BUSN 2nd Edition Kelly Test Bank 1

BUSN 2nd Edition Kelly
Full download at link:
Test bank: https://testbankpack.com/p/test-bank-for-busn-2nd-

edition-by-kelly-isbn-0176555307-9780176555306/
Solution Manual: https://testbankpack.com/p/solution-manual-

for-busn-2nd-edition-by-kelly-isbn-0176555307-9780176555306/
Chapter 6 Business Formation
TRUE/FALSE
1. A sole proprietorship is a business that is owned, and usually managed, by a single

individual.
ANS: T DIF: LL1 REF: Page 69 OBJ: 1
2. The sole proprietorship is the most common form of business ownership.
3. The sole proprietorship is the most common form of business ownership.
4. A disadvantage of a sole proprietorship is that it is relatively expensive and complex to form.
ANS: F DIF: LL1 REF: Page 70 OBJ: 1
5. There are attractive advantages and no significant drawbacks to starting a sole

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

7. Most sole proprietorships are small businesses with net incomes that lag far behind those of
partnerships and corporations.
8. Owners of sole proprietorships are personally responsible for any debts incurred by their
business.
9. Sole proprietorships are in every sector of the economy, but they are most common in
professional and technical services, construction, and retail trade.
10. In terms of total net income by form of ownership, the sole proprietorship is the largest form
of business ownership; partnerships follow, with corporations being the smallest form.
11. The owner of a sole proprietorship must share any after-tax profits with the company’s
shareholders.
12. Sole proprietorships generally have a distinct advantage over other forms of business
ownership when it comes to raising large sums of financial resources.
13. The first step in forming a sole proprietorship is filing the appropriate paperwork and paying
the necessary filing fees with the secretary of state for the state where the business will
operate.
14. Hennie Hanks has a great idea for a new business—one he is sure will make a ton of money.
He’s eager to get started, so he wants to form his business with a minimum of hassle,
expense, and red tape. He also wants to be his own boss and have complete control over the
company. Hennie’s goals suggest that he would seriously consider operating his business as
a sole proprietorship.
15. Suzie Kew just graduated with honors from a leading university with a degree in financial
management. She wants (and expects) to get a job with excellent pay and benefits, as well
as the opportunity for growth and advancement. Suzie is likely to be very interested in
working for a company that is organized as a sole proprietorship.

16. Ralph Flores owns and operates his own business as a sole proprietor. Recently his
company was sued. The fact that Ralph has organized his business as a sole proprietorship
means that Ralph is protected against any financial loss if the company loses the lawsuit.
17. A general partnership is a voluntary partnership in which all partners can take an active role
in managing the business and have unlimited liability for any claims against the firm.
18. A limited partnership is a partnership that includes at least one general partner and one
limited partner.
19. Limited liability partnerships (LLPs) are a relatively new form of partnership in which all
partners have the right to participate in management and have some degree of limited liability
for the debts of the company.
20. A limited partnership is an agreement between two or more individuals to operate a business
as co-owners for a limited period of time.
21. In a general partnership, all owners have unlimited liability for the debts and obligations of
their firm.
22. In a general partnership, each partner incurs unlimited liability only for claims resulting from
his or her own negligence.
23. The general partnership is the dominant form of business ownership, with the vast majority of
large business organizations using this form of ownership.
24. Limited liability partnerships (LLPs) are a relatively new form of partnership in which some
owners obtain limited liability in exchange for giving up the right to participate in
management.
25. Limited partnerships and limited liability partnerships are just two names for exactly the same
type of business organization.

26. In a limited partnership, all owners have limited liability for the debts and obligations of their
company.
27. Families may be able to protect their personal assets from lawsuits and creditors by forming
limited partnerships, with the parents as general partners and the children as limited partners.
28. A major advantage of limited liability partnerships (LLP) is that they offer all partners “full
shield” liability protection in every state in the United States.
ANS: F DIF: LL2 REF: Pages 72-73

OBJ: 2
29. Bailey Nix is a limited partner in his company. A general partner in his company is going on
an extended vacation and has asked Bailey to run the company while he is gone. If Bailey
agrees to do so, he will no longer qualify as a limited partner.
30. The formation of a corporation requires filing a special form with a specific state agency.
31. A corporation is a form of business ownership in which the business is considered a legal
entity separate and distinct from its owners.
32. Corporate bylaws are the basic rules governing how a corporation is organized and how it
conducts its business.
33. As business entities, corporations may engage in virtually any business activity a natural
person can, including buying and selling property and entering into binding contracts.
ANS: T DIF: LL1 REF: 73 OBJ: 3
34. One advantage of a general corporation is that it is easy and inexpensive to form.
35. Many of the largest corporations in the United States are incorporated in Delaware.
36. Owners of corporations are known as stockholders.

37. Most stockholders in large corporations take an active role in managing their companies.
38. Examples of institutional investors are mutual funds, insurance companies, and pension
funds.
39. Corporations are more closely regulated and required to file more paperwork than other
forms of business.
40. General corporations normally are at a distinct disadvantage compared to other forms of
business ownership when it comes to raising financial capital.
41. Stockholders are required to purchase common stock before they can purchase preferred
stock.
42. Most state governments grant corporations the right to operate under a corporate charter for
no more than 100 years, after which the corporation must be dissolved.
43. Nash Games Inc. is incorporated in Illinois but also does business in Missouri. Nash would
be classified as a domestic corporation in Illinois and as a foreign corporation in Missouri.
44. Liza owns 1000 shares of common stock in Bigbux Inc. As a stockholder in the company, she
may vote in the election of Bigbux’s board of directors.
45. Joe owns 500 shares of stock in the Megabux Corporation. He is pleased to learn that the
company earned a very nice profit over the most recent operating period. The company has
announced that they will pay each shareholder a dividend of $1 per share out of its after-tax
profits. Because Megabux has already paid taxes on this profit, this payment will represent
tax-free income to Joe.
46. Unlike general corporations, nonprofit corporations have no stockholders and pay no
dividends.

47. Unlike other types of corporations, nonprofit corporations cannot have stockholders and
cannot pay dividends.
48. A statutory close (or closed) corporation is a corporation with a limited number of owners who
file special articles of incorporation allowing it to operate under simpler, less formal rules than
a general corporation.
49. A statutory close corporation can not have more than 100 stockholders. And with only a few
rare exceptions, each stockholder must be a U.S. citizen or permanent resident of the United
States.
ANS: F DIF: LL1 REF: page 76 OBJ: 4
50. S corporations cannot have more than 100 stockholders.
51. A general corporation, commonly known as an S corporation, taxes its owners separately
from the corporation.
52. Unlike C corporations, members of S Corporations have unlimited liability.
53. The earnings of nonprofit corporations are exempt from federal and state income taxes.
54. In order to qualify as an S corporation, a firm must meet several criteria, including limits on
the number and types of stockholders.
55. Individuals who contribute money or property to a nonprofit organization can take a tax
deduction, making it easier for these organizations to raise funds from donations.
56. A closed corporation is also known as a not-for-profit corporation.
57. One drawback of an S corporation is that its earnings are taxed by the IRS, which also taxes
the dividends it pays to its stockholders. This results in the double taxation of an S
corporation’s earnings.
58. Moe Chow owns stock in an S corporation. He’s told his buddy Juan about the company, and
now Juan wants to invest in it, too. Juan is a Mexican citizen who lives in northern Mexico,
just across the border from El Paso, Texas. Juan can own stock in the company, but it must
be purchased in the United States and he must pay U.S. income taxes on any dividends he
receives.
59. S corporations, closed corporations, and nonprofit corporations earnings are exempt from
federal and state income taxes based on a commitment to reinvest in local communities.
60. The earnings of S corporations and closed corporations are not exempt from federal and
state income taxes.
61. Acquisition is a corporate restructuring in which one firm buys another. After the acquisition,
the target firm ceases to exist as an independent entity, while the acquiring firm continues to
operate.
62. A merger is a corporate restructuring that occurs when one firm, called the acquiring firm,
buys another firm, called the target firm.
63. A horizontal merger is a combination of two firms that are in the same industry.
64. A vertical merger is a combination of firms at different stages in the production of a good or
service.
65. A conglomerate merger is a combination of two firms in unrelated industries.
66. In an acquisition, the firm who is doing the buying is called the target firm.
67. Mergers and acquisitions basically mean the same thing; the only difference is the size of the
companies involved.

