Contemporary Business 16th Edition Boone Test Bank 1

Contemporary Business 16th Edition
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Chapter 5—Forms of Business Ownership and Organization
MATCHING
Complete the following using the terms listed.

a. sole proprietorship
b. small business
c. corporation
d. merger
e. acquisition
f. horizontal merger
g. conglomerate merger
h. cooperative
i. vertical merger
j. business incubators
k. business plan
l. alien corporation
m. preferred stock
n. franchising
1. A(n) _____ joins firms in the same industry that wish to diversify, increase their customer base, cut costs,
or offer expanded product lines.
2. The form of business ownership that is least subject to legal red tape is _____.
3. A(n) _____ occurs when one firm purchases the property and assumes the obligations of another firm.
4. A(n) _____ combines firms operating at different levels in the production and marketing process.
5. A(n) _____ is a type of business ownership formed in one country but that operates in another country.
6. During a(n) _____, two or more firms combine to form one company.
7. The form of business ownership that establishes the firm as a separate legal entity is the _____.
8. _____ is a contractual agreement that specifies the methods by which a dealer can produce and market a
supplier’s good or service.
9. A(n) _____ is independently owned and operated and is responsible for more than half of the nation’s
gross domestic product.
10. A(n) _____ business consists of owners who join forces to collectively operate all or part of the functions
in their industry.
11. A merger of firms in unrelated industries is called a(n) _____.
12. Small start-up ventures looking for low-cost shared facilities can utilize _____, offered by local
community agencies.
13. Owners of _____ have limited voting rights, but are entitled to the earliest dividends.
14. Having a(n) _____ improves the chances of success for a new business by providing an orderly statement
of a company’s goals.
1. ANS: f DIF: MEDIUM LO: 5.10 Section: Explain what happens when
businesses join forces
AACSB: Analytical thinking BT: K
2. ANS: a DIF: MEDIUM LO: 5.7 Section: Outline the forms of private
business ownership
3. ANS: e DIF: MEDIUM LO: 5.10 Section: Explain what happens when
4. ANS: i DIF: MEDIUM LO: 5.10 Section: Explain what happens when
5. ANS: l DIF: MEDIUM LO: 5.9 Section: Discuss organizing a
corporation
6. ANS: d DIF: MEDIUM LO: 5.10 Section: Explain what happens when
7. ANS: c DIF: MEDIUM LO: 5.7 Section: Outline the forms of private
business ownership
8. ANS: n DIF: MEDIUM LO: 5.6 Section: Explain franchising
9. ANS: b DIF: MEDIUM LO: 5.1 Section: Discuss why most businesses
are small businesses
10. ANS: h DIF: MEDIUM LO: 5.8 Section: Describe public and collective
ownership of business
11. ANS: g DIF: MEDIUM LO: 5.10 Section: Explain what happens when
12. ANS: j DIF: MEDIUM LO: 5.5 Section: Identify the available assistance
for small businesses.
13. ANS: m DIF: MEDIUM LO: 5.9 Section: Discuss organizing a
corporation
14. ANS: k DIF: MEDIUM LO: 5.4 Section: Describe the features of a
successful business plan
ESSAY
15. Describe how to identify a small business from a large one.
ANS:
The Small Business Administration (SBA), the federal agency most directly involved with this sector of
the economy, defines a small business as an “independent business having fewer than 500 employees.”
However, those bidding for government contracts or applying for government assistance may vary in size
according to industry. For example, small manufacturers fall in the 500-worker range, whereas wholesalers
must employ fewer than 100. Retailers may generate up to $7 million in annual sales and still be
considered small businesses, while farms or other agricultural businesses are designated small if they
generate less than $750,000 annually.4
DIF: MEDIUM LO: 5.1 Section: Discuss why most businesses are small businesses
16. Why are small businesses especially important to women and minorities?
ANS:
Women, like men, have a variety of reasons for starting their own companies. Many women feel they can
achieve more as small-business owners and can balance family and work more easily if they own their own
fi rms. Minority business owners can receive special assistance from programs such as the SBA’s Mentor-
Protégé program.
DIF: MEDIUM LO: 5.5 Section: Identify the available assistance for small businesses
AACSB: Diversity BT: K
17. Describe how small businesses help create new jobs.
ANS:
Small businesses make tremendous contributions to the U.S. economy and to society as a whole. One
impressive contribution is the number of new jobs created each year by small businesses. While it varies
from year to year, on average two of every three new jobs are created by companies with fewer than 500
employees. A significant share of these jobs is created by the smallest companies, those with four or fewer
employees. Several provisions of the recent Small Business Jobs Act may help give a further boost to these
job numbers by raising the dollar amount of small business loans available to companies.14
DIF: MEDIUM LO: 5.2 Section: Determine the contributions of small businesses to
the economy
AACSB: Analytical thinking BT: C
18. Explain how small businesses create new industries.
ANS:
New industries are sometimes created when small businesses adapt to provide needed services to a larger
corporate community. In addition, new industries are created when small businesses adapt to shifts in
consumer interests and preferences. New industries may also be created when the business world and
consumers recognize a need for change.
DIF: MEDIUM LO: 5.2 Section: Determine the contributions of small businesses to
the economy
19. Describe three primary reasons why a small business might fail.
ANS:
Small businesses might fail due to management shortcomings, inadequate financing, and difficulty dealing
with government regulations. Business founders often possess great strengths in specific areas, but they
may not be adept in areas such as accounting and order fulfillment. Inadequate financing is another leading
cause of small business failure, particularly uneven cash flows. Even home-based businesses have to
accommodate start-up expenses. Finally, small businesses can drown in paperwork and regulation red tape.
While a large firm can hire specialists in a particular area, small business owners have to deal with limited
staffs and budgets.
DIF: MEDIUM LO: 5.3 Section: Discuss why small businesses fail
20. List the elements contained in a business plan.
ANS:
A typical business plan contains the following elements: (1) an executive summary answering the who,
what, why, where, when, and how questions for the business in brief; (2) an introduction stating the
concept, purpose, and objectives of the proposed business, along with an overview of the industry; (3)
separate financial and marketing sections that describe the firm’s target market and marketing
plan as well as detailed financial forecasts of the need for funds; and (4) resumes of the principals.
DIF: HARD LO: 5.4 Section: Describe the features of a successful business plan
21. Describe the types of loans the Small Business Administration (SBA) offers to small businesses.
ANS:
Contrary to popular belief, the SBA seldom provides direct business loans. Nor does it provide outright
grants to start or expand small businesses. Instead, the SBA guarantees small-business loans made by
private lenders, including banks and other institutions. The SBA also guarantees microloans of up to
$35,000 to start-ups and other very small firms. The average loan is $13,000, with a maximum term of six
years.35 Microloans may be used to buy equipment or operate a business but not to buy real estate or pay
off other loans. These loans are available from nonprofit organizations located in most states. Other
sources of microloans include the federal Economic Development Administration, some state
governments, and certain private lenders, such as credit unions and community development groups. The
most frequent suppliers of credit to small firms are banks. Small-business loans are also available through
SBA-licensed organizations called Small Business Investment Companies (SBICs), which are run by
experienced venture capitalists. SBICs use their own capital, supplemented with government loans, to
invest in small businesses. Like banks, SBICs are profit-making enterprises, but they are likely to be more
flexible than banks in their lending decisions. Large companies that used SBIC financing when they were
small start-ups include Apple, Federal Express, and Staples.
DIF: HARD LO: 5.5 Section: Identify the available assistance for small businesses
22. What is a business incubator?
ANS:
In recent years, local community agencies interested in encouraging business development have
implemented a concept called a business incubator to provide low-cost shared business facilities to small
start-up ventures.
DIF: MEDIUM LO: 5.5 Section: Identify the available assistance for small businesses
23. Provide an example of how innovation drives small business.
ANS:
Responses will vary but might include social networking, security, and green energy industries.
DIF: EASY LO: 5.2 Section: Determine the contributions of small businesses to
the economy
24. Describe the complexity of franchise agreements.
ANS:
Franchise agreements can be complex. They involve an initial purchase fee plus agreed-on start-up costs.
Because the franchisee is representing the franchisor’s brand, the franchisor usually stipulates the purchase
of certain ingredients or equipment, pricing, and marketing efforts. The total start-up cost for a Subway
franchise may be as low as $78,600.46 In contrast, McDonald’s is one of the more expensive franchises—
total start-up costs can run more than $1 million. For this reason, businesspeople interested in purchasing a
more expensive franchise often group together.
DIF: MEDIUM LO: 5.6 Section: Explain franchising

