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Complete Test Bank With Answers
Sample Questions Posted Below
5
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Student:
___________________________________________________________________________
The corporation is the most common form of business ownership.
True False
The three major forms of business ownership in the U.S. are sole proprietorships, partnerships, and
corporations.
True False
Few people today start their own business.
True False
Once a business is established, it’s almost impossible to change from one form of business ownership to
another.
True False
When two or more people legally agree to become co-owners of a business, the form of business is called
a partnership.
True False
A legal entity with authority to act and have liability separate from its owners is called a partnership.
True False
Corporations represent 20 percent of all the businesses in the U.S. and earn 81 percent of the total U.S.
business receipts.
True False
A comparison of the three major forms of business ownership shows that sole proprietorships are usually
the most difficult type of business to establish.
True False
The first step in starting a sole proprietorship is to fill out a proprietorship charter application form and
file it with the state government.
True False
It is usually easy to start and end a sole proprietorship.
True False
The profits of a sole proprietorship are taxed as the personal income of the owner.
True False
The sole proprietorship form of ownership tends to be attractive to people who want to invest in a
company without taking an active role in management.
True False
A major advantage of sole proprietorships is that an owner has limited liability for the debts of his or her
business.
True False
One of the strengths of the sole proprietorship is its ability to sustain rapid growth by raising large
amounts of financial resources.
True False
The debts of a business operated as a sole proprietorship are considered to be the personal debts of the
owner of the business.
True False16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. A drawback of sole proprietorships is that they usually have limited access to additional financial
resources.
True False
An advantage of forming a sole proprietorship is that it allows the owner to have more time for leisure
activities.
True False
If a sole proprietorship fails, the owner may lose whatever was invested in the business; however, the
owner’s personal assets are not at risk.
True False
If the business is designated a sole proprietorship, profits are passed along to the owner. For tax purposes,
these profits are accounted for with any other personal income the owner may have accumulated and
taxed at the owner’s personal income tax rate.
True False
A difficulty that sole proprietors try to overcome is the fact that they have trouble competing with large
firms for expert talent. Large firms can usually pay better and offer fringe benefits that are unaffordable
to the sole proprietor.
True False
Unlike partnerships, if sole proprietorships find themselves in bankruptcy, they need not worry about a
court of law requiring them to sell off personal assets to pay for the debts of the firm.
True False
Eric wants to start a business. He is attracted to the idea of being his own boss, and wants to get started
with a minimum of expense and hassle. He is confident in his abilities, and the market he can draw from,
so he is not particularly worried about financial risks. All of these factors suggest that Eric may favor
starting his business as a sole proprietorship.
True False
Sandy Beech, a talented fashion designer who wants to start her own women’s swimwear and beach towel
line, is trying to decide which form of business ownership is right for her. As a young mother who aspires
to send her children to college some day, she does not want to jeopardize her savings account in any way.
In order to overcome these risks, Sandy should start her business as a sole proprietorship.
True False
Rocky Rhodes is convinced that he has a great idea for a new business. Unfortunately, the type of
business he wants to start would require a fairly high initial investment and Rocky has a poor credit rating
and very little personal wealth. Rocky would be unlikely to find success if he organized his business as a
sole proprietorship.
True False
A general partner takes an active role in the management of the business.
True False
All partners in a general partnership have limited liability for the debts of their firm.
True False
In a general partnership, all partners share in management of the business and in the liability for the firm’s
debts.
True False
In a general partnership, all partners are entitled to an equal share of the firm’s profits.
True False
Limited partnerships are just like general partnerships, except that they are partners for a limited time
period.
True False30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. A limited partner is an owner who assumes no management responsibility and has no liability for losses
beyond the amount invested.
True False
A limited partnership consists of one or more general partners and one or more limited partners.
True False
Although shares of master limited partnerships can be purchased on one of the national stock exchanges,
these companies are taxed like partnerships.
True False
The Uniform Partnership Act is law in every state except Louisiana.
True False
According to the Uniform Partnership Act, the three key elements of any general partnership are (1)
shares of stock to represent ownership, (2) limited liability, and (3) ease of ownership transfer.
True False
According to the Uniform Partnership Act, the three key elements of any general partnership are (1)
common ownership, (2) shared profits and losses, and (3) the right to participate in managing the
operations of the business.
True False
A recent study showed that partnerships are more likely to fail than sole proprietorships.
True False
A major objective of limited liability partnerships (LLPs) is to limit each partner’s personal liability to the
consequences of their own acts and those of people under their supervision.
True False
One of the major disadvantages of a partnership is that profits must be divided equally.
True False
A general partner has unlimited liability for the debts of the partnership only if he or she personally
approved the decisions that resulted in those debts.
True False
In order to protect all parties and minimize misunderstandings among partners, all terms of the
partnership should be spelled out in writing.
True False
One advantage of a partnership is that there is a simple process for partners to terminate their
business.
True False
Compared to sole proprietorships, an advantage of partnerships is their ability to obtain more financial
resources.
True False
Setting up a partnership under the terms of a written agreement is a bad idea, because written agreements
tend to be too inflexible and impersonal.
True False
Compared to sole proprietorships, partnerships offer the advantage of shared management and pooled
knowledge.
True False
A limited partnership refers to a partnership set up for a temporary purpose, such as a real estate
development project.
True False46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. In a limited partnership, the general partners should encourage the limited partners to take a more
active role in the operations of the business. After all, the limited partner has comparable liability in the
business, even though he/she may not be a partner for as long a period of time as the general partners.
True False
If a partner in a limited partnership dies, the partnership ceases to exist.
True False
In the Figure 5.2, the authors suggest that potential partners discuss the types of skills that each brings to
the business. Partners with complementary skills may enhance the business.
True False
One method to avoid conflicts between partners is to solicit the services of a lawyer to create a well-
written partnership agreement.
True False
According to Figure 5.2, attributes such as trust and integrity are not something you should get overly
concerned about when selecting partners, due to the fact that this is a business decision, not a friendly
game of golf.
True False
The fairest way to handle profits in any partnership arrangement is to divide things evenly. If there are
two owners in the business, each gets 50%. If there are three owners (even if one is a limited partner),
each gets 33.333% of any accumulated profits.
True False
Ted and Mark are partners in a dry cleaning business. They would like their brother Todd to join them.
Unfortunately, partnership law states that only two partners can participate in a partnership.
True False
Connie is a general partner in a retail cookie store. Her personal assets are legally protected from the
debts of the business.
True False
Two of Diana’s friends have approached her about starting a new business. Diana is willing to invest
money in the business and share in its profits, but she has no desire to be involved in the day-to-day
management of the company, nor is she willing to risk any amount beyond her initial investment. Diana’s
preferences suggest that she prefers a general partnership form of business ownership.
True False
Emma Pebble and Chase Stone formed a partnership in a landscape business. Under their arrangement,
Emma actively manages the company and assumes unlimited liability for the firm’s debts. Chase has
invested several thousand dollars of his money with plans to share in the profits, but does not actively
make management decisions, nor will he assume liability beyond his initial investment. Emma and Chase
participate in a limited partnership.
True False
Sergio has agreed to become a partner in his brother’s horse-breeding business. Since he provided 30
percent of the money to start the firm and built an air-conditioned barn, he is entitled to 30 percent of any
profits the firm earns during its first year of operation.
True False
After spending a summer “down under,
” two Oregon friends, Rick and Mick, created a general
partnership to import emu from Australia to the U.S. After a year, Rick found himself at the mercy of
Mick, who seemed to keep the books and seldom share the financial results, even though Rick was out
selling the emu idea to farmers and ecologically conscious consumers and shipments were increasing.
As their consultant, one of the first things that you inquire about is whether they are familiar with the
UPA (Uniform Partnership Act), specifically the right to participate in managing the operations of the
business.
True False58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. Marco is a limited partner in an e-commerce company. As a limited partner, Marco can be involved with
the company for a maximum of five years.
True False
Last night as you scrolled through the TV channels to find an action flick, you came across an old movie
with tough guy James Cagney, called “Yankee Doodle Dandy.
” Although not particularly your kind of
movie, you stayed on that channel for a few minutes because Cagney and another guy were in partnership
together. They were arguing over who was the senior partner and who was the junior partner, even
though, clearly, they started the business at the same time. If you were brought on board as their present-
day business advisor, you would explain to them that all partnerships have at least one general partner
(known as the senior partner) and one limited partner (known as the junior partner).
True False
A conventional corporation is a state-chartered legal entity, with authority to act and have liability
separate from its owners.
True False
In today’s economy, only large business enterprises should operate as corporations.
True False
The owners of a corporation are known as general corporate partners.
True False
A corporation can raise financial capital by selling shares of stock to interested investors.
True False
Stockholders in a corporation accept unlimited liability for the corporation’s debts.
True False
A disadvantage of corporations is that their charters are only valid for 99 years, so corporations are less
permanent than other types of businesses.
True False
When one of the owners of a corporation dies, the corporation legally ceases to exist.
True False
Corporations are easy to start and easy to terminate.
True False
A disadvantage of corporations is that they generally require extensive paperwork.
True False
A disadvantage of corporations is that an owner must get the approval of all other owners before selling
his or her interest in the firm to another investor.
True False
Stockholders in a corporation normally exert a significant degree of control over the company’s daily
operations.
True False
The stockholders in a corporation elect a board of directors to oversee the company’s major policy
issues.
True False
Stockholders in a corporation exert a significant degree of control over the company’s daily
operations.
True False
Stockholders in a corporation have limited liability.
True False74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. Stockholders in a corporation entrust control over the company’s daily operations to managers selected by
the board of directors to run the company.
True False
One advantage of corporations is that the initial cost of organization is usually lower than for other forms
of business ownership.
True False
States may levy special taxes on corporations that are not imposed on other businesses.
True False
Most states have legal restrictions that prevent individuals from incorporating.
True False
One reason individuals incorporate is to obtain the advantage of limited liability.
True False
An alien corporation does business abroad but is chartered in the U.S.
True False
A domestic corporation does business in the state in which it’s chartered.
True False
A foreign corporation is chartered in a country outside the U.S.
True False
Delaware is a popular state in which to seek incorporation due to its reduced costs and other perks.
True False
A closed corporation is one whose stock is held by a few people and is not available to the general
public.
True False
A nonprofit corporation does not seek personal profit for its owners.
True False
A quasi-public corporation is a corporation chartered by the government as an approved monopoly to
perform services to the general public.
True False
A multinational corporation is a firm that operates in several countries.
True False
To change ownership in a corporation you simply sell your stock to someone else.
True False
Stock options are the right to purchase shares of the corporation for a fixed price.
True False
An advantage of corporations is their ability to attract good talent by offering stock options and other
employee benefits.
True False
It is said that corporations have perpetual life.
True False
One advantage of an S Corporation is that the profits are distributed to the owners and taxed as each
owner’s personal income, thus avoiding the problem of double taxation.
True False92. By filling out the correct paperwork annually, any corporation can qualify to be classified as an S
corporation.
True False
93. A company that loses its status as an S corporation may not reelect this status for at least 5 years.
True False
94. An S corporation has fewer ownership rules than a limited liability company.
True False
95. The S corporation form of business would be particularly attractive to fast growing companies that want
to attract thousands of new stockholders.
True False
96. A limited liability company is similar to an S corporation, but without the special eligibility
requirements.
True False
97. Limited liability companies have both flexibility in tax treatment of earnings and limited liability
protection for owners.
True False
98. One of the drawbacks of a limited liability company is that most states do not yet recognize this form of
ownership.
True False
99. Like stockholders of a C corporation, owners of a limited liability company (LLC) are free to sell their
ownership without the approval of other members.
True False
100.The limited liability company requires a minimum of 10 members.
True False
101.The organization structure of a corporation allows for stockholders to exert a significant degree of control
over the company’s daily operations.
True False
102.Public utilities are examples of quasi-public corporations.
True False
103.In order to establish a C corporation, it is a requirement that investors run the company, whereas in an S
corporation, this is not the case.
True False
104.If you want to sell your ownership in a publicly traded corporation, you find someone willing to buy your
shares.
True False
105.The stockholders of large, publicly traded corporations have a daily pulse on the operation of the
business.
True False
106.If a corporation distributes after-tax profits to its stockholders in the form of dividends, the government
considers these distributions as part of each stockholder’s personal income. Stockholders pay taxes on
these distributions.
True False
107.If a corporation has after-tax profits of $360,000, and elects to distribute this amount in the form of
dividends to its stockholders, these distributions are free and clear of taxes because the corporation paid
taxes on this amount prior to distribution.
True False108.Double taxation means that a corporation pays twice the amount of taxes as a sole proprietorship or
partnership.
True False
109.The major differences between an S corporation and a limited liability company are limits on the number
of owners and the citizenship status of individuals who are owners.
True False
110.The owners of a limited liability company (LLC) must pay self-employment taxes on any profits they
earn, even if they did not obtain a salary from the company.
True False
111.A group of medical doctors are interested in incorporating their business. There is no advantage due to
the costs involved.
True False
112.Nutty Dough is a small chain of donut shops currently owned and operated by a group of seven partners.
The owners think that their chain has the potential for rapid growth, but several of the partners are
concerned about the growing financial risks that will accompany this growth. One way the partners could
deal with this problem would be to incorporate their business.
True False
113.Chad recently invented Wave-Aerobics, a next generation watercraft that can safely perform water stunts
similar to an amusement park ride. As the founder of a fast growing business, you think his goal of
incorporating,
“to remain in steadfast control of the firm’s operations for an indefinite number of years,
“
is good strategy.
True False
114.Mojo Motors is a small conventional corporation with only 212 stockholders. Eleven of the stockholders
are citizens of Mexico, and eight others are citizens of Canada. Due to its size and diversity in ownership,
you would recommend that Mojo Motors change to an S corporation.
True False
115.The owners of Idle Time Gaming Company would like to become an S corporation. Unfortunately,
their lawyer advised them that they do not meet some of the requirements necessary to qualify as an S
corporation. An alternative form of business that would give them similar advantages is a limited liability
company.
True False
116.The owners of California Canines, a firm that designs and manufactures coats, sweaters, jackets, and
rainwear for dogs, want to organize as an LLC. Two members are college students and two others are
thirty-something couples with young children. This is good strategy because each member can choose to
commit to limited or unlimited liability.
True False
117.A few years back, your friends who are horse fanatics inherited several acres of land that they turned
into a retirement haven for race horses. Peaceful Pastures was recently incorporated as a limited liability
company. The members are reevaluating this form of ownership. Unlike an S corporation, they now pay
self-employment taxes on all company profits—not just on the salaries they pay themselves.