68. A key goal of horizontal mergers is to achieve tighter integration of production and increased
control over supply of crucial inputs.
69. If an oil company merged with a company that produced motion pictures, the result would be
a vertical merger.
70. Fly By Knight and Air Pockets are two mid-sized regional airlines that serve much the same
territory. If these two airlines merged, the result would be a horizontal merger.
71. One reason given to justify a conglomerate merger is the desire to diversify into new markets,
thus reducing the risk associated with adverse conditions in any single market.
72. An LLC is a relatively new and increasingly popular form of business ownership.
73. Owners of limited liability companies are known as limited partners.
74. Limited liability companies were very popular in the middle of the 20th century, but they have
become much less popular with the rise of other forms of business ownership such as the
limited partnership and S corporation.
75. The formation of an LLC requires filing a document, usually called the articles of organization,
and paying filing fees in the state where the business is organized.
76. A limited liability company (LLC) combines the limited liability of corporations with the tax
pass-through of partnerships.
77. Some states do not permit certain types of businesses, such as banks, insurance companies,
and nonprofit organizations to operate as LLCs.
78. Like corporations, LLCs are required to hold regular board meetings.

79. Compared to a general corporation, the LLC offers simplicity of management and operations
and the tax pass-through, which eliminates the problem of double taxation.
80. Jerry and Lenny are general partners in an automotive shop. Their business has grown
tremendously over the last two years, and they now want to reorganize their business as
either a corporation or a limited liability company to facilitate continued growth. One
advantage of forming an LLC is that, unlike a corporation, it doesn’t require them to file any
special paperwork or pay any fees.
81. A business format franchise is a broad franchise agreement in which the franchisee pays for
the right to use the name, trademark, and business and production methods of the franchisor.
82. A franchisee is the business entity in a franchise relationship that pays for the right to use
resources supplied by the franchisor.
83. Franchising is a contractual relationship in which an established business entity allows others
to operate a business using the unique resources it supplies in exchange for monetary
payments and other considerations.
84. A business entity that allows others to operate a business using its name, trademark,
business methods, and products in exchange for money and other considerations is called a
franchisee.
85. Franchisors seldom succeed in their attempts to move into foreign markets.
86. One of the biggest trends in franchising over the past several years has been a rapid
expansion into foreign markets.
87. A franchise agreement is the contractual arrangement between a franchisor and franchisee
that details the duties and responsibilities of both parties.

88. Under a business format franchise, the franchisees pay royalties for the right to sell the
product of the franchisor, but otherwise they have complete freedom as to how they manage
their businesses.
89. One drawback of operating a franchise is the greater risk of failure relative to independently
owned businesses.
90. The first recognized business format franchise arrangement was established in 1891 when
Martha Matilda Harper began offering franchises in her hair salon business.
91. One of the great success stories of franchising is that almost 40 percent of all franchises are
owned by Hispanics, African-Americans, and Asians.
92. Individuals who want to be their own boss and use their own methods are likely to have
difficulty accepting the terms of a typical franchise agreement.
93. Lakesia Wiley is a bright, hardworking, and responsible young woman who has always
wanted to own a business. However, she realizes that she lacks training and experience in
some areas of running a business and doesn’t have confidence in her ability to start a new
company from scratch. She also is nervous about the amount of risk involved in business
ownership. These concerns suggest that Lakesia might be interested in becoming a
franchisee in a business format franchise.
MULTIPLE CHOICE
94. The form of ownership entrepreneurs choose when they organize their business can affect
a) the types of taxes the business must pay.

b) how much liability they face for the debts of their company.
c) the way the firm can obtain financial resources.
d) all of the items in this list.
ANS: D DIF: LL1 REF: Page 69 OBJ: 1
95. The majority of businesses today are formed as
a) sole proprietorships.
b) corporations.
c) limited liability partnerships.
d) partnerships.
ANS: A DIF: LL1 REF: Page 69 OBJ: 1
96. Sole proprietors have _________________ for the debts of the of their companies.
a) no liability
b) limited liability
c) unlimited liability
d) shared liability
ANS: C DIF: LL1 REF: Page 70 OBJ: 1
97. From the standpoint of an owner, a major advantage of the sole proprietorship is the
a) ability to pool financial resources.

b) ability to capitalize on complementary skills.
c) retention of control.
d) permanence of the business.
98. A key advantage of a sole proprietorship is that
a) it is easy and inexpensive to form this type of business.

b) the owner has limited liability for the debts for this type of business.
c) it is very easy to raise financial capital for this type of business.
d) the business has perpetual life.
99. A serious drawback of sole proprietorships is that they
a) are difficult and inexpensive to form.

b) expose their owners to unlimited liability for the company’s debts.
c) result in double taxation of the company’s earnings.
d) are heavily regulated by the federal government.
ANS: B DIF: LL1 REF: Page 70 OBJ: 1
100. Historically, the three basic forms of business ownership in the United States have been the
a) sole proprietorship, partnership, and corporation.

b) full partnership, nominal partnership, and silent partnership.
c) joint venture, cooperative, and holding company.
d) monopoly, duopoly, and oligopoly.
101. While sole proprietorships have recently generated a combined revenue figure of over $1
trillion, they do NOT
a) outnumber the corporations and partnerships combined.

b) generate the level of net income seen in partnerships and corporations.
c) expand at the rate of corporations.
d) grow financially.
ANS: B DIF: LL2 REF: Pages 69-70
OBJ: 1
102. Which of the following is NOT an accurate statement about a sole proprietorship?
a) A sole proprietorship is easy and inexpensive to form.

b) Legally, the business is considered separate and distinct from its owner.
c) Most sole proprietorships are small businesses.
d) Sole proprietorships are the most common form of business ownership.
103. A disadvantage of the sole proprietorship is that it is
a) expensive and difficult to set up this type of business.

b) heavily regulated by most state and local governments.
c) hard to attract and retain talented employees.
d) all of the items in this list are disadvantages of sole proprietorships.
104. Sole proprietorships make up over _________ of all businesses.
a) 5 percent
b) 25 percent
c) 70 percent
d) 95 percent
105. Sole proprietorships offer all of the following advantages EXCEPT
a) retention of control.
b) ease of raising financial resources needed for growth.
c) that its formation is simple and inexpensive.
d) that owning and running a business as a sole proprietorship can be a great source
of pride and personal satisfaction.
106. All of the following are disadvantages of sole proprietorships EXCEPT
a) unlimited liability.
b) heavy workload and responsibilities.
c) lack of permanence.
d) double taxation of earnings.
107. A key reason most sole proprietorships remain relatively small is that
a) they have limited ability to raise funds needed to finance growth.