25. Compare and contrast the three forms of business ownership.
ANS:
The three forms of business ownership are sole proprietorships, partnerships, and corporations. Sole
proprietorships are the most common form of business ownership, accounting for more than
70 percent of all firms in the United States.. A sole proprietorship offers the advantage of being able to
make changes and decisions quickly. The major disadvantage is that the sole proprietor is totally
responsible for all debts. A partnership spreads out the responsibilities and allows the business to grow.
However, like the sole proprietor, each partner is totally financially responsible for his or her actions, as
well as those of the partners. A corporation limits liability and offers expanded financial capacity, but deals
with double taxation.
DIF: HARD LO: 5.7 Section: Outline the forms of private business ownership
26. Describe the steps required when incorporating a business. Regarding incorporation, what might make a
state “business-friendly”?
ANS:
Creating a corporation involves the following steps: (1) deciding where to incorporate; (2) drawing up a
corporate charter; and (3) preparing a set of bylaws. All states have laws regarding what elements the
corporate charter and bylaws must contain. “Business-friendly” states provide a favorable legal climate and
speed and simplicity of the incorporation process.
DIF: MEDIUM LO: 5.9 Section: Discuss organizing a corporation.

27. Define the categories of corporations.

ANS:
Corporations fall into three categories: domestic, foreign, and alien. A firm is considered a domestic
corporation in the state where it is incorporated. When a company does business in states other than the
one where it has filed incorporation papers, it is registered as a foreign corporation in each of those states.
A firm incorporated in one nation that operates in another is known as an alien corporation where it
operates. Many firms—particularly large corporations with operations scattered around the world—may
operate under all three of these designations.
DIF: MEDIUM LO: 5.9 Section: Discuss organizing a corporation