True False
118.After a successful five years, Peaceful Pastures, LLC (a retirement ranch for race horses), thinks it may
be able to attract donations from animal activist groups and even the federal government if it becomes a
nonprofit corporation. As its business advisor, you explain that as a nonprofit corporation, the owner(s)
may earn a salary but the business should not seek after-tax profits.
True False119.Chipper’s Golf Resort has the opportunity to buy 1,000 acres of property adjacent to its 18-hole golf
course. After talking with her banker, the owner is encouraged to begin the paperwork to change from a
limited liability company form of business ownership to a corporation. You applaud this strategy because
she will eliminate the problem of double taxation.
True False
120.When two firms join together to form one company, it is called a merger.
True False
121.The three major types of mergers are acquisition, joint, and connective.
True False
122.An acquisition is when one company buys the property and obligations of another company.
True False
123.Taking a firm private involves converting a firm from a corporation to a general partnership.
True False
124.If firms wish to gain market share in their current market, they would consider a conglomerate
merger.
True False
125.The purpose of a conglomerate merger is to diversify operations and investments.
True False
126.A merger between two businesses in different stages of related businesses is known as a vertical
merger.
True False
127.A horizontal merger refers to a merger between two companies that serve entirely different markets.
True False
128.A horizontal merger refers to a merger between two companies in the same industry, and serving the
same markets.
True False
129.A leveraged buyout is an attempt by top management to gain control of a company by issuing a large
amount of new stock.
True False
130.When a group of investors take a firm private, they purchase all the company’s outstanding stock.
True False
131.In recent years, foreign firms were reluctant to merge with or acquire American corporations.
True False
132.A merger is a mutual agreement where a firm joins together with another firm, whereas an acquisition is
when one firm purchases the assets and obligations of another firm.
True False
133.One reason that a firm would choose to merge or acquire another company would be to gain market
share.
True False
134.One reason that a firm may choose to merge or acquire another company would be diversity of products
or services.
True False
135.The strategy of a leveraged buyout is used when employee talent is at a minimum.
True False136.Taking a firm private means turning a profit-seeking corporation into a nonprofit corporation in order to
avoid a hostile takeover.
True False
137.A major objective of a leveraged buyout is to enable investors to gain control of a company by issuing
new shares of ownership, thus minimizing the use of debt.
True False
138.Hole-In-One Golf Company announced plans to purchase the property and assume the obligations of
Champion Golf, Inc., one of its major competitors. Hole-In-One Golf Company’s plans are an example of
a merger.
True False
139.Two competitors, Stanley’s Food Mart and Bluejay Groceries, recently issued a joint announcement
stating their decision to merge. The announcement claimed that the new firm would have more financial
resources, which would enable it to expand services and broaden offerings to consumers. This proposed
merger is an example of a horizontal merger.
True False
140.Tech Solutions, Inc., a manufacturer of laptops, is considering a merger with Outtel, a leading producer
of microprocessors and other computer chips. Tech Solutions believes such a merger would give them
a guaranteed source of needed components, and enable them to have better control over quality. If this
merger occurs, it would be an example of a horizontal merger.
True False
141.Cory Raider is leading a group of stockholders who want to take the Bigbux Corporation private. If
Cory’s group succeeds, Bigbux’s stock will no longer be available to investors on the open market.
True False
142.Due to several years of poor performance, Scrappy’s Metal Fabrication, Inc., is closing. Through the use
of debt financing, workers plan to purchase the company’s stock from current shareholders in order to buy
the firm, improve company performance, and save jobs.
True False
143.A franchise agreement is an arrangement where a franchisor sells the rights to a business name and the
right to sell a product or service within a given territory to a franchisee.
True False
144.A franchise may be organized as a sole proprietorship, partnership, or corporation.
True False
145.Franchisees are not always pleased with management regulations handed down from the franchisor.
In some cases, franchisees have been known to band together to express concern over marketing and
management direction.
True False
146.Franchisors give franchisees the right to use their name and product, with the understanding that
franchisees obtain all financing and develop all marketing strategies on their own.
True False
147.The most popular businesses for franchising are restaurants.
True False
148.In a franchise arrangement, ownership remains in the hands of the franchisor.
True False
149.One of the major advantages for the franchisee is instant business name recognition and important
management assistance from the franchisor.
True False150.Franchisees must follow more rules, regulations, and procedures than if they operated independently
owned businesses.
True False
151.The coattail effect refers to the burden of corporate rules and regulations on franchisees.
True False
152.The coattail effect refers to inevitable repercussions on your business if a fellow franchisee should
fail.
True False
153.One drawback of franchises is that they have a higher failure rate than other types of business
ventures.
True False
154.The franchisee pays the franchisor a share of profits or a percentage commission on sales, known as a
royalty.
True False
155.Many franchisors have rules that prohibit franchisees from sponsoring their own websites.
True False
156.Because of the growth of minority-owned businesses in the U.S., franchisors are becoming more focused
on recruiting minority franchisees.
True False
157.It is impossible to run a franchise completely from home.
True False
158.Franchising is popular in the United States, but legal barriers have limited its popularity in foreign
countries.
True False
159.Global franchising is unlikely to experience major growth due to the high costs of operations in global
markets.
True False
160.Franchising in global markets has demonstrated that high operating costs are counterbalanced by high
profit opportunities.
True False
161.Franchisors sometimes pay reverse royalties to franchisees if it is evident that the franchisor’s Internet
sales have negatively impacted the profits of traditional bricks and mortar franchisee businesses.
True False
162.In a typical franchise agreement, the franchisor pays the franchisee a fee to manage its company, and the
two of them split the profits based on the percentages established in the agreement.
True False
163.Although franchise arrangements are a good source of income for the franchisee, these businesses do not
contribute significantly toward job creation.
True False
164.It is correct to say that if a franchisor expects a 6% royalty fee on revenue, the franchisor earns 6 cents on
each dollar of revenue the franchisee generates.
True False
165.The financial advantage to the parent company (the franchisor) in a franchise arrangement is the upfront
franchise fee and the collection of royalties if franchisees are successful.
True False166.If a firm is advertising that it is selling franchise opportunities, the prospective franchisee can be
assured that the government has performed due diligence on this company, and has deemed it a safe
investment.
True False
167.If a franchisee decides he wants out of the business, he is free to close up shop or sell the business, just as
if he were a sole proprietor or partnership outside of a franchise arrangement.
True False
168.If an established franchisor agrees to provide you the opportunity to become a franchisee in its franchise
system, the franchisor may also be willing to serve as a source of financing for your operation.
True False
169.According to the Spotlight on Small Business box, restaurants aren’t the only franchises attractive to
potential franchisees. Some prefer a low-cost and easily reproducible business model.
True False
170.In the Adapting to Change box, digital franchising is an impossible feat and could not be successful.
True False
171.Joshua wants to run his own business. A friend suggested that an inexpensive way to get started is to
buy a franchise, where he will have the freedom to run it exactly as he sees fit. As a recent student of
business, you concur with this advice.
True False
172.Marilyn paid a sizeable franchise fee to obtain a Fontmaster Printers franchise in Cleveland, Ohio. With
the franchise fee behind her, she can look forward to using her creative talents to make her print shop
different and more attractive than other Fontmaster shops in the Cleveland area.
True False
173.Liam owns a Far Horizons Travel Agency franchise. As a franchisee, Liam is guaranteed the right to
retain all of his franchise’s revenues and profits.
True False
174.Leanne, a franchisee, runs a chain of small restaurants with a well-known name. Due to her hard work
and people skills, her locations are doing quite well. She has noticed that several other franchisees in
the same franchise system have let their restaurants deteriorate, especially in terms of lack of upgrades.
Leanne should be concerned about this trend, since it eventually could affect her own business.
True False
175.Maria is already a successful franchisee with Nite Lite, a chain of “no frills” motels that provide clean
rooms and good service at affordable rates. The motel she currently operates is located in Texas, but she
is considering an opportunity to open another Nite Lite motel in Canada. Although her costs of operating
in a foreign nation may be higher, she has the benefit of an expanding market and less competition.
True False
176.A well-known franchised food chain was brought to its knees when several customers got sick from
tainted beef. Although the food chain recovered due to its quick and consistent action, several franchisees
sued the parent company for loss of sales. The franchisees experienced the coattail effects of the bad
publicity this event received.
True False
177.Alex’s uncle recently passed away and left him an American Dream Real Estate franchise business. Alex
is not a licensed agent or broker, nor does he know anything about the real estate business. He plans to
sell his American Dream franchise to his friend Derek, who recently got his real estate license. One of the
advantages of owning a franchise is that you can decide to sell out to anyone you believe is suitable for
the business.
True False178.Your friend Brett called to tell you he just heard a sales pitch for a new website development franchise
where “he can get in for a few thousand dollars.
” He wants to know if you are ready to invest too.
Although you lack expertise in graphic design or html programming, this should be a safe investment
since it is already advertised as a franchise system. It’s probably too good to pass up.
True False
179.A cooperative is simply another name for a corporation.
True False
180.A cooperative consists of people with similar needs who pool their resources for mutual gain.
True False
181.It is not unusual for members of cooperatives to work for and help manage their cooperative.
True False
182.Farm cooperatives were originally established to help farmers increase their economic power by acting as
a group rather than as individuals.
True False
183.The companies Blue Diamond, Ocean Spray, and Land O’Lakes are well-known cooperatives.
True False
184.A disadvantage of farm cooperatives is that they are subject to higher tax rates than corporations.
True False
185.At one time there were many farm cooperatives, but more recently other forms of business ownership
have replaced them.
True False
186.Originally, food cooperatives were formed to provide better prices for farmers. These groups now
cooperatively buy farm equipment and other products, and realize economies of scale by banding together
for these things.
True False
187.Jocelyn belongs to a food cooperative in her community. As a member, she can expect to have a vote in
the election of the cooperative’s board of directors.
True False
188.Jane has always disliked the notion that the customers, managers and workers of a business are separate
individuals with competing goals. She has joined with many other people in her community who share
this view to become a member, and part owner, of a child care center. Jane and the other members
operate the center for their own benefit, and each is expected to work at the center at least 12 hours each
month. The type of organization Jane belongs to is known as a joint venture.
True False
189.The
__________
A. partnership
B. corporation
C. joint venture
D. sole proprietorship
is the most common form of business ownership.
190.A
___________
A. closed corporation
B. subchapter S corporation
C. sole proprietorship
D. limited partnership
is a form of business that is owned, and usually managed, by one person. 191.
____________
receipts.
A. Corporations
B. Partnerships
C. Sole proprietorships
D. Limited liability companies
comprise about 20% of all businesses but account for about 81% of U.S. business
192.To many businesspeople, one of the major attractions of a sole proprietorship is:
A. the ability to obtain additional financial resources.
B. the protection of limited liability.
C. an unlimited lifespan.
D. the chance to be their own boss.
193.The
__________
A. sole proprietorship
B. limited partnership
C. corporation
D. cooperative
is usually the easiest form of business to start and end.
194.One of the major disadvantages of a sole proprietorship is the:
A. possibility of disagreements between owners.
B. unlimited liability the owner has for the debts of the firm.
C. fact that any income earned by this type of business is taxed twice.
D. high cost of starting or ending the company.
195.Starting a new business as a sole proprietorship:
A. requires retaining the services of an attorney.
B. is simple, but the proprietorship fee is very expensive in some states.
C. is usually simpler and less expensive than starting other forms of ownership.
D. is very similar to starting a business as a corporation.
196.In a sole proprietorship, the profits earned by the business are:
A. taxed as income for the business, but exempt from the personal income tax paid by the owner.
B. taxed at the lowest corporate rate.
C. the property of the owner, except for taxes owed to the government.
D. tax-free if the appropriate exemption is filed with the local government.
197.With respect to taxes, the sole proprietorship:
A. pays taxes on the profits of the business at the same rate that corporations pay taxes.
B. pays taxes on the profits of the business, at the owner’s personal tax rate.
C. pays taxes only if there are no expenses associated with the business.
D. is permitted to determine its own tax rate and schedule of payments.
198.A significant disadvantage of owning a sole proprietorship is the:
A. possibility of limited liability.
B. heavy tax liability that must be assumed.
C. overwhelming time commitment often required of the owner.
D. lack of incentives to motivate the owner.
199.When a sole proprietor dies:
A. the sole proprietor’s heirs have the option of taking over the business.
B. the business is sold to a larger corporation.
C. the company continues to function as it always has.
D. the company always closes down.200.Unlimited liability means:
A. when you own your own business you are responsible for all the business debts.
B. you are only liable for the money you invest in the business.
C. as a franchisee your franchisor is responsible for the debts of the franchise.
D. you are liable for whatever advertising promises your firm makes.
201.Any debts or damages incurred by a firm organized as a sole proprietorship are:
A. the responsibility of the owner.
B. limited to the amount the owner has invested in the firm.
C. paid for out of a reserve contingency fund that sole proprietors are required by law to set up.
D. normally covered by liability insurance.
202.An entrepreneur who wishes to start a business with little delay or hassle, and who wants to be his or her
own boss, should organize the business as a:
A. sole proprietorship.
B. cooperative.
C. C corporation.
D. general partnership.
203.Which of the following statements is the most accurate? Sole proprietorships:
A. are well suited for people who want to own a business and share in its profits without taking an active
role in management.
B. are taxed at the owner’s personal tax rate.
C. are the least risky form of business ownership.
D. must receive a state charter before they can legally conduct business.
204.Although sole proprietors do not pay any special taxes, as the owner of the business you are also an
employee of the business, which requires you to:
A. pay income tax only one time each year.
B. pay self-employment taxes.
C. pay for the right to get an employee identification number.
D. file an income tax return for the business.
205.Being your own boss means:
A. reducing your working hours.
B. having the freedom to set your own working hours and taking lots of vacations, particularly when just
beginning the business.