b) government regulations limit their ability to expand into new areas of business.
c) the owners often disagree about the need to take on additional risk associated
with growth.
d) their stockholders would rather receive dividends than have earnings reinvested
to finance growth.
108. Dana wants to open her own business after completing college. As a fine arts student, she is
planning to provide services as a graphic artist. She wants the freedom to be her own boss
and doesn’t want to deal with a lot of rules and regulations. But she is nervous about risking
her personal wealth. She is thinking about forming a sole proprietorship and asks you for
your opinion about this form of business. Which of the following statements is most accurate?
a) Forming a sole proprietorship will enable you to be your own boss. But if you are
really nervous about risking your personal assets, you might want to consider
some other form of ownership because it will also expose you to unlimited liability.
b) Forming a sole proprietorship is a bad choice. Not only is a sole proprietorship
subject to extensive government regulation that will limit your ability to run your
business, it also exposes you to unlimited liability.
c) Forming a sole proprietorship is a great idea. It gives you the ability to be your
own boss while also protecting your personal assets from loss.
d) Forming a sole proprietorship can help you protect your personal assets, but it is a
poor choice for individuals who want to be their own boss because this form of
business is heavily regulated.
109. Justin Rolando decided to operate his own Web design firm and is leaning toward organizing
it as a sole proprietorship. One factor Justin should realize is that by choosing this form of
business he would be
a) creating a business that was legally separate and distinct from himself.
b) incurring the problem of double taxation.
c) exposing himself to unlimited personal liability for the company’s debts.
d) required to fill out special forms and pay proprietorship fees to get the company
legally established.
110. Allison Peterson has elected to operate her new downtown boutique as a _____________ .
She is aware of the unlimited liability associated with this form of ownership, but she wants to
remain in complete control of her company and be her own boss.
a) general partnership
b) S Corporation
c) sole proprietorship
d) limited partnership
111. Marco Valez is comparing forms of business structure in order to make the best decision for
the business he plans to form next month. He plans to be the only investor/owner, and he
will also actively manage the business. He is convinced that the company will be profitable,
so he wants to keep all of the after-tax earnings for himself. Which of the following forms of
business ownership is Marco likely to choose?
a) limited partnership
b) limited liability company
c) C corporation
d) sole proprietorship
112. Samantha has a talent for making attractive but inexpensive jewelry and wants to set up a
small business to sell some of her creations. She asks for your advice about setting up her
firm, telling you that she wants to start her business as quickly and inexpensively as
possible. In addition, she doesn’t want to share control (or profits) with anyone else. Which
form of business ownership would you suggest for Samantha?
a) general partnership.
b) C corporation.
c) sole proprietorship.
d) limited liability company (LLC).
113. Basil Pappas spent his youth working in the restaurants of several of his close relatives.
Now, he wants to venture into his own business and has decided that he will open his own
restaurant. Basil needs more money than he can come up with on his own, so he plans to
ask his two brothers to put up some money in exchange for a share of ownership. Such an
arrangement means that the company can’t be formed as a
b) sole proprietorship.
c) limited partnership.
d) statutory close corporation.
114. A __________ is a voluntary agreement between two or more people to jointly own a
business.
a) sole proprietorship
b) partnership
c) corporation
d) limited liability partnership
115. In a _________, all partners have the right to actively participate in the management of the
firm and to share in any profits or losses incurred by the business.
b) limited liability partnership
c) limited partnership
116. Three types of partnerships are
a) sole, general, and specific.

b) general, unlimited, and general liability.
c) specific, general, and generic.
d) general, limited, and limited liability.
ANS: D DIF: LL1 REF: Pages 71-72
OBJ: 2
117. All of the following are drawbacks of general partnerships EXCEPT
a) lack of continuity.
b) unlimited liability.
c) inability to pool financial resources.
d) potential for disagreements among owners.
118. Compared to a sole proprietorship, an advantage of a general partnership is that it is
a) considered to be a permanent business organization.

b) able to take advantage of complementary skills and shared workload.
c) easier and less expensive to form.
d) able to completely avoid the problem associated with unlimited liability.
119. The general partnership avoids the problem of double taxation experienced by
_____________, because earnings of partnerships are taxed only as income of the
_______________, with no separate tax on the income of the _______________.
a) sole proprietorships; partners; business

b) sole proprietorships; business; partners
c) C corporations; partners; business
d) C corporations; business; partners
120. A well-written partnership agreement for a general partnership can help the partners deal
with all of the following issues EXCEPT how to
a) share the profits.

b) handle disagreements among partners.
c) handle the withdrawal of a partner.
d) avoid unlimited liability.
121. Limited partners
a) have limited liability for the debts of their company as long as they do not actively
participate in management.
b) risk their personal wealth in exchange for a controlling share of ownership.
c) agree to invest their money in the company for a limited time period.
d) cannot own more than 10 percent of the company’s stock.
122. Families can reduce gift and inheritance taxes and protect family property from lawsuits by
forming
a) family limited partnerships.
b) general family proprietorships.
c) limited liability corporations.
d) general family partnerships.
123. The ___________ allows all partners to participate in management while also offering them
limited liability.
a) nominal partnership
b) general partnership
c) limited liability partnership
d) limited partnership
124. Sue has a great idea for a business but has limited financial assets. She wants to retain
control over the management of the company, but she needs someone to provide additional
financing. Her friend Tom has some money to invest and likes Sue’s idea. He would like to
share in any profits, but he doesn’t have the time or interest in managing the company and is
nervous about the liability involved in running a business. A _______________ would
probably match the needs of both Sue and Tom.
b) limited partnership
c) sole proprietorship
d) foreign corporation
125. Cathy and Denise open a business as a limited liability partnership in a state that offers
partial shield protection. From Cathy’s perspective, this means that she
a) has unlimited liability for most types of debts the firm incurs, but she is protected
from any debts that result from Denise’s negligence or malpractice.
b) is protected from any debts that arise from her own negligence or business errors
but has unlimited liability for any other business debts.
c) may lose any money she initially invests in the company but has no further
liability.
d) will split responsibility for any company debts evenly with Denise, so she can
never be held responsible for more than 50 percent of any claims against their
business.
ANS: A DIF: LL3 REF: Pages 72-73
OBJ: 2
126. A ________ is a legal entity created by permission of a state or federal government.
a) limited partnership
b) sole proprietorship
c) general partnership
d) corporation
127. General Motors, ExxonMobil, General Electric, and virtually all other large companies in the
United States are organized as
a) C corporations.
b) general partnerships.
c) limited liability companies.
d) limited partnerships.
128. A _________ is a form of business ownership that is considered to be separate from its
owners, who are known as stockholders.
a) sole proprietorship
b) general partnership
c) limited partnership
d) corporation
129. In the United States, ___________ are the dominant form of business ownership in terms of
net income.
a) sole proprietorships
b) limited liability partnerships
c) corporations
d) general partnerships
130. In most states, the document incorporators must file to form a corporation is referred to as
the
a) articles of incorporation.
b) prospectus.
c) registration statement.
d) election of incorporation certificate.
131. The _________ of a corporation establish(es) the basic rules and procedures governing
how it is organized and how it conducts business.
a) articles of incorporation
b) corporate bylaws
c) prospectus
d) statement of shareholder governance
132. Types of corporations include
a) sole, general, and nonprofit.

