Better Business, 2e (Solomon)
Chapter 6 Forms of Business Ownership
1) A sole proprietorship is a common form of business ownership for startup businesses.
Answer: TRUE
Explanation: A sole proprietorship is a business owned, and usually operated, by a single
individual. Because no legal paperwork is necessary to establish a business as a sole
proprietorship, many small-business owners are sole proprietors without even knowing it.
Diff: 1
Page Ref: 167-168
AACSB: Reflective Thinking
Objective: 6-1 What are the strengths and weaknesses of a sole proprietorship?
Skill: Conceptual
2) The profits of a sole proprietorship are taxed as the personal income of the owner.
Answer: TRUE
Explanation: Since there is no legal distinction between the owner and the business, no separate
tax return is required. As a result, the income and expenses of a sole proprietorship flow through
the owner's personal tax return.
Diff: 1
Page Ref: 168
AACSB: Reflective Thinking
Objective: 6-1 What are the strengths and weaknesses of a sole proprietorship?
Skill: Conceptual
3) One disadvantage of a sole proprietorship is they usually have limited access to additional
financial resources.
Answer: TRUE
4) When establishing a sole proprietorship, it may be necessary to obtain local licensing or
permits.
Answer: TRUE
5) A sole proprietorship can have only one owner, but it can have any number of employees.
Answer: TRUE
6) Partnerships are taxed at the lowest corporate tax rate.
Answer: FALSE
7) To protect partnerships and minimize misunderstandings among partners, all terms of a
partnership should be spelled out in writing.
Answer: TRUE
8) In a general partnership, all partners are entitled to an equal share of the firm's profits.
Answer: FALSE
5) A sole proprietorship can have only one owner, but it can have any number of employees.
Answer: TRUE
6) Partnerships are taxed at the lowest corporate tax rate.
Answer: FALSE
7) To protect partnerships and minimize misunderstandings among partners, all terms of a
partnership should be spelled out in writing.
Answer: TRUE
8) In a general partnership, all partners are entitled to an equal share of the firm's profits.
Answer: FALSE
9) Tom has agreed to become a partner in a business. Since he will provide 30% of the capital to
start the company, he is entitled to 30% of any profits the company earns during its first year of
operation.
Answer: FALSE
10) The biggest difference between general and limited partnerships involves who accepts most
of the business liability.
Answer: TRUE
11) A limited partner is an owner who assumes no management responsibility and has no
liability for losses beyond the amount invested.
Answer: TRUE
12) A corporation is a specific form of business that is legally formed under state laws and is
considered a separate entity.
Answer: TRUE
13) If you want to terminate your ownership in a publicly traded corporation, you simply sell
your shares.
Answer: TRUE
14) The owners of a corporation are known as general corporate partners.
Answer: FALSE
15) The organizational structure of a corporation allows for shareholders to have control over the
company's daily operations.
Answer: FALSE
16) A disadvantage of corporations is that they generally require extensive paperwork.
Answer: TRUE
17) S corporations are similar to C corporations because they both pay corporate income taxes.
Answer: FALSE
18) Like partnerships, shareholders in an S corporation pay income taxes based on their
proportionate share of the business profits.
Answer: TRUE
19) A company with 200 shareholders can establish itself as an S corporation.
Answer: FALSE
24) In order to expand more quickly and remain competitive, companies integrate other
established businesses through the process of mergers or acquisitions.
Answer: TRUE
25) All mergers and acquisitions are mutually desired by both companies.
Answer: FALSE
26) A conglomeration occurs when two companies selling different but related products in the
same market combine.
Answer: FALSE
27) More than one-half of all mergers do not succeed in achieving greater market value.
Answer: TRUE
28) Lucia owns her own dog walking business and has several employees. She filed no legal
paperwork and has no partners. Lucia's business is a ________.
A) limited liability company
B) corporation
C) sole proprietorship
D) separate legal entity
Answer: C
29) All of the following are advantages of sole proprietorship EXCEPT ________.
A) single ownership
B) no special forms
C) ease of formation
D) limited liability
Answer: D
30) One disadvantage of sole proprietorship is the ________.
A) possibility of disagreements between different owners
B) unlimited liability the owner has for the debts of the company
C) fact that any income earned by this type of business is taxed twice
D) cost of starting or ending the company is higher than other businesses
Answer: B
31) Paula is thinking of making homemade perfumes and selling them to her relatives. She has
not filed any legal documents to start her business. Paula would be operating as a(n) ________.