28. Compare mergers and acquisitions.
ANS:
The terms merger and acquisition are often used interchangeably, but their meanings are different. In a
merger, two or more firms combine to form one company. In an acquisition, one firm purchases the other.
This means that not only does the buyer acquire the firm’s property and assets, it also takes on any debt
obligations. Acquisitions also occur when one firm buys a division or subsidiary from another firm.
DIF: MEDIUM LO: 5.10 Section: Explain what happens when businesses join forces
29. Discuss two alternatives to private ownership and give an example of each.
ANS:
Public ownership and cooperatives are alternatives to private ownership. Public ownership refers to
organizations owned by municipal, state, or federal governments. Examples include a local government
owning a parking structure and the federal government owning and operating Amtrak. Cooperatives are
organizations whose owners collectively operate all or part of the industry. Cooperatives may be organized
by producers or consumers. Cabot Creamery is a cooperative of 1,200 small dairy farms spread throughout
New England and upstate New York. Cabot is owned and operated by its members—farmers and their
families. In addition, Cabot works with other cooperatives around the country to produce and distribute
high-quality cheese, butter, and other dairy products.
DIF: MEDIUM LO: 5.8 Section: Describe public and collective ownership of business
MULTIPLE CHOICE
30. The majority of all U.S. firms employ:

a. more than 5,000 employees.
b. 1,000 to 3,000 employees.
c. 3,000 to 5,000 employees.
d. 500 or fewer employees.
.
ANS: d DIF: EASY LO: 5.1 Section: Discuss why most businesses
31. Small-business owners want to determine whether their companies meet the standards for small-business
designation because:
a. they do not have to pay taxes on their profits.
b. government agencies offer benefits designed to help small businesses compete with larger
firms.
c. incorporation is easier for them.
d. banks are more likely to grant them loans.
ANS: b DIF: MEDIUM LO: 5.1 Section: Discuss why most businesses
32. Which government agency establishes standards for small businesses?

a. Food and Drug Administration
b. Securities and Exchange Commission
c. Small Business Administration
d. Small Business Investment Company
ANS: c DIF: EASY LO: 5.1 Section: Discuss why most businesses
33. Traditionally, small businesses tended to be concentrated in the _____ industry.

a. manufacturing
b. retailing
c. wholesaling
d. importing/exporting
ANS: b DIF: EASY LO: 5.1 Section: Discuss why most businesses
34. Of the following industries, which is most likely to be owned by a small business owner?
a. Nursing home
b. Paper mill
c. Home building company
d. Electric utilities company
ANS: c DIF: EASY LO: 5.1 Section: Discuss why most businesses
35. Almost 90 percent of U.S. farms are owned by _____.

a. the government
b. large corporations
c. individual farmers
d. small corporations
ANS: c DIF: MEDIUM LO: 5.1 Section: Discuss why most businesses
36. _____ of small businesses are considered home-based businesses.
a. About 50 percent
b. About 75 percent
c. Less than 25 percent
d. About 25 percent
ANS: a DIF: MEDIUM LO: 5.1 Section: Discuss why most businesses
37. Which of the following is an advantage of a home-based business?

a. Greater visibility to customers
b. Lower costs
c. Less flexibility
d. Isolation
ANS: b DIF: MEDIUM LO: 5.1 Section: Discuss why most businesses
38. Compared to large businesses, which of the following statements regarding small businesses is correct?
a. Small businesses are less likely to hire young employees.
b. Small businesses are less likely to develop new products.
c. Small businesses are more likely be eligible for government loans or for government
purchasing programs.
d. Small businesses are more likely to be franchises.
ANS: c DIF: MEDIUM LO: 5.1 Section: Discuss why most businesses
39. All of the following are contributions of small businesses EXCEPT:

a. They provide more job security than large corporations.
b. They fuel local economies.
c. They provide needed services to the larger corporate community.
d. They create a substantial number of new jobs.
ANS: a DIF: MEDIUM LO: 5.2 Section: Determine the contributions of

small businesses to the economy
40. Owners of small businesses can increase their chances of success if they:
a. become an expert in legal, financial, marketing, and other related business areas.
b. incorporate their business.
c. hire only family members or friends.
d. understand their customers.
ANS: d DIF: MEDIUM LO: 5.3 Section: Discuss why small businesses
fail
41. If you are considering starting your own business, a key priority for you should be to:
a. get a loan from your local bank.
b. incorporate your business.
c. understand the industry in which a company operates.
d. apply for a Small Business Administration loan.
ANS: c DIF: EASY LO: 5.3 Section: Discuss why small businesses
fail
42. Many businesses fail during the early years because of _____.
a. niche marketers
b. inadequate financing
c. unmotivated owners
d. poor planning
ANS: b DIF: MEDIUM LO: 5.3 Section: Discuss why small businesses
fail
43. The largest lenders to small businesses are _____.

a. commercial banks
b. retail chains
c. venture capitalists
d. investors
ANS: a DIF: MEDIUM LO: 5.3 Section: Discuss why small businesses
fail
44. A business plan for a small business typically contains all of the following EXCEPT _____.
a. a statement of the company’s goals
b. an executive summary
c. separate financial and marketing sections
d. a time frame for selling stock to investors
ANS: d DIF: MEDIUM LO: 5.4 Section: Describe the features of a

45. Mariana wants to start an event management firm with two of her friends. She decides to create a business
plan that will help her in securing financing for her firm. Which of the following should she include in the
business plan?
a. A list of her previous clients
b. A list of the potential lenders
c. An introduction that includes the objectives of her business
d. A time frame for selling stock to investors
ANS: c DIF: MEDIUM LO: 5.4 Section: Describe the features of a
AACSB: Application of knowledge BT: AP
46. When the Small Business Administration (SBA) assists a small business in applying for a major loan, it
acts as the lender’s _____.
a. credit union
b. savings and loan association
c. guarantor
d. bank
ANS: c DIF: MEDIUM LO: 5.5 Section: Identify the available assistance
for small businesses
47. _____ use their own capital supplemented with government loans to invest in small businesses.
a. Franchisors
b. Small Business Investment Companies (SBICs)
c. Joint ventures
d. Freemium business models
ANS: b DIF: MEDIUM LO: 5.5 Section: Identify the available assistance
48. The management of Javier Investments wants to create more job opportunities in their city. They believe
that the best way to create more jobs is to help people start their own business. They invest a portion of the
company’s profit, along with money received through government loans, to support people trying to start
their own business. Javier Investments is an example of:
a. Unit investment trusts (UITs).