b) general, S, statutory close, and nonprofit.
c) limited, general, nominal, and S.
d) general, limited, and limited liability.
133. A corporation must register as a _________ in every state in which it operates other than its
state of incorporation.
a) foreign corporation
b) domestic corporation
c) C corporation
d) closed corporation
134. Stockholders are _________ of a corporation. They have the right to vote on issues affecting
the operation of the business.
a) creditors
b) employees
c) buyers
d) owners
135. ___________ are organizations, such as mutual funds, insurance companies, or pension
funds, that pool contributions from a large number of investors, clients, or depositors to buy
stock and other securities.
a) C corporations
b) Institutional investors
c) Conglomerates
d) ETFs
136. An advantage of the C corporation as a form of ownership is/are
a) the limited liability of the owners.

b) the ability of owners to directly manage their company.
c) low taxes.
d) the simplified structure.
ANS: A DIF: LL1 REF: Pages 74-75
OBJ: 3
137. As an artificial person, a(n) ______________ can legally engage in almost any business
activity a natural person can, including own property, enter into binding contracts, and initiate
legal actions..
a) partnership
b) corporation
c) enterprise
138. In 1984, ___________ and __________ formed a joint venture to operate an automobile
production facility in California that is still in operation today.
a) Honda, Ford
b) Ford, Chrysler
c) Honda, Toyota
d) Toyota, General Motors
139. Sixty percent of Fortune 500 firms have filed articles of incorporation in the state of
a) California.
b) Maryland.
c) Delaware.
d) Texas.
140. Stockholders in a corporation elect the ________ to oversee the operation of the company
and ensure that their interests are protected.
a) board of proprietors
b) senior staff
c) board of directors
d) audit committee
141. A disadvantage of general corporations is that
a) their owners have unlimited liability.

b) any earnings they distribute to shareholders are subject to double taxation.
c) they have very limited ability to raise financial resources.
d) they lack permanence, since in most states corporate charters are only valid for
40 years.
142. As a form of ownership, a disadvantage of general corporations is that
a) they are unable to make use of specialized management.

b) their growth is limited because of difficulties in raising financial capital.
c) they are more expensive and complex to form than most other types of business.
d) they can only be owned by U.S. citizens, creating legal problems when they try to
expand in the global economy.
143. Advantages of a corporation include all of the following EXCEPT
a) limited liability.
b) permanence.
c) the ability to raise large amounts of financial capital.
d) less paperwork and government regulation.
144. Relative to sole proprietorships and partnerships, a disadvantage of the corporate form of
business ownership is
a) limited ability to raise financial capital.

b) more paperwork and government regulation.
c) limited life.
d) unlimited liability.
145. Benny’s Bumpers is incorporated in Ohio but also conducts business in Florida. Benny’s
Bumpers is a _______ in Ohio but is a _________ in Florida.
a) C corporation, S corporation
b) global, multinational
c) primary corporation, secondary corporation
d) domestic corporation, foreign corporation
146. Suzanne Limley was just elected to the board of directors at United Bank Corporation. As a
board member, she is expected to represent the interests of
a) senior bank management.

b) shareholders.
c) creditors.
d) customers.
147. Mike’s Motorcycles, Inc., has just incorporated the business in Delaware. John Littleton, a
partner, now becomes a
a) shareholder.
b) CEO.
c) management trainee.
d) board member.
148. You are in a group of investors that is considering taking over Sips and Chips, the cybercafe
in town. Several investors favor reorganizing the cafe by forming a C corporation. You want
to make sure these investors are aware of the possible drawbacks of this form of ownership,
so you point out that
a) this type of business lacks permanence.

b) earnings that the investors receive would be taxed both as corporate income and
as income to the investors.
c) all of the investors would be subject to unlimited liability for any debts the firm
incurs.
d) all of the items in this list would be legitimate drawbacks of forming a C
corporation.
149. Recently, several well-known large companies such as Home Depot, Inc., and Time Warner,
Inc., have been criticized for paying CEOs exorbitant salaries and bonuses even when the
corporations they lead have lost value. This is considered a failure on the part of the
__________ of these firms to protect the rights of the ___________ who elected them.
.
a) boards of directors, creditors
b) boards of directors, stockholders
c) top management, employees
d) audit committee, partners
150. ___________ are clauses in senior management contracts that can compensate executives
with millions of dollars in severance pay.
a) Indenture agreements
b) Silver spoons
c) Golden parachutes
d) Bomb shelters
151. An S corporation can have ______ shareholders with limited liability.
a) an unlimited number of
b) up to 25
c) no more than 100
d) a minimum of 100 and a maximum of 1000
152. A statutory close (or closed) corporation gives its shareholders
a) an automatic seat of the board of directors.

b) a guaranteed dividend.
c) rights to manage the company in exchange for unlimited liability.
d) limited liability and opportunities to participate in management.
153. A nonprofit corporation enjoys the benefit of
a) earnings that are exempt from state and federal taxes.

b) guaranteed dividends to shareholders.
c) exemption from filing paperwork.
d) limited liability for shareholders.
154. A key difference between S Corporations and C Corporations is that

a) the owners of C corporations have limited liability while the owners of S
corporations have unlimited liability.
b) S corporations may have no more than 100 shareholders who must all be citizens
or permanent residents of the United States, while C corporations do not have
these restrictions on ownership.
c) C corporations seek profits while S corporations operate as not-for-profit
organizations.
d) C corporations have stockholders who have the right to vote in stockholders’
meetings while S corporations have members with no voting rights.
155. Suzanne Ragos is a Canadian citizen. Three friends in the United States recently told her
about an S corporation in which they own stock. She would like to own stock in this company.
Is this possible?
a) no, because she is not a citizen of the United States.
b) yes, because anyone can own stock in an S corporation as long as they are
willing to fill out the appropriate paperwork.
c) no, because stock in an S corporation cannot be held by more than three people.
d) yes, because under the terms of NAFTA, Canadian citizens have the same rights
to own shares of stock in an S corporation as American citizens.
156. Individuals who make contributions to _______________ will receive a tax-deduction, making
it easier for these organizations to raise funds from donations.
a) S corporations, C corporations, or nonprofit corporations

b) C corporations or S corporations
c) statutory close corporations or open distant corporations
d) nonprofit corporations
ANS: D DIF: LL2 REF: page 76 OBJ: 4
157. Like a statutory close corporation, a limited liability company (LLC)
a) files articles of incorporation outlining operational and organizational levels.