A) S corporation
B) corporation
C) sole proprietor
D) limited liability company
Answer: C
32) A sole proprietor's income and expenses flow through ________.
A) shareholders' tax returns
B) individual partners' tax returns
C) his or her personal tax returns
D) corporate tax returns
Answer: C
44) Jaden and Noel are starting a computer repair business together. Jaden insists on outlining
rules for the departure of partners in the partnership agreement, although Noel does not think it is
necessary. Which of the following statements might Jaden use to explain his insistence to Noel?
A) Provisions to remove a partner's ownership interest are necessary so the business would not
have to liquidate.
B) Determining the allocation of profits to new, junior partners is important to eliminate future
potential conflicts.
C) Responsibilities must be clearly delineated to avoid the possibility of one partner
overstepping his or her bounds.
D) As the partnership matures and ages, defining how profits and losses will be distributed must
be made.
Answer: A
Skill: Application
45) In a partnership, the type of partner that is responsible for all claims against the company is
called a(n) ________.
A) investor
B) general partner
C) unlimited partner
D) limited partner
Answer: B
33) Dan is excited to start marketing and selling his new indoor practice hockey tarps and would
like to start today. He already has several hockey associations waiting to make purchases. Dan's
best option for starting his business quickly and hassle free is a(n) ________.
A) S corporation
B) C corporation
C) general partnership
D) sole proprietorship
Answer: D
34) Arthur is a truck driver who owns his own business. He has been on the road for several
months, and the constant wear and tear on his truck results in the need for several major
mechanical repairs. This generates a loss for his business. Which of the following reflects how
this will affect Arthur's tax obligation?
A) Arthur's tax obligation will be increased.
B) Arthur's tax obligation will be reduced.
C) Arthur's tax obligation will not change at all.
D) Arthur will not be required to pay his tax obligation.
Answer: B
35) Unlimited liability with respect to business ownership means ________.
A) to have an obligation to pay all business debt
B) to have an obligation to pay only the money you invest in a business
C) to be liable for expenses incurred only by you, not your employees
D) to be liable for estimated business expenses only
Answer: A
36) In a sole proprietor ownership, if business assets are not enough to pay business debts, then
personal assets, such as the sole proprietor's house, personal investments, and retirement plans
can be used to pay the debt. This is called ________.
A) unlimited liability
B) limited liability
C) non-liability
D) double taxation
Answer: A
37) All of the following EXCEPT ________ would be an advantage to partnership.
A) pooled skills
B) increased financial resources
C) increased available time
D) unlimited liability
Answer: D
38) The most significant difference between a partnership and a sole proprietor is the ________.
A) amount of liability of owners
B) taxation process used by owners
C) number of government forms required for establishment
D) number of people contributing resources
Answer: D
39) A good reason why partners should spell out the details of their partnership arrangements in
writing is because ________.
A) the partnership is not a legally recognized business until the arrangement is in writing
B) a written agreement will help reduce misunderstandings and disagreements among the
partners
C) putting the agreement in writing will limit the liability of each partner to a specified level
D) doing so will make it easier to convert the business to a corporation at a later date
Answer: B
40) Jenny and Rose are hairstylists that have decided to open their own salon by starting a
general partnership. The first step to ensuring a successful partnership would be to ________.
A) insure they each have 25 clients to bring into the partnership
B) submit the partnership formation fee to the state
C) draw up a partnership agreement
D) submit the limited liability forms before they see clients
Answer: C
41) In a partnership, all profits and losses flow through each partner's ________.
A) tax returns
B) savings
C) liabilities
D) investments
Answer: A
Explanation: A) Like sole proprietors, partnerships do not file a separate tax return. All profits
42) Which of the following parts of a partnership agreement spells out the policy regarding
partners entering into key financial or contractual agreements?
A) addition of partners
B) departure of partners
C) responsibilities of partners
D) decision-making process
Answer: C
43) Policies regarding all of the following points should be included in a partnership agreement
EXCEPT ________.
A) division of stock
B) capital contribution
C) shares of profits or losses
D) decision-making process
Answer: A
44) Jaden and Noel are starting a computer repair business together. Jaden insists on outlining
rules for the departure of partners in the partnership agreement, although Noel does not think it is
necessary. Which of the following statements might Jaden use to explain his insistence to Noel?
A) Provisions to remove a partner's ownership interest are necessary so the business would not
have to liquidate.
B) Determining the allocation of profits to new, junior partners is important to eliminate future
potential conflicts.
C) Responsibilities must be clearly delineated to avoid the possibility of one partner
overstepping his or her bounds.
D) As the partnership matures and ages, defining how profits and losses will be distributed must
be made.
Answer: A
Skill: Application
45) In a partnership, the type of partner that is responsible for all claims against the company is
called a(n) ________.
A) investor
B) general partner
C) unlimited partner
D) limited partner
Answer: B
46) Kris and Amy own a workout facility in which they are co-owners. Both take an active role
in the management of the business and each accepts unlimited liability. Kris and Amy operate as
a ________.
A) joint venture
B) general partnership
C) limited partnership
D) cooperative
Answer: B
47) A partner who invests money in a business but is not involved in the day-to-day operation
and is only risking capital equal to what they have contributed is called a ________.
A) general partner
B) limited partner
C) partial partner
D) corporate investor
Answer: B
48) Which of the following is the limit of liability of a limited partner?
A) the amount of their investment
B) the amount of business capital
C) the amount of their shared profits
D) the amount of their personal assets
Answer: A
49) Alex and Bailey opened a dance studio together as general partners. They each invested
$10,000 of their personal savings. After one year in business, they decided to close the doors.
Their partnership agreement said they would divide profits and losses 50/50. They have more
debt than assets. Alex and Bailey will each ________.
A) lose only $10,000, the amount they invested since they agreed to share profits and losses
50/50
B) lose personal assets to repay the debt since a partnership is not considered to be a separate
entity from the partners who own it
C) collect the debt from their former customers since the customers accepted responsibility for
the business when they purchased services
D) avoid any liability for the debt since a partnership is considered to be a separate entity from
the partners who own it
Answer: B
50) Nick is investing $25,000 in a partnership with his sister and brother. Nick does not want to
be an active part of the partnership and can only afford to risk the $25,000 he is investing. His
brother and sister agree to let him share a proportionate amount of the profits. Nick is a
________ in this partnership.
A) limited partner
B) junior partner
C) general partner
D) sole partner
Answer: A
51) Which of the following statements about the operation of a corporation is correct?
A) A corporation is a separate entity and is legally formed under state laws.
B) A corporation automatically expires in 99 years and must be renewed if a corporation wants
to remain in business.
C) Owners of a corporation have unlimited liability for any claims against their company.
D) A corporation tends to be much easier to set up than a sole proprietorship or partnership.
Answer: A
52) All of the following are advantages of forming a corporation EXCEPT ________.
A) extended life
B) capitalization
C) separated liability
D) ease of set up
Answer: D
Skill: Conceptual
53) Which of the following is the MOST compelling argument for incorporating a business?
A) to hire more employees
B) to avoid paying federal taxes
C) to protect the owners' personal assets
D) to complete minimal legal requirements
Answer: C
52) All of the following are advantages of forming a corporation EXCEPT ________.
A) extended life
B) capitalization
C) separated liability
D) ease of set up
Answer: D
Skill: Conceptual
53) Which of the following is the MOST compelling argument for incorporating a business?
A) to hire more employees
B) to avoid paying federal taxes
C) to protect the owners' personal assets
D) to complete minimal legal requirements
Answer: C
52) All of the following are advantages of forming a corporation EXCEPT ________.
A) extended life
B) capitalization
C) separated liability
D) ease of set up
Answer: D
Skill: Conceptual
53) Which of the following is the MOST compelling argument for incorporating a business?
A) to hire more employees
B) to avoid paying federal taxes
C) to protect the owners' personal assets
D) to complete minimal legal requirements
Answer: C
54) Traci and Sally have considered starting their own business but are concerned about the
possibility of losing their personal assets if the business fails. One way for Traci and Sally to
avoid this risk would be to organize their company as a ________.
A) general partnership
B) limited partnership
C) corporation
D) sole proprietorship
Answer: C
55) Ben recently purchased 100 shares of stock in Feger's Sports, Inc. Ben is a(n) ________ of
Feger's Sports, Inc.
A) owner
B) manager
C) director
D) partner
Answer: A
56) If a corporation provides medical insurance, it will actually lower the company's taxes
because ________.
A) medical insurance benefits are legally deductible expenses
B) its employees will be healthy, creating higher productivity because of lower absenteeism
C) it increases the company's profits
D) IRS regulations allows medical benefits to be filed as a business loss
Answer: A
57) Management and ownership roles would most likely be separate in what type of business
structure?
A) sole proprietorship
B) general partnership
C) corporation
D) limited liability partnership
Answer: C
58) Owners of limited liability companies are referred to as ________, while owners of
corporations are called ________.
A) partners; shareholders
B) shareholders; partners
C) shareholders; members
D) members; shareholders
Answer: D
59) In a large corporation, shareholders responsibilities include ________.
A) making major business and financing decisions
B) authorizing the issuance of stock
C) electing corporate officers
D) electing a board of directors
Answer: D
of accountability for ________.
A) corporate officers
B) board of directors
C) shareholders
D) business owners
Answer: B
61) Which of the following is a benefit of forming a corporation?
A) Corporations can be double taxed.
B) Owners of a corporation are passive investors.
C) Owners of a corporation are subject to unlimited liability.
D) Corporations can offer stock options to employees.
Answer: D
62) Which of the following tasks is NOT the responsibility of the board of directors?
A) setting policies for the corporation
B) authorizing the issuance of stock
C) electing corporate officers
D) managing the company's daily operations
Answer: D
63) Which of the following is a disadvantage of forming a corporation?
A) unlimited liability of owners
B) difficult transfer of ownership
C) limited life
D) double taxation
Answer: D
64) Leslie is excited to begin a personal shopping business. She is planning on having employees
and is concerned about losing personal assets should something happen to the business. She
would like to focus on profits and building a business but she does not want her business to pay
its own taxes. What ownership structure is Leslie's best choice?
A) sole proprietor
B) C corporation
C) S corporation
D) cooperative
Answer: C
65) Which of the following statements about S corporations is MOST accurate?
A) S corporations enable owners to avoid the problem of double taxation.
B) S corporations can have an unlimited number of owners.
C) S corporations must have fewer than 5 employees.
D) S corporation are easier to set up than sole proprietorships and partnerships.
Answer: A
66) Many new business owners prefer a limited liability structure because there are ________.
A) fewer corporate formalities
B) fewer lawsuits
C) typically higher profits than other forms of ownership
D) more informal agreements
Answer: A
67) Which of the following types of ownership is limited to 100 owners?
A) C corporation
B) S corporation
C) sole proprietor
D) limited liability company
Answer: B
68) Compared to the C corporation, the limited liability company is an attractive form of
business ownership because ________.
A) a limited liability company may be more expensive to form but it has a longer life than a C
corporation
B) a limited liability company allows only one owner, whereas a C corporation requires over 100
owners
C) a limited liability company provides owners with protection of their personal assets; whereas
C corporation owner's personal assets are at risk
D) a limited liability company does not require the firm to hold annual meetings and it can avoid
double taxation
Answer: D
69) A disadvantage of a limited liability company is that it ________.
A) requires earnings to be taxed at the corporate rate
B) must dissolve when an owner leaves the company
C) requires the division of profits in a fixed proportion
D) has more restrictive ownership rules than S corporations
Answer: B
Skill: Conceptual
70) Limited liability companies are unable to offer stock options or stock bonus incentives to
their employees because ________.
A) benefits such as these are too costly for these types of startup companies
B) extra profits are reinvested into the company, not into company stocks
C) limited liability companies do not have shareholders or stock
D) approval of stock benefits is difficult due to the number of members
Answer: C
71) Becca and Bob own a car rental business. Becca contributes 75 percent of the capital but
does only 20 percent of the work, while Bob contributes 25 percent of the capital but does 80
percent of the work. Both decide on a 50/50 allocation of profits. In which types of business
structures would this arrangement be possible?
A) limited liabilities and partnerships
B) S corporations and partnerships
C) sole proprietorships and limited liabilities
D) S corporations, limited liabilities and partnerships
Answer: A
72) All of the following are reasons business owners consider using a corporation structure of
ownership EXCEPT ________.
A) the appearance of stability and legitimacy
B) protection from significant loss of personal assets
C) ease of forming and setting up the structure
D) eased ability of raising capital
Answer: C
73) The following are characteristics shared by both for-profit and not-for-profit corporations
EXCEPT ________.
A) electing a board of directors to run the organization
B) offering employee fringe benefits
C) having limited liability protection
D) issuing shares of stock
Answer: D
74) Which of the following statements BEST describes the distinction between a not-for-profit
corporation and a for-profit corporation?
A) Not-for-profits do not pay their employees.
B) Not-for-profits cannot be organized for any person's private gain.
C) Not-for-profits have to dissolve when the owner leaves or dies.
D) Not-for-profits cannot hire executive officers to run the business.
Answer: B
75) When a not-for-profit corporations dissolves, its assets are ________.
A) transferred to the government
B) distributed among major donors
C) passed to the owners' families
D) given to a similar not-for-profit group
Answer: D
76) Which of the following methods do not-for-profit corporations primarily use to generate
revenues?
A) withholding employees' salaries
B) scaling down big-budget projects
C) organizing fund-raising events
D) issuing shares of corporate stock
Answer: C
77) A not-for-profit corporation such as a church or ministry may be exempt from ________.
A) inheritance tax
B) property tax
C) dividend tax
D) value-added tax
Answer: B
78) A cooperative is a type of business that is owned by ________ who use its products or
services.
A) members
B) shareholders
C) directors
D) partners
Answer: A
79) Mr. Gonzales wants to help fellow farmers in his community, but he is not interested in
making a personal profit. His main goal is to join with other farmers so they can have better
bargaining power when purchasing supplies. Which of the following business types will Mr.
Gonzales MOST likely form?
A) general partnership
B) sole proprietorship
C) cooperative
D) not-for-profit corporation
Answer: C
80) A(n) ________ occurs when two companies of about the same size mutually agree to create a
new combined company.
A) merger
B) acquisition
C) takeover
D) synergy
Answer: A
81) Companies MOST often resort to mergers and acquisitions when they want to expand their
markets and product lines because ________.
A) it minimizes conflicts that are rooted on hidden agendas and power struggles
B) it minimizes time and investment to research and develop new products
C) upper management prefers to concentrate on day-to-day activities
D) employees are motivated to work harder because of the resulting stability
Answer: B
82) A proxy fight occurs when a company attempts to persuade the target company's
shareholders to replace the existing management with one that is ________ the goals of the
acquiring company.
A) unaware of
B) hostile toward
C) familiar with
D) sympathetic to
Answer: D
83) Which of the following moves would MOST likely initiate a hostile takeover?
A) The buying company offers to buy the target company's stocks at a price higher than their
current value.
B) The buying company delivers an ultimatum to the target company's shareholders to give up
their shares.
C) The target company's shareholders offer their company's stocks at an attractive rate to the
buying company.
D) The target company's shareholders agree to sell their company's stocks all at the same time.
Answer: A
84) Lizzie is the CEO of a large corporation that offers accounting services to several companies.
She has tried to acquire her closest rival, but her rival's management is opposed to the idea. In
order to gain a competitive edge, Lizzie starts a campaign to persuade her rival company's
shareholders to vote out its existing management in the hopes of replacing it with a management
team more sympathetic to the goals of the acquiring company. Which method of acquiring a
company is Lizzie using?
A) conglomeration
B) proxy fight
C) tender offer
D) synergistic value
Answer: B
85) A(n) ________ acquisition occurs when one company tries to take control over another
company against its wishes.
A) proxy
B) hostile
C) horizontal
D) extension
Answer: B
86) At a meeting to announce a merger with another company, which of the following
buzzwords is a business leader MOST likely to use to justify the decision?
A) accountability
B) bottom line
C) streamline
D) synergy
Answer: D
87) A merger involving a computer manufacturer and an electronics retailer that sells its
computers would be an example of a ________.
A) vertical merger
B) horizontal merger
C) product extension merger
D) conglomeration
Answer: A
88) When two companies in entirely different industries combine, it is known as a ________.
A) vertical merger
B) horizontal merger
C) product extension merger
D) conglomeration
Answer: D
89) A dance studio and a dancewear manufacturer decide to combine. This type of merger is
called a ________.
A) vertical merger
B) horizontal merger
C) product extension merger
D) conglomeration
Answer: A
A) vertical merger
B) horizontal merger
C) product extension merger
D) conglomeration
Answer: D