for individuals.
E. They are taxed based on the number of shareholders.
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Education.
49. _____ are profits of a corporation that are distributed in the form of cash payments to
stockholders.
A. Common stocks
B. Bonds
C. Retained earnings
D. Dividends
E. Preferred stocks
50. _____ is a legal document that the state issues to a company based on information the company
provides in the articles of incorporation.
A. State bond
B. Corporation contract
C. Corporate charter
D. Articles of proprietorship
E. Articles of partnership
51. A corporation doing business outside the state in which it is chartered is known as a(n) _____
corporation.
A. conglomerate
B. horizontal
C. domestic
D. alien
E. foreign
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Education.
52. A private corporation is one:
A. that can be bought, sold, or traded by anyone.

B. that does not pay taxes on its income.
C. whose stock is not traded in public markets.
D. whose stock can be purchased on the New York Stock Exchange.
E. that discloses proprietary information to the public.
53. Organizations such as the National Aeronautics and Space Administration (NASA) and the U.S.
Postal Service that are owned by the federal, state, or local governments are known as _____.
A. S corporations
B. sole proprietorships
C. private corporations
D. quasi-public corporations
E. limited liability companies
54. Which of the following is a corporation that provides a service, but does not focus on earning
profits, nor is it owned by the government?
A. An S corporation
B. A limited liability company
C. A nonprofit corporation
D. A quasi-public corporation
E. A C corporation
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Education.
55. A(n) _____ is elected by the stockholders of a corporation to oversee its general operation and
set long-term objectives.
A. board of stockholders
B. preferred stockholder
C. board of directors
D. chief executive
E. silent partner
56. Common stockholders do not have the right to:
A. vote for the board of directors.

B. vote by proxy.
C. attend the stockholders' meetings.
D. exercise preemptive rights.
E. receive dividends before preferred stockholders.
57. Which of the following statements is true of preferred stockholders?
A. They are eligible to vote by proxy.

B. They are the voting owners of a corporation.
C. They have the right to exercise preemptive rights.
D. They have a claim to profits before other stockholders do.
E. They are generally the decision-makers in the day-to-day running of an organization.
58. Which type of stockholders usually has the right to vote and control the board of directors?
A. Preferred
B. Common
C. Capital
D. Perpetual
E. Proxy
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Education.
59. A written authorization that assigns a stockholder's voting privilege to another is called a:
A. profit deed.
B. stock certificate.
C. preemptive right.
D. leveraged buyout.
E. proxy.
60. The right of common stockholders to have the opportunity to purchase new shares of stock is
called a:
A. first offer right.

B. preemptive right.
C. stock-split right.
D. profit-sharing right.
E. cooperative right.
61. The form of ownership that has the ability to raise capital most easily is a(n):
A. public corporation.
B. private corporation.
C. sole proprietorship.
D. joint venture.
E. limited partnership.
62. All of the following are advantages of a corporation EXCEPT:
A. limited liability.
B. lower frequency of taxation.
C. perpetual life of organization.
D. ease of transfer of ownership.
E. external funding sources.
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Education.
63. Which of the following organizational forms is the most expensive to set up?
B. A general partnership
C. A limited liability company
D. A limited partnership
E. A corporation
64. Which of the following is a typical characteristic of a corporation?
A. Lack of regulatory controls

B. Unlimited liability
C. Absence of perpetual life
D. Employee-owner separation
E. Lack of expansion potential
65. Which of the following statements is true of joint ventures?
A. It enjoys reduced government regulations when compared to general partnerships.

B. It is a form of business ownership that is taxed as though it were a partnership.
C. It is set up not to make money as an entity but so that its members can become more
profitable or save money.
D. It is popular in situations that call for large investments.
E. It restricts the number and types of shareholders in the organization.
66. Which of the following forms of business organizations restricts the number and types of
shareholders and is difficult to form and operate?
B. A cooperative
D. An S corporation
E. A C corporation
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Education.
67. Which of the following forms of business ownership provides limited liability, but is taxed like a
partnership?
B. A cooperative
C. A C corporation
D. An S corporation
E. A limited liability company
68. Big Lite Inc. purchases Canton Bulbs, its direct competitor, by buying most of its stock. Big Lite
Inc. is involved in a(n) ____.
A. conglomerate merger
B. acquisition
C. vertical merger
D. leveraged buyout
E. white knight
69. Eastern Sandwiches merges with its supplier, All Sauce, in an effort to have a constant supply of
sauce for its sandwiches. This is an example of a(n):
A. shark repellant.
B. vertical merger.
C. conglomerate merger.
D. white knight.
E. horizontal merger.
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Education.
70. Aztex Inc., an automobile manufacturing firm, merges with Blaze Inc., a firm that manufactures
tires, in order to limit the uncertainty of fluctuating supply of automobile tires and reduce the
production cost for its cars. This merger is an example of a(n):
A. vertical merger.
B. leveraged buyout.
C. horizontal merger.
D. shark repellant merger.
E. conglomerate merger.
71. When a corporate raider wants to acquire or take over another company, it first offers to buy
some or all of the other company's stock at a premium over its current price in a ____.
A. leveraged buyout
B. preemptive merger
C. conglomerate merger
D. vote by proxy
E. tender offer
72. If a firm issues a poison pill when facing a hostile takeover attempt:
A. it fires its board of directors for incompetence.