C. accepting accountability for the mistakes of the business.
D. having limited financial resources to throw into the business.
206.Joe Jackson operates a sole proprietorship, but he is in poor health and may be unable to continue running
the business. If Joe becomes incapacitated, his business:
A. automatically continues under new management as a sole proprietorship.
B. automatically converts into a public corporation with stock sold to interested investors.
C. ceases to exist unless sold or taken over by Joe’s heirs.
D. becomes the property of the most senior employee who wishes to continue operating the firm.
207.Maria has a lot of self-confidence and business knowledge. She recently opened a bakery as a sole
proprietor. She is expecting a high level of profits and is looking forward to:
A. the lower corporate tax rate paid by sole proprietorships.
B. keeping all of the money she earns except for the taxes she is required to pay.
C. keeping all of the money she earns since she does not have to pay taxes as a sole proprietor.
D. easily raising additional large sums of money from the capital markets since she is a sole proprietor.208.Kali owns Dog Trotters, a dog-walking business that she started to earn money after school and
supplement her allowance. She planned to keep all the profits, and has kept things simple by putting a
flier on the bulletin board at the local grocery store announcing that she was available to provide this
service. Kali’s business is a:
A. sole proprietorship.
B. franchise.
C. S corporation.
D. partnership.
209.Nick wants to start his own business. Nick should consider a sole proprietorship if he:
A. expects rapid growth and wants to be able to raise a large sum of money.
B. wants to make it easy to attract qualified employees.
C. wants to be his own boss and can accept unlimited liability.
D. wants to minimize the financial risk he must accept as the owner of a business.
210.Javier is the sole proprietor of a golf shop. Because he is a sole proprietor, any profit Javier’s business
earns is:
A. totally tax-free.
B. taxed only as Javier’s personal income.
C. taxed twice, once as business income, then again as Javier’s personal income.
D. taxed only if and when it is distributed to investors.
211.Selma owns a roofing business. She enjoys being her own boss, but her satisfaction comes at a price. Her
days are filled with organizing the activities of her employees and soliciting new customers. She often
misses activities with friends and family because of the obligations of running her own business. She also
knows that she has unlimited personal liability for any of her firm’s debts. Selma’s business is organized
as a(n):
A. joint venture.
B. C corporation.
C. S corporation.
D. sole proprietorship.
212.Halle wants to start a business. She has two goals. First, given her limited personal wealth and eagerness
to get started, she wants to get her business up and running with the least possible hassle and expense.
Second, she wants to minimize her personal risk in the event that her company experiences difficulties. If
Halle chooses a sole proprietorship, she would:
A. achieve both goals since this form of ownership is both the easiest to form and the least risky.
B
meet her first goal since sole proprietorships are easy and inexpensive to form. However, she would
.
expose herself to personal risk because owners of sole proprietorships have unlimited liability.
C. not achieve either goal since proprietorships are both costly to set up and subject to unlimited liability.
D
achieve her second goal, since the owners of sole proprietorships are legally protected from losing more
.
than the amount they invest in their company. However, she would find that the start-up costs would be
higher than if she had incorporated her business.
213.In a partnership, a(n) __________ partner (owner) actively manages the company and has unlimited
liability for claims against the firm.
A. unlimited
B. limited
C. general
D. associate
214.A partner (owner) who invests money in a business does not take an active role in managing the
operation, and is only subject to losing the funds he/she invested.
A. implied partner.
B. limited partner.
C. partial partner.
D. corporate partner.215.The limited liability provided to limited partners means that they are not responsible for the debts of the
business beyond:
A. the firm’s total assets.
B. the amount they have invested in the company.
C. the percentage of profits they are entitled to earn.
D. their total personal assets.
216.According to the Uniform Partnership Act, the three key elements of any general partnership are:
A. a board of directors, a written partnership agreement, and a well-defined product or service.
B. two owners, an adequate financial base, and a written statement describing the manner in which profits
and losses will be divided.
C. common ownership, shared profits and losses, and right to participate in management.
D. common stock, a board of directors, and a statement of limited liability.
217.A type of partnership called a
___________
acts much like a corporation and is traded on stock
exchanges, but it is taxed like a partnership with profits passing through to the owners and taxed as the
owner’s personal income.
A. limited partnership
B. combined general partnership
C. cooperative partnership
D. master limited partnership
218.Compared to a sole proprietorship, which of the following is considered an advantage of a general
partnership?
A. Ability to pool financial resources
B. Unlimited liability for all owners
C. Division of profits among owners
D. Ease and flexibility in transferring shares of ownership to others
219.In a limited liability partnership, each partner’s risk of losing personal assets is:
A. unlimited.
B
.
limited to losses that result from his/her own acts and omissions and the acts and omissions of those
who work under his/her supervision.
C. determined entirely by the maximum loss provision established by the articles of co-partnership.
D. nonexistent.
220.Which of the following is an advantage of a partnership?
A. Ease of starting and ending the business
B. Unlimited liability
C. Shared management and pooled skills
D. Little time commitment
221.When entering into a new partnership, a good strategy is to:
A. avoid putting the agreement in writing since this would limit the flexibility of the partnership.
B. put the partnership agreement in writing.
C. plan to incorporate as soon as possible.
D. agree to put the first year’s profits back into the partnership.
222.One difference between partnerships and sole proprietorships is that partnerships:
A. take less work to form.
B. are managed by an elected board of directors.
C. have the advantage of limited liability.
D. have a greater chance of long-term survival due to the accountability of each partner to the other.
223.Which of the following statements about partnerships is most accurate?
A. A partnership is a corporation with fewer than 100 owners.
B. A major advantage of a partnership is that it offers all owners limited liability.
C. A major drawback of a partnership is that it is difficult to terminate.
D. Partnerships are taxed at the lowest corporate tax rate.224.When comparing general partnerships to sole proprietorships, an advantage of partnerships is that
they:
A. are less risky, because each partner is responsible for only a specified fraction of the firm’s debts.
B. are easier to terminate.
C. cost less to organize.
D. give the firm a stronger financial foundation.
225.A good reason why partners should spell out the details of their partnership arrangements in writing
is:
A. the partnership is not a legally recognized business unless they do so.
B. a written agreement will help reduce misunderstandings and disagreements among the partners.
C. putting the agreement in writing will limit the liability of each partner to a specified level.
D. doing so will make it easier to convert the business to a corporation at a later date.
226.A master limited partnership (MLP) is:
A. not traded on the stock exchanges.
B. pays corporate income taxes.
C. taxed like a partnership.
D. the corporate form of choice for small groups of individuals.
227.Which of the following is not a disclosure that should be part of a partnership agreement?
A. The way profits will be divided among partners.
B. The list of personal assets of each partner.
C. The specific responsibilities of each partner.
D. The salaries and drawing accounts of each partner.
228.One way to eliminate some of the risk of your partners making costly mistakes that could jeopardize your
personal assets is to set up a:
A. Master Limited Partnership.
B. sole proprietorship.
C. limited amount of time each can actively spend in the business.
D. limited liability partnership.
229.Finley is a limited partner in Gettout & Associates. Heywood U. Gettout, one of the general partners
in the company, must temporarily leave the company to attend to some personal matters. Heywood has
asked Finley to perform his managerial duties while he is gone. As a limited partner, Finley:
A. can fill in as a manager whenever necessary, as long as it is for only a limited time.
B. can make managerial decisions as long as they do not involve the payment of money.
C. cannot participate in the management of the partnership.
D. can manage the firm as long as he gets approval from the company’s other general partners.
230.Kristen and her brothers and sisters decided to form a partnership that specializes in home design of all
types. One of their goals is to maintain the loving relationship they currently enjoy, so they are following
the Model Business Corporation Act recommendations as they write the partnership agreement. Which of
the following is an accurate recommendation of the Act?
A
The business should be actively operating for an extended period before the partners decide who is
.
responsible for what business functions.
B. Family businesses never take on outside partners, so no discussion of this need take place.
C. There should be discussion and well-understood ways that the partners will handle disagreements.
D
Due to the fact that they are all under 40 years old and expect to work until they are 65 there is no need
.
to decide what will happen to the partnership if one decides to leave the business or retire, or dies.231.Maya plans to open a shop specializing in foods and cultural items from the Middle East. She wants to
be the firm’s only general partner, but she is trying to get several friends to participate as limited partners.
Apparently Maya wants to:
A. limit her personal liability to the amount she personally invests in the company.
B. keep all of the firm’s profits.
C. obtain a strong financial base for the firm while maintaining personal control over the firm’s
management.
D. meet the legal requirements of the Uniform Partnership Act.
232.Zach and Mac own an auto repair business that they operate as co-owners. Both take an active role
in the management of the business, and each accepts unlimited liability. Zach and Mac operate as a
.
________
A. joint venture
B. general partnership
C. limited partnership
D. cooperative
233.Mel, Tim, and Bill agreed to partner in a small rehab business. Initially, they were enthusiastic
contributors until their first project took more work than Mel initially estimated; Tim wanted morning
meetings and long lunch hours; and Bill decided to go on vacation even though the project was not
complete and ready to sell. As Figure 5.2 indicates,
A. it’s smart to begin the partnership with honest communication of what each partner expects to give and
get from the partnership.
B
.
it’s smart to organize the business as a limited liability company to reduce the financial risks that put
pressure on members of the partnership.
C. it’s smart to designate one of the partners as the primary partner with final authority to call all the
shots.
D. it’s smart to enter into partnerships with people who have similar educational and cultural backgrounds
and similar personalities.
234.Jamie and Maria invested all their savings in a small pizzeria they opened outside the University of
Western Kentucky. They operated the business as a general partnership. After 11 months, the business
went broke and Jamie and Maria were left with outstanding bills of $37,500, which was more than their
initial investment in the company. Jamie and Maria can:
A. lose their personal assets as the result of their company’s financial problems.
B. lose only the funds they originally invested in their company.
C. lose only the total value of the assets actually used to operate the business.
D
avoid any liability for these debts since a partnership is considered to be a business entity that is
.
separate and distinct from the partners who own it.
235.Randy and Mandy plan to pool their money and musical talents to form a general partnership and begin
booking weekend gigs. One of the first things Randy and Mandy should do is:
A. seal the deal with at least five clubs where they can book three months’ worth of gigs.
B. consult an attorney and put their agreement in writing.
C. pay the partnership formation fee to their state’s commerce commission.
D. file the limited liability paperwork at the courthouse in the county in which their partnership will be
formed.
236.Travis has agreed to invest $16,000 in a partnership with his sister and brother-in-law. He does not intend
to actively work in the partnership, nor does he wish to risk any of his own assets other than the $16,000
he initially invests. The partnership has agreed to permit him to share in the profits. As an expert on forms
of business ownership, you know that Travis is a
______________
in this partnership.
A. general partner
B. preferred stockholder
C. secondary partner
D. limited partner237.Jim is one of several general partners who own Beef ‘N Beer, a small chain of restaurants located in
Missouri and Illinois. Jim is interested in converting the partnership into a master limited partnership. If
he convinces other partners to go along with his idea, Beef ‘N Beer will:
A. offer shares of ownership that are traded on a stock exchange much like a corporation.
B. pay its taxes like a corporation.
C. begin to operate much like a sole proprietorship.
D. have to change its name to include the term Ltd. in its title to indicate its owners have limited liability.
238.Kristen and her brothers and sisters set up a design firm called Houses by Design LLP. Although key
business functions are centralized, each sibling is a licensed architect that designs, builds, and installs
residential and commercial buildings for his/her own clients. Unfortunately, a design created and installed
for one of their clients resulted in water damage to the basement of the client’s new home. The limited
liability partnership:
A. guarantees that none of the company’s partners will lose more than the amount they invested in the
company.
B
guarantees that only those partners who were directly involved in designing and building this home face
.
unlimited liability for claims against the firm.
C. protects the partners from any suit by the client.
D. will enable the firm to quickly reorganize with only minor financial losses.
239.A(n) ___________________
separate from its owners.
A. limited partnership
B. conventional corporation
C. unlimited partnership
D. nonprofit organization
is a state-chartered legal entity with authority to act and to have liability
240.An owner of a corporation is known as a(n):
A. general partner.
B. limited partner.
C. director.
D. stockholder.
241.Which of the following statements about the operation of a corporation is correct?
A. A corporation receives its charter from a state government.
B. A corporate charter automatically expires in 99 years and must be renewed if the corporation wants to
remain in business.
C. Owners of a corporation have unlimited liability for any claims against their company.
D. A corporation tends to be much easier to set up than a sole proprietorship or partnership.
242.The form of business ownership best suited to raising large amounts of money for expansion is the:
A. sole proprietorship.
B. partnership.
C. corporation.
D. cooperative.
243.Which of the following is an advantage of the corporate form of business when compared to sole
proprietorships and partnerships?
A. Ease of formation
B. Lower taxes
C. Simplified paperwork
D. Limited liability of owners
244.Compared to partnerships and sole proprietorships, a major advantage of the C (conventional) corporation
as a form of business ownership is that it:
A. has the ability to raise more money.
B. is easier and less expensive to form.
C. qualifies for simplified tax treatment.
D. creates unlimited liability for its owners.245.Which of the following is normally considered a disadvantage of the corporate form of business?
A. Unlimited liability of owners.
B. Difficult transfer of ownership.
C. Limited life.
D. Double taxation of earnings.
246.The board of directors for a corporation is elected by its:
A. creditors.
B. stockholders.
C. managers.
D. employees.
247.A separation between ownership and management is most likely to occur in a:
A. sole proprietorship.
B. general partnership.
C. corporation.
D. limited liability partnership.
248.One disadvantage of
A. corporations
B. general partnerships
C. sole proprietorships
D. limited partnerships
is the initial cost of formation.
_________
249.The form of business ownership that usually requires the most detailed record keeping is the:
A. corporation.
B. partnership.
C. sole proprietorship.
D. limited partnership.
250.A major advantage of S corporations is that they:
A. can have more stockholders than a C corporation.
B. can operate in foreign nations as if they were domestic corporations.
C. require less paperwork to set up than a C corporation does.
D. avoid the problem of double taxation associated with conventional corporations.
251.One reason many companies do not organize themselves as an S corporation is that this form of
business:
A. is subject to a higher tax rate than a general partnership.
B. does not provide owners with limited liability.
C. has a special eligibility restriction, which many businesses are unable to meet.
D. is much more difficult to set up than C corporations.
252.To qualify as an S corporation, a company must:
A. have no more than 50 shareholders.
B. have shareholders who are individuals or estates and qualify as permanent residents of the U.S.
C. have a different class of stock for each owner.
D. have not more than 5 percent of income derived from passive sources.
253.The income generated by S corporations:
A. passes through to its owners, and each is taxed individually for this income.
B. is provided to nonprofit organizations, so it is considered a tax-free source of funds.
C. is taxed separately from its owners.
D. must be reinvested in the business. Owners should not expect dividends.254.
_____________
eligibility requirements.
A. Regulated equity companies
B. Corporate cooperatives
C. Limited liability companies
D. Private drawing companies
are companies that are similar to S corporations but are not restricted with similar
255.One disadvantage of a limited liability company is that it:
A. requires all earnings of the business be taxed at the corporate rate.
B. has a limited life span.
C. requires the owners to divide up profits and losses in a fixed proportion.
D. has a more restrictive ownership requirement than S corporations.
256.One reason limited liability companies have become so popular is that they:
A
.
can be taxed either as a corporation or as a partnership, so owners can choose the tax treatment that is
most advantageous for their situation.