b. Small Business Investment Companies (SBICs).
c. Joint ventures.
d. Business incubators.
ANS: b DIF: MEDIUM LO: 5.5 Section: Identify the available assistance
AACSB: Analytical thinking BT: AP
49. Maria is the owner of a very small technology start-up. She shares clerical staff, computers, and other
business services with other small business owners. Maria is part of a:
a. business incubator.
b. venture capital company.
c. joint venture.
d. microloan company.
ANS: a DIF: EASY LO: 5.5 Section: Identify the available assistance
AACSB: Analytical thinking BT: AP
50. The Small Business Administration (SBA) provides all of the following EXCEPT _____.
a. loan guarantees
b. information and advice through toll-free telephone numbers
c. loans for natural disaster recovery
d. business incubators
ANS: d DIF: MEDIUM LO: 5.5 Section: Identify the available assistance
51. All of the following organizations are regularly and directly involved in sponsoring business incubators
EXCEPT _____.
a. the federal government
b. colleges and universities
c. not-for-profit organizations
d. profit-seeking businesses
ANS: a DIF: MEDIUM LO: 5.5 Section: Identify the available

assistance for small businesses
52. Neehara owns a small business and needs assistance on a variety of issues. The Small Business
Administration (SBA) can help her by providing _____.
a. an accountant
b. a business incubator
c. government procurement
d. direct business loans
ANS: c DIF: MEDIUM LO: 5.5 Section: Identify the available assistance
53. In exchange for an ownership share, small businesses receive financing from a group of investors known
as _____,
a. microloan investors
b. franchisors
c. Small Business Investment Companies
d. venture capitalists
ANS: d DIF: EASY LO: 5.5 Section: Identify the available assistance
54. The _____ industry represents the greatest percentage of minority-owned businesses.
a. finance
b. service
c. retail
d. transportation
ANS: b DIF: MEDIUM LO: 5.5 Section: Identify the available

55. A fast food chain offers a contractual business arrangement in various countries around the world. This fast
food chain will be an example of a(n) international _____.
a. franchise
b. acquisition
c. merger
d. not-for-profit corporation
ANS: a DIF: MEDIUM LO: 5.6 Section: Explain franchising

56. Which of the following is a trend in the area of franchising?

a. More franchises are opening outside the United States.
b. Franchises are becoming less expensive to fund.
c. Franchisees are determining their own pricing and marketing.
d. Franchisees are able to negotiate better pricing than franchisors.

57. The two principal parties in a franchising agreement are the _____.
a. manager and worker
b. franchiser and partners
c. franchisor and franchisee
d. venture capitalist and SBA
ANS: c DIF: EASY LO: 5.6 Section: Explain franchising

58. The franchisor provides all of the following services EXCEPT _____.
a. business training
b. marketing programs
c. name recognition
d. on-site management
ANS: d DIF: EASY LO: 5.6 Section: Explain franchising

59. Ricardo buys the franchise of a fast food chain. In this scenario, he is the _____ and _____ for this fast
food chain.
a. franchisor; works
b. franchisee; does not work
c. franchisee; works
d. franchisor; does not work
ANS: b DIF: MEDIUM LO: 5.6 Section: Explain franchising

60. Franchising offers all of the following advantages EXCEPT _____.

a. a recognizable company name
b. prior performance record
c. training
d. guaranteed level of profitability
ANS: d DIF: EASY LO: 5.6 Section: Explain franchising

61. Which of the following statements regarding franchising is FALSE?

a. Franchises are riskier than other forms of business ownership.
b. Franchisees have the benefit of name recognition.
c. Franchisors provide a wide range of support to franchisees.
d. Benefits for the franchisor include opportunities for expansion that might not otherwise be
available.

62. Diya owns FoodMart, the franchisee of a local retail shop. Which of the following will be one of Diya’s
chief concerns regarding owning the franchise?
a. The franchisor does not provide her with the required supplies.
b. The franchising agreement is too restrictive.
c. The franchise has the benefit of name recognition.
d. The franchisor can negotiate better deals on ingredients, supplies, and real estate, because
of its financial strength.
ANS: b DIF: EASY LO: 5.6 Section: Explain franchising

63. If you are a highly independent individual used to having your own way, the best business format for you
is a _____.
a. partnership
b. corporation
c. sole proprietorship
d. limited liability corporation
ANS: c DIF: EASY LO: 5.7 Section: Outline the forms of private
business ownership
64. Sole proprietorships have all of the following advantages EXCEPT _____.
a. unlimited life
b. ease of formation
c. profits subject only to a single tax
d. ease of liquidation
ANS: a DIF: MEDIUM LO: 5.7 Section: Outline the forms of private
business ownership
65. Sunita is the owner of an electronic repair shop. She creates the marketing strategy for her shop, pays all
the required taxes, and is also the only person who enjoys the profits generated by the shop. Sunita’s
business ownership in this scenario can be regarded as a _____.
b. partnership
c. corporation
d. franchise
business ownership
66. The stocks of Silver Novelties, a toy store, are completely owned by the Schmidts. When the family
elected to move from a sole proprietorship to a corporation, the greatest concern was _____.
a. there might be family squabbles
b. how to limit liability
c. choosing work assignments
d. double taxation
ANS: d DIF: MEDIUM LO: 5.7 Section: Outline the forms of private
business ownership
AACSB: Application of Knowledge BT: AP
67. People are likely to form a partnership because it offers:

a. limiting liability of partners to the value of their interests in the company.
b. unlimited financial liability.
c. greater financial resources.
d. double taxation.
business ownership
68. If business owners in a partnership wish to limit liability, they have the option to _____.
a. pledge funds
b. limit expenditure
c. set up a limited-liability partnership
d. dissolve the partnership
ANS: c DIF: MEDIUM LO: 5.7 Section: Outline the forms of private
business ownership
69. Salma and Debbie opened a restaurant in partnership. Two years later, Debbie left the restaurant, and
Salma discovered that Debbie had incurred numerous expenses to their account. These expenses resulted in
thousands of dollars’ worth of debt for the restaurant. From the following, identify an accurate statement
about this situation.
a. Salma doesn’t have to worry because, according to law, everyone is responsible for his/her
own debts.
b. Salma doesn’t have to worry because business creditors will pursue Debbie alone since her
signature authorized payments.
c. Business creditors will expect Salma to pay at least half the debt since she owns 50
percent of the business.
d. Business creditors will expect full payment from Salma.
ANS: d DIF: EASY LO: 5.7 Section: Outline the forms of private
business ownership.
70. Although _____ are the most common type of business ownership, the greatest revenues come from
_____.
a. sole proprietorships; partnerships
b. sole proprietorships; corporations
c. corporations; partnerships
d. partnerships; corporations
ANS: b DIF: EASY LO: 5.7 Section: Outline the forms of private
business ownership
71. Corporations have all of the following advantages EXCEPT _____.

a. favorable tax treatment
b. limited liability
c. expanded financial capacity
d. limited legal risk
business ownership
72. Jose is a stockholder in a software consulting firm. He gets a share of the earnings of the firm, on which he
has to pay taxes. Moreover, the firm pays taxes on its earnings. As an individual, Jose is not legally liable
to pay off the debts that might be incurred by the firm. In this scenario, the software consulting firm can be
regarded as a _____.
b. partnership
c. corporation
d. franchise
ANS: c DIF: MEDIUM LO: 5.7 Section: Outline the forms of private
business ownership
73. The maximum number of shareholders is limited to _____ for a firm to qualify as a subchapter S
corporation.
a. 25
b. 50
c. 75
d. 100
ANS: d DIF: EASY LO: 5.7 Section: Outline the forms of private
business ownership
74. Which of the following statements is true regarding employee-owned corporations?

a. The number of employee-owned corporations is declining in the United States.
b. Employee-owned corporations may not publicly trade their stock.
c. Employees buy shares of stock in the company that employs them.
d. Stock prices in employee-owned corporations typically decrease.
business ownership.
75. Three members of Abdul’s family work at BioTechno, a multi-national drug manufacturer. Each of them
owns 5% shares of the company respectively. In fact, most of the employees of BioTechno, like Abdul and
his family members, are stockholders of the company. BioTechno can be regarded as a _____.
b. employee-owned corporation
c. family-owned business
d. partnership
ANS: b DIF: MEDIUM LO: 5.7 Section: Outline the forms of private
business ownership.
76. Which of the following statements regarding family-owned businesses is true?

a. Only a small percentage of family-owned businesses survive into the second or third
generation.
b. Family-owned companies must submit a written agreement to the state in which it
organizes.
c. All family-owned companies must be closed corporations.
d. Family-owned companies are an example of a not-for-profit corporation.
business ownership
77. When a government unit owns and operates an organization, the arrangement is known as _____.
a. private ownership
b. a cooperative
c. public ownership
d. employee ownership
ANS: c DIF: EASY LO: 5.8 Section: Describe public and collective
78. Which of the following is most likely an example of public ownership?

a. A movie theater
b. The city sewer system
c. A trucking company
d. A television company
ANS: b DIF: MEDIUM LO: 5.8 Section: Describe public and collective
79. Alternatives to private ownership include _____.

a. public ownership and collective ownership
b. employee ownership and foreign corporations
c. foreign corporations and public ownership
d. employee ownership and collective ownership
ANS: a DIF: MEDIUM LO: 5.8 Section: Describe public and collective
80. Farid is the owner of a small mushroom farm in Pennsylvania. He would like to join hands with other
growers to create an organization that will promote and distribute mushrooms. The form of ownership that
would be most suited for Farid and other growers will be a(n) _____.
a. joint venture
b. open corporation
c. government-owned collective
d. cooperative
ANS: d DIF: MEDIUM LO: 5.8 Section: Describe public and collective
81. Nikita established a corporation in Nebraska, but she recently moved to Colorado where she now conducts
her business. What type of corporation does Nikita own?
a. Alien corporation
b. Domestic corporation
c. Foreign corporation
d. National corporation
ANS: c DIF: MEDIUM LO: 5.9 Section: Discuss organizing a

corporation
82. The board of directors of a corporation is elected by the _____.

a. corporation’s employees
b. bondholders and other creditors
c. corporate officers
d. stockholders
ANS: d DIF: EASY LO: 5.9 Section: Discuss organizing a

corporation
83. When founding members of Mike & Sons wanted to regain family control of the business, they changed
the company ownership from publicly held to _____, in order to control and manage corporate activities.
a. limited corporations
b. closed corporations
c. preferred corporations
d. restricted corporations
ANS: b DIF: MEDIUM LO: 5.9 Section: Discuss organizing a

corporation
84. Catalina owns 100 _____ stock of NxtGen Solutions, a software firm. It means that she has voting rights
on company decisions at NxtGen Solutions, but only residual claims on the company’s assets.
a. preferred
b. principal
c. management
d. common
ANS: d DIF: MEDIUM LO: 5.9 Section: Discuss organizing a