B. it allows stockholders to buy shares of stock at prices lower than the market value.
C. it involves the firing of the entire executive committee before a takeover.
D. it requires a majority of stockholders to approve the takeover.
E. it files a lawsuit to avoid the takeover.
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Education.
73. Big City Financial is attempting to avoid a hostile takeover by a corporate raider by allowing
stockholders to buy more shares of stock at prices lower than its current market value. Which of
the following methods is being used to avoid the takeover?
A. A leveraged buyout
B. A tender offer
C. A white knight
D. A poison pill
E. A shark repellant
74. In the context of corporations, what is a white knight?
A. A more acceptable firm that is willing to acquire the firm threatened by hostile takeover
B. An attempt to fend off a hostile takeover by selling stock at prices below the market value
C. An attempt to fend off a hostile takeover by requiring the deal to be approved by a majority of
shareholders
D. An attempt to find off a hostile takeover by raising capital through an initial public offering
E. A group of investors that has borrowed money to acquire a firm
75. Tim and Andy, wealthy industrialists, borrow money from the United Bank to acquire Solar Corp.
They promise to repay the bank using the assets of Solar Corp. as collateral. Tim and Andy are
involved in a(n):
A. horizontal merger.
B. vertical merger.
C. leveraged buyout.
D. conglomerate merger.
E. poison pill.
Essay Questions
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Education.
76. What are the advantages of sole proprietorships over other forms of business organizations?
77. Briefly discuss unlimited liability as a disadvantage of sole proprietorships.
78. How can taxation be disadvantageous in sole proprietorships?
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Education.
79. Discuss the two basic types of partnerships.
80. What are articles of partnership?
81. Why is it more difficult to value a partnership share than a share of stock in a corporation?
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Education.
82. Discuss limited sources of funds as a disadvantage in partnerships.
83. Explain taxation of partnerships.
84. Briefly discuss domestic, foreign, alien, private, and public corporations.
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Education.
85. How do preferred stockholders differ from the common stockholders of a corporation?
86. What is the preemptive right of common stockholders in a corporation?
87. How is disclosure of information a disadvantage to corporations?
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Education.
88. Discuss employee-owner separation in corporations.
89. Describe joint venture as a form of business ownership.
90. What is an S corporation? Discuss its advantages and disadvantages.
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Education.
91. What is a limited liability company (LLC)? Why do some consider it the best form of business
ownership?
92. Discuss a cooperative as a form of business ownership.
93. Discuss horizontal and vertical mergers.
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Education.
94. Discuss the techniques to head off a hostile takeover attempt.
95. What is a leveraged buyout? Discuss some of the advantages of mergers and acquisitions.
4-25
Education.
Chapter 04 Options for Organizing Business Answer Key
True / False Questions
1. Most sole proprietorships focus on the manufacturing of goods rather than on services.
FALSE
Many sole proprietors focus on services—small retail stores, financial counseling, appliance
repair, child care, and the like—rather than on the manufacture of goods, which often requires
large sums of money not available to most small businesses.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Define and examine the advantages and disadvantages of the sole proprietorship form of
organization.
Topic: Sole Proprietorships
2. Compared to other forms of business ownership, sole proprietorships have the greatest
degree of secrecy.
TRUE
Sole proprietorships make possible the greatest degree of secrecy. The proprietor, unlike the
owners of a partnership or corporation, does not have to discuss publicly his or her operating
plans, minimizing the possibility that competitors can obtain trade secrets.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
organization.
4-26
Education.
3. The inability to make immediate decisions is a disadvantage of sole proprietorships.
FALSE
The sole proprietor has complete control over the business and can make decisions on the
spot without anyone else's approval.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
organization.
4. Compared to other forms of business ownership, sole proprietorships have the least freedom
from government regulations.
FALSE
Sole proprietorships have the most freedom from government regulation. Many government
regulations—federal, state, and local—apply only to businesses that have a certain number of
employees, and securities laws apply only to corporations that issue stock.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
organization.
4-27
Education.
5. A sole proprietor has limited liability in meeting the debts of the business.
FALSE
The sole proprietor has unlimited liability in meeting the debts of the business. In other words,
if the business cannot pay its creditors, the owner may be forced to use personal,
nonbusiness holdings such as a car or a home to pay off the debts.
AACSB: Analytic
Blooms: Remember
organization.
6. Sole proprietorships typically employ less than 50 people.
TRUE
Sole proprietorships are small businesses and usually employ fewer than 50 people.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
organization.
4-28
Education.
7. A general partnership involves a complete sharing in the management of a business.
TRUE
A general partnership involves a complete sharing in the management of a business.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Identify two types of partnership and evaluate the advantages and disadvantages of the partnership
form of organization.
Topic: Partnerships
8. In a limited partnership, both the general partner and the limited partner assume unlimited
liability.
FALSE
A limited partnership has at least one general partner, who assumes unlimited liability, and at
least one limited partner, whose liability is limited to his or her investment in the business.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic: Partnerships
4-29
Education.
9. All states require partnerships to have articles of partnership.
FALSE
Most states require articles of partnership but even if they are not required, it makes good
sense for partners to draw them up.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic: Partnerships
10. Partnerships have fewer regulatory controls than corporations.
TRUE
Similar to a sole proprietorship, a partnership has fewer regulatory controls affecting its
activities than does a corporation.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic: Partnerships
4-30
Education.
11. Limited partners have no voice in the management of the partnership.
TRUE
Limited partners have no voice in the management of the partnership, and they may bear
most of the risk of the business while the general partner reaps a larger share of the benefits.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic: Partnerships
12. In a general partnership, each partner is liable only for the debts he or she incurs.
FALSE
In a general partnership, each partner has unlimited liability for the debts of the business.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic: Partnerships
4-31
Education.
13. The assets and liabilities of a corporation are separate from its owners.
TRUE
A corporation is a legal entity, created by the state, whose assets and liabilities are separate
from its owners.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-03 Describe the corporate form of organization; and cite the advantages and disadvantages of
corporations.
Topic: Corporations
14. S Corporations are more flexible than traditional C corporations.
TRUE
Many smaller firms elect to incorporate as "S Corporations," which operate under slightly
different rules and have greater flexibility than do traditional "C Corporations."
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-32
Education.
15. In most states, corporations must have "corporation," "incorporated," or "limited" at the end of
their names to show that their owners have limited liability.
TRUE
In most states, a corporation's name must end in "company," "corporation," "incorporated," or