B. allow owners to sell their interests in the company without requiring approval from other owners.
C. have unlimited life.
D. permit owners to avoid paying self-employment taxes on the company’s profits.
257.Earnings of C corporations can be:
A. taxed twice if they are distributed as dividends to stockholders.
B. taxed at twice the going rate of a partnership or sole proprietorship.
C. taxed by the federal government, but they are exempt from state taxes if the corporation owns any
facilities within that state.
D. taxed the same as a partnership.
258.Which of the following is an attractive benefit of a corporation?
A. Corporations can enjoy double taxation.
B. Unlike limited partnerships, all owners of corporations are passive investors.
C. Corporations can protect their owners with unlimited liability.
D. Corporations can attract employees by offering stock options.
259.The reason a professional such as a lawyer or doctor would incorporate his/her business is:
A. to be assured that another professional firm would not take over and make decisions, similar to a
hostile takeover.
B. to comply with the law because insurance companies require that they be corporations.
C. to protect his/her other assets with limited liability.
D. to protect his/her assets with unlimited liability.
260.Which of the following statements about S corporations is most accurate?
A. The major attraction of S corporations is that they avoid the problem of double taxation.
B. S Corporations are similar to C corporations, except that the majority of owners are foreign investors.
C. Any corporation willing to pay the necessary fees and fill out the required paperwork can become an S
Corporation.
D. Only large corporations with operations in more than one state can qualify to be classified as S
corporations.
261.The organizational structure of a corporation permits:
A. the company management to elect the Board of Directors.
B. stockholders to elect the Board of Directors.
C. stockholders to elect the officers and management team.
D. employees (by committee) to elect the officers of the company.
262.Which of the following statements is the most accurate? A foreign corporation:
A. does business in one or more states, but is chartered in another state.
B. is 50% owned by individuals or companies from another nation.
C. is headquartered in another nation.
D. is the same thing as a multinational corporation.263.The S corporation is likely to be less popular in the future because:
A
congress repealed the limited liability protection of S corporations and limited them to companies with
.
earnings of less than $3 million per year.
B
limited liability companies, which do not have the restrictive eligibility requirements of S corporations
.
and offer greater flexibility in the choice of tax treatment, are now legal in all 50 states.
C
many states significantly increased the annual fee that S corporations must pay to maintain their tax
.
status, thus eliminating the financial advantages of this form of ownership.
D
S corporations have been made illegal in several states as a reaction to widespread abuse of the special
.
benefits available to this type of business.
264.Compared to the C corporation, the limited liability company is an attractive form of business ownership
because:
A. even though it is a little more expensive to form, it has a longer life than the C corporation.
B
a limited liability company permits one owner to own all the stock of the company, whereas a C
.
corporation requires several owners.
C
once formed, the limited liability company is a legal form of business ownership, worldwide, whereas
the C corporation must file for corporate status in each nation it elects to do business.
.
D
once formed, the limited liability company does not require the firm to hold annual meetings, and has
.
the option to avoid double taxation.
265.Double taxation means:
A. if stockholders decide to sell their shares, they are subject to paying twice the amount of taxes on any
capital gains.
B. as the owner of the company, you pay twice the amount in employment taxes on yourself, as you do on
your employees.
C
corporations pay taxes on their profits. If they distribute after-tax profits to the stockholders, the
.
stockholders also pay taxes on the distribution.
D. if the corporation doubles its profits from the previous year, the firm’s tax rate (the percentage it pays
in taxes) will also double.
266.Trevor and Tyler own all the stock in the Double T Corporation. The stock of this corporation is not sold
to the general public. Trevor and Tyler own a:
A. limited liability company.
B. master limited partnership.
C. alien corporation.
D. closed corporation.
267.Tess and Tijuana have considered starting their own business but are concerned about the possibility of
losing their personal assets if the business fails. One way for Tess and Tijuana to avoid this risk would be
to organize their firm as a(n):
A. general partnership.
B. limited partnership.
C. corporation.
D. sole proprietorship.
268.Maria recently purchased 100 shares of stock in Idle Time Gaming, Inc. Maria is a(n) ______________
of this company.
A. owner
B. manager
C. creditor
D. partner269.Dane is a stockholder in SmallWorld, Inc., a C corporation that manufactures amusement park rides. The
company recently lost a major court decision and will probably be forced into bankruptcy. In fact, the
damages awarded are so great that, even if all company assets are sold and the proceeds are used to pay
its debts, SmallWorld is likely to still owe money to its creditors. If SmallWorld goes bankrupt, Dane and
the other stockholders will:
A. be personally responsible for all remaining debts.
B. lose their investment but nothing else.
C. be entitled to full reimbursement of any investment losses.
D. automatically qualify for federal reimbursement for any losses suffered by the firm.
270.Ramon lives in Mexico City and is a Mexican citizen. He has several friends in the United States who
own shares in an S corporation. Ramon would like to invest in this company. Ramon:
A. can invest in this company, but must pay both U.S. and Mexican taxes.
B. cannot become a shareholder since he is not a citizen or permanent resident of the U.S.
C. can become a shareholder but cannot become a manager, and his income must be paid in pesos.
D. needs approval from the Mexican government before he can invest.
271.Although it is a small company, Zorn Enterprises owns a large number of inexpensive rental housing
units in Texas and Louisiana. Currently, the company is a chartered C corporation, but the owners
are interested in switching to be an S corporation. After consulting a lawyer, they learned that Zorn
Enterprises does not qualify to be designated as an S corporation. Which of the following characteristics
of Zorn Enterprises would prevent it from becoming an S corporation?
A. The firm has fewer than 75 stockholders.
B. The firm is chartered in one state, but owns property in another.
C. The firm has only one class of stock, all owned by U.S. citizens.
D. The firm receives more than 70 percent of its income from rents and other passive sources.
272.Emily wants to open a chain of hair styling salons and hopes to attract investors to help finance growth.
She considered forming a C corporation, but wants to have more flexibility about how the new business
will be taxed. She also wants to offer investors/owners limited liability. Emily can satisfy her objectives
by setting up a(n):
A. limited liability company.
B. S corporation.
C. alien corporation.
D. general partnership.
273.A few years back, your three U.S. born friends that live in the State of Wyoming inherited a dude
ranch that they plan to turn into a retirement haven for race horses. Peaceful Pastures wants to open its
doors by spring of 2018. After attending several small business seminars, the three friends are certain
they need limited liability. The high-risk, labor-intensive business will require a sizeable investment
including an air-conditioned barn, several fenced-in pastures and loads of animal feed. You recently
heard that one form of business ownership requires owners to pay self-employment taxes on the entire
amount of earnings. You are fairly certain this is one tax liability your friends would like to avoid. You
recommend:
A. sole proprietorship
B. general partnership
C. limited liability company
D. S corporation274.Double taxation is experienced by corporations that pay dividends. Which of the following scenarios is an
accurate example of double taxation?
A
If Idle Time Gaming, Inc., distributes 20% of its net profit after taxes to its stockholders, these funds
.
will be taxed again, when each individual stockholder claims his/her portion as earnings.
B
By law, Idle Time Gaming, Inc., is permitted to tax its executive employees twice on their earnings, and
.
then pass those funds on to its stockholders in the form of dividends.
C
Due to the fact that it is a corporation, the accountants of Idle Time Gaming, Inc., calculate 35% of the
.
company’s earnings, multiply it by 2, and then distribute that amount to the federal government each
year for taxes.
D
If Idle Time Gaming, Inc., fails to pay its taxes on time during any given year, it must pay the current
.
year and the delinquent year, in order to stay in business, similar to being taxed two times.
275.Khalid is a 39-year-old married business owner who runs a dry cleaning service with three locations.
His personal obligations are the home that he owns with his wife who works for a well-known insurance
company; the health needs of his family; and his commitment toward saving for the future higher
education needs of his three children. Khalid knows that two of his locations require a large infusion of
cash to pay for new and expensive dry cleaning equipment. Although his wife’s job provides the family
with health insurance, it also places the family in a higher income tax bracket. Khalid would certainly
like to minimize his taxes. Which of the following forms of business ownership would you suggest for
Khalid? Khalid should consider:
A. a sole proprietorship due to the fact that it pays its own taxes and it has limited liability.
B. a sole proprietorship due to the fact that it has unlimited liability and it will protect the family’s
personal assets.
C
a corporation because he can avoid the negative aspect of limited liability. Corporations are always
.
taxed at a lower rate than individuals.
D
a limited liability company because he will only be liable for what he has invested in the business. His
.
personal assets will be protected, and he can be taxed like a sole proprietorship.
276.One reason that companies participate in mergers and acquisitions is:
A. to do the same thing as the competition because it makes for a highly leveraged company.
B. to convert a sole proprietorship into a partnership.
C. to expand within their own field or enter new markets.
D. to take the first step toward a join venture.
277.A
____________
A. joint tenancy
B. tenancy in common
C. merger
D. leveraged buyout
is two firms combining to form one company.
278.A(n) _________
A. cooperative
B. hostile takeover
C. leveraged buyout
D. acquisition
occurs when one company buys the property and obligations of another company.
279.Three types of corporate mergers are:
A. economic, geographic, and financial.
B. vertical, horizontal, and conglomerate.
C. flexible, differentiated, and conditional.
D. explicit, implicit, and intrinsic.
280.A
______________
A. vertical
B. horizontal
C. diagonal
D. conglomerate
merger unites firms at different stages of related businesses. 281.When two companies in the same industry agree to become one firm, the result is called a:
A. vertical merger.
B. joint venture.
C. monopoly.
D. horizontal merger.
282.When two companies in completely unrelated industries agree to become one firm, the result is called
a:
A. vertical merger.
B. joint venture.
C. conglomerate merger.
D. horizontal merger.
283.A conglomerate merger will:
A. diversify business operations and investments.
B. allow the firm to have a less dominant position in its market.
C. enable the firm to enjoy a higher degree of specialization.
D. give the firm a more secure access to needed materials and components and better control over quality.
284.One result of taking a firm private is:
A. the firm’s stock is no longer available for purchase on the open market.
B. managers lose some control as the number of stockholders increases.
C. the public image of the firm will suffer.
D. the firm will have access to more capital.
285.An attempt by employees, management, or a group of investors to purchase an organization primarily
through borrowing is called a(n):
A. golden parachute.
B. arbitrage agreement.
C. factor transaction.
D. leveraged buyout.
286.If a group of stockholders or management obtain all the stock of a previously publicly traded firm for
themselves, this is referred to as:
A. capitalizing.
B. stock turning.
C. turning the equity.
D. taking the firm private.
287.The difference between a merger and an acquisition is:
A. a merger does not combine the assets and liabilities of firms, whereas an acquisition combines assets
and liabilities.
B
a merger combines the assets of the two firms, but each company continues to assume its own
.
liabilities, whereas an acquisition is a total buyout of one firm by another.
C
a merger is the joining of resources of two companies, whereas an acquisition is a buyout of one firm by
.
the other. The new company concerns itself with merging of resources.
D
a merger is always something smaller tagging onto something larger, like a merging lane onto an
.
interstate, whereas an acquisition is two firms that are relatively the same size agreeing to continue as
one, more like two major interstates that come together and travel as one for several miles.
288.When two firms which do not participate in the same industries, for example, a software company and a
fast food restaurant company, decide to merge, the result is called a
____________
merger.
A. vertical
B. horizontal
C. linear
D. conglomerate289.A merger involving a commercial bakery and a grocery retailer would be an example of a:
A. vertical merger.
B. horizontal merger.
C. linear merger.
D. conglomerate merger.
290.A merger involving a software producer and a clothing manufacturer is an example of a:
A. vertical merger.
B. horizontal merger.
C. linear merger.
D. conglomerate merger.
291.In a leveraged buyout, the managers of a firm, its employees, or other investors:
A. move the company elsewhere and start over.
B. obtain the assets of the company through bankruptcy proceedings.
C. borrow funds to buy out the firm’s stockholders.
D. negotiate a merger with another firm to create a conglomerate.
292.When investors successfully take a firm private, the firm’s stock is:
A. converted into bonds.
B. converted into cash.
C. no longer sold to investors on the open market.
D. pledged as collateral to its bondholders.
293.Modern Screen Entertainment, Inc., recently bought Star Power Pictures, Inc., for an undisclosed amount
of money. It now owns all of Star Power Picture’s properties and obligations. This is an example of
a(n):
A. merger.
B. combination.
C. expropriation.
D. acquisition.
294.Continental Foods is considering a conglomerate merger with a company that makes storage solutions. A
likely reason is:
A. expand its market share.
B. develop spin-off companies.
C. diversification.
D. meet the requirements to convert to a limited liability company.
295.Several years ago, Regis Corporation, a very large hair styling salon company, purchased 60 “Your
Father’s Mustache” salons. Although this was initially an acquisition, the merging of these two businesses
was a(n) __________
. Regis went on to purchase several hair care product companies. Joining forces
with hair care product companies would represent a
.
___________
A. conglomerate merger; horizontal merger
B. vertical merger; horizontal merger
C. horizontal merger; vertical merger
D. conglomerate merger; conglomerate merger
296.The strategy of investors who are attempting a leveraged buyout is to:
A. shape up the company for quick resale.
B. use debt to finance the buyout of the firm’s stockholders and gain control of the firm themselves.
C. secure ownership of all of the existing stock in a company by issuing and selling large amounts of new
stock.
D. use investment tax credits from the government to acquire all of the physical assets owned by the firm.297.Foreign investment in U.S. companies continues to be strong. When Belgian-based In-Bev purchased the
largest beer company in the U.S., Anheuser-Busch, this action constituted a(n) _________________
with
a negotiated selling price of $52 billion.
A. merger
B. aggregate
C. acquisition
D. unequivocal buy-in
298.Adam is a major stockholder in Precision Transmission Services (PTS), a nationwide network of
transmission repair shops founded by his father. Currently, PTS stock is sold on the open market, but
Adam has talked to several relatives about his desire to get all of the PTS stock back in his family’s
hands. Adam is interested in
.