corporation
85. All of the following are duties of the board of directors of a corporation EXCEPT _____.
a. guaranteeing the payment of cash dividends every year
b. electing its own officers
c. hiring the corporation’s chief executive officer
d. authorizing major transactions of the corporation
ANS: a DIF: MEDIUM LO: 5.9 Section: Discuss organizing a
corporation
86. The board of directors usually includes some individuals who are not employed by the corporation. These
people are referred to as _____.
a. priority directors
b. outside directors
c. stockholders
d. members of top management
ANS: b DIF: EASY LO: 5.9 Section: Discuss organizing a

corporation
87. Latifa is a chief financial officer in a large corporation. She has the full financial authority to make
appropriations and authorize expenditures. Latifa is likely to be a member of _____ management.
a. Middle
b. advisory
c. supervisory
d. Top
ANS: d DIF: MEDIUM LO: 5.9 Section: Discuss organizing a

corporation
88. _____ must verify in writing the accuracy of their corporation’s financial statements.
a. Board members
b. Stockholders
c. Chief operating officers and chief financial officers
d. Governmental officials
ANS: c DIF: MEDIUM LO: 5.9 Section: Discuss organizing a

corporation
89. An acquisition occurs when _____.

a. one company purchases the property and assumes the obligations of another company
b. one corporation owns 8 percent of the stock of another corporation
c. owners of small companies band together to operate their businesses collectively
d. two or more firms combine to form a single company
ANS: a DIF: MEDIUM LO: 5.10 Section: Explain what happens when
90. Star Airlines’ purchase of Hispania Airlines combines the resources and capabilities of both firms to create
the world’s largest airline. The newly formed company is an example of a _____.
a. vertical merger
b. joint venture
c. horizontal merger
d. conglomerate company
ANS: c DIF: MEDIUM LO: 5.10 Section: Explain what happens when
91. If JNK steel buys Ramirez Iron Ore to assure itself of a constant flow of ore, it will be an example of a
_____.
a. conglomerate company
b. domestic company
c. vertical merger
d. subsidiary corporation
ANS: c DIF: MEDIUM LO: 5.10 Section: Explain what happens when
92. The joining of two car manufacturing companies will be an example of a _____.
b. horizontal merger
c. vertical merger
d. joint venture
ANS: b DIF: MEDIUM LO: 5.10 Section: Explain what happens when
93. News 24/7, a newspaper group, merged with Alfalah Finance, an investment firm. The two companies
merged together to diversify their business and to generate more revenue. This merger will be an example
of a _____.
a. conglomerate merger
b. horizontal merger
c. vertical merger
d. joint venture
94. Assume that a tech firm decides to invest some of its excess cash by acquiring a coffeehouse chain. This
would be a _____.
b. vertical merger
d. joint venture
95. Which type of merger is done to increase customer bases?

a. Vertical merger
b. Conglomerate company
c. Joint venture
d. Horizontal merger
ANS: d DIF: MEDIUM LO: 5.10 Section: Explain what happens when
96. An American retail chain started doing business in India by forming a _____ with one of India’s leading
business groups.
a. joint venture
b. subsidiary
d. vertical merger
TRUE/FALSE
97. The vast majority of firms have fewer than 500 employees.
ANS: T DIF: EASY LO: 5.1 Section: Discuss why most businesses
98. 40 percent of all privately held companies are owned by women.
ANS: T DIF: EASY LO: 5.5 Section: Identify the available assistance
99. Small businesses generate over 50 percent of new jobs.
100. Any firm with fewer than 1,000 employees is considered a small business.
ANS: F DIF: EASY LO: 5.1 Section: Discuss why most businesses
101. Businesses with fewer than 500 employees generate more than half of the nation’s GDP.
102. Government agencies offer benefits designed to help small businesses compete with larger firms.
103. Fifty-two percent of small businesses operate from the owner’s residence.
104. Most managers of home-based businesses struggle to establish business hours that correspond with
customer availability.
AACSB: Technology BT: K
105. Many small-business start-ups are more competitive because of technology and online resources.
ANS: T DIF: MEDIUM LO: 5.1 Section: Discuss why most businesses
are small businesses.
106. Small businesses are more likely to employ older workers than large businesses, but not the youngest ones.
ANS: F DIF: MEDIUM LO: 5.2 Section: Determine the contributions of

107. A reason small businesses are so successful is also the reason they might fail—their founders are willing to
take a risk.
ANS: T DIF: MEDIUM LO: 5.3 Section: Discuss why small businesses
fail
108. Direct Small Business Administration (SBA) loans are available in only a few special situations, such as
natural disaster recovery and energy conservation.
ANS: T DIF: MEDIUM LO: 5.5 Section: Identify the available
109. Larger firms prove more successful than smaller firms in offering innovative products to consumers.
ANS: F DIF: EASY LO: 5.2 Section: Determine the contributions of

110. Small businesses produce over 16 times more patents than large businesses each year.
ANS: T DIF: MEDIUM LO: 5.2 Section: Determine the contributions of

111. 20th century innovations developed by small businesses include the personal computer and the zipper.
ANS: T DIF: MEDIUM LO: 5.2 Section: Determine the contributions of