"limited" to show that their owners have limited liability.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
16. A public corporation is owned by one or a few people who manage the business.
FALSE
A public corporation is one whose stock anyone can buy, sell, or trade.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-33
Education.
17. In a corporate form of ownership, there is limited liability for its owners.
TRUE
Because a corporation is a separate legal entity, it has some very specific advantages over
other forms of ownership. The biggest advantage may be the limited liability of the owners.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
18. In a corporation, the preferred stockholders have the advantage of exercising voting rights
over common stockholders.
FALSE
Preferred stockholders do not have voting rights, but they do receive dividend payouts before
common stockholders.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-34
Education.
19. An acquisition occurs when one company purchases another company by buying most its
stock.
TRUE
An acquisition occurs when one company purchases another, generally by buying most of its
stock. The acquired company may become a subsidiary of the buyer, or its operations and
assets may be merged with those of the buyer.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-04 Define and debate the advantages and disadvantages of mergers; acquisitions; and leveraged
buyouts.
Topic: Trends in Business Ownership: Mergers and Acquisitions
20. When firms that make and sell similar products to the same customers merge, it is known as a
horizontal merger.
TRUE
A horizontal merger occurs when firms that make and sell similar products to the same
customers merge.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
buyouts.
4-35
Education.
21. A conglomerate merger results when two firms in unrelated industries merge.
TRUE
A conglomerate merger results when two firms in unrelated industries merge. For example,
the purchase of Sterling Drug, a pharmaceutical firm, by Eastman Kodak, best-known for its
films and cameras, represents a conglomerate merger because the two companies are of
different industries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
buyouts.
22. Most tender offers of corporate raiders are hostile.
FALSE
Most tender offers are "friendly," with both groups agreeing to the proposed deal, but some
are "hostile," when the second company does not want to be taken over.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
buyouts.
4-36
Education.
23. Shark repellant is a method of avoiding a hostile corporate takeover in which management
requires a large majority of stockholders to approve the takeover.
TRUE
To head off a hostile takeover attempt, the company's managers may use a technique known
as shark repellent, in which management requires a large majority of stockholders to approve
the takeover.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
buyouts.
24. A leverage buyout is a technique used to avoid a hostile takeover in which the threatened firm
allows stockholders to buy more shares of stock at prices lower than the current market
value.
FALSE
A leveraged buyout (LBO) occurs when a group of investors borrows money from banks and
other institutions to acquire a company or a division of one, using the assets of the purchased
company to guarantee repayment of the loans.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
buyouts.
4-37
Education.
25. Companies that are victims of hostile takeovers generally streamline their operations, reduce
unnecessary staff, and cut costs.
TRUE
Companies that are victims of hostile takeovers generally streamline their operations, reduce
unnecessary staff, cut costs, and otherwise become more efficient with their operations,
which benefits their stockholders whether or not the takeover succeeds.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
buyouts.
Multiple Choice Questions
4-38
Education.
26. Which of the following forms of business ownership is the easiest to establish?
A. Partnership
B. Sole proprietorship
C. S Corporation
D. Joint venture
E. C Corporation
Forming a sole proprietorship is relatively easy and inexpensive. In some states, creating a
sole proprietorship involves merely announcing the new business in the local newspaper.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
organization.
4-39
Education.
A. It is heavily regulated by the government.

B. It has limited liability for the debts incurred by the business.
C. It is hard to dissolve.
D. It is unaffected by the death or withdrawal of its owner.
E. It is easy and inexpensive to form.
A sole proprietorship is easy and inexpensive to form; it has the greatest degree of secrecy; all
profits belong to the owner; it has complete control; it has the most freedom from government
regulation; the owner pays one income tax; and the business can be easily dissolved.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
organization.
4-40
Education.
28. Barber shops, dog kennels, and independent grocery stores are typically:
A. S corporations.
B. nonprofit agencies.
C. sole proprietorships.
D. partnerships.
E. C corporations.
Sole proprietorships are small businesses such as restaurants, barber shops, flower shops,
dog kennels, and independent grocery stores.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
organization.
A. Ease of dissolving the business

B. Equally shared profits among owners
C. Limited liability
D. Varied sources of funds
E. Increased life expectancy
A sole proprietorship can be dissolved easily. No approval of co-owners or partners is

necessary. The only legal condition is that all financial obligations must be paid or resolved.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
organization.
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Education.
30. Judy has realized that she does not like working for others. She wants to open a business in
which she will have maximum control and the least interference from government regulation.
Which of the following forms of business is best suited for Judy's needs?
A. A joint venture
B. An S corporation
D. A partnership
E. A C corporation
A sole proprietorship is easy and inexpensive to form; it has the greatest degree of secrecy; all
profits belong to the owner; it has complete control; it has the most freedom from government
regulation; the owner pays one income tax; and the business can be easily dissolved.
AACSB: Reflective Thinking

Blooms: Apply
organization.
4-42
Education.
31. According to the U.S. Bureau of the Census, which form of business ownership is the least
used in the U.S.?
A. An S-corporation
B. A joint venture
D. A C-corporation
E. A partnership
According to the U.S. Bureau of the Census, partnerships are the least used form of business.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
organization.
32. The income earned in sole proprietorships is:
A. taxed twice.
B. exempted from tax.
C. taxed as personal income.
D. quasi-taxable.
E. taxed as business income.
Profits from the sole proprietorship are considered personal income to the sole proprietor and
are taxed at individual tax rates.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
organization.
4-43
Education.
33. All of the following are advantages of a sole proprietorship EXCEPT:
A. ease of formation.
B. secrecy.
C. unlimited liability.
D. control of the business.
E. limited government regulation.
Unlimited liability is a disadvantage of a sole proprietorship because the owner may be forced
to use personal assets such as a car or a home to pay off the debts.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
organization.
4-44
Education.
34. Which of the following is NOT a source of funds for a sole proprietorship?
A. Bank loans
B. Family members
C. Personal funds
D. Selling stock
E. Small Business Administration
The few sources of money available to sole proprietorships are banks, family, friends, the
Small Business Administration, and his or her personal funds. Selling stock or issuing bonds is
only applicable to corporations.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
organization.
4-45
Education.
35. Which of the following is a disadvantage of sole proprietorships?
A. Sharing of profits with major stockholders

B. Lack of continuity
C. Lack of business control
D. Stringent government regulations
E. Absence of a tax-exempt retirement account
The life expectancy of a sole proprietorship is directly linked to that of the owner and his or
her ability to work. The serious illness of the owner could result in failure of the business if
competent help cannot be found.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
organization.
4-46
Education.
36. Which of the following forms of business ownership is directly linked to the life of its owner?
B. A limited partnership
C. A corporation
D. A cooperative
E. A joint venture
The life expectancy of a sole proprietorship is directly linked to that of the owner and his or
her ability to work.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
organization.
4-47
Education.
37. Which of the following forms of business ownership requires owners to perform many
functions and possess diverse skills to make decisions?
A. A corporation
B. A partnership
D. A cooperative
E. A joint venture
The sole proprietor must be able to perform many functions and possess skills in diverse
fields such as management, marketing, accounting, finance, bookkeeping, and personnel
management.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
organization.
4-48
Education.
38. Which characteristic of a sole proprietorship can be considered both an advantage and a
disadvantage?
A. Secrecy
B. Fund sources
C. Liability
D. Continuity
E. Taxation
Profits from sole proprietorships are considered personal income and are taxed at individual
tax rates. Another tax benefit is that a sole proprietor is allowed to establish a tax-exempt
retirement account or a tax-exempt profit-sharing account. Taxation can also be a
disadvantage, depending on the proprietor's income. Under current tax rates, sole proprietors
pay a higher marginal tax rate than do small corporations on income of less than $75,000.
AACSB: Analytic
Blooms: Understand
organization.
4-49
Education.
39. When are limited partnerships generally used?
A. When the firm sells its stock to the public

B. When a project is risky and the chance of loss is great
C. When articles of incorporation are mandatory
D. When all partners wish to share equal liability
E. When articles of partnership are mandatory
Limited partnerships exist for risky investment projects where the chance of loss is great.
AACSB: Analytic
Blooms: Understand
Topic: Partnerships
4-50
Education.
40. Josh has been asked to join a new partnership that is developing wind energy technologies.
Since the business involves high risk, he does not want to be held liable for the firm's debts if
the project fails. In this case, Josh might prefer to participate as a(n):
A. a member of a cooperative.
B. limited partner.
C. general partner.
D. owner of an S corporation.
E. sole proprietor.
A limited partner's liability is limited to his or her initial investment in the business. Limited
partnerships are most often used for risky investments where the chance for loss is great.

Blooms: Apply
Difficulty: 3 Hard
Topic: Partnerships
4-51
Education.
41. The legal documents that identify the basic agreements between partners are called:
A. articles of proprietorship.
B. partnership charters.
C. articles of incorporation.
D. articles of partnership.
E. partnership bonds.
Articles of partnership are legal documents that usually specify the money or assets that each
partner has contributed, each partner's role, how the profits and losses will be divided, and
how a partner may leave the partnership.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic: Partnerships
4-52
Education.
42. Articles of partnership are legal documents that set forth the basic agreement between
partners. The issues covered usually include all of the following EXCEPT:
A. the assets that each partner has contributed.

B. how the profits and losses will be divided.
C. what duties each partners will have.
D. provisions for leaving the partnership.
E. classes of public stock to be issued.
Articles of partnership are legal documents that usually specify the money or assets that each
partner has contributed, each partner's role, how the profits and losses will be divided and
how a partner may leave the partnership. The classes of public stock to be issued in a
partnership are not listed in the articles of partnership.
AACSB: Analytic
Blooms: Understand
Topic: Partnerships
4-53
Education.
43. It is easier to raise funds in a partnership than in a sole proprietorship because:
A. several partners mean greater earning power and credit.

B. some of the partners have unlimited liability.
C. partnerships have less regulatory controls than sole proprietorship.
D. all the partners have limited liability.
E. a partnership can issue public stock with much less difficulty than a sole proprietorship.
When a business has several partners, it has the benefit of pooled financial resources.
Partnerships tend to be larger than sole proprietorships and therefore have greater earning
power and better credit ratings.
AACSB: Analytic
Blooms: Understand
Topic: Partnerships
4-54
Education.
44. The decision-making process in a partnership tends to be faster when:
A. there are numerous partners and a few are involved in the day-to-day activities of the
business.
B. there are two partners and both of them are involved in the day-to-day activities of the
business.
C. the partnership is a foreign corporation that conducts its business outside the state in
which it was incorporated.
D. the partnership is a domestic corporation with numerous partners.
E. there are numerous partners and the firm has issued public stock.
Small partnerships can react quickly to changes in the business environment than can large
partnerships and corporations.
AACSB: Analytic
Blooms: Understand
Topic: Partnerships
4-55
Education.
45. Which of the following is NOT a disadvantage of forming a partnership?
A. All partners sharing business responsibility

B. Unlimited liability of all the partners
C. Fewer regulatory controls than in a corporation
D. Business continuity when a partner withdraws or dies
E. Limited sources of funds
The presence of fewer regulatory controls is an advantage of partnerships.
AACSB: Analytic
Blooms: Understand
Topic: Partnerships
46. Which of the following is an advantage of a partnership?
A. Unlimited liability
B. Life of partnership
C. Distribution of profits
D. Lack of regulatory control
E. Business responsibility
The advantages of a partnership are ease of formation, availability of capital and credit,
combined knowledge and skills, ability to react quickly to changes, and lack of regulatory
controls.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic: Partnerships
4-56
Education.
47. Which of the following is a disadvantage of a partnership?
A. Difficulty in selling ownership

B. Difficulty of forming business
C. Lack of specialization of partners
D. Lack of capital and credit
E. Stringent government regulation
Because it is difficult to place a value on a partnership, difficulty of selling a partnership is a

distinct disadvantage of the partnership form of business.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic: Partnerships
48. Which of the following statements is true of taxation in partnerships?
A. They pay taxes before distributing profits.

B. They report their share of profits as partnership incomes.
C. They are exempted from tax.
D. They pay taxes at the income tax rate for individuals.
E. They are taxed based on the number of shareholders.
Partners must report their share of profits on their individual tax returns and pay taxes at the
income tax rate for individuals.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Topic: Partnerships
4-57
Education.
49. _____ are profits of a corporation that are distributed in the form of cash payments to
stockholders.
A. Common stocks
B. Bonds
C. Retained earnings
D. Dividends
E. Preferred stocks
Dividends are profits of a corporation that are distributed in the form of cash payments to
stockholders.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-58
Education.
50. _____ is a legal document that the state issues to a company based on information the
company provides in the articles of incorporation.
A. State bond
B. Corporation contract
C. Corporate charter
D. Articles of proprietorship
E. Articles of partnership
A corporate charter is a legal document that the state issues to a company based on
information the company provides in the articles of incorporation. After securing this charter,
the owners hold an organizational meeting at which they establish the corporation's bylaws
and elect a board of directors.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-59
Education.
51. A corporation doing business outside the state in which it is chartered is known as a(n) _____
corporation.
A. conglomerate
B. horizontal
C. domestic
D. alien
E. foreign
A foreign corporation does business outside the state in which it was chartered.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-60
Education.
52. A private corporation is one:
A. that can be bought, sold, or traded by anyone.

B. that does not pay taxes on its income.
C. whose stock is not traded in public markets.
D. whose stock can be purchased on the New York Stock Exchange.
E. that discloses proprietary information to the public.
A private corporation is owned by one person or a few people who are closely involved in
managing the business and own all of the corporation's stock; none of the firm's stock is
traded in public markets.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-61
Education.
53. Organizations such as the National Aeronautics and Space Administration (NASA) and the
U.S. Postal Service that are owned by the federal, state, or local governments are known as
_____.
A. S corporations
B. sole proprietorships
C. private corporations
D. quasi-public corporations
E. limited liability companies
Quasi-public corporations are owned by the federal, state, or local government and focus on
providing a public service rather than earning a profit. Examples include NASA and the U.S.
Postal Service.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-62
Education.
54. Which of the following is a corporation that provides a service, but does not focus on earning
profits, nor is it owned by the government?
A. An S corporation
B. A limited liability company
C. A nonprofit corporation
D. A quasi-public corporation
E. A C corporation
Nonprofit corporations focus on providing a service rather than earning a profit but are not
owned by a government entity.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-63
Education.
55. A(n) _____ is elected by the stockholders of a corporation to oversee its general operation and
set long-term objectives.
A. board of stockholders
B. preferred stockholder
C. board of directors
D. chief executive
E. silent partner
A board of directors, elected by the stockholders to oversee the general operation of the
corporation, sets the long-range objectives of the corporation. It is the board's responsibility
to ensure that the objectives are achieved on schedule.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-64
Education.
56. Common stockholders do not have the right to:
A. vote for the board of directors.

B. vote by proxy.
C. attend the stockholders' meetings.
D. exercise preemptive rights.
E. receive dividends before preferred stockholders.
Common stockholders do not receive dividends before preferred stockholders, but they can
vote for the board of directors and have other rights.
AACSB: Analytic
Blooms: Understand
corporations.
Topic: Corporations
57. Which of the following statements is true of preferred stockholders?
A. They are eligible to vote by proxy.

B. They are the voting owners of a corporation.
C. They have the right to exercise preemptive rights.
D. They have a claim to profits before other stockholders do.
E. They are generally the decision-makers in the day-to-day running of an organization.
Preferred stockholders are a special type of stockholders who do not generally have a say in
running a company but have a claim to profits before other stockholders do.
AACSB: Analytic
Blooms: Understand
corporations.
Topic: Corporations
4-65
Education.
58. Which type of stockholders usually has the right to vote and control the board of directors?
A. Preferred
B. Common
C. Capital
D. Perpetual
E. Proxy
Common stockholders are the voting owners of a corporation because they are usually
entitled to one vote per share of common stock and they elect the board of directors.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
59. A written authorization that assigns a stockholder's voting privilege to another is called a:
A. profit deed.
B. stock certificate.
C. preemptive right.
D. leveraged buyout.
E. proxy.
A proxy is a written authorization by which stockholders assign their voting privilege to

someone else, who then votes for his or her choice at the stockholders' meeting.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-66
Education.
60. The right of common stockholders to have the opportunity to purchase new shares of stock is
called a:
A. first offer right.

B. preemptive right.
C. stock-split right.
D. profit-sharing right.
E. cooperative right.
When a corporation decides to sell new shares of common stock in the marketplace, common
stockholders have a preemptive right to purchase enough new shares to maintain their
percentage of ownership in the corporation.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-67
Education.
61. The form of ownership that has the ability to raise capital most easily is a(n):
A. public corporation.
B. private corporation.
C. sole proprietorship.
D. joint venture.
E. limited partnership.
The public corporation finds it easiest to raise money because it can issue stocks or bonds
when it needs to raise capital.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
62. All of the following are advantages of a corporation EXCEPT:
A. limited liability.
B. lower frequency of taxation.
C. perpetual life of organization.
D. ease of transfer of ownership.
E. external funding sources.
The advantages of a corporation are limited liability, ease of transfer of ownership, perpetual
life, external sources of funds, and expansion potential.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-68
Education.
63. Which of the following organizational forms is the most expensive to set up?
B. A general partnership
D. A limited partnership
E. A corporation
The formation of a corporation can be costly due to the need of an attorney's services and
annual fees paid to maintain the charter.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-69
Education.
64. Which of the following is a typical characteristic of a corporation?
A. Lack of regulatory controls

B. Unlimited liability
C. Absence of perpetual life
D. Employee-owner separation
E. Lack of expansion potential
Corporations may be subject to double taxation, have limited liability, are usually chartered to
last forever, can easily expand into international markets, and may suffer from employee-
owner separation.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
4-70
Education.
65. Which of the following statements is true of joint ventures?
A. It enjoys reduced government regulations when compared to general partnerships.

B. It is a form of business ownership that is taxed as though it were a partnership.
C. It is set up not to make money as an entity but so that its members can become more
profitable or save money.
D. It is popular in situations that call for large investments.
E. It restricts the number and types of shareholders in the organization.
A joint venture is a partnership established for a specific project or for a limited time and it is
popular in situations that call for large investments.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Other Types of Ownership
4-71
Education.
66. Which of the following forms of business organizations restricts the number and types of
shareholders and is difficult to form and operate?
B. A cooperative
D. An S corporation
E. A C corporation
S corporations have restrictions on the number (100) and types (individuals, estates, and
certain trusts) of shareholders.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
4-72
Education.
67. Which of the following forms of business ownership provides limited liability, but is taxed like
a partnership?
B. A cooperative
C. A C corporation
D. An S corporation
E. A limited liability company
A limited liability company (LLC) is a form of business ownership that provides limited liability,
as in a corporation, but is taxed like a partnership.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
4-73
Education.
68. Big Lite Inc. purchases Canton Bulbs, its direct competitor, by buying most of its stock. Big
Lite Inc. is involved in a(n) ____.
A. conglomerate merger
B. acquisition
C. vertical merger
D. leveraged buyout
E. white knight
An acquisition is the purchase of one company by another, usually by buying its stock. It
sometimes involves the purchase of a division or some other part of a company rather than
the entire company.

Blooms: Apply
Difficulty: 3 Hard
buyouts.
4-74
Education.
69. Eastern Sandwiches merges with its supplier, All Sauce, in an effort to have a constant supply
of sauce for its sandwiches. This is an example of a(n):
A. shark repellant.
B. vertical merger.
C. conglomerate merger.
D. white knight.
E. horizontal merger.
When companies operating at different but related levels of an industry merge, it is known as
a vertical merger. In many instances, a vertical merger results when one corporation merges
with one of its customers or suppliers.

Blooms: Apply
Difficulty: 3 Hard
buyouts.
4-75
Education.
70. Aztex Inc., an automobile manufacturing firm, merges with Blaze Inc., a firm that
manufactures tires, in order to limit the uncertainty of fluctuating supply of automobile tires
and reduce the production cost for its cars. This merger is an example of a(n):
A. vertical merger.
B. leveraged buyout.
C. horizontal merger.
D. shark repellant merger.
E. conglomerate merger.
When companies operating at different but related levels of an industry merge, it is known as
a vertical merger. In many instances, a vertical merger results when one corporation merges
with one of its customers or suppliers.

Blooms: Apply
Difficulty: 3 Hard
buyouts.
4-76
Education.
71. When a corporate raider wants to acquire or take over another company, it first offers to buy
some or all of the other company's stock at a premium over its current price in a ____.
A. leveraged buyout
B. preemptive merger
C. conglomerate merger
D. vote by proxy
E. tender offer
When a company (or an individual), sometimes called a corporate raider, wants to acquire or
take over another company, it first offers to buy some or all of the other company's stock at a
premium over its current price in a tender offer.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
buyouts.
4-77
Education.
72. If a firm issues a poison pill when facing a hostile takeover attempt:
A. it fires its board of directors for incompetence.

B. it allows stockholders to buy shares of stock at prices lower than the market value.
C. it involves the firing of the entire executive committee before a takeover.
D. it requires a majority of stockholders to approve the takeover.
E. it files a lawsuit to avoid the takeover.
A poison pill occurs when the firm allows stockholders to buy up shares of stock at lower than
market value in order to fend off a hostile takeover.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
buyouts.
4-78
Education.
73. Big City Financial is attempting to avoid a hostile takeover by a corporate raider by allowing
stockholders to buy more shares of stock at prices lower than its current market value. Which
of the following methods is being used to avoid the takeover?
A. A leveraged buyout
B. A tender offer
C. A white knight
D. A poison pill
E. A shark repellant
A poison pill allows stockholders to buy more shares of stock at prices lower than current
market value to deter a hostile takeover.

Blooms: Apply
Difficulty: 3 Hard
buyouts.
4-79
Education.
74. In the context of corporations, what is a white knight?
A. A more acceptable firm that is willing to acquire the firm threatened by hostile takeover
B. An attempt to fend off a hostile takeover by selling stock at prices below the market value
C. An attempt to fend off a hostile takeover by requiring the deal to be approved by a majority
of shareholders
D. An attempt to find off a hostile takeover by raising capital through an initial public offering
E. A group of investors that has borrowed money to acquire a firm
A white knight is a firm that is willing to acquire a threatened firm in order to save it from
hostile takeover.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
buyouts.
4-80
Education.
75. Tim and Andy, wealthy industrialists, borrow money from the United Bank to acquire Solar
Corp. They promise to repay the bank using the assets of Solar Corp. as collateral. Tim and
Andy are involved in a(n):
A. horizontal merger.
B. vertical merger.
C. leveraged buyout.
D. conglomerate merger.
E. poison pill.
A leveraged buyout (LBO) is a group of investors that borrows money from banks and other
institutions to acquire a company (or a division of one) using the assets of the purchased
company to guarantee repayment of the loan.

Blooms: Apply
Difficulty: 3 Hard
buyouts.
Essay Questions
4-81
Education.
76. What are the advantages of sole proprietorships over other forms of business organizations?
The advantages of sole proprietorships include ease and inexpensive cost of formation; high
degree of secrecy; all profits belong exclusively to the owner; high degree of flexibility and
control of the business; most freedom from government regulation; profits are considered
personal income and are taxed at individual tax rates; and a sole proprietorship can be
dissolved easily.
AACSB: Analytic
Blooms: Understand
organization.
77. Briefly discuss unlimited liability as a disadvantage of sole proprietorships.
The sole proprietor has unlimited liability in meeting the debts of the business. In other words,
if the business cannot pay its creditors, the owner may be forced to use personal,
nonbusiness holdings such as a car or a home to pay off the debts. There are only a few
states in which houses and homesteads cannot be taken by creditors, even if the proprietor
declares bankruptcy. The more wealth an individual has, the greater is the disadvantage of
unlimited liability.
AACSB: Analytic
Blooms: Understand
organization.
4-82
Education.
78. How can taxation be disadvantageous in sole proprietorships?
Although taxation can be an advantage for a sole proprietor, it can also be a disadvantage
depending on the proprietor's income. Under current tax rates, sole proprietors pay a higher
marginal tax rate than do small corporations on income of less than $75,000. However, sole
proprietorships avoid the double taxation that occurs with corporations. The tax effect often
determines whether a sole proprietor chooses to incorporate his or her business.
AACSB: Analytic
Blooms: Understand
organization.
79. Discuss the two basic types of partnerships.
There are two basic types of partnership: general partnership and limited partnership.
A general partnership involves a complete sharing in the management of a business. In a
general partnership, each partner has unlimited liability for the debts of the business.
A limited partnership has at least one general partner, who assumes unlimited liability, and at
least one limited partner, whose liability is limited to his or her investment in the business.
Limited partnerships exist for risky investment projects where the chance of loss is great. The
general partners accept the risk of loss; the limited partners' losses are limited to their initial
investment. Limited partners do not participate in the management of the business but share
in the profits in accordance with the terms of a partnership agreement. Usually the general
partner receives a larger share of the profits after the limited partners have received their
initial investment back.
AACSB: Analytic
Blooms: Understand
Topic: Partnerships
4-83
Education.
80. What are articles of partnership?
Articles of partnership are legal documents that set forth the basic agreement between
partners. Most states require articles of partnership, but even if they are not required, it
makes good sense for partners to draw them up. Articles of partnership usually list the money
or assets that each partner has contributed, state each partner's individual management role
or duty, specify how the profits and losses of the partnership will be divided among the
partners, and describe how a partner may leave the partnership as well as any other
restrictions that might apply to the agreement.
AACSB: Analytic
Blooms: Remember
Topic: Partnerships
81. Why is it more difficult to value a partnership share than a share of stock in a corporation?
Because no public value is placed on the business (such as the current trading price of a
corporation's stock), potential partners do not know what one partnership share is worth.
Moreover, because partnership shares cannot be bought and sold easily in public markets,
potential owners may not want to tie up their money in assets that cannot be readily sold on
short notice.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Topic: Partnerships
4-84
Education.
82. Discuss limited sources of funds as a disadvantage in partnerships.
As with a sole proprietorship, the sources of funds available to a partnership are limited.
Because no public value is placed on the business, potential partners do not know what one
partnership share is worth. Moreover, because partnership shares cannot be bought and sold
easily in public markets, potential owners may not want to tie up their money in assets that
cannot be readily sold on short notice. Accumulating enough funds to operate a national
business, especially a business requiring intensive investments in facilities and equipment,
can be difficult. Partnerships also may have to pay higher interest rates on funds borrowed
from banks than do large corporations because partnerships may be considered greater risks.
AACSB: Analytic
Blooms: Understand
Topic: Partnerships
83. Explain taxation of partnerships.
Partnerships are quasi-taxable organizations. This means that partnerships do not pay taxes
when submitting the partnership tax return to the Internal Revenue Service. The tax return
simply provides information about the profitability of the organization and the distribution of
profits among the partners. Partners must report their share of profits on their individual tax
returns and pay taxes at the income tax rate for individuals.
AACSB: Analytic
Blooms: Understand
Topic: Partnerships
4-85
Education.
84. Briefly discuss domestic, foreign, alien, private, and public corporations.
If the corporation does business in the state in which it is chartered, it is known as a domestic
corporation. In other states where the corporation does business, it is known as a foreign
corporation. If a corporation does business outside the nation in which it is incorporated, it is
called an alien corporation. A corporation may be privately or publicly owned.
A private corporation is owned by just one or a few people who are closely involved in
managing the business. These people, often a family, own the entire corporation's stock, and
no stock is sold to the public. A public corporation is one whose stock anyone may buy, sell, or
trade.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
corporations.
Topic: Corporations
85. How do preferred stockholders differ from the common stockholders of a corporation?
While common stockholders usually have voting rights and share in profits, preferred
stockholders have no vote in the election of the board of directors but get a preference in the
distribution of the company's profits. Preferred stockholders have first claim to profits, usually
paid at a fixed percentage of the initial issuing price.
AACSB: Analytic
Blooms: Understand
corporations.
Topic: Corporations
4-86
Education.
86. What is the preemptive right of common stockholders in a corporation?
In most American states, when the corporation decides to sell new shares of common stock in
the marketplace, common stockholders have the first right, called a preemptive right, to
purchase new shares of the stock from the corporation. A preemptive right is often included in
the articles of incorporation. This right is important because it allows stockholders to
purchase new shares to maintain their original positions.
AACSB: Analytic
Blooms: Remember
corporations.
Topic: Corporations
87. How is disclosure of information a disadvantage to corporations?
Corporations must make information available to their owners, usually through an annual
report to shareholders. The annual report contains financial information about the firm's
profits, sales, facilities and equipment, and debts, as well as descriptions of the company's
operations, products, and plans for the future. Public corporations must also file reports with
the Securities and Exchange Commission (SEC), the government regulatory agency that
regulates securities such as stocks and bonds. The larger the firm, the more data the SEC
requires. Because all reports filed with the SEC are available to the public, competitors can
access them. Additionally, complying with securities laws takes time.
AACSB: Analytic
Blooms: Understand
corporations.
Topic: Corporations
4-87
Education.
88. Discuss employee-owner separation in corporations.
Many employees are not stockholders of the company for which they work. This separation of
owners and employees may cause employees to feel that their work benefits only the owners.
Employees without an ownership stake do not always see how they fit into the corporate
picture and may not understand the importance of profits to the health of the organization. If
managers are part owners but other employees are not, management-labor relations take on a
different, sometimes difficult, aspect from those in partnerships and sole proprietorships.
However, this situation is changing as more corporations establish employee stock ownership
plans (ESOPs), which give shares of the company's stock to its employees. Such plans build a
partnership between employee and employer and can boost productivity because they
motivate employees to work harder so that they can earn dividends from their hard work as
well as from their regular wages.
AACSB: Analytic
Blooms: Understand
corporations.
Topic: Corporations
89. Describe joint venture as a form of business ownership.
A joint venture is a partnership established for a specific project or for a limited time. The
partners in a joint venture may be individuals or organizations. Control of a joint venture may
be shared equally, or one partner may control decision making. Joint ventures are especially
popular in situations that call for large investments, such as extraction of natural resources
and the development of new products.
AACSB: Analytic
Blooms: Remember
corporations.
4-88
Education.
90. What is an S corporation? Discuss its advantages and disadvantages.
An S corporation is a form of business ownership that is taxed as though it were a

partnership. Net profits or losses of the corporation pass to the owners, thus eliminating
double taxation. The benefit of limited liability is retained. Advantages of S corporations
include the simple method of taxation, the limited liability of shareholders, perpetual life, and
the ability to shift income and appreciation to others. Disadvantages include restrictions on
the number (100) and types (individuals, estates, and certain trusts) of shareholders and the
difficulty of formation and operation.
AACSB: Analytic
Blooms: Understand
corporations.
91. What is a limited liability company (LLC)? Why do some consider it the best form of business
ownership?
A limited liability company (LLC) is a form of business ownership that provides limited liability,
as in a corporation, but is taxed like a partnership. Although relatively new in the United
States, LLCs have existed for many years abroad. Many consider the LLC a blend of the best
characteristics of corporations, partnerships, and sole proprietorships. One of the major
reasons for the LLC form of ownership is to protect the members' personal assets in case of
lawsuits. LLCs are flexible, simple to run, and do not require the members to hold meetings,
keep minutes, or make resolutions, all of which are necessary in corporations.
AACSB: Analytic
Blooms: Understand
corporations.
4-89
Education.
92. Discuss a cooperative as a form of business ownership.
A cooperative is an organization composed of individuals or small businesses that have

banded together to reap the benefits of belonging to a larger organization. A co-op is set up
not to make money as an entity but so that its members can become more profitable or save
money. Co-ops are generally expected to operate without profit or to create only enough profit
to maintain the co-op organization.
AACSB: Analytic
Blooms: Understand
corporations.
93. Discuss horizontal and vertical mergers.
When firms that make and sell similar products to the same customers merge, it is known as a
horizontal merger. They reduce the number of corporations competing within an industry, and
for this reason they are usually reviewed carefully by federal regulators before the merger is
allowed to proceed. When companies operating at different but related levels of an industry
merge, it is known as a vertical merger. In many instances, a vertical merger results when one
corporation merges with one of its customers or suppliers.
AACSB: Analytic
Blooms: Understand
buyouts.
4-90
Education.
94. Discuss the techniques to head off a hostile takeover attempt.
To head off a hostile takeover attempt, a threatened company's managers may use one or
more of several techniques:
They may ask stockholders not to sell to the raider.
They might file a lawsuit in an effort to abort the takeover.
They can institute a poison pill in which the firm allows stockholders to buy more shares of
stock at prices lower than the current market value.
They can institute a shark repellant in which management requires a large majority of
stockholders to approve the takeover.
They can seek a white knight, a more acceptable firm that is willing to acquire the threatened
company.
In some cases, management may take the company private or even take on more debt so that
the heavy debt obligation will "scare off" the raider.
AACSB: Analytic
Blooms: Understand
buyouts.
95. What is a leveraged buyout? Discuss some of the advantages of mergers and acquisitions.
A leveraged buyout is a purchase in which a group of investors borrows money from banks
and other institutions to acquire a company (or a division of one), using the assets of the
purchased company to guarantee repayment of the loan. Advantages of mergers and
acquisitions include boosting stock prices and market values to the benefit of stockholders,
company's enhanced ability to meet foreign competition, and increased efficiency of the firm.
AACSB: Analytic
Blooms: Understand
buyouts.
4-91
Education.
4-92
Education.

M Business 4th Edition Ferrell Test Bank 1

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M BUSINESS 4TH EDITION

FERRELL TEST BANK

Test Bank: https://testbankpack.com/p/test-bank-for-m-business-4th-

Solution Manual: https://testbankpack.com/p/solution-manual-for-m-

Options for Organizing Business

True / False Questions

3. The inability to make immediate decisions is a disadvantage of sole proprietorships.

6. Sole proprietorships typically employ less than 50 people.

7. A general partnership involves a complete sharing in the management of a business.

9. All states require partnerships to have articles of partnership.

10. Partnerships have fewer regulatory controls than corporations.

11. Limited partners have no voice in the management of the partnership.

14. S Corporations are more flexible than traditional C corporations.

Multiple Choice Questions

A. It is heavily regulated by the government.

29. Which of the following is an advantage of a sole proprietorship?

A. Ease of dissolving the business

32. The income earned in sole proprietorships is:

33. All of the following are advantages of a sole proprietorship EXCEPT:

A. Sharing of profits with major stockholders

A. When the firm sells its stock to the public

A. the assets that each partner has contributed.

43. It is easier to raise funds in a partnership than in a sole proprietorship because:

A. several partners mean greater earning power and credit.

44. The decision-making process in a partnership tends to be faster when:

A. All partners sharing business responsibility

46. Which of the following is an advantage of a partnership?

47. Which of the following is a disadvantage of a partnership?

A. Difficulty in selling ownership

48. Which of the following statements is true of taxation in partnerships?

A. They pay taxes before distributing profits.

A. that can be bought, sold, or traded by anyone.

56. Common stockholders do not have the right to:

A. vote for the board of directors.

57. Which of the following statements is true of preferred stockholders?

A. They are eligible to vote by proxy.

A. first offer right.

62. All of the following are advantages of a corporation EXCEPT:

64. Which of the following is a typical characteristic of a corporation?

A. Lack of regulatory controls

65. Which of the following statements is true of joint ventures?

A. It enjoys reduced government regulations when compared to general partnerships.

A. it fires its board of directors for incompetence.

74. In the context of corporations, what is a white knight?

77. Briefly discuss unlimited liability as a disadvantage of sole proprietorships.

78. How can taxation be disadvantageous in sole proprietorships?

80. What are articles of partnership?

83. Explain taxation of partnerships.

86. What is the preemptive right of common stockholders in a corporation?

87. How is disclosure of information a disadvantage to corporations?

89. Describe joint venture as a form of business ownership.

90. What is an S corporation? Discuss its advantages and disadvantages.

92. Discuss a cooperative as a form of business ownership.

93. Discuss horizontal and vertical mergers.

True / False Questions

6. Sole proprietorships typically employ less than 50 people.

A general partnership involves a complete sharing in the management of a business.

10. Partnerships have fewer regulatory controls than corporations.

14. S Corporations are more flexible than traditional C corporations.

In most states, a corporation's name must end in "company," "corporation," "incorporated," or

22. Most tender offers of corporate raiders are hostile.

Multiple Choice Questions

A. It is heavily regulated by the government.

29. Which of the following is an advantage of a sole proprietorship?