_____________________________
A. taking the firm private
B. a hostile takeover of the firm
C. converting the firm to a general partnership
D. forming a master limited partnership
299.Hidden Valley Communications, Inc., located in a remote area of Utah, made a special device that was
used in LTE phones. After three years of local operations, the company that employed 4,000 people was
planning to close its Utah operation and move the assembly offshore. Under the direction of a financial
services company that financed the deal, the employees agreed to become owners of the company and
continue to operate the business. The business concept that describes this arrangement is:
A. IPO (initial public offering).
B. LBO (leveraged buyout).
C. EPO (equity public offering).
D. HM (horizontal merger).
300.A(n) ___________
is an arrangement whereby someone with a proven idea for a business sells the rights
to use the business model, to sell a product or service to others in a given territory.
A. conditional grant
B. franchise agreement
C. trade contract
D. extended ownership agreement
301.A(n) _____________
is a company that has a proven business model and is willing to sell the rights
to use the business model to others so that they can sell the same product or service within a given
territory.
A. intrapreneur
B. franchisee
C. limited partner
D. franchisor
302.A person who buys the right to use a business name and sell a product within a given territory is called
a:
A. stockholder.
B. franchisee.
C. limited franchisor.
D. venture capitalist.
303.A franchise can be formed:
A. only as a general partnership.
B. only as a corporation.
C. as either a corporation or partnership, but not as a sole proprietorship.
D. as a corporation, partnership or sole proprietorship.304.The most popular type of business for franchising is:
A. consumer wholesale firms.
B. restaurants.
C. specialty steel manufacturing.
D. medical services.
305.A
____________
A. royalty
B. dividend
C. premium
D. co-pay
is the share of profits or percentage of sales a franchisee pays to a franchisor.
306.Which of the following is an advantage of franchises?
A. Shared profit.
B. Management regulation.
C. Management and marketing assistance.
D. Coattail effects.
307.One reason franchises have become so popular is that this arrangement provides the franchisee with:
A. a nationally recognized name and product.
B. a low cost way to start a business.
C. limited liability.
D. the right to retain all profits earned by their franchise.
308.Global franchising offers:
A. few opportunities for American investors.
B. opportunities for large franchise systems, but not small ones.
C. opportunities for both large and small franchises.
D. American firms the opportunity to market goods overseas without any need to adjust for cultural
differences.
309.Opening and operating a franchise in a different country:
A. is illegal according to the Clayton Antitrust Act.
B. is no different than setting up a franchise in the domestic market.
C. may require the owner to adapt to social and cultural differences.
D. is much less risky than owning a domestically based franchise.
310.Franchisors may send reverse royalties to franchisees who:
A. have not yet created their own website.
B. feel their sales have been hurt by the franchisor’s Internet sales.
C. are using e-commerce to expand their sales territory.
D. desire to streamline their communication with employees, customers, and vendors.
311.
_____________
in other countries.
A. Canada
B. Mexico
C. Great Britain
D. Japan
is by far the most popular target for American franchisors seeking to establish franchises
312.Franchised businesses are successful (both domestically and internationally) because:
A. they require very little start-up revenue.
B. people prefer the owners and employees of franchised businesses.
C. laws require franchisors to provide the same level of service to franchisees.
D. customers like the predictability of the product and/or service.313.An evaluation of franchising would conclude that this type of arrangement:
A
.
has become the dominant form of business organization in the United States because it has many
advantages and almost no disadvantages.
B. appeals to people who want to own a business, but are not comfortable starting a company from
scratch.
C. has a much higher risk of failure than independent companies.
D. has little chance of success outside the United States because many foreign countries do not allow such
arrangements.
314.Which of the following statements best summarizes the experience of American franchisors in foreign
countries?
A. Very few American franchisors of any size have had success in international markets.
B
Large franchisors have had success in other nations, but newer and smaller franchisors have lacked the
.
financial strength and reputation to succeed in global markets.
C. The only nations in which American franchisors have achieved any success are Great Britain and
Mexico.
D
Both large and small franchises have found success in foreign countries by providing convenience and
.
a predictable level of service and quality.
315.One important consideration when prospecting for a good franchise business is:
A. the saturation rate of the franchise. The more saturation the better.
B. the market potential for the product or service, at the prices you need to charge.
C
the population level of the area where you will operate. Large populations are too overwhelming, often
.
needlessly increasing demand.
D. a limited disclosure statement, and being mindful that any disclosure statement may limit your
success.
316.Which of the following statements about buying a franchise is most accurate?
A
One of the advantages of buying a franchise is that franchisors are so closely regulated that there is
.
virtually no chance for scams to succeed.
B
Before purchasing a franchise, the buyer should carefully evaluate the franchise, the franchisor, his or
.
her own situation, and the nature of the market.
C
Franchise agreements are simple to evaluate, since federal law requires that all such agreements must be
.
written in plain English with all fees and terms clearly explained.
D
Buying a franchise is the simplest and least expensive way to set up a business, since the franchisor has
.
already worked out all of the details for setting up and running the business.
317.Which of the following statements about operating a U.S.
-based franchise in a foreign country is most
accurate?
A
U.S.
-based franchises are most likely to succeed in a foreign market if they use the same strategies and
.
procedures used by franchises in the United States.
B
There are limited opportunities for U.S.
-based franchises to open in foreign countries because, aside
.
from Canada, Mexico, and a small number of European countries, most foreign nations do not allow
American-owned franchises to operate within their borders.
C
The operating costs for franchises in foreign countries may be fairly high, but chances for success are
.
quite good, because competition is likely to be less intense and the customer base in many foreign
countries is expanding.
D
It is difficult for U.S.
-based franchises to succeed in most foreign countries because the low incomes of
.
most households in these countries result in weak demand.
318.Sierra is interested in becoming a franchise owner, by opening and operating one of 50 Cactus Katie’s
Grills, a very successful fast food chain specializing in food dishes from the American southwest. Which
of the following problems is Sierra most likely to encounter if she agrees to become a franchisee?
A. High initial costs and fees
B. Poor name recognition and visibility
C. Lack of financing
D. Lack of managerial assistance319.Marco is a franchisee with Daggies, a chain of sandwich shops. His business was doing well until several
Daggies franchisees got in trouble and were forced to close their shops. Soon afterward, Marco’s business
deteriorated and he too was forced to close. This is an example of:
A. an economic shakeout at work.
B. the coattail effect.
C. the law of diminishing returns.
D. management by exception.
320.Daggie’s Sandwiches, Inc., sells the rights to use its name and sell its sandwiches in a given market area
to aspiring businesspeople who are willing to pay agreed-upon fees and meet certain contractual terms.
Daggie’s:
A. is offering investors the opportunity to form limited partnerships.
B. is a franchisor.
C. creates private subsidiary companies.
D. offers a tax-free investment potential.
321.Midas Muffler sells franchises to prospective businesspersons who want to use the Midas name and offer
Midas products. In a franchise arrangement, Midas would be the
________, and the buyer of the franchise
is the
.
________
A. owner; limited partner
B. co-signer; co-signee
C. franchisor; franchisee
D. franchisee; franchisor
322.Jenna plans to invest in a cleaning service franchise called Spare Time. At her first interview with the
franchisor’s selling agent, she learned that the parent company expects royalties of 5%. These are:
A. the initial investment, also known as the franchise fee paid to the franchisor.
B. the cost of supplies that she will purchase one time each month from the parent company.
C. milestones that the parent company expects her to reach. With each milestone, she will be rewarded
with commissions.
D. a share of the profits or a percentage share of revenues (net sales).
323.A prospective franchise owner wants to keep his monthly costs at a minimum. The franchisor he is
reviewing is advertising that royalty payments of 8% of sales could be as high as $250,000 per month.
The franchisor is claiming that a franchisee can expect monthly sales to be as high as:
A. $2,125,000
B. $2,000,000
C. $3,125,000
D. $200,000
324.Naomi is planning to invest in a new online franchise, the Novel Artist, Inc. The franchisor provides
proprietary software and training for designing invitations and cards for special occasions such as
weddings, graduations, and birth announcements. The franchisee is obligated to pay a monthly fee to the
franchisor. Naomi will use the software to create her own special designs that she will ultimately feature
on her website. Order turn-around time must be fast. She can only take on as many clients as she can
make good on delivery. An advantage of Naomi’s online franchise is:
A. She has a limited territory.
B. She has a narrow product offering.
C. She does not need name recognition or marketing assistance.
D. She has an unlimited territory.325.Greg plans to open up three Hottie Pata′tee franchises in the greater Denver area. He just informed you
that he plans to negotiate with the franchisor to eliminate the Big Potato Head that graces the roof of these
restaurants. Greg is likely to learn that:
A. the parent company will give him a start-up cost break for the same amount that it would have to pay
for three of these signs.
B
he is making a smart decision because it is not the sign that will bring customers to his potato bar. It is
.
the wide-selection of toppings and six different ways he will cook potatoes.
C. it is nonnegotiable due to company rules.
D. his failure rate will not increase or decrease because franchises traditionally have low failure rates.
326.A
___________
A. corporation
B. limited partnership
C. mutual fund
D. cooperative
is an organization that is owned and controlled by the people who use it—producers,
consumers and workers with similar needs pool their resources for mutual gain.
327.In rural areas electrical power is often sold by ____________
policy to sell them electricity at wholesale rates.
A. franchises
B. limited partnerships
C. mutual funds
D. cooperatives
that take advantage of the government’s
328.Some
__________
part of their duties.
A. franchises
B. limited partnerships
C. mutual funds
D. cooperatives
ask members/customers to work at the organization for a number of hours a month as
329.The purpose of a farm cooperative is to:
A. give members more economic power as a group than they would have as individuals.
B. give each farm an equal share in the running of the cooperative.
C. equalize the members’ standard of living.
D. allow socialism a foothold in the U.S.
330.In a cooperative, members/customers:
A. democratically control their businesses by electing a board of directors.
B. are known as limited partners.
C. each have unlimited liability for the debts of the firm.
D. take turns serving on the board that manages the company.
331.People who form cooperatives:
A. believe the government should play a larger role in the economy.
B. dislike the notion of having owners, managers, and customers as separate individuals with separate
goals.
C. see competitive behavior as the key to ensuring rapid economic growth.
D. want to find a way to supply basic necessities free of charge to everyone.
332.A distinguishing feature of a cooperative is that it:
A. maintains a distinct separation between ownership and management.
B. is only intended to operate for a limited period of time.
C. is owned and operated by the people who use it.
D. can have no more than 75 owners, all of whom must be citizens of the United States.333.Which of the following statements about farm cooperatives is most accurate? Farm cooperatives
have:
A. declined in importance in recent years.
B. become a major force in American agriculture.
C. run afoul of U.S. antitrust laws in recent years.
D. increased in number, but decreased in size in recent years.
334.Which of the following people would be most interested in participating in a business organized as a
cooperative?
A
Joe is intrigued by the idea of combining his time and resources with many other people to operate a
.
business providing a good or service that they all will use.
B
Joan wants to be an owner of a business and share in its profits, but has no desire to take an active role
.
in managing the company or participating in its daily operations.
C
Jeff wants to work for a government-owned business because he believes government ownership
.
ensures a more equitable distribution of income and wealth.
D. Jennifer prefers to work for a charitable organization that emphasizes helping people who are less
fortunate than she is.
335.Twenty-six years ago, several small vineyard owners in California joined voluntarily to market their
grapes and wine in an attempt to get better prices. Over the years they expanded the organization to
include other services such as buying and selling farm supplies and equipment and providing financial
and technical services. The arrangement established by these vineyard owners is an example of a(n):
A. closed corporation.
B. joint venture.
C. limited agricultural partnership.
D. farm cooperative.
Mini-Case
For as long as she could remember, Jenna Raiter’s passion was cars. As a teenager, she spent hours with
her dad tinkering with the family car, learning to change the oil and making minor repairs. She got a job
at a local garage while still in high school. A few years after graduating from high school and completing
the auto mechanics degree at a local community college, Jenna decided she wanted to be her own boss.
She quit her job, borrowed some money from her dad, and began her own repair shop, the AutoMotion
Garage. Jenna’s hard work gradually attracted a loyal clientele of satisfied customers. Her success has her
thinking about opening garages in two other locations, but she lacks the financial resources needed for
expansion. Furthermore, the success of her business is forcing Jenna to spend more time managing the
business and less time doing the actual technical work she still enjoys. She wants to find business partners
who can help her with management and provide additional financial resources. She has approached a
couple of friends she met in high school: Al Ternator and Lew Banfilter, to see if they would like to join
the business.
336.Currently, AutoMotion Garage is operated as a(n):
A. limited liability company.
B. cooperative.
C. sole proprietorship.
D. solitary subsidiary.
337.Jenna approached Al Ternator about joining the business as an owner. She proposed that she continue
to provide the technical expertise and deal directly with customers, while Al, who has a college degree
in finance, handles many of the financial aspects of running AutoMotion. In addition, Jenna wants Al to
contribute some much-needed money for expansion. Under Jenna’s proposal, she and Al would operate
the business together as:
A. limited partners.
B. general partners.
C. majority shareholders.
D. business consultants.338.Although Lew Banfilter, now a young attorney, is impressed with AutoMotion and believes it could be a
place to invest money, he informed Jenna that his professional position at a law firm prevents him from
taking an active role in the business. He is also concerned about accepting more risk since he has a young
family. He mentioned a preference for unlimited liability. If Lew joined Jenna and Al, the three might
consider forming a(n):
A. limited partnership.
B. general partnership.
C. sole proprietorship.
D. Master Limited Partnership.
339.When Jenna confided in Lew and Al that she too was concerned about adding additional risk, Lew
suggested that they explore the possibility of one of the newest forms of business ownership, a(n)
__________, which has very flexible ownership rules and would give them more choices in how the
company’s earnings are taxed while still protecting all owners from high levels of risk.
A. alien corporation
B. master limited partnership
C. limited partnership
D. limited liability company
340.Al also suggested another way Jenna could finance her expansion. He described setting up a chain of
AutoMotion Garages by selling the rights to use AutoMotion’s name, business model, garage design and
service ideas to others who would like to own a similar shop. These individuals would pay AutoMotion
an initial fee and monthly royalties based on earnings. Al is suggesting that Jenna set up a:
A. joint venture.
B. franchise arrangement.
C. C corporation.
D. master limited partnership.
341.With all these choice, Jenna’s head is swirling with ideas. She knows that Al and Lew have expertise
in business and management, but she also knows that she will need to read on her own for more
information. Referring back to a textbook she had in her Introduction to Business class in college, she
comes upon the following statement:
A. All forms of business ownership ultimately offer the same liability protection.
B. An S corporation is a suitable form of business ownership for all businesses, while an LLC is limited to
ownership by U.S. citizens.
C. Even if you sell the rights to others to own a similar business, you still need to commit to a form of
business ownership.