112. More than half of all small businesses fail within the first year.
ANS: F DIF: EASY LO: 5.3 Section: Discuss why small businesses
fail
113. The smallest firms—those with fewer than 20 employees—spend 45 percent more per employee than
larger firms just to comply with federal regulations.
ANS: T DIF: EASY LO: 5.3 Section: Discuss why small businesses
fail
114. Securing adequate financing is a major problem for most small businesses.
fail
115. The heaviest users of credit cards for business financing are firms with fewer than 10 employees.
fail
116. First-time business owners often overestimate the funds their firms will generate from initial sales to allow
for operations to continue.
fail
117. Most owners of small businesses rely on loans from financial institutions for their start-up funds.
fail
118. Taxes and government regulations are more significant issues for small businesses than for large
businesses.
fail
119. With less money to spend on employees, marketing, inventory, and other business costs, successful small
companies need to be creative.
fail
120. Small businesses are not required to pay workers’ compensation or Social Security.
ANS: F DIF: MEDIUM LO: 5.3 Section: Discuss why small businesses
fail
121. One of the most important tasks for an entrepreneur is to create a business plan.
ANS: T DIF: EASY LO: 5.4 Section: Describe the features of a

123. Business plans identify the firm’s mission and goals.
ANS: T DIF: EASY LO: 5.4 Section: Describe the features of a

124. A business plan should include résumés of the company’s principal owners.
ANS: T DIF: MEDIUM LO: 5.4 Section: Describe the features of a

125. The Small Business Administration (SBA) is the major lending source for small businesses needing
additional funds.
ANS: F DIF: EASY LO: 5.5 Section: Identify the available assistance
126. Direct Small Business Administration (SBA) loans are rewarded to owners of small businesses 90 percent
of the time.
ANS: F DIF: MEDIUM LO: 5.5 Section: Identify the available assistance
127. Small Business Investment Company (SBIC) loans are actually government loans funneled through a
private organization.
ANS: F DIF: MEDIUM LO: 5.5 Section: Identify the available

128. The average amount rewarded to owners of small businesses through Small Business Administration
(SBA) microloans is $13,000.
ANS: T DIF: MEDIUM LO: 5.5 Section: Identify the available assistance
129. The set-aside program designates that a percentage of government contracts must be awarded to qualifying
small businesses.
130. Most business incubators are run by not-for-profit organizations focused on economic development.
131. Most of the small businesses today are run by Caucasian males.
ANS: F DIF: MEDIUM LO: 5.5 Section: Identify the available assistance
132. The Small Business Administration has programs targeted to minority-owned small businesses.
ANS: T DIF: EASY LO: 5.5 Section: Identify the available

133. Franchises often minimize the amount of expansion opportunities.
ANS: F DIF: EASY LO: 5.6 Section: Explain franchising

134. Franchisors typically experience a greater return on investment than if the firm were run entirely as a
company-owned chain.
ANS: T DIF: EASY LO: 5.6 Section: Explain franchising

135. Franchising overseas is too difficult for most companies.

ANS: F DIF: MEDIUM LO: 5.6 Section: Explain franchising
136. A small business owner who sells the goods or services of the supplier is known as the franchisor.

137. A successful franchisor can usually negotiate better pricing for ingredients, supplies, even real estate,
because of its financial strength and large volume purchases.
ANS:T DIF: MEDIUM LO: 5.6 Section: Explain franchising

138. Franchising combines the freedom of business ownership with the support of a large company.
ANS: T DIF: EASY LO: 5.6 Section: Explain franchising

139. Franchisors generally find it more challenging to build a large customer base.

140. Initial investment amounts and ongoing franchise fees tend to be a relatively small cost of owning and
operating a franchise.
ANS: F DIF: MEDIUM LO: 5.6 Section: Explain franchising

141. Strict franchise agreements help to maintain the integrity of the brand.
ANS: T DIF: MEDIUM LO: 5.6 Section: Explain franchising

142. Sole proprietorship is the most common form of business ownership.
ANS: T DIF: EASY LO: 5.7 Section: Outline the forms of private
business ownership
143. Out of all forms of business, partnerships are the most challenging to establish.
ANS: F DIF: EASY LO: 5.7 Section: Outline the forms of private
business ownership
144. A sole proprietor is easy to dissolve.
business ownership
145. Breaking up a partnership is more complicated than dissolving a sole proprietorship.
business ownership
146. In a partnership, each partner is liable for the business-related debts of the other partner.
business ownership
147. Large businesses must be organized as corporations.
ANS: F DIF: EASY LO: 5.7 Section: Outline the forms of private
business ownership
148. Sole proprietorships are concentrated mainly in corporations.
ANS: F DIF: MEDIUM LO: 5.7 Section: Outline the forms of private
business ownership
149. Owners of corporations may owe personal income taxes on dividends, which are paid from after-tax
corporate profits. This is an example of double taxation.
ANS: T DIF: MEDIUM LO: 5.7 Section: Outline the forms of private
business ownership
150. Proctor & Gamble is an example of a company that has embraced employee ownership.
ANS: T DIF: MEDIUM LO: 5.7 Section: Outline the forms of private
business ownership.
151. Not-for-profit corporations do not issue stock certificates and are exempt from paying income taxes.
business ownership.
152. A corporation operating outside its state of incorporation is known as a domestic corporation.
ANS: F DIF: MEDIUM LO: 5.9 Section: Discuss organizing a

corporation
153. Delaware is an example of a state that is considered to be “business friendly” based on tax incentives.
ANS: T DIF: EASY LO: 5.9 Section: Discuss organizing a

corporation
154. Each state mandates a specific procedure for incorporating a business.
ANS: T DIF: EASY LO: 5.9 Section: Discuss organizing a

corporation
155. Preferred shareholders typically have voting rights.
ANS: F DIF: EASY LO: 5.9 Section: Discuss organizing a

corporation
156. Owners of preferred stock receive dividends after owners of common stock.

corporation
157. The CEO of a corporation is automatically the chair of the board of directors.

corporation
158. A vertical merger joins firms in the same industry in order to cut costs and promote diversification.
ANS: F DIF: EASY LO: 5.10 Section: Explain what happens when
Pg. 160 AACSB: Analytical thinking BT: K
159. CVS Caremark, a healthcare company, recently purchased another firm’s Medicaid prescription business.
It is an example of a horizontal merger.
ANS: T DIF: MEDIUM LO: 5.10 Section: Explain what happens when
160. A computer manufacturer purchasing a laptop brand would be an example of a conglomerate merger.
ANS: F DIF: MEDIUM LO: 5.10 Section: Explain what happens when
161. Horizontal mergers are popular in the automobile and healthcare industries.
ANS: T DIF: MEDIUM LO: 5.10 Section: Explain what happens when
162. A conglomerate merger is a merger of unrelated firms.
ANS: T DIF: EASY LO: 5.10 Section: Explain what happens when
163. Joint ventures rarely occur between not-for-profit organizations and for-profit companies.
ANS: F DIF: EASY LO: 5.10 Section: Explain what happens when
164. Joint ventures are not ideal for international companies due to logistics and conflicting business laws.
ANS: F DIF: MEDIUM LO: 5.10 Section: Explain what happens when
165. In public ownership a unit or agency of government owns and operates an organization.
ANS: T DIF: EASY LO: 5.8 Section: Describe public and collective
166. Cooperatives rarely exist in the field of agriculture.
ANS: F DIF: EASY LO: 5.8 Section: Describe public and collective
167. Commercial banks are considered to be financial cooperatives.
ANS: F DIF: MEDIUM LO: 5.8 Section: Describe public and collective
ownership of business AACSB: Analytical thinking BT: K

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Chapter 5—Forms of Business Ownership and Organization

Complete the following using the terms listed.

11. A merger of firms in unrelated industries is called a(n) _____.

15. Describe how to identify a small business from a large one.

17. Describe how small businesses help create new jobs.

18. Explain how small businesses create new industries.

20. List the elements contained in a business plan.

22. What is a business incubator?

23. Provide an example of how innovation drives small business.

24. Describe the complexity of franchise agreements.

DIF: MEDIUM LO: 5.6 Section: Explain franchising

25. Compare and contrast the three forms of business ownership.

DIF: MEDIUM LO: 5.9 Section: Discuss organizing a corporation.

27. Define the categories of corporations.

DIF: MEDIUM LO: 5.9 Section: Discuss organizing a corporation

28. Compare mergers and acquisitions.

30. The majority of all U.S. firms employ:

32. Which government agency establishes standards for small businesses?

33. Traditionally, small businesses tended to be concentrated in the _____ industry.

35. Almost 90 percent of U.S. farms are owned by _____.

37. Which of the following is an advantage of a home-based business?

39. All of the following are contributions of small businesses EXCEPT:

ANS: a DIF: MEDIUM LO: 5.2 Section: Determine the contributions of

43. The largest lenders to small businesses are _____.

ANS: d DIF: MEDIUM LO: 5.4 Section: Describe the features of a

a. Unit investment trusts (UITs).

ANS: a DIF: MEDIUM LO: 5.5 Section: Identify the available

ANS: b DIF: MEDIUM LO: 5.5 Section: Identify the available

ANS: a DIF: MEDIUM LO: 5.6 Section: Explain franchising

56. Which of the following is a trend in the area of franchising?

ANS: a DIF: MEDIUM LO: 5.6 Section: Explain franchising

ANS: c DIF: EASY LO: 5.6 Section: Explain franchising

ANS: d DIF: EASY LO: 5.6 Section: Explain franchising

ANS: b DIF: MEDIUM LO: 5.6 Section: Explain franchising

60. Franchising offers all of the following advantages EXCEPT _____.

ANS: d DIF: EASY LO: 5.6 Section: Explain franchising

61. Which of the following statements regarding franchising is FALSE?

ANS: a DIF: MEDIUM LO: 5.6 Section: Explain franchising

ANS: b DIF: EASY LO: 5.6 Section: Explain franchising

67. People are likely to form a partnership because it offers:

71. Corporations have all of the following advantages EXCEPT _____.

74. Which of the following statements is true regarding employee-owned corporations?

76. Which of the following statements regarding family-owned businesses is true?

78. Which of the following is most likely an example of public ownership?

79. Alternatives to private ownership include _____.

ANS: c DIF: MEDIUM LO: 5.9 Section: Discuss organizing a

82. The board of directors of a corporation is elected by the _____.

ANS: d DIF: EASY LO: 5.9 Section: Discuss organizing a

ANS: b DIF: MEDIUM LO: 5.9 Section: Discuss organizing a

ANS: d DIF: MEDIUM LO: 5.9 Section: Discuss organizing a

ANS: b DIF: EASY LO: 5.9 Section: Discuss organizing a

ANS: d DIF: MEDIUM LO: 5.9 Section: Discuss organizing a

ANS: c DIF: MEDIUM LO: 5.9 Section: Discuss organizing a

89. An acquisition occurs when _____.

95. Which type of merger is done to increase customer bases?

98. 40 percent of all privately held companies are owned by women.

99. Small businesses generate over 50 percent of new jobs.

ANS: F DIF: MEDIUM LO: 5.2 Section: Determine the contributions of

ANS: F DIF: EASY LO: 5.2 Section: Determine the contributions of

ANS: T DIF: MEDIUM LO: 5.2 Section: Determine the contributions of

ANS: T DIF: MEDIUM LO: 5.2 Section: Determine the contributions of

ANS: T DIF: EASY LO: 5.4 Section: Describe the features of a