b) is not required to elect a board of directors or hold annual stockholders’ meetings.
c) follows the same state laws that C corporations follow.
d) has no more than 50 shareholders.
ANS: B DIF: LL3 REF: Pages 76, 78
OBJ: 4, 6
158. Elaine and several friends want to start a business. They like the idea of limited liability.
However, they want to keep their organization simple and avoid the need to have formal
meetings. Each member of the group wants to actively participate in managing the business
and share in any profits. Which of the following forms of business ownership would best
satisfy the goals of Elaine and her friends?
b) limited partnership.
c) nonprofit corporation.
d) statutory close corporation.
159. A(n) _______ occurs when one firm buys another firm.
a) conglomeration
b) joint venture
c) merger
d) acquisition
160. In a(n) ______________, two or more companies agree to a combination of equals, creating
one new company from the two previously independent companies.
a) amalgamation
b) merger
c) corporate integration
d) industrial concentration
161. A(n) _______ occurs when two companies agree to combine operations to form a new
company.
a) limited liability corporation

c) merger
d) acquisition
162. In an acquisition, the firm being purchased is the ________ and the firm which is purchasing
the other firm is the ___________.
a) target firm; acquiring firm

b) acquiring firm; target firm
c) limited liability partnership; limited liability corporation
d) merged firm; target firm
163. A ___________ merger is the combination of firms in the same industry.
a) hostile
b) conglomerate
c) vertical
d) horizontal
164. A(n) _________ merger is the combination of two or more firms at different stages of
production of a given product or service so the firms have a buyer-seller relationship.
a) upward
b) conglomerate
c) vertical
d) horizontal
165. A(n) _________ merger is the combination of two or more firms in unrelated industries.
a) upward
b) conglomerate
c) vertical
d) horizontal
166. One reason a firm would consider a ____________ merger would be to increase size and
market power in its industry.
a) generic
b) conglomerate
c) vertical
d) horizontal
167. Firms that want to improve the integration of production activities or increase their control
over the supply of inputs would be likely to consider a __________ merger.
a) generic
b) conglomerate
c) vertical
d) horizontal
168. To reduce risk of vulnerability to downturns in single markets, corporations would consider a
_______ merger.
a) downward
b) conglomerate
c) vertical
d) horizontal
169. To increase production capacity and provide consumers with market stability, Exxon and
Mobil created ExxonMobil. This would be an example of a _______ merger.
a) conglomerate
b) horizontal
c) vertical
d) limited liability
170. In 1988, Philip Morris, the leading cigarette manufacturer in the United States, merged with
Kraft, Inc., the maker of several leading food brands, such as Miracle Whip, Velveeta, and
Maxwell House. This combination would be classified as a _________ merger.
a) horizontal
b) vertical
c) conglomerate
d) macro
171. A _________ calls its owners “members,” not shareholders, and files articles of organization
instead of articles of incorporation.
a) partnership
b) conglomerate corporation
c) limited liability partnership
d) limited liability company
172. The _________is a relatively new and increasingly popular form of business ownership that
is like a corporation in some ways and like a partnership in others.
a) joint venture
b) limited liability company
c) cooperative
173. All of the following are advantages of limited liability companies EXCEPT
a) simple management and operation.

b) uniform state laws.
c) flexible ownership.
d) limited liability.
174. Which statement is TRUE about limited liability companies (LLCs)?
a) LLCs are taxed like partnerships, and each member’s income is accounted for
with his or her personal income tax.
b) LLCs do not pay franchise taxes.
c) LLCs in their most common forms are banks, insurance companies, and nonprofit
organizations.
d) LLCs are the same entities state to state.
175. Which statement is FALSE about limited liability companies (LLCs)?
a) LLCs are taxed like partnerships, with members paying personal income taxes on
income earned.
b) Like corporations, LLCs pay franchise taxes.
c) LLCs are most commonly found in the banking and insurance industries.
d) LLCs are subject to each state’s laws governing operations, making operating in
more than one state rather complex.
176. Some states do not permit banks, insurance companies, and nonprofit organizations to form
as
a) S corporations.
b) C corporations.
c) limited liability partnerships.
d) limited liability companies.
177. Tim, Bill, and Mel want to start a rehabbing business. All of them want to take an active role
in managing their company while also protecting their personal assets from unlimited liability.
They are likely to find that forming a ______________ will meet their needs.
a) nonprofit corporation
c) limited liability company
d) general partnership
ANS: C DIF: LL3 REF: Pages 77-78
OBJ: 6
178. Compared to C corporations, an advantage of an LLC is that
a) C corporations must file paperwork with the state when they are formed, while no
paperwork needs to be filed to form an LLC.
b) C corporations are limited to no more than 100 owners, while LLCs can have an
unlimited number of owners.
c) earnings of C corporations that are distributed to owners are subject to double
taxation, but the earnings of LLCs pass through the company and are taxed only
as personal income.
d) LLCs are classified as domestic firms in all of the states where they operate, while
corporations are classified as “foreign” business entities in states other than the
one in which they are incorporated.
179. _________ is the contractual relationship in which an established firm supplies another
business with unique resources in exchange for payment and other considerations.
a) Franchising
b) Formalizing
c) Formatting
d) Articles of incorporation
180. The _________ is the business entity in a franchise relationship that allows others to operate
a business using resources it supplies in exchange for money and other considerations.
a) general corporation
b) partner
c) franchisor
d) franchisee
181. The party in a franchise relationship that pays for the right to use resources supplied by
another business entity is known as the
a) general corporation.
b) limited partner.
c) franchisor.
d) franchisee.
182. Franchisees normally pay a ________ to the franchisor. The royalty is often calculated as a
percentage of monthly sales.
a) gratuity
b) dividend
c) royalty
d) commission
183. The most common type of franchise agreement is the
a) business format franchise agreement.

b) general partnership agreement.
c) limited liability corporate agreement.
d) operation agreement.
184. Which of the following statements about recent franchising trends is most accurate?
a) Women own almost half of all franchises.

b) Over 40 percent of all franchisees are now members of minorities.
c) Many franchisors are finding that opportunities are greater in foreign countries
than in the United States.
d) All of the statements in this list are true.
ANS: C DIF: LL2 REF: Pages 78-79
OBJ: 7
185. Martha Matilda Harper is credited with establishing the first
a) closed corporation.
b) C corporation.
c) general partnership agreement.
d) business format franchise.
186. For the franchisee, the advantages of a franchise arrangement often include
a) less risk and easier access to funding.

b) unlimited and unrestricted opportunities for growth.
c) low cost of formation.
d) freedom and flexibility in management.
187. From the perspective of the franchisee, the disadvantages of entering into a franchise
relationship could include
a) high costs.
b) lack of control.
c) the possibility of a negative halo effect.
d) all of the items in this list.
188. Nonprofit franchise organizations are creating opportunities for nonprofits seeking creative
fundraising options. From the franchisor’s perspective, the advantage of having nonprofit
organizations become franchisees is that it
a) eliminates all taxes on the franchisor’s business operations.

b) provides a way to be socially responsible and builds goodwill in a community.
c) reduces royalty payments.
d) avoids the need for a complex franchise agreement.
189. In a typical business format franchise, the franchisor
a) pays royalties and fees to the franchisees.

b) provides the franchisees with management training and support.
c) allows franchisees to operate loosely, as long as they are profitable.
d) owns all of the franchise outlets but leases them to the franchisees.
190. Successful franchisors are particularly vigilant in avoiding the ______________, a situation
where the behavior of an incompetent or irresponsible franchisee harms the reputation of the
franchisor and other franchisees.
a) pie-in-the-sky effect
b) saturated effect
c) negative halo effect
d) restructuring effect
ESSAY
191. What is a sole proprietorship? Identify and explain two advantages and two disadvantages of
sole proprietorships.
ANS:
A sole proprietorship is a business that is owned, and usually managed, by a single
individual. From a legal perspective, the firm is simply an extension of its owner.
The advantages and disadvantages identified by students should come from the following
lists:
Sole proprietorships offer several advantages:
⚫ It is the simplest and least expensive form of ownership to establish.

⚫ It offers the owner the greatest degree of control when it comes to running the business.
The sole proprietor doesn’t have to seek the approval of other owners.
⚫ All of the profits go to the individual owner.
⚫ Many individuals derive a great deal of pride and personal satisfaction from owning and
operating their own business.

⚫ There is no separate tax on the earnings of the business, thus avoiding the problem of
double taxation, one of the major disadvantages of corporations.
But sole proprietorships also have some significant disadvantages:
⚫ Because the firm is simply an extension of the owner, a sole proprietor has unlimited liability
for the debts of the business.
⚫ Sole proprietorships can also face difficulties in raising money to finance growth from banks
and other financial institutions. Suppliers often won’t provide supplies on credit.
⚫ The sole owner often must work long hours and assume heavy responsibilities.
⚫ Sole proprietorships are at a disadvantage when it comes to attracting and keeping highly
qualified, experienced employees; sole proprietors can’t afford to offer them high salaries and
perks.
⚫ Sole proprietorships have a limited life. The death or retirement of the owner means that,
from a legal perspective, the business ceases to exist.
DIF: LL3 OBJ: 1
192. Sole proprietorships are the most common form of business ownership. What advantages
explain the popularity of the sole proprietorship?
ANS:
Ease of formation: Compared to the other forms of ownership, the paperwork and costs
involved in forming a sole proprietorship are minimal. No special forms must be filed, and no
special fees must be paid.
Retention of control: As the only owner of a sole proprietorship, you’re in control. You have
the ability to manage your business the way you want.
Pride of ownership: One of the main reasons many people prefer a sole proprietorship is
the feeling of pride and the personal satisfaction they gain from owning and running their own
business.
Retention of profits: If your business is successful all the profits go to you, minus your
personal taxes, of course.
Possible tax advantages: No taxes are levied directly on the earnings of sole
proprietorships as a business. Instead, the earnings are taxed only as income of the
proprietor. This avoids the undesirable possibility of double taxation of earnings that is a
drawback of the corporate form of ownership.
DIF: LL3 OBJ: 1
193. Identify and discuss the drawbacks of operating a business as a sole proprietorship.
ANS:
Limited financial resources: Raising money to finance growth can be tough for sole
proprietors. Banks and other financial institutions are often reluctant to lend them money, and
suppliers may not provide supplies on credit. This leaves sole proprietors dependent on their
own wealth plus money that their firms generate.
Unlimited liability: Since the law views a sole proprietorship as an extension of its owner,
the debts of the firm become the personal debts of the owner. If someone sues your business
and wins, the court could seize your personal possessions, even those that have nothing to
do with your business, and sell them to pay the damages.
Limited ability to attract and maintain talented employees: Most sole proprietors are
unable to pay the high salaries and offer the perks that highly qualified, experienced
employees get when they work for big, well-established companies.
Heavy workload and responsibilities: While being your own boss can be very rewarding, it
can also mean very long hours and a lot of stress. Sole proprietors, as the ultimate authority
in their business, often must perform tasks or make decisions in areas where they lack
expertise.
Lack of permanence: Because a sole proprietorship is just an extension of the owner, it

lacks permanence. If the owner dies, retires, or must withdraw from the business for some
other reason, the company legally ceases to exist. Even if the company continues to operate
under new ownership, in the eyes of the law it would be a different firm.
DIF: LL3 OBJ: 1
194. What is a partnership? Describe the basic features of the three major types of partnerships:
general partnerships, limited partnerships, and limited liability partnerships.
ANS:
A partnership is a voluntary arrangement under which two or more people act as co-owners
of a business for profit. There are three major types of partnerships.
In a general partnership, each partner takes an active role in management, shares in the
profits, and has unlimited liability for the firm’s debts.
A limited partnership consists of at least one general partner, who participates actively in
managing the company and assumes unlimited liability, and at least one limited partner, who
gives up the right to participate in management in exchange for limited liability. Both types of
partners contribute financially to the company and share in its profits.
The limited liability partnership is a relatively new form of partnership that allows all
partners to participate in management while retaining some degree of limited liability. The
amount of liability protection offered by LLPs varies among states.
DIF: LL3 OBJ: 2
195. Identify and describe the advantages of general partnerships.
ANS:
Ability to pool financial resources: With more people investing in the company, a
partnership is likely to have a stronger financial base than a sole proprietorship.
Ability to share responsibilities and capitalize on complementary skills: Partners can

share the burden of running the business, which can ease the workload. They can also
benefit from complementary skills and interests; the partners can split up the tasks so they
use their skills to best advantage.
Ease of formation: Partnerships are relatively easy to set up. All that’s needed is an
agreement among two or more people to operate a business as co-owners.
Possible tax advantages: Similar to a sole proprietorship, the earnings of a partnership

“pass through” the business, untouched by the Internal Revenue Service (IRS), and are
taxed only as the partners’ personal income. As with a sole proprietorship, this avoids the
potential for double taxation endemic to corporations.
DIF: LL3 OBJ: 2
196. Identify and describe the disadvantages of general partnerships.
ANS:
Unlimited liability: All general partners have unlimited liability for the debts and obligations
of their business. If the business can’t pay its debts, each partner must pay from his or her
personal resources. And as a general partner you’re not only liable for your own mistakes but
also for the mistakes of your partners. In fact, if you have more personal wealth than the
other partners, you could lose more than they do, even if they were at fault!
Potential for disagreements: If general partners can’t agree on how to run the business,
the conflict can complicate and delay decision-making. Although a well-drafted partnership
agreement usually specifies how disputes will be resolved, disagreements among partners
can undermine the communication and cooperation needed to manage the business.
Difficulty in withdrawing from a partnership: Most partnership agreements specify the

terms under which a partner may withdraw. If a withdrawing partner violates those terms, the
other partners can sue him or her for breach of contract.
Lack of continuity: If a current partner leaves the business or a new partner joins, the
relationship among the participants will clearly change, potentially ending the partnership.
But most agreements allow the partnership to continue under such circumstances, as long as
the other partners unanimously agree to the change.
DIF: LL3 OBJ: 2
197. Explain the similarities and differences between limited partnerships and limited liability
partnerships.
ANS:
A limited partnership is a business arrangement that includes at least one general partner
and at least one limited partner. Both types of partners contribute financially to the company
and share in its profits. But in other respects, they play different roles:
General partners may contribute money, property, and personal services to the partnership.
They assume full responsibility for managing the partnership, and they have unlimited
personal liability for any of its debts, just like the partners in a general partnership.
Limited partners may contribute money and property to the company, but they cannot actively
participate in its management. Limited partners have limited liability; they are liable for the
debts of the firm only to the extent of their actual investment. As long as they do not actively
participate in management, their personal wealth is not at risk.
The limited liability partnership (LLP) is the newest form of partnership. It’s similar to a
limited partnership in some ways, but it has the advantage of allowing all partners to take an
active role in management while also offering all partners some form of limited liability. In
other words, there’s no need to distinguish between limited and general partners in an LLP.
DIF: LL3 OBJ: 2
198. Explain why general corporations have become the dominant form of business ownership.
ANS:
General corporations (sometimes called C corporations) are businesses that are considered
legally separate and distinct from their owners, who are called stockholders. There are
several reasons why general corporations have become the dominant form of business
ownership. First of all, this form of ownership offers limited liability to all owners; stockholders
are not personally liable for their company’s debts. Secondly, under articles of incorporation,
corporations have unlimited life; general corporations are unaffected by the death or
withdrawal of an owner. Thirdly, there is the ease of transfer of ownership; stockholder of
publicly traded corporations can withdraw from ownership simply by selling their stock.
Fourth, corporations have the ability to raise financial capital through issuing shares of stocks
and bonds, giving them an advantage when it comes to financing growth. And last of all, with
their greater financial resources and the opportunities for career advancement they offer,
large corporations often find it easier to hire highly qualified, specialized professional
managers.
DIF: LL3 OBJ: 3
199. Describe how a corporation is formed. Why do so many large firms choose to incorporate in
Delaware?
ANS:
Forming a corporation is more complex than forming a sole proprietorship or partnership. It
requires filing a special form, known in most states as the articles of incorporation, with a
specific state agency. In addition, incorporators must pay filing fees to the state and must
establish corporate bylaws, which are the basic rules and procedures governing the way the
corporation will operate—and file them with the state as well.
When it comes to the specifics of incorporating, every state has its own forms and
requirements. Some states—with Delaware the most prominent among them—are known for
their simple forms, inexpensive filing fees, low corporate tax rates, and “corporation friendly”
laws and court systems. Not surprisingly, many large companies choose to incorporate in
states with these favorable requirements, even if they intend to do the majority of their
business in other states. Over 60 percent of the corporations listed on the Fortune 500 are
incorporated in Delaware.
DIF: LL3 OBJ: 3
200. List and define the advantages and disadvantages of forming a general corporation.
ANS:
Advantages
Limited liability: Because a corporation is legally separate from its owners, stockholders
are not personally liable for the debts of their company. If a corporation goes bankrupt, the
stockholders might find that their stock is worthless, but their other personal assets are
protected.
Permanence: Unless the articles of incorporation specify a limited duration, corporations
can continue operating as long as they remain financially viable and the majority of
stockholders want the business to continue. Unlike a sole proprietorship or partnership, a
general corporation is unaffected by the death or withdrawal of an owner.
Ease of transfer of ownership: It’s easy for stockholders of publicly traded general
corporations to withdraw from ownership—they simply sell their shares of stock.
Ability to raise large amounts of financial capital: Corporations can raise large amounts
of financial capital by issuing shares of stock or by selling long term IOUs called corporate
bonds. The ability to raise money by issuing these securities gives corporations a major
financial advantage over most other forms of ownership.
Ability to make use of specialized management: Large corporations often find it easier to
hire highly qualified professional managers than proprietorships and partnerships do. Major
corporations can typically offer attractive salaries and benefits, and their permanence and
potential for growth offer managers opportunities for career advancement.
Disadvantages
Expense and complexity of formation and operation: Establishing a corporation is more

complex and expensive than forming sole proprietorships and partnerships. Corporations are
also subject to more formal operating requirements. For example, they are required to hold
regular board meetings and keep accurate minutes.
Double taxation of earnings and additional taxes: The IRS considers a general
corporation to be a separate legal entity, and taxes its earnings accordingly. Then, any
dividends (earnings the corporation distributes to stockholders) are taxed again as the
personal income of the stockholders. In addition to income taxes, states also impose an
annual franchise tax on corporations.
More paperwork and more regulation: Corporations are more closely regulated than other
forms of business. Large, publicly traded corporations are required to send annual
statements to all shareholders and to file detailed quarterly and annual reports with the
Securities and Exchange Commission (SEC). Anyone can look at the forms filed with the
SEC, making it difficult to keep financial information secret from competitors.
Possible conflicts of interest: The corporate officers appointed by the board are supposed
to further the interests of stockholders. But some top executives pursue policies that further
their own interests (such as prestige and power, job security, and attractive financial perks) at
the expense of the stockholders. The board of directors is supposed to look out for the
interests of stockholders, but several boards in recent years have been criticized for failure to
exercise proper oversight.
DIF: LL3 OBJ: 3
201. Describe the advantages and limitations of S corporations, statutory close (or closed)
corporations, and nonprofit (or not-for-profit) corporations.
ANS:
Type Key Advantage Limitations
S Corporation · IRS does not tax earnings · Can have no more than
of S corporations 100 stockholders.
separately. Earnings “pass
through” the company and
· With only a few rare
are taxed only as income exceptions, each
to stockholders, thus stockholder must be a
avoiding the problem of U.S. citizen or
double taxation associated permanent resident of
with C corporations. the United States. (No
ownership by foreigners
· Stockholders have limited or other corporations.)
liability.
Statutory Close (or · Can operate under simpler · Number of stockholders
Closed) Corporation arrangements than is limited. (The number
conventional corporations. varies among states but
For example, doesn’t have is usually no more than
to elect a board of 50.)
directors or hold an annual
stockholders’ meeting.
· Stockholders normally
can’t sell their shares to
· All owners can actively the public without first
participate in management offering the shares to
while still having limited existing owners.
liability.
· Not all states allow
formation of this type of
corporation.
Nonprofit (or not-for- · Earnings are exempt from ·· Has members (who may
profit) Corporation federal and state income pay dues) but cannot
taxes. have stockholders.
· Members and directors have · Cannot distribute
limited liability. dividends to members.
· Cannot contribute funds to
a political campaign.
· Individuals who contribute · Must keep accurate
money or property to the records and file
nonprofit can take a tax paperwork to document
deduction, making it easier tax-exempt status.
for these organizations to
raise funds from donations.
DIF: LL3 OBJ: 4
202. How does a merger differ from an acquisition. What are the three basic types of mergers, and
how do they differ? Identify a reason why firms might pursue each type of merger.
ANS:
An acquisition occurs when one corporation buys controlling interest in another firm. The
firm being acquired ceases to exist as an independent entity, while the acquiring firm
continues to operate. A merger occurs when two formerly independent firms agree to
combine and form a new business entity.
There are three basic types of mergers: horizontal, vertical, and conglomerate. A horizontal
merger is a combination of firms in the same industry. This type of merger enables the firm
to achieve more power and control within a given market. It may also allow the new firm to be
more efficient through the elimination of duplicate facilities and personnel. A vertical merger
is between firms that are at different stages in the production process for a good or service.
This type of merger may allow tighter integration of production and increased control over the
supply of resources and inputs. A conglomerate merger is between firms that are in
unrelated industries. A key reason cited for this type of merger is the desire to reduce risk by
making the firm less vulnerable to adverse conditions in any single market.
DIF: LL3 OBJ: 5
203. Discuss why limited liability companies have become increasingly popular.
ANS:
The limited liability company (LLC) is a relatively new form of business ownership that
combines the limited liability of corporations with the tax pass-through advantage of
partnerships, eliminating the problem of double taxation (i.e., the situation where profits are
taxed both as the company’s earnings and the owners’ personal income). In addition, LLCs
are attractive because managing and operating this type of company is less complicated than
managing a corporation: they are not required to hold regular board meetings, and they are
subject to less paperwork and fewer reporting requirements. Finally, LLCs have fewer
ownership restrictions: they can have any number of owners, and those owners can include
foreigners and other corporations.
DIF: LL3 OBJ: 6
204. List and define the limitations and disadvantages of a limited liability company (LLC).
ANS:
More complex to form than partnerships: LLCs take more time and effort to form than
sole proprietorships and general partnerships. For example, the formation of an LLC requires
filing articles of organization with the appropriate state agency and paying filing fees.
Annual franchise tax: Like corporations, LLCs typically must pay an annual franchise tax to
the state where they’re organized.
Foreign status in other states: Also like corporations, LLCs must file as “foreign”
companies when they do business in states other than where they were organized. This
results in more paperwork and fees.
Limits on types of firms that can form LLCs: Some states do not permit certain types of
businesses—such as banks, insurance companies, and nonprofit organizations—to operate
as LLCs.
Differences in state laws: There are significant differences in the state laws governing
LLCs. This can make operating an LLC in more than one state a complex endeavor.
DIF: LL3 OBJ: 6
205. What is franchising? What is the relationship between a franchisor and franchisee? Describe
at least one advantage and one disadvantage of franchising for the franchisor, and at least
one advantage and disadvantage for the franchisee.
ANS:
Franchising is an ongoing contractual relationship in which an established firm (the
franchisor) allows another business (the franchisee) to use its unique resources in exchange
for payments and other considerations. Both the franchisor and the franchisee benefit from
the arrangement.
Franchisors
Students can choose one of the two following advantages for the franchisor:
· Being a franchisor is an opportunity for a business to gain revenue without having to
invest its own money in new outlets.
· Franchisors often find that franchisees—as profit-oriented owners—are more highly
motivated than salaried managers to do whatever it takes to maximize the success of
their outlets.
Students can mention the following disadvantage to being a franchisor that is mentioned in
the text: the disadvantage for the franchisor is that they often find that dealing with a large
number of semi-independent franchisees can be complex and challenging.
Franchisees
Students can choose one of the following four advantages to franchisees of participating in a
franchise:
· Operating a franchise can be considerably less risky than starting a business from
scratch. That’s because franchises offer access to a proven business system and
product.
· Franchisees receive training and support from the franchisors.
· Franchisees often have an easier time attracting customers because of the instant
brand name recognition.
· Franchisees often have an easier time obtaining loans than a new, unproven
business would because they are a part of an established franchise.
Students can choose one of the following six disadvantages to franchisees of participating in
a franchise:
· Participating in a franchise can be costly: franchisees usually pay an initial franchise

fee as well as ongoing royalties; in addition, they can be assessed additional fees to
cover costs such as national advertising campaigns.
· Franchisees have limited control over the way they do business; franchise
agreements usually spell out procedures and methods that need to be followed to the
letter.
· Franchisees can suffer from a negative halo effect when the irresponsible or
incompetent behavior of a few franchisees creates a negative perception of the entire
franchise and all its outlets.
· Franchise agreements can make growth challenging; they usually limit the territory
and require franchisor approval before a franchisee can expand into other areas.
· Franchisees cannot sell their franchises to other investors without prior approval from
the franchisor.
· Not all franchisors live up to their promises; for example, they can provide poor quality
training and support.
DIF: LL3 OBJ: 7

BUSN 2nd Edition Kelly Test Bank 1

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

BUSN 2nd Edition Kelly Test Bank 1

Uploaded by

Copyright:

Available Formats

BUSN 2nd Edition Kelly

Full download at link:

Test bank: https://testbankpack.com/p/test-bank-for-busn-2nd-

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

Chapter 6 Business Formation

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

ANS: T DIF: LL1 REF: Page 69 OBJ: 1

2. The sole proprietorship is the most common form of business ownership.

ANS: T DIF: LL1 REF: Page 69 OBJ: 1

3. The sole proprietorship is the most common form of business ownership.

ANS: T DIF: LL1 REF: Page 69 OBJ: 1

4. A disadvantage of a sole proprietorship is that it is relatively expensive and complex to form.

ANS: F DIF: LL1 REF: Page 70 OBJ: 1

5. There are attractive advantages and no significant drawbacks to starting a sole

ANS: F DIF: LL1 REF: Page 70 OBJ: 1

ANS: F DIF: LL1 REF: Page 70 OBJ: 1

ANS: T DIF: LL1 REF: Page 70 OBJ: 1

ANS: T DIF: LL1 REF: Page 70 OBJ: 1

ANS: T DIF: LL2 REF: Page 69 OBJ: 1

ANS: F DIF: LL2 REF: Page 70 OBJ: 1

ANS: F DIF: LL2 REF: Page 70 OBJ: 1

ANS: F DIF: LL2 REF: Page 70 OBJ: 1

ANS: F DIF: LL2 REF: Page 70 OBJ: 1

ANS: T DIF: LL3 REF: Page 70 OBJ: 1

ANS: F DIF: LL3 REF: Page 70 OBJ: 1

ANS: F DIF: LL3 REF: Page 70 OBJ: 1

ANS: T DIF: LL1 REF: Page 71 OBJ: 2

ANS: T DIF: LL1 REF: Page 72 OBJ: 2

ANS: T DIF: LL1 REF: Page 72 OBJ: 2

ANS: F DIF: LL1 REF: Page 72 OBJ: 2

ANS: T DIF: LL1 REF: Page 72 OBJ: 2

ANS: F DIF: LL2 REF: Page 71 OBJ: 2

ANS: F DIF: LL2 REF: Page 71 OBJ: 2

ANS: F DIF: LL2 REF: Page 72 OBJ: 2

ANS: F DIF: LL2 REF: Page 72 OBJ: 2

ANS: F DIF: LL2 REF: Page 72 OBJ: 2

ANS: T DIF: LL2 REF: Page 72 OBJ: 2

ANS: F DIF: LL2 REF: Pages 72-73

ANS: T DIF: LL3 REF: Page 72 OBJ: 2

ANS: T DIF: LL1 REF: Page 73 OBJ: 3

ANS: T DIF: LL1 REF: Page 73 OBJ: 3

ANS: T DIF: LL1 REF: Page 73 OBJ: 3

ANS: T DIF: LL1 REF: 73 OBJ: 3

ANS: F DIF: LL1 REF: Page 73 OBJ: 3

ANS: T DIF: LL1 REF: Page 74 OBJ: 3

36. Owners of corporations are known as stockholders.

ANS: F DIF: LL1 REF: Page 74 OBJ: 3

ANS: T DIF: LL1 REF: Page 74 OBJ: 3

ANS: T DIF: LL1 REF: Page 75 OBJ: 3

ANS: F DIF: LL1 REF: Page 75 OBJ: 3

ANS: F DIF: LL2 REF: Page 74 OBJ: 3

ANS: F DIF: LL2 REF: Page 74 OBJ: 3

ANS: T DIF: LL2 REF: Page 74 OBJ: 3

ANS: T DIF: LL2 REF: Page 74 OBJ: 3

ANS: F DIF: LL3 REF: Page 75 OBJ: 3

ANS: T DIF: LL1 REF: Page 76 OBJ: 4

ANS: T DIF: LL1 REF: Page 76 OBJ: 4

ANS: T DIF: LL1 REF: Page 76 OBJ: 4

ANS: F DIF: LL1 REF: page 76 OBJ: 4

50. S corporations cannot have more than 100 stockholders.

ANS: T DIF: LL1 REF: Page 76 OBJ: 4

ANS: F DIF: LL1 REF: Page 76 OBJ: 4

52. Unlike C corporations, members of S Corporations have unlimited liability.

ANS: F DIF: LL1 REF: Page 76 OBJ: 4