D
The least risky form of business ownership is still the sole proprietorship, and that is precisely the
.
reason that so many are formed each year.
342.Although most new firms start out as sole proprietorships, few large firms are organized this way. Why
is the sole proprietorship such a popular form of ownership for new firms? What features of the sole
proprietorship make it unattractive to growing firms?
343.What is the difference between a general partner and a limited partner? Give an example of a situation in
which a person would want to be a limited partner.
344.What is a C corporation? What are the major advantages and disadvantages of this form of business
ownership?
345.What is a limited liability company (LLC)? How does it compare to an S corporation? What are the major
advantages and disadvantages of an LLC?
346.Describe and differentiate between the three types of corporate mergers. Give an example of each
type.
347.Franchising has certainly become a key component of the U.S. economy. What are the major advantages
and disadvantages of franchising?
1. 2. 3. 4. 5. 6. 5 Key
The corporation is the most common form of business ownership.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #1
Topic: The Importance of Small Business Ownership to the U.S. Economy
The three major forms of business ownership in the U.S. are sole proprietorships, partnerships, and
corporations.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #2
Topic: The Importance of Small Business Ownership to the U.S. Economy
Few people today start their own business.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #3
Topic: The Importance of Small Business Ownership to the U.S. Economy
Once a business is established, it’s almost impossible to change from one form of business ownership
to another.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #4
Topic: The Importance of Small Business Ownership to the U.S. Economy
When two or more people legally agree to become co-owners of a business, the form of business is
called a partnership.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #5
Topic: The Importance of Small Business Ownership to the U.S. Economy
A legal entity with authority to act and have liability separate from its owners is called a
partnership.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #6
Topic: The Importance of Small Business Ownership to the U.S. Economy7. 8. 9. 10. 11. 12. 13. Corporations represent 20 percent of all the businesses in the U.S. and earn 81 percent of the total U.S.
business receipts.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #7
Topic: The Importance of Small Business Ownership to the U.S. Economy
A comparison of the three major forms of business ownership shows that sole proprietorships are
usually the most difficult type of business to establish.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #8
Topic: The Importance of Small Business Ownership to the U.S. Economy
The first step in starting a sole proprietorship is to fill out a proprietorship charter application form and
file it with the state government.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #9
Topic: Sole Proprietorships
It is usually easy to start and end a sole proprietorship.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #10
Topic: Sole Proprietorships
The profits of a sole proprietorship are taxed as the personal income of the owner.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #11
Topic: Sole Proprietorships
The sole proprietorship form of ownership tends to be attractive to people who want to invest in a
company without taking an active role in management.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #12
Topic: Sole Proprietorships
A major advantage of sole proprietorships is that an owner has limited liability for the debts of his or
her business.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #13
Topic: Sole Proprietorships14. 15. 16. 17. 18. One of the strengths of the sole proprietorship is its ability to sustain rapid growth by raising large
amounts of financial resources.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #14
Topic: Sole Proprietorships
The debts of a business operated as a sole proprietorship are considered to be the personal debts of the
owner of the business.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #15
Topic: Sole Proprietorships
A drawback of sole proprietorships is that they usually have limited access to additional financial
resources.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #16
Topic: Sole Proprietorships
An advantage of forming a sole proprietorship is that it allows the owner to have more time for leisure
activities.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #17
Topic: Sole Proprietorships
If a sole proprietorship fails, the owner may lose whatever was invested in the business; however, the
owner’s personal assets are not at risk.
FALSE
Sole proprietors have unlimited liability for the debts of their business. This means that if their
business gets into financial trouble they can lose their personal assets.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #18
Topic: Sole Proprietorships19. 20. 21. If the business is designated a sole proprietorship, profits are passed along to the owner. For tax
purposes, these profits are accounted for with any other personal income the owner may have
accumulated and taxed at the owner’s personal income tax rate.
TRUE
The profits of a sole proprietorship are passed through to the owner, and taxed at the owner’s personal
tax rate. However, owners do have to pay self employment tax (for Social Security and Medicare).
By law, sole proprietors are required to estimate their taxes and make quarterly payments to the
government or suffer penalties for nonpayment.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #19
Topic: Sole Proprietorships
A difficulty that sole proprietors try to overcome is the fact that they have trouble competing with
large firms for expert talent. Large firms can usually pay better and offer fringe benefits that are
unaffordable to the sole proprietor.
TRUE
Sole proprietors often find it difficult to attract qualified employees to help run the business because
often they cannot compete with the salary and benefits offered by larger companies.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #20
Topic: Sole Proprietorships
Unlike partnerships, if sole proprietorships find themselves in bankruptcy, they need not worry about
a court of law requiring them to sell off personal assets to pay for the debts of the firm.
FALSE
Sole proprietorships have unlimited liability. This means that the proprietor is financially responsible
for all debts incurred by the company. In a court of law, a judge could require the owner/proprietor to
liquidate personal assets to pay the debts of the business.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #21
Topic: Sole Proprietorships22. 23. 24. Eric wants to start a business. He is attracted to the idea of being his own boss, and wants to get
started with a minimum of expense and hassle. He is confident in his abilities, and the market he can
draw from, so he is not particularly worried about financial risks. All of these factors suggest that Eric
may favor starting his business as a sole proprietorship.
TRUE
People who want to be their own boss often prefer to operate their business, at least initially, as a sole
proprietorship. An advantage of the sole proprietorship is that it is a relatively easy and inexpensive
form of business to set up. One drawback of a sole proprietorship is that the owner has unlimited
liability. However, at this time, Eric is not worried about risk. The unlimited liability factor does not
appear to be a problem for him.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #22
Topic: Sole Proprietorships
Sandy Beech, a talented fashion designer who wants to start her own women’s swimwear and beach
towel line, is trying to decide which form of business ownership is right for her. As a young mother
who aspires to send her children to college some day, she does not want to jeopardize her savings
account in any way. In order to overcome these risks, Sandy should start her business as a sole
proprietorship.
FALSE
Sandy is concerned about the risk of losing personal assets if her business does not succeed. Although
the sole proprietorship is easy to set up, it may not be the best form of business ownership for Sandy
due to her need to protect personal assets. She may want to consider a form of ownership that provides
limited liability.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #23
Topic: Sole Proprietorships
Rocky Rhodes is convinced that he has a great idea for a new business. Unfortunately, the type of
business he wants to start would require a fairly high initial investment and Rocky has a poor credit
rating and very little personal wealth. Rocky would be unlikely to find success if he organized his
business as a sole proprietorship.
TRUE
Funds available to sole proprietorships are often limited to the amount the owner can raise. Thus,
Rocky’s business would probably have a hard time raising enough money if he organized it as a sole
proprietorship.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #24
Topic: Sole Proprietorships25. 26. 27. 28. 29. 30. 31. A general partner takes an active role in the management of the business.
TRUE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #25
Topic: Partnerships
All partners in a general partnership have limited liability for the debts of their firm.
FALSE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #26
Topic: Partnerships
In a general partnership, all partners share in management of the business and in the liability for the
firm’s debts.
TRUE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #27
Topic: Partnerships
In a general partnership, all partners are entitled to an equal share of the firm’s profits.
FALSE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #28
Topic: Partnerships
Limited partnerships are just like general partnerships, except that they are partners for a limited time
period.
FALSE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #29
Topic: Partnerships
A limited partner is an owner who assumes no management responsibility and has no liability for
losses beyond the amount invested.
TRUE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #30
Topic: Partnerships
A limited partnership consists of one or more general partners and one or more limited partners.
TRUE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #31
Topic: Partnerships32. 33. 34. 35. 36. 37. 38. Although shares of master limited partnerships can be purchased on one of the national stock
exchanges, these companies are taxed like partnerships.
TRUE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #32
Topic: Partnerships
The Uniform Partnership Act is law in every state except Louisiana.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #33
Topic: Partnerships
According to the Uniform Partnership Act, the three key elements of any general partnership are (1)
shares of stock to represent ownership, (2) limited liability, and (3) ease of ownership transfer.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #34
Topic: Partnerships
According to the Uniform Partnership Act, the three key elements of any general partnership are (1)
common ownership, (2) shared profits and losses, and (3) the right to participate in managing the
operations of the business.
TRUE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #35
Topic: Partnerships
A recent study showed that partnerships are more likely to fail than sole proprietorships.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #36
Topic: Advantages of Partnerships
A major objective of limited liability partnerships (LLPs) is to limit each partner’s personal liability to
the consequences of their own acts and those of people under their supervision.
TRUE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #37
Topic: Partnerships
One of the major disadvantages of a partnership is that profits must be divided equally.
FALSE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #38
Topic: Disadvantages of Partnerships39. 40. 41. 42. 43. 44. A general partner has unlimited liability for the debts of the partnership only if he or she personally
approved the decisions that resulted in those debts.
FALSE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #39
Topic: Partnerships
In order to protect all parties and minimize misunderstandings among partners, all terms of the
partnership should be spelled out in writing.
TRUE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #40
Topic: Disadvantages of Partnerships
One advantage of a partnership is that there is a simple process for partners to terminate their
business.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #41
Topic: Disadvantages of Partnerships
Compared to sole proprietorships, an advantage of partnerships is their ability to obtain more financial
resources.
TRUE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #42
Topic: Advantages of Partnerships
Setting up a partnership under the terms of a written agreement is a bad idea, because written
agreements tend to be too inflexible and impersonal.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #43
Topic: Disadvantages of Partnerships
Compared to sole proprietorships, partnerships offer the advantage of shared management and pooled
knowledge.
TRUE
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #44
Topic: Advantages of Partnerships45. 46. 47. 48. A limited partnership refers to a partnership set up for a temporary purpose, such as a real estate
development project.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #45
Topic: Partnerships
In a limited partnership, the general partners should encourage the limited partners to take a more
active role in the operations of the business. After all, the limited partner has comparable liability
in the business, even though he/she may not be a partner for as long a period of time as the general
partners.
FALSE
By definition, a limited partnership will consist of one or more general partners and one or more
limited partners. The limited partners are passive investors. By law, they do not take an active role in
the management of the business, yet they may share in the profits of the business and remain a partner
for as long as the partnership exists.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #46
Topic: Partnerships
If a partner in a limited partnership dies, the partnership ceases to exist.
TRUE
If a partner in any partnership dies, the partnership agreement automatically ceases to exist. Good
partnership agreements usually have provisions for these situations.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #47
Topic: Partnerships
In the Figure 5.2, the authors suggest that potential partners discuss the types of skills that each brings
to the business. Partners with complementary skills may enhance the business.
TRUE
It is suggested that you ask yourself what types of skills you and your potential partners bring to
the business, and whether those skills complement each other. Successful partners often come with
varying backgrounds. Sometimes one partner will have the technical skills to get the job done, while
others might have the business or accounting knowledge.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #48
Topic: Partnerships49. 50. 51. One method to avoid conflicts between partners is to solicit the services of a lawyer to create a well-
written partnership agreement.
TRUE
One of the most important tasks to achieve before forming a partnership is to create a partnership
agreement. The partnership agreement addresses a number of rules that will govern the activities of
the partnership, including but not limited to: the duties of each partner; the rules for adding partners;
contributions by each partner; and, how profits will be distributed.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #49
Topic: Partnerships
According to Figure 5.2, attributes such as trust and integrity are not something you should get overly
concerned about when selecting partners, due to the fact that this is a business decision, not a friendly
game of golf.
FALSE
Prospective partners should concern themselves with several aspects of the business relationship,
including the values shared by partners who are entering into business together. Other things that you
should ask yourself is whether the partners share the same goals and whether each partner’s skills
complement the others.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #50
Topic: Partnerships
The fairest way to handle profits in any partnership arrangement is to divide things evenly. If there are
two owners in the business, each gets 50%. If there are three owners (even if one is a limited partner),
each gets 33.333% of any accumulated profits.
FALSE
The partnership agreement should stipulate the way the business plans to share the profits. The
partnership may not necessarily divide the profits equally among members. Several criteria may
enter into the decision of how to share profits, including the expertise of each partner, the investment
amount of each partner, and the amount of time each partner spends in the business.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #51
Topic: Partnerships52. 53. 54. 55. Ted and Mark are partners in a dry cleaning business. They would like their brother Todd to join
them. Unfortunately, partnership law states that only two partners can participate in a partnership.
FALSE
A partnership consists of two or more owners. Unless explicitly written in the original partnership
agreement, the partnership can add partners.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #52
Topic: Partnerships
Connie is a general partner in a retail cookie store. Her personal assets are legally protected from the
debts of the business.
FALSE
As a general partner, Connie assumes unlimited liability for the debts of her business.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #53
Topic: Partnerships
Two of Diana’s friends have approached her about starting a new business. Diana is willing to invest
money in the business and share in its profits, but she has no desire to be involved in the day-to-day
management of the company, nor is she willing to risk any amount beyond her initial investment.
Diana’s preferences suggest that she prefers a general partnership form of business ownership.
FALSE
In a general partnership, all partners share in the management of the business, and have unlimited
liability for the firm’s debts. Since Diana has no interest in managing a company and wants to limit
her risk, she is more suited for a limited partnership, where her friends would serve as general partners
and she would serve as a limited partner.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #54
Topic: Partnerships
Emma Pebble and Chase Stone formed a partnership in a landscape business. Under their
arrangement, Emma actively manages the company and assumes unlimited liability for the firm’s
debts. Chase has invested several thousand dollars of his money with plans to share in the profits,
but does not actively make management decisions, nor will he assume liability beyond his initial
investment. Emma and Chase participate in a limited partnership.
TRUE
A limited partnership consists of at least one general partner, who has unlimited liability, and at least
one limited partner, who risks only what he or she has invested. By law, the limited partner cannot
actively manage the partnership.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #55
Topic: Partnerships56. 57. 58. Sergio has agreed to become a partner in his brother’s horse-breeding business. Since he provided 30
percent of the money to start the firm and built an air-conditioned barn, he is entitled to 30 percent of
any profits the firm earns during its first year of operation.
FALSE
The division of profits in a partnership is negotiable and is not necessarily tied to the amount of the
initial investment.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #56
Topic: Partnerships
After spending a summer “down under,
” two Oregon friends, Rick and Mick, created a general
partnership to import emu from Australia to the U.S. After a year, Rick found himself at the mercy of
Mick, who seemed to keep the books and seldom share the financial results, even though Rick was out
selling the emu idea to farmers and ecologically conscious consumers and shipments were increasing.
As their consultant, one of the first things that you inquire about is whether they are familiar with the
UPA (Uniform Partnership Act), specifically the right to participate in managing the operations of the
business.
TRUE
The Uniform Partnership Act (adopted in every state except Louisiana) stipulates: (1) common
ownership; (2) shared profits and losses; and (3) the right to participate in managing the operations of
the business. Rick has the right to know and be provided with regular financial statements that pertain
to his business.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #57
Topic: Partnerships
Marco is a limited partner in an e-commerce company. As a limited partner, Marco can be involved
with the company for a maximum of five years.
FALSE
A limited partner has limited liability and cannot actively manage the firm, but his involvement is not
restricted as to length of time.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #58
Topic: Partnerships59. Last night as you scrolled through the TV channels to find an action flick, you came across an old
movie with tough guy James Cagney, called “Yankee Doodle Dandy.
” Although not particularly
your kind of movie, you stayed on that channel for a few minutes because Cagney and another guy
were in partnership together. They were arguing over who was the senior partner and who was the
junior partner, even though, clearly, they started the business at the same time. If you were brought
on board as their present-day business advisor, you would explain to them that all partnerships have
at least one general partner (known as the senior partner) and one limited partner (known as the junior
partner).
FALSE
According to the Uniform Partnership Act adopted in every state except Louisiana, partners have
the right to (1) common ownership; (2) shared profits and losses; and (3) the right to participate in
managing the operations of the business. In some cases, partners may have differing skills and skill
levels (or level of experience) of the other partners, but as partners they are on equal footing. A good
partnership agreement will spell out the details of the partnership. Further, partnerships can be (1)
general partnerships or (2) limited partnerships, but these variations do not hold the senior/junior
designation.
60. Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #59
Topic: Partnerships
A conventional corporation is a state-chartered legal entity, with authority to act and have liability
separate from its owners.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #60
Topic: Corporations
61. In today’s economy, only large business enterprises should operate as corporations.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #61
Topic: Corporations
62. The owners of a corporation are known as general corporate partners.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #62
Topic: Corporations
63. A corporation can raise financial capital by selling shares of stock to interested investors.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #63
Topic: Corporations64. Stockholders in a corporation accept unlimited liability for the corporation’s debts.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #64
Topic: Corporations
65. A disadvantage of corporations is that their charters are only valid for 99 years, so corporations are
less permanent than other types of businesses.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #65
Topic: Corporations
66. When one of the owners of a corporation dies, the corporation legally ceases to exist.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #66
Topic: Corporations
67. Corporations are easy to start and easy to terminate.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #67
Topic: Corporations
68. A disadvantage of corporations is that they generally require extensive paperwork.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #68
Topic: Corporations
69. A disadvantage of corporations is that an owner must get the approval of all other owners before
selling his or her interest in the firm to another investor.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #69
Topic: Corporations70. Stockholders in a corporation normally exert a significant degree of control over the company’s daily
operations.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #70
Topic: Corporations
71. The stockholders in a corporation elect a board of directors to oversee the company’s major policy
issues.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #71
Topic: Corporations
72. Stockholders in a corporation exert a significant degree of control over the company’s daily
operations.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #72
Topic: Corporations
73. Stockholders in a corporation have limited liability.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #73
Topic: Corporations
74. Stockholders in a corporation entrust control over the company’s daily operations to managers selected
by the board of directors to run the company.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #74
Topic: Corporations
75. One advantage of corporations is that the initial cost of organization is usually lower than for other
forms of business ownership.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #75
Topic: Corporations76. States may levy special taxes on corporations that are not imposed on other businesses.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #76
Topic: Corporations
77. Most states have legal restrictions that prevent individuals from incorporating.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #77
Topic: Corporations
78. One reason individuals incorporate is to obtain the advantage of limited liability.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #78
Topic: Corporations
79. An alien corporation does business abroad but is chartered in the U.S.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #79
Topic: Corporations
80. A domestic corporation does business in the state in which it’s chartered.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #80
Topic: Corporations
81. A foreign corporation is chartered in a country outside the U.S.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #81
Topic: Corporations
82. Delaware is a popular state in which to seek incorporation due to its reduced costs and other
perks.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #82
Topic: Corporations83. A closed corporation is one whose stock is held by a few people and is not available to the general
public.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #83
Topic: Corporations
84. A nonprofit corporation does not seek personal profit for its owners.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #84
Topic: Corporations
85. A quasi-public corporation is a corporation chartered by the government as an approved monopoly to
perform services to the general public.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #85
Topic: Corporations
86. A multinational corporation is a firm that operates in several countries.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #86
Topic: Corporations
87. To change ownership in a corporation you simply sell your stock to someone else.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #87
Topic: Corporations
88. Stock options are the right to purchase shares of the corporation for a fixed price.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #88
Topic: Corporations89. An advantage of corporations is their ability to attract good talent by offering stock options and other
employee benefits.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #89
Topic: Corporations
90. It is said that corporations have perpetual life.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #90
Topic: Corporations
91. One advantage of an S Corporation is that the profits are distributed to the owners and taxed as each
owner’s personal income, thus avoiding the problem of double taxation.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #91
Topic: Corporations
92. By filling out the correct paperwork annually, any corporation can qualify to be classified as an S
corporation.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #92
Topic: Corporations
93. A company that loses its status as an S corporation may not reelect this status for at least 5 years.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #93
Topic: Corporations
94. An S corporation has fewer ownership rules than a limited liability company.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #94
Topic: Corporations95. The S corporation form of business would be particularly attractive to fast growing companies that
want to attract thousands of new stockholders.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #95
Topic: Corporations
96. A limited liability company is similar to an S corporation, but without the special eligibility
requirements.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #96
Topic: Corporations
97. Limited liability companies have both flexibility in tax treatment of earnings and limited liability
protection for owners.
TRUE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #97
Topic: Corporations
98. One of the drawbacks of a limited liability company is that most states do not yet recognize this form
of ownership.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #98
Topic: Corporations
99. Like stockholders of a C corporation, owners of a limited liability company (LLC) are free to sell their
ownership without the approval of other members.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #99
Topic: Corporations
100. The limited liability company requires a minimum of 10 members.
FALSE
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #100
Topic: Corporations101. The organization structure of a corporation allows for stockholders to exert a significant degree of
control over the company’s daily operations.
FALSE
Stockholders elect the Board of Directors of a corporation. The Board of Directors appoints the
management. The management operates separately from stockholders.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #101
Topic: Corporations
102. Public utilities are examples of quasi-public corporations.
TRUE
Quasi-public corporations are corporations authorized by the government to serve as regional
monopolies.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #102
Topic: Corporations
103. In order to establish a C corporation, it is a requirement that investors run the company, whereas in an
S corporation, this is not the case.
FALSE
In a C corporation, the investors elect the Board of Directors. The Board of Directors appoints the
officers and management team. It is not a requirement that investors run the company. S corporations
also have stockholders, directors, and employees, but S corporations are taxed differently from C
corporations.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #103
Topic: Corporations
104. If you want to sell your ownership in a publicly traded corporation, you find someone willing to buy
your shares.
TRUE
There is ease of ownership in a corporation. If you no longer want to be an owner/stockholder, you
sell your shares to another party. The corporation has perpetual life, but your ownership does not need
to be for life.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #104
Topic: Corporations105. The stockholders of large, publicly traded corporations have a daily pulse on the operation of the
business.
FALSE
The owners/stockholders elect a Board of Directors, who hire the officers of the corporation and
oversee major policy issues. The owners/stockholders thus have some say in who runs the corporation
but have little to no control over the daily operations.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #105
Topic: Corporations
106. If a corporation distributes after-tax profits to its stockholders in the form of dividends, the
government considers these distributions as part of each stockholder’s personal income. Stockholders
pay taxes on these distributions.
TRUE
A disadvantage of the corporate form of business ownership is double taxation. If corporations
distribute after-tax profits to stockholders, these individuals are required to pay taxes on this income.
Unfortunately, these amounts were already taxed once, when the corporation paid taxes on them.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #106
Topic: Corporations
107. If a corporation has after-tax profits of $360,000, and elects to distribute this amount in the form of
dividends to its stockholders, these distributions are free and clear of taxes because the corporation
paid taxes on this amount prior to distribution.
FALSE
A disadvantage of the corporate form of business ownership is double taxation. If corporations
distribute after-tax profits to stockholders, these individuals are required to pay taxes on dividend
income. Unfortunately, these amounts were already taxed once, when the corporation paid taxes on
them, hence the term double taxation.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #107
Topic: Corporations108. Double taxation means that a corporation pays twice the amount of taxes as a sole proprietorship or
partnership.
FALSE
A disadvantage of the corporate form of business ownership is double taxation. If corporations
distribute after-tax profits to stockholders, these individuals are required to pay taxes on dividend
income. Unfortunately, these amounts were already taxed once, when the corporation paid taxes on
them, hence the term double taxation.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #108
Topic: Corporations
109. The major differences between an S corporation and a limited liability company are limits on the
number of owners and the citizenship status of individuals who are owners.
TRUE
A limited liability company (LLC) is similar to an S corporation but without the special eligibility
requirements. S corporations require their owners to be U.S. citizens or the estates of U.S. citizens.
The LLC does not have these requirements.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #109
Topic: Corporations
110. The owners of a limited liability company (LLC) must pay self-employment taxes on any profits they
earn, even if they did not obtain a salary from the company.
TRUE
Although the LLC allows for profits to be distributed to owners and taxed at each owner’s personal
tax rate, the owners must also pay self-employment taxes on those earnings. Self-employment taxes
include Medicare and Social Security taxes.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #110
Topic: Corporations
111. A group of medical doctors are interested in incorporating their business. There is no advantage due to
the costs involved.
FALSE
Many individuals choose to incorporate to obtain limited liability. In some cases, they may also
receive tax savings by doing so.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #111
Topic: Corporations112. Nutty Dough is a small chain of donut shops currently owned and operated by a group of seven
partners. The owners think that their chain has the potential for rapid growth, but several of the
partners are concerned about the growing financial risks that will accompany this growth. One way
the partners could deal with this problem would be to incorporate their business.
TRUE
An advantage of corporations is that they provide their owners (stockholders) with the protection of
limited liability.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #112
Topic: Corporations
113. Chad recently invented Wave-Aerobics, a next generation watercraft that can safely perform water
stunts similar to an amusement park ride. As the founder of a fast growing business, you think his goal
of incorporating,
“to remain in steadfast control of the firm’s operations for an indefinite number of
years,
” is good strategy.
FALSE
One potential drawback of incorporation is the possibility of conflict between the entrepreneurs
who originally start a business and the stockholders and board of directors who may eventually gain
control.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #113
Topic: Corporations
114. Mojo Motors is a small conventional corporation with only 212 stockholders. Eleven of the
stockholders are citizens of Mexico, and eight others are citizens of Canada. Due to its size and
diversity in ownership, you would recommend that Mojo Motors change to an S corporation.
FALSE
Mojo Motors does not satisfy the requirements for an S corporation—it has more than 100
stockholders, some of whom are not U.S. citizens or permanent residents of the United States.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #114
Topic: Corporations115. The owners of Idle Time Gaming Company would like to become an S corporation. Unfortunately,
their lawyer advised them that they do not meet some of the requirements necessary to qualify as an
S corporation. An alternative form of business that would give them similar advantages is a limited
liability company.
TRUE
Limited liability companies offer many of the same advantages as S corporations, including limited
liability and the possibility of taxation like a partnership, without the special eligibility requirements
required to qualify for S corporation status.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #115
Topic: Corporations
116. The owners of California Canines, a firm that designs and manufactures coats, sweaters, jackets, and
rainwear for dogs, want to organize as an LLC. Two members are college students and two others are
thirty-something couples with young children. This is good strategy because each member can choose
to commit to limited or unlimited liability.
FALSE
All members of an LLC have limited liability. There is no choice in that matter. The purpose of
organizing as an LLC is to eliminate the risk of losing personal assets in an unprofitable venture.
In terms of taxes, a limited liability company offers the best of both worlds, allowing the owners to
choose to be taxed as a partnership or a corporation depending on which tax rates would benefit them
the most.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #116
Topic: Corporations
117. A few years back, your friends who are horse fanatics inherited several acres of land that they turned
into a retirement haven for race horses. Peaceful Pastures was recently incorporated as a limited
liability company. The members are reevaluating this form of ownership. Unlike an S corporation,
they now pay self-employment taxes on all company profits—not just on the salaries they pay
themselves.
TRUE
While S corporations have several restrictions, one advantage they have compared to the limited
liability company is the self-employment tax requirements. Any profits earned by the LLC are
considered part of the owner’s wages/salary/income. These wages are subject to self-employment
taxes. The S corporation pays self-employment taxes only on those dollars designated as salary or
wage expenses by the business. They do not pay self-employment taxes on the profits of the business.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #117
Topic: Corporations118. After a successful five years, Peaceful Pastures, LLC (a retirement ranch for race horses), thinks it
may be able to attract donations from animal activist groups and even the federal government if it
becomes a nonprofit corporation. As its business advisor, you explain that as a nonprofit corporation,
the owner(s) may earn a salary but the business should not seek after-tax profits.
TRUE
If Peaceful Pastures decides to change its form of business ownership to a nonprofit corporation, it
will not seek personal profits for its owners. If the owner(s) works in the business, he/she can expect
a salary. By law, the firm cannot distribute any additional income to owners. It must put all revenues
and/or contributions back into the business.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #118
Topic: Corporations
119. Chipper’s Golf Resort has the opportunity to buy 1,000 acres of property adjacent to its 18-hole golf
course. After talking with her banker, the owner is encouraged to begin the paperwork to change from
a limited liability company form of business ownership to a corporation. You applaud this strategy
because she will eliminate the problem of double taxation.
FALSE
C corporations (not LLCs) face the disadvantage of double taxation. A C corporation’s income is
taxed twice. First the corporation pays tax on all income before it can distribute any, as dividends, to
stockholders. The stockholders pay income tax on the dividends they receive.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #119
Topic: Corporations
120. When two firms join together to form one company, it is called a merger.
TRUE
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #120
Topic: Mergers and Acquisitions
121. The three major types of mergers are acquisition, joint, and connective.
FALSE
122. Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #121
Topic: Mergers and Acquisitions
An acquisition is when one company buys the property and obligations of another company.
TRUE
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #122
Topic: Mergers and Acquisitions123. 124. 125. 126. 127. 128. 129. Taking a firm private involves converting a firm from a corporation to a general partnership.
FALSE
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #123
Topic: Mergers and Acquisitions
If firms wish to gain market share in their current market, they would consider a conglomerate
merger.
FALSE
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #124
Topic: Mergers and Acquisitions
The purpose of a conglomerate merger is to diversify operations and investments.
TRUE
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #125
Topic: Mergers and Acquisitions
A merger between two businesses in different stages of related businesses is known as a vertical
merger.
TRUE
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #126
Topic: Mergers and Acquisitions
A horizontal merger refers to a merger between two companies that serve entirely different
markets.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #127
Topic: Mergers and Acquisitions
A horizontal merger refers to a merger between two companies in the same industry, and serving the
same markets.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #128
Topic: Mergers and Acquisitions
A leveraged buyout is an attempt by top management to gain control of a company by issuing a large
amount of new stock.
FALSE
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #129
Topic: Mergers and Acquisitions130. 131. 132. 133. 134. When a group of investors take a firm private, they purchase all the company’s outstanding stock.
TRUE
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #130
Topic: Mergers and Acquisitions
In recent years, foreign firms were reluctant to merge with or acquire American corporations.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #131
Topic: Mergers and Acquisitions
A merger is a mutual agreement where a firm joins together with another firm, whereas an acquisition
is when one firm purchases the assets and obligations of another firm.
TRUE
When companies merge, there is a mutual agreement to join forces. Although the assets and
obligations are combined, there is no offering of funds or stock by one company, for the other, as in an
acquisition.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #132
Topic: Mergers and Acquisitions
One reason that a firm would choose to merge or acquire another company would be to gain market
share.
TRUE
Firms know that the fastest way, but not always the least expensive way, to acquire market share or
expand their market is to merge with or buy out a competitor.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #133
Topic: Mergers and Acquisitions
One reason that a firm may choose to merge or acquire another company would be diversity of
products or services.
TRUE
When firms participate in conglomerate mergers, they purchase companies whose products and
services are different or unrelated to what they currently offer. They choose to diversify the portfolio
of business units and even the industries where they operate.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #134
Topic: Mergers and Acquisitions135. 136. 137. 138. The strategy of a leveraged buyout is used when employee talent is at a minimum.
FALSE
If employees and/or management believe they can improve performance by running the company
themselves, they will seek financial backing (borrow funds) and take ownership, by buying all
available stock from the current stockholders.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #135
Topic: Mergers and Acquisitions
Taking a firm private means turning a profit-seeking corporation into a nonprofit corporation in order
to avoid a hostile takeover.
FALSE
Taking a firm private involves an effort by a group of stockholders or managers to gain control of all
of a corporation’s outstanding stock.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #136
Topic: Mergers and Acquisitions
A major objective of a leveraged buyout is to enable investors to gain control of a company by issuing
new shares of ownership, thus minimizing the use of debt.
FALSE
Leveraged buyouts involve financing the acquisition of an organization through the use of debt
financing.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #137
Topic: Mergers and Acquisitions
Hole-In-One Golf Company announced plans to purchase the property and assume the obligations of
Champion Golf, Inc., one of its major competitors. Hole-In-One Golf Company’s plans are an example
of a merger.
FALSE
Hole-In-One Golf Company’s actions are an acquisition rather than a merger. An acquisition refers to
one firm’s purchase of the assets and obligations of another firm. Since the firms are competing in the
same market rather than at different stages, this is a horizontal move.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #138
Topic: Mergers and Acquisitions139. 140. 141. 142. Two competitors, Stanley’s Food Mart and Bluejay Groceries, recently issued a joint announcement
stating their decision to merge. The announcement claimed that the new firm would have more
financial resources, which would enable it to expand services and broaden offerings to consumers.
This proposed merger is an example of a horizontal merger.
TRUE
A merger between two firms in the same industry, such as two grocery stores, is a horizontal merger.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #139
Topic: Mergers and Acquisitions
Tech Solutions, Inc., a manufacturer of laptops, is considering a merger with Outtel, a leading
producer of microprocessors and other computer chips. Tech Solutions believes such a merger would
give them a guaranteed source of needed components, and enable them to have better control over
quality. If this merger occurs, it would be an example of a horizontal merger.
FALSE
A merger between two companies at different stages of related business is known as a vertical merger.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #140
Topic: Mergers and Acquisitions
Cory Raider is leading a group of stockholders who want to take the Bigbux Corporation private. If
Cory’s group succeeds, Bigbux’s stock will no longer be available to investors on the open market.
TRUE
Taking a firm private involves gaining control of a firm’s stock so that it is no longer available to
investors on the open market.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #141
Topic: Mergers and Acquisitions
Due to several years of poor performance, Scrappy’s Metal Fabrication, Inc., is closing. Through the
use of debt financing, workers plan to purchase the company’s stock from current shareholders in
order to buy the firm, improve company performance, and save jobs.
TRUE
A leveraged buyout involves the use of debt financing to buy the stock of a company. Skilled workers
want to save their jobs and make their company profitable again.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #142
Topic: Mergers and Acquisitions143. A franchise agreement is an arrangement where a franchisor sells the rights to a business name and the
right to sell a product or service within a given territory to a franchisee.
TRUE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #143
Topic: Franchising
144. A franchise may be organized as a sole proprietorship, partnership, or corporation.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #144
Topic: Franchising
145. Franchisees are not always pleased with management regulations handed down from the franchisor.
In some cases, franchisees have been known to band together to express concern over marketing and
management direction.
TRUE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #145
Topic: Franchising
146. Franchisors give franchisees the right to use their name and product, with the understanding that
franchisees obtain all financing and develop all marketing strategies on their own.
FALSE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #146
Topic: Franchising
147. The most popular businesses for franchising are restaurants.
TRUE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #147
Topic: Franchising
148. In a franchise arrangement, ownership remains in the hands of the franchisor.
FALSE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #148
Topic: Franchising149. One of the major advantages for the franchisee is instant business name recognition and important
management assistance from the franchisor.
TRUE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #149
Topic: Franchising
150. Franchisees must follow more rules, regulations, and procedures than if they operated independently
owned businesses.
TRUE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #150
Topic: Franchising
151. The coattail effect refers to the burden of corporate rules and regulations on franchisees.
FALSE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #151
Topic: Franchising
152. The coattail effect refers to inevitable repercussions on your business if a fellow franchisee should
fail.
TRUE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #152
Topic: Franchising
153. One drawback of franchises is that they have a higher failure rate than other types of business
ventures.
FALSE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #153
Topic: Franchising
154. The franchisee pays the franchisor a share of profits or a percentage commission on sales, known as a
royalty.
TRUE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #154
Topic: Franchising155. Many franchisors have rules that prohibit franchisees from sponsoring their own websites.
TRUE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #155
Topic: Franchising
156. Because of the growth of minority-owned businesses in the U.S., franchisors are becoming more
focused on recruiting minority franchisees.
TRUE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #156
Topic: Franchising
157. It is impossible to run a franchise completely from home.
FALSE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #157
Topic: Franchising
158. Franchising is popular in the United States, but legal barriers have limited its popularity in foreign
countries.
FALSE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #158
Topic: Franchising
159. Global franchising is unlikely to experience major growth due to the high costs of operations in global
markets.
FALSE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #159
Topic: Franchising
160. Franchising in global markets has demonstrated that high operating costs are counterbalanced by high
profit opportunities.
TRUE
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #160
Topic: Franchising161. Franchisors sometimes pay reverse royalties to franchisees if it is evident that the franchisor’s Internet
sales have negatively impacted the profits of traditional bricks and mortar franchisee businesses.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #161
Topic: Franchising
162. In a typical franchise agreement, the franchisor pays the franchisee a fee to manage its company, and
the two of them split the profits based on the percentages established in the agreement.
FALSE
The franchisor, who owns the rights to the company’s name and products, usually does not pay the
franchisee. More typically, the franchisee pays the franchisor a royalty to use the company’s name and
sell its products or services in a given area.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #162
Topic: Franchising
163. Although franchise arrangements are a good source of income for the franchisee, these businesses do
not contribute significantly toward job creation.
FALSE
Franchised businesses contribute in a big way to job creation in the U.S. According to the
International Franchising Association, the more than 750,000 franchised businesses operating in the
U.S. create approximately 8 million jobs.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #163
Topic: Franchising
164. It is correct to say that if a franchisor expects a 6% royalty fee on revenue, the franchisor earns 6 cents
on each dollar of revenue the franchisee generates.
TRUE
Shared profits is an important aspect of most franchise arrangements. The franchise agreement will
stipulate the percent of revenues that the franchisor will collect from each franchisee. In this example,
6% of each dollar of revenue = 6 cents, or $.06 that will go to the franchisor.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #164
Topic: Franchising165. The financial advantage to the parent company (the franchisor) in a franchise arrangement is the
upfront franchise fee and the collection of royalties if franchisees are successful.
TRUE
Shared profits is an important aspect of most franchise arrangements. The franchisee will pay the
franchisor an up-front fee for the opportunity to use the business name, and the right to sell the
product or service. Besides this fee, the franchise agreement almost always includes royalty payments.
The franchisee will pay the franchisor a percentage of revenues or profits for the entire contract
period.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #165
Topic: Franchising
166. If a firm is advertising that it is selling franchise opportunities, the prospective franchisee can be
assured that the government has performed due diligence on this company, and has deemed it a safe
investment.
FALSE
Most franchisors are not large systems like McDonald’s and Subway. Many are small, rather obscure
companies that prospective franchisees may know little about. Most are honest, but complaints to the
Federal Trade Commission have increased about franchisors that delivered little or nothing of what
they promised. Before you buy a franchise, make certain you check out the facts fully.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #166
Topic: Franchising
167. If a franchisee decides he wants out of the business, he is free to close up shop or sell the business, just
as if he were a sole proprietor or partnership outside of a franchise arrangement.
FALSE
Unlike owners of private businesses, who can sell their companies to whomever they choose on their
own terms, many franchisees face restrictions on the resale of their franchises. Franchisors want to
reserve the right to select new owners.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #167
Topic: Franchising168. If an established franchisor agrees to provide you the opportunity to become a franchisee in its
franchise system, the franchisor may also be willing to serve as a source of financing for your
operation.
TRUE
One advantage of entering into a franchise arrangement is that the franchisor will often provide
financing. The financing may come in the form of a loan to get started, or an arrangement whereby
you will pay the franchise fee over time.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #168
Topic: Franchising
169. According to the Spotlight on Small Business box, restaurants aren’t the only franchises attractive to
potential franchisees. Some prefer a low-cost and easily reproducible business model.
TRUE
As cited in the box, Bricks 4 Kidz expanded into more than 200 franchises in the U.S. and other
countries. Most of that current and future success was credited to the company’s cheap and easily
reproducible model.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #169
Topic: Franchising
170. In the Adapting to Change box, digital franchising is an impossible feat and could not be
successful.
FALSE
Chris Jeffery created OrderUP and was afraid that expansion might force him out of his company.
Instead he looked toward franchising. Franchisees receive software and training along with an
exclusive territory in their area. Since this model took effect, the 20 digital franchises have generated
over $30 million in food orders annually.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #170
Topic: Franchising171. Joshua wants to run his own business. A friend suggested that an inexpensive way to get started is to
buy a franchise, where he will have the freedom to run it exactly as he sees fit. As a recent student of
business, you concur with this advice.
FALSE
The start-up costs of franchising can be quite high, so becoming a franchisee is not necessarily
an inexpensive way to start a business. Moreover, although they have some authority to run their
franchise, franchisees generally follow a set of rules and procedures and meet certain standards
established by the franchisor. This would limit Joshua’s freedom to run his business the way he wants.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #171
Topic: Franchising
172. Marilyn paid a sizeable franchise fee to obtain a Fontmaster Printers franchise in Cleveland, Ohio.
With the franchise fee behind her, she can look forward to using her creative talents to make her print
shop different and more attractive than other Fontmaster shops in the Cleveland area.
FALSE
Although they have a certain amount of managerial freedom, franchisees are expected to follow rules
and procedures set by the franchisor. While this limits the freedom and flexibility of the franchisee, it
also helps ensure quality and a predictable level of service.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #172
Topic: Disadvantages of Franchises
173. Liam owns a Far Horizons Travel Agency franchise. As a franchisee, Liam is guaranteed the right to
retain all of his franchise’s revenues and profits.
FALSE
Franchisees usually pay a royalty to the franchisor. This royalty is sometimes expressed as a share of
the franchisee’s revenues or a share of the franchisee’s profits.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #173
Topic: Disadvantages of Franchises174. Leanne, a franchisee, runs a chain of small restaurants with a well-known name. Due to her hard work
and people skills, her locations are doing quite well. She has noticed that several other franchisees
in the same franchise system have let their restaurants deteriorate, especially in terms of lack of
upgrades. Leanne should be concerned about this trend, since it eventually could affect her own
business.
TRUE
The actions of less successful franchisees can hurt the success of others in the same franchise. This is
known as the coattail effect.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #174
Topic: Franchising
175. Maria is already a successful franchisee with Nite Lite, a chain of “no frills” motels that provide clean
rooms and good service at affordable rates. The motel she currently operates is located in Texas,
but she is considering an opportunity to open another Nite Lite motel in Canada. Although her costs
of operating in a foreign nation may be higher, she has the benefit of an expanding market and less
competition.
TRUE
Franchisees often find that the costs of operating franchises in foreign countries are high, but these
costs are counterbalanced by expanding markets and less competition.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #175
Topic: Franchising
176. A well-known franchised food chain was brought to its knees when several customers got sick
from tainted beef. Although the food chain recovered due to its quick and consistent action, several
franchisees sued the parent company for loss of sales. The franchisees experienced the coattail effects
of the bad publicity this event received.
TRUE
The coattail effect occurs when bad publicity affects one or more of the businesses associated with a
franchise chain. The coattail effect can negatively impact growth and profitability.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #176
Topic: Franchising177. Alex’s uncle recently passed away and left him an American Dream Real Estate franchise business.
Alex is not a licensed agent or broker, nor does he know anything about the real estate business.
He plans to sell his American Dream franchise to his friend Derek, who recently got his real estate
license. One of the advantages of owning a franchise is that you can decide to sell out to anyone you
believe is suitable for the business.
FALSE
Most franchisors reserve the right to approve or disapprove the sale of new or existing franchises. A
franchise owner usually cannot sell his/her business without the approval of the parent company.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #177
Topic: Franchising
178. Your friend Brett called to tell you he just heard a sales pitch for a new website development franchise
where “he can get in for a few thousand dollars.
” He wants to know if you are ready to invest too.
Although you lack expertise in graphic design or html programming, this should be a safe investment
since it is already advertised as a franchise system. It’s probably too good to pass up.
FALSE
Fraudulent franchises exist. These are small, obscure companies that most prