Chapter 9 The Organizational Plan
True/False Questions
1. Investors usually insist that the management team not operate the business as a parttime venture.
Answer: True Page: 265 Difficulty: Easy
2. Investors accept that the management team draws a large salary for their contributions
in early operations.
Answer: False Page: 265 Difficulty: Medium
3. The proprietor is personally liable for all aspects of the business.
Answer: True Page: 265 Difficulty: Medium
4. The corporation is considered a legal person that is taxable and absorbs liability.
Answer: True Page: 267 Difficulty: Easy
5. In a limited partnership, the limited partners are equally liable for the debts of the
partnership.
Answer: False Page: 267 Difficulty: Medium
6. In a partnership, the general partners usually share the amount of personal liability
equally, regardless of their capital contributions.
Answer: True Page: 267 Difficulty: Hard
7. The most expensive type of business to start is the partnership.
Answer: False Page: 268 Difficulty: Medium
8. The corporation can be created only by statute.
Answer: True Page: 268 Difficulty: Easy
9. In a partnership, the death of a general partner generally does not result in termination
of the partnership.
Answer: False Page: 268 Difficulty: Medium
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10. The corporation has the most continuity of the forms of business.
Answer: True Page: 268 Difficulty: Medium
11. In a limited liability partnership (LLP), the death or withdrawal of a partner has no
effect on the partnership.
Answer: True Page: 269 Difficulty: Easy
12. In an S Corporation, ownership can be freely transferred as long as the buyer is an
individual.
Answer: True Page: 269 Difficulty: Hard
13. Sole proprietors can access two sources of capital—personal contributions from the
entrepreneur and sale of stock.
Answer: False Page: 269 Difficulty: Medium
14. The only source of capital for a corporation is the sale of shares of stock.
Answer: False Page: 269-270 Difficulty: Medium
15. The corporate form of ownership gives owners the most control of business
operations.
Answer: False Page: 270 Difficulty: Medium
16. The limited partners in a venture share control of day-to-day operations with the
general partners.
Answer: False Page: 270 Difficulty: Medium
17. Stockholders in a corporation share day-to-day control of the entrepreneur.
Answer: False Page: 270 Difficulty: Medium
18. Corporations are not able to distribute profits to shareholders.
Answer: False Page: 271 Difficulty: Medium
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Chapter 9 The Organizational Plan
19. The corporation is the most attractive type of business formation for raising capital.
Answer: True Page: 271 Difficulty: Easy
20. Both partnerships and proprietorships serve as nontaxable conduits of income for their
owners.
Answer: True Page: 271 Difficulty: Medium
21. Income from the partnership is taxed twice: once at the business level and once as
personal income.
Answer: False Page: 271 Difficulty: Medium
22. Since a corporation is recognized as a separate tax, it has the advantage of being able
to take many deductions and expenses that are not available to the proprietorship or
partnership.
Answer: True Page: 273 Difficulty: Medium
23. The limited liability company is automatically taxed as a partnership.
Answer: True Page: 274 Difficulty: Medium
24. An S Corporation combines the tax advantages of the partnership and the corporation.
Answer: True Page: 274 Difficulty: Medium
25. The S corporation can deduct most fringe benefits for shareholders.
Answer: False Page: 275 Difficulty: Medium
26. In a limited liability company, every member has limited liability.
Answer: True Page: 275 Difficulty: Medium
27. The limited liability company is the only form of organization that allows members to
share liability.
Answer: False Page: 276 Difficulty: Medium
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28. When a business grows beyond stage one, submanagers are hired to coordinate aspects
of the business.
Answer: True Page: 278 Difficulty: Easy
29. When hiring employees for the venture, the entrepreneur should consider the
candidate's skills and abilities and avoid considering the individual's personality.
Answer: False Page: 279 Difficulty: Medium
30. The hiring process is one area of business operation that the entrepreneur can cut back
on and save time.
Answer: False Page: 279 Difficulty: Medium
31. The Sarbanes-Oxley Act reduced the responsibilities of the board of directors.
Answer: False Page: 280 Difficulty: Medium
32. The board of directors should be limited to 7-12 members with limited terms.
Answer: True Page: 280 Difficulty: Medium
33. A board of advisors has more decision making authority than a board of directors
does.
Answer: False Page: 282 Difficulty: Medium
34. Once the board of advisors have been hired, the entrepreneur should not question their
advice.
Answer: False Page: 282 Difficulty: Hard
Multiple Choice Questions
35. The management team of a new venture:
A) is encouraged to operate the business as a sideline.
B) must operate the business full-time.
C) can expect to draw a large salary.
D) should be employed elsewhere to assure adequate income.
Answer: B Page: 265 Difficulty: Medium
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Chapter 9 The Organizational Plan
36. Some customers prefer to do business with a _______________ because this form of
business is sometimes viewed as a more stable form than the others.
A) proprietorship
B) limited partnership
C) full partnership
D) corporation
Answer: D Page: 265 Difficulty: Medium
37. _____________ have unlimited liability for the actions of the business.
A) General partners
B) Corporate shareholders
C) Limited liability company members
D) Limited partners
Answer: A Page: 267 Difficulty: Medium
38. In a limited partnership, the limited partners:
A) are liable only for the amount of their capital contributions.
B) share the amount of personal liabilities equally.
C) have only insurance as protection against liability suits.
D) are allowed to decide on the amount of individual liabilities.
Answer: A Page: 267 Difficulty: Medium
39. Liability is one of the most critical reasons for establishing a:
A) corporation.
B) limited liability company.
C) partnership.
D) sole proprietorship.
Answer: A Page: 267 Difficulty: Easy
40. In a limited liability partnership (LLP) death or withdrawal of a partner:
A) results in automatic transfer of ownership to surviving partner(s).
B) may result in problems trying to find a market for the shares.
C) always results in termination of the partnership.
D) has no effect on the partnership.
Answer: D Page: 268 Difficulty: Hard
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41. Which of the following types of ownership has the most continuity?
A) Corporation
B) General partnership
C) Limited partner
D) Sole proprietorship
Answer: A Page: 268 Difficulty: Medium
42. Sole proprietorships:
A) have no time limit on how long they may exist.
B) are perpetual.
C) continue even upon the death of the owner.
D) allow a member of the deceased partner’s family take over as a partner.
Answer: D Page: 268 Difficulty: Medium
43. In which of the legal forms of ownership is transferability of interest the easiest?
A) Sole proprietorship
B) Limited partnership
C) General partnership
D) Corporation
Answer: D Page: 269 Difficulty: Medium
44. In an S corporation, the transfer of interest can occur:
A) only with the consent of the other shareholders.
B) only if there is a charter provision for doing so.
C) only as long as the buyer is an individual.
D) depending on the agreement.
Answer: C Page: 269 Difficulty: Hard
45. The legal form of business with the most alternatives for raising capital is the:
A) proprietorship.
B) corporation.
C) limited partnership.
D) full partnership.
Answer: B Page: 269 Difficulty: Easy
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Chapter 9 The Organizational Plan
46. Bonds can be used to raise capital in which form of ownership?
A) Sole proprietorship
B) Limited partnership
C) General partnership
D) Corporation
Answer: D Page: 269-270 Difficulty: Medium
47. In which form of organization does the owner have greatest control?
A) Sole proprietorship
B) Limited partnership
C) General partnership
D) Corporation
Answer: A Page: 270 Difficulty: Medium
48. When it comes to decision making, in a limited partnership:
A) there is no separation of ownership and control.
B) limited partners have no control over business decisions.
C) limited partners have an equal say, but no liability.
D) the partners have control based on invested capital.
Answer: B Page: 270 Difficulty: Medium
49. Corporations distribute profits to owners through:
A) bonds.
B) taxes.
C) dividends.
D) interest.
Answer: C Page: 271 Difficulty: Hard
50. Organization costs in a proprietorship are:
A) amortizable over a period of 60 months.
B) amortizable over a period of 45 months.
C) not amortizable.
D) amortizable for a period of a year.
Answer: C Page: 272 Difficulty: Medium
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51. Which of the following statements is (are) true?
A) Corporates are not able to take deductions and expenses available to the
proprietorship or partnership.
B) Distribution of dividends is taxed once, as income of the corporation.
C) Bonuses, incentives,and profit sharing are allowable ways to distribute income of
the corporation.
D) Corporate tax may be higher than the individual rate.
Answer: C Page: 273 Difficulty: Hard
52. Which of the following ways of distributing the income of corporations is taxed twice?
A) Bonus
B) Salary
C) Dividends
D) Profit sharing
Answer: C Page: 273 Difficulty: Medium
53. A limited liability corporation:
A) has unlimited liability.
B) is automatically taxed as a partnership.
C) is decreasing in popularity among venture capitalists.
D) had been the most popular choice of organization structure by new ventures and
small businesses.
Answer: B Page: 273 Difficulty: Medium
54. S corporation status means:
A) shareholders do not have limited liability.
B) the corporation is subject to a minimum tax of 34 percent.
C) consent by a majority of shareholders is required for the election of this form of
business.
D) the corporation pays no tax.
Answer: D Page: 274 Difficulty: Hard
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55. In an S corporation:
A) gains or losses of the business are separate from the personal income of the
shareholder.
B) shareholders retain unlimited liability.
C) only one class of stock is permitted.
D) most fringe benefits for shareholders can be deducted.
Answer: C Page: 274 Difficulty: Medium
56. In a limited liability company:
A) owners are called shareholders.
B) members may transfer their interests at any time.
C) members are not allowed to share income, profit, expense, deduction, loss and
credit among themselves.
D) laws governing its formation differ from state to state.
Answer: D Page: 275-276 Difficulty: Medium
57. As an organization grows, submanagers are hired to coordinate the various aspects of
the business. The text describes this as:
A) Stage 1.
B) Management Phase.
C) Stage 2.
D) Organizing Phase.
Answer: C Page: 278 Difficulty: Medium
58. Our text tells us that much of an entrepreneur's time during start-up is spent:
A) delegating.
B) negotiating.
C) putting out fires.
D) allocating resources.
Answer: C Page: 278 Difficulty: Medium
59. To build a successful organization culture the entrepreneur:
A) should focus and not try out different things.
B) needs to remember that it is easier to change a person’s attitude than it is to
change the person’s behavior.
C) should spend extra time in the hiring process.
D) must create a workplace where communication from the top down is encouraged.
Answer: C Page: 279 Difficulty: Medium
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60. The board of directors:
A) lacks voting authority.
B) has responsibilities to represent all shareholders.
C) is less objective than the entrepreneur.
D) are always volunteers and need not be compensated.
Answer: B Page: 280 Difficulty: Medium
61. The _________ imposes oversight responsibilities on members of the board of
directors.
A) Social Security Act
B) Fair Labor Practices Act
C) Sarbanes-Oxley
D) Taft-Hartley Act
Answer: C Page: 280 Difficulty: Medium
62. The difference between a board of directors and a board of advisors is that:
A) the board of advisors meets less frequently.
B) the board of directors lacks voting authority.
C) the board of directors is subject to less pressure of litigation.
D) the board of advisors are compensated.
Answer: A Page: 282 Difficulty: Medium
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