Test Bank For Essentials of Entrepreneurship and Small Business Management 9th by Scarborough

Test Bank for Essentials of Entrepreneurship and Small Business Management 9th by Scarboroug
Test Bank for Essentials of Entrepreneurship and

Small Business Management 9th by Scarborough
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Essentials of Entrepreneurship and Small Business Management, 9e (Scarborough)
Chapter 6 Forms of Business Ownership
1) The key to choosing the right form of ownership is ________.

A) envisioning where your business will be in 10 years
B) understanding the characteristics of each form and knowing how they affect your business
and personal circumstances
C) forming either an S corporation or a limited liability company since they are the only forms
that offer owners liability protection
D) irrelevant since choosing a form of ownership is merely a technicality and has little impact on
the business and its owner(s)
Answer: B
Diff: 2
Learning Obj: 6-1 Explain the advantages and disadvantages of a sole proprietorship and a
partnership.
AACSB: Analytical Thinking
2) Which of the following issues would influence an entrepreneur's choice of a form of business
ownership?
A) Tax considerations
B) Management succession plans
C) Liability exposure
D) All of the above
Answer: D
Diff: 1
partnership.
3) The most common form of business ownership that is also the simplest to create is the
________.
A) sole proprietorship
B) partnership
C) corporation
D) S corporation
Answer: A
Diff: 1
partnership.
1
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4) Marco is opening a new computer repair shop. He is owner and sole employee. He has paid
the appropriate fees and licensing costs and begun his business. This is an example of a(n)
________.
A) S corporation
B) partnership
C) corporation
D) sole proprietorship
Answer: D
Diff: 1
partnership.
AACSB: Reflective Thinking
5) The most critical disadvantage of the sole proprietorship is ________.

A) the owner's unlimited personal liability
B) limited access to capital
C) lack of continuity
D) limited skills and abilities of the owner
Answer: A
Diff: 3
partnership.
6) Which form of ownership generally has the least ability to accumulate capital?
A) Partnership
B) Sole proprietorship
C) Corporation
D) S corporation
Answer: B
Diff: 1
partnership.
7) A partnership agreement defines how the partners will be compensated. Normally, ________.
A) partners are not entitled to salaries or wages, but are compensated by a share of the profits of
the business
B) the general partner's salary is set at two times the salaries of the limited partners
C) both general and limited partners are permitted salaries, but all silent or dormant partners are
compensated only by sharing in the profits
D) while the agreement establishes payout schedules, it does not spell out what constitutes profit
Answer: A
Diff: 3
partnership.
2
8) Probably the most important reason to have a partnership agreement is that ________.
A) it identifies the name of the partnership and protects that name from infringement by others
B) it states the location and the purpose of the business
C) it determines how the partnership and the partners will pay taxes
D) it resolves potential sources of conflict that, if not addressed in advance, could later result in
partnership battles and dissolution of an otherwise successful business
Answer: D
Diff: 2
partnership.
9) Which of the following issues would a typical partnership agreement address?

A) The contributions of each partner to the business.
B) How the partnership profits (or losses) will be distributed.
C) How a partner can sell her/his ownership in the business.
D) All of the above
Answer: D
Diff: 1
partnership.
10) All of the following are advantages of a partnership except ________.

A) partnerships are relatively easy and inexpensive to establish
B) partnerships avoid double taxation since the partnership itself is not subject to federal taxation
C) partnerships have the greatest ability to accumulate capital of all of the forms of ownership
D) partnerships offer the ability to combine the management and business skills of two or more
people in a complementary and powerful fashion
Answer: C
Diff: 1
partnership.
11) In a partnership, the ________ partner(s) has (have) unlimited liability for the partnership's
debts.
A) limited
B) dormant
C) nominal
D) general
Answer: D
Diff: 1
partnership.
3
12) In a general partnership, ________.
A) each partner is held responsible for an agreement/decision made by any one of the partners
B) partners can be held responsible only for decisions they make personally
C) no partner can be held legally responsible for decisions since the partnership itself is a legal
entity
D) no decision is binding unless all partners agree to it in writing
Answer: A
Diff: 3
partnership.
13) Which of the following is required to form a partnership?

A) A general partner
B) A limited partner
C) A secret partner
D) A silent partner
Answer: A
Diff: 2
partnership.
14) ________ is a special type of limited partnership in which all partners who, in many states
must be considered to be professionals, are limited partners.
A) Limited liability partnership (LLP)
B) Master limited partnership (MLP)
C) General partnership
D) Limited partnership
Answer: A
Diff: 2
partnership.
4
15) Which of the following is not true of a limited liability partnership?
A) All partners are limited partners.
B) Most states restrict this form of ownership to certain types of professions such as attorneys,
physicians, dentists, accountants, etc.
C) Although LLPs have many of the characteristics of partnerships, they are taxed as a
corporation.
D) It must involve a general partner, a limited partner, a silent partner, and a dormant partner.
Answer: C
Diff: 2
partnership.
16) A ________ partner is a person who makes financial investments in a partnership, does not
take an active role in managing the business, and whose liability for the partnerships' debts is
limited to the amount they have invested.
A) limited
B) master
C) dormant
D) silent
Answer: A
Diff: 3
partnership.
17) A ________ partnership is composed of at least one general partner and at least one limited
partner.
A) general
B) limited
C) silent
D) passive
Answer: B
Diff: 3
partnership.
5
18) Acme Corporation is chartered in Delaware, but its primary area of operation is in South
Carolina. In South Carolina, Acme would be considered a(n) ________ corporation.
A) alien
B) domestic
C) foreign
D) local
Answer: C
Diff: 2
partnership.
19) A special type of partnership in which all partners, who in many states must be professionals,
are limited partners is called ________ partnership.
A) general
B) limited
C) silent
D) limited liability
Answer: D
Diff: 2
partnership.
20) Changing from one form of ownership to another once a business is up and running can be
difficult, expensive, and complicated.
Answer: TRUE
Diff: 1
partnership.
21) Some forms of ownership are much more costly and involved to create.
Answer: TRUE
Diff: 1
partnership.
22) Entrepreneurs should not spend much time selecting a form of ownership for their businesses
because making the choice is merely a technicality, which has little impact on the business and
its owner(s).
Answer: FALSE
Diff: 1
partnership.
6
23) The sole proprietorship is the best form of ownership for entrepreneurs launching their first
businesses.
Answer: FALSE
Diff: 1
partnership.
24) Of all U.S. business firms, sole proprietorships are the most common, accounting for
approximately 71 percent of businesses.
Answer: TRUE
Diff: 1
partnership.
25) The sole proprietorship is the easiest form of ownership to create, but once formed, it is
subject to the greatest number of regulations.
Answer: FALSE
Diff: 1
partnership.
26) All the profits of a sole proprietorship are taxed as current income of the owner even if they
are not withdrawn from the business.
Answer: TRUE
Diff: 1
partnership.
27) If a sole proprietorship fails, the owner is not liable for its debts since the business is a
separate legal entity.
Answer: FALSE
Diff: 1
partnership.
28) In a sole proprietorship, the owner has limited liability.

Answer: FALSE
Diff: 1
partnership.
7
29) The sole proprietorship is the form of ownership with the least ability to accumulate capital.
Answer: TRUE
Diff: 1
partnership.
30) If a sole proprietor dies, retires, or becomes incapacitated, the business automatically
terminates.
Answer: TRUE
Diff: 2
partnership.
31) The most common form of business ownership in the United States is the partnership.
Answer: FALSE
Diff: 1
partnership.
32) Although not required by law, a written partnership agreement that spells out the terms of
operating the partnership and the status of each partner should be developed.
Answer: TRUE
Diff: 1
partnership.
33) State law requires that individuals creating a partnership file the Articles of Partnership with
the Secretary of State.
Answer: FALSE
Diff: 2
partnership.
34) Defining the duties, responsibilities, contributions, and roles of the partners in a partnership
agreement is not necessary since the law covers these provisions automatically.
Answer: FALSE
Diff: 2
partnership.
8
35) In a partnership, profits (and losses) must be shared according to the ratio of capital
originally invested in the partnership.
Answer: FALSE
Diff: 2
partnership.
36) If a partnership agreement does not exist, the partnership will be governed by the Uniform
Partnership Act.
Answer: TRUE
Diff: 2
partnership.
37) There is no limit to the number of general partners a partnership may have, but it must have
at least one general partner.
Answer: TRUE
Diff: 2
partnership.
38) Profits earned by a partnership are taxed in the same fashion as those earned by a sole
proprietorship.
Answer: TRUE
Diff: 1
partnership.
39) The partnership, like the proprietorship, avoids the disadvantage of double taxation.
Answer: TRUE
Diff: 1
partnership.
40) In a partnership, the business itself is subject to federal income tax.

Answer: FALSE
Diff: 1
partnership.
9
41) A general partner is personally liable only for the amount of money he has invested in the
partnership.
Answer: FALSE
Diff: 1
partnership.
42) One of the advantages of a partnership over a proprietorship is the increased sources of
capital and credit it offers.
Answer: TRUE
Diff: 1
partnership.
43) If a limited partner withdraws, sells his ownership in the partnership, or dies, the partnership
is not forced into dissolution.
Answer: TRUE
Diff: 2
partnership.
44) One disadvantage of the partnership form of ownership is the great potential for personality
and authority conflicts.
Answer: TRUE
Diff: 1
partnership.
45) A common denominator in many partnership disputes is the lack of a written agreement
clearly spelling out the roles, rights, and responsibilities of each partner.
Answer: TRUE
Diff: 1
partnership.
46) A limited partner is personally liable only for the amount of money she/he has invested in the
partnership.
Answer: TRUE
Diff: 1
partnership.
10
47) A limited partner is treated as an investor in a business venture and does not take an active
role in managing it.
Answer: TRUE
Diff: 1
partnership.
48) Each partner in a limited liability partnership is a limited partner; there are no general
partners.
Answer: TRUE
Diff: 2
partnership.
49) Limited liability partnerships (LLP) are where all partners in a business are limited partners,
which offers the advantage of limited liability for the debts of the partnership.
Answer: TRUE
Diff: 2
partnership.
50) A corporation formed and chartered in Kansas is considered a domestic corporation when
doing business in Kansas, and a foreign corporation when doing business in Missouri.
Answer: TRUE
Diff: 2
partnership.
51) A corporation formed in Taiwan doing business in the United States is a foreign corporation.
Answer: FALSE
Diff: 2
partnership.
52) Most states do not require a Certificate of Incorporation or a charter to be filed for a new
corporation.
Answer: FALSE
Diff: 1
partnership.
11
53) What factors should an entrepreneur consider when choosing a form of ownership?
Answer: Factors an entrepreneur should consider when choosing a form of ownership include:
∙ Tax considerations
∙ Liability exposure
∙ Start-up capital requirements
∙ Control
∙ Managerial ability
∙ Business goals
∙ Management succession plans
∙ Cost of formation
Diff: 2
partnership.
54) What is a sole proprietorship? Explain the advantages and the disadvantages of a sole
proprietorship.
Answer: A sole proprietorship is a business owned and managed by one individual.
Advantages of a sole proprietorship:

∙ Simple to create
∙ Least costly form of ownership to begin
∙ Profit incentive
∙ Total decision-making authority
∙ No special legal restrictions
∙ Easy to discontinue
Disadvantages of a sole proprietorship:

∙ Unlimited personal liability
∙ Limited skills and capabilities
∙ Feeling of isolation
∙ Limited access to capital
∙ Lack of continuity for the business
Diff: 2
partnership.
12
55) What is a partnership? Explain the advantages and the disadvantages of a partnership.
Answer: A partnership is an association of two or more people who co-own a business for the
purpose of making a profit.
Advantages of a partnership:
∙ Easy to establish
∙ Complementary skills
∙ Division of profits
∙ Larger capital pool
∙ Ability to attract limited partners
∙ Minimal governmental regulation
∙ Flexibility
∙ Taxation
Disadvantages of a partnership:
∙ Unlimited liability of the general partner(s)
∙ Not effective in capital accumulation
∙ Difficulty in disposing of partnership interest without dissolving partnership
∙ Lack of continuity
∙ Potential for personal and authority conflicts
Diff: 3
partnership.
13
Mini Case 6-1: "Today, You Gotta' Be a Corporation"
Duke has been a successful used car dealer for 25 years in the same location, operating as a
proprietorship. In those 25 years, he has expanded his operation and become the largest
independent car dealer in a city of 85,000 people. Few people in town can boast of a business
reputation better than Duke's. As he says, "I've always done business in a fair and honest fashion,
and I've tried to give my customers an honest deal. The public has responded well, and last year
the business revenue increased to an all-time high of $830,000."
As the business has grown, so have Duke's liabilities. On a given day, Duke will have cars worth
from $350,000 to $450,000 as inventory on the lot. "Twenty years ago, if I'd asked the bank for a
line of credit of $200,000, they'd have tossed me out the front door. There is no question that
today business is different."
Duke's only daughter recently married a garage mechanic who has worked in the area for the past
three years. Though Duke thinks the boy is certainly nice enough, he does not believe he is very
smart. "The kid sure knows how to fix a car, but that's as far as it goes," says Duke. "On my last
visit to the accountant, he suggested I consider incorporating. I guess he knows what he's talking
about. That's all you hear today – 'you gotta be a corporation.' I guess he's right. But, to tell you
the truth, I don't know."
56) Should Duke incorporate or should he remain a proprietorship? Why?

Answer: There are significant advantages for Duke to investigate other alternatives. The sole
proprietorship does not offer limited liability and incorporating would provide that benefit.
Diff: 3
partnership.
57) The "Das Spelunker" corporation, formed in Germany and conducting business in the U.S.,
is considered to be a(n) ________ corporation.
A) alien
B) domestic
C) foreign
D) distant
Answer: A
Diff: 2
Learning Obj: 6-2 Describe the similarities and differences of the C corporation and the S
corporation.
14
58) Which of the following is true regarding the corporate form of ownership?
A) Generally has the greatest ability to accumulate capital.
B) Most complex form of ownership.
C) Separate legal entity in the eyes of the law.
D) All of the above
Answer: D
Diff: 1
corporation.
59) A corporation receives its charter from the ________.

A) federal government
B) state
C) board of directors
D) stockholders
Answer: B
Diff: 2
corporation.
60) Which of the following generally is not required by a Certificate of Incorporation?

A) The names and the addresses of the incorporators.
B) A statement of the corporation's purpose.
C) A statement of how stock proceeds will be used.
D) The corporation's bylaws.
Answer: C
Diff: 2
corporation.
61) Which of the following statement(s) is/are true?

A) Closely held corporations are owned by only a few shareholders — often family members.
B) Most closely held corporations require shareholders interested in selling their stock to offer it
first to the corporation. This is known as the right of first refusal.
C) Shares of stock the corporation itself owns are called treasury stock.
D) All of the above
Answer: D
Diff: 2
corporation.
15
62) Which of the following is not an advantage of the corporate form of ownership?
A) Limited liability for the owners.
B) It is the easiest and least expensive form of ownership to create.
C) Easy transfer of ownership.
D) Perpetual life.
Answer: B
Diff: 2
corporation.
63) Which of the following is a disadvantage of the corporation form of ownership?

A) An inability to accumulate capital.
B) The unlimited liability to the members of the board.
C) Double taxation on profits.
D) The lack of continuity.
Answer: C
Diff: 1
corporation.
64) In the ________ form of ownership, the business itself pays income taxes.
A) proprietorship
B) partnership
C) corporation
D) All of the above
Answer: C
Diff: 1
corporation.
65) Carlos founded the "Taco Factory" 20 years ago as a family-oriented restaurant. Over the
years as they grew the business, he incorporated and sold stock to outside investors. Recently the
stockholders voted to seek liquor licenses and to sell beer and hard liquor in the restaurants.
Carlos opposed this, citing the history of the restaurant's "family" environment, but was voted
down. Carlos has experienced which drawback of the corporate form of ownership?
A) The inability to accumulate capital.
B) The potential for diminished managerial incentives.
C) Legal requirements and red tape.
D) The potential loss of control.
Answer: D
Diff: 2
corporation.
16
66) A disadvantage of the corporate form of ownership is when profits are taxed at the corporate
rate and at the individual rate and this is referred to as ________.
A) double taxation
B) limited liability
C) double liability
D) single taxation
Answer: A
Diff: 1
corporation.
67) An S corporation form of ownership overcomes which disadvantage of the regular or C

corporation form of ownership?
A) The double taxation issue.
B) The expense and difficulty of formation.
C) The amount of regulation and red tape involved in its operation.
D) The potential loss of control by the founder.
Answer: A
Diff: 2
corporation.
68) Which of the following would be most likely to benefit from choosing S corporation status?
A) Startup companies anticipating net losses.
B) Corporations where net profits before any compensation to shareholders is less than $100,000
per year.
C) Highly profitable firms with substantial dividends to pay out to shareholders.
D) A and C only
Answer: D
Diff: 3
corporation.
69) Which of the following statements is not true regarding the liquidation of an S corporation?
A) The owners pay all taxes, debts, and creditors.
B) The owners obtain the written approval of shareholders to dissolve the company.
C) The owners file a statement of intent to dissolve with the secretary of state's office in each
state where they conduct business.
D) The owners distribute all assets of the corporation to the shareholders.
Answer: C
Diff: 2
corporation.
17
70) Corporations must obtain a federal charter before they can conduct any business.
Answer: FALSE
Diff: 2
corporation.
71) Stockholders in the corporation have the same kind of liability as general partners in a
partnership.
Answer: FALSE
Diff: 2
corporation.
72) When filing the corporate charter, a corporation must file in the state in which its
headquarters are located.
Answer: FALSE
Diff: 2
corporation.
73) Outline the incorporation process.

Answer: When incorporating, a Certificate of Incorporation or charter must be filed with the
Secretary of State. The Certificate of Incorporation includes such things as:
∙ The corporation's name
∙ The corporation's statement of purpose
∙ Time horizon (50 years or perpetuity)
∙ Name and address of incorporators
∙ Place of business
∙ Capital stock authorization
∙ Capital required at the time of incorporation
∙ Provisions for preemptive rights
∙ Restrictions, if any, on transferring shares
∙ Names and addresses of the officers and directors
Diff: 3
corporation.
18
74) What is a corporation? Explain the advantages and the disadvantages of a corporation.
Answer: A corporation is a separate legal entity apart from its owners that receives the right to
exist from the state in which it is incorporated.
Advantages:
∙ Limited liability of stockholders
∙ Ability to attract capital
∙ Ability to continue indefinitely
∙ Transferrable ownership
Disadvantages:
∙ Cost and time of incorporation
∙ Double taxation
∙ Potential for diminished managerial incentives
∙ Legal requirements and regulatory red tape
∙ Potential loss of control by the founder(s)
Diff: 2
corporation.
75) What is an S corporation? Explain the advantages and the disadvantages of an S corporation.
Answer: A corporation that retains the legal characteristics of a regular (C) corporation but has
the advantage of being taxed as a partnership if it meets certain criteria.
Advantages of an S corporation:
∙ Continuity of existence
∙ Transferability of ownership
∙ Limited liability for owners
∙ Income taxed once – at individual's rate
∙ Avoids "C" corporation tax on assets
∙ Owners can get year-end payouts
∙ Can have "S" corporation subsidiaries
Disadvantages of an S corporation:
∙ Lower rate than top individual tax rates
∙ Many fringe benefits cannot be deducted
Diff: 3
corporation.
19
76) Would you recommend Duke establish an S corporation? What conditions would he have to
meet?
Answer: Duke's business looks as though it would qualify for S corporation status, and, as the
text describes, there are tax advantages and, given the volume of sales and the "good living"
Duke makes, he should consider this form of ownership.
Diff: 3
corporation.
77) A limited liability company ________.

A) is similar to an S corporation in that it is a cross between a partnership and a corporation
B) prevents owners who want to maintain their limited liability status from actively managing
the company
C) can have a maximum of 50 owners
D) All of the above
Answer: A
Diff: 2
Learning Obj: 6-3 Understand the characteristics of the Limited Liability Company.
20
78) A limited liability company is most like a(n) ________.
A) general partnership
B) master partnership
C) sole proprietorship
D) S corporation
Answer: D
Diff: 2
79) Which of the following documents must an entrepreneur file to create a limited liability
company?
A) Articles of Organization
B) Articles of Incorporation
C) Operating Agreement
D) A and C only
Answer: D
Diff: 2
80) Which of the following is not true regarding the limitations of professional corporations?
A) Seventy-five percent of the shares of stock must be owned and held by individuals licensed in
the profession of the corporation.
B) At least one of the incorporators, one director, and one officer must be licensed in the
profession.
C) The Articles of Incorporation, in addition to all other requirements, must designate the
professional services to be provided by the corporation.
D) The professional corporation must obtain from the appropriate licensing board a certification
that declares the shares of stock are owned by individuals who are duly licensed in the
profession.
Answer: A
Diff: 3
21
81) Would a limited liability corporation be any better for Duke? Why or why not?
Answer: A limited liability corporation offers many of the same advantages as an S
corporation. Future ownership may be one consideration. If Duke wishes to take on additional
owners, an S corporation may better facilitate that transition.
Diff: 3
82) C corporations, S corporations, and LLCs can be ________ to establish.

A) costly
B) easy
C) quick
D) cheap
Answer: A
Diff: 2
Learning Obj: 6-4 Explain the process of creating a legal entity for a business.
22
Test Bank for Essentials of Entrepreneurship and Small Business Management 9th by Scarboroug
83) The average cost to create a legal business entity is ________.

A) $2,000
B) $1,000
C) $500
D) $5,000
Answer: B
Diff: 2
Learning Obj: 6-4 Explain the process of creating a legal entity for a business.
23
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Test Bank for Essentials of Entrepreneurship and

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1) The key to choosing the right form of ownership is ________.

5) The most critical disadvantage of the sole proprietorship is ________.

9) Which of the following issues would a typical partnership agreement address?

10) All of the following are advantages of a partnership except ________.

13) Which of the following is required to form a partnership?

28) In a sole proprietorship, the owner has limited liability.

40) In a partnership, the business itself is subject to federal income tax.

Advantages of a sole proprietorship:

Disadvantages of a sole proprietorship:

56) Should Duke incorporate or should he remain a proprietorship? Why?

59) A corporation receives its charter from the ________.

60) Which of the following generally is not required by a Certificate of Incorporation?

61) Which of the following statement(s) is/are true?

63) Which of the following is a disadvantage of the corporation form of ownership?

67) An S corporation form of ownership overcomes which disadvantage of the regular or C

73) Outline the incorporation process.

77) A limited liability company ________.

82) C corporations, S corporations, and LLCs can be ________ to establish.

83) The average cost to create a legal business entity is ________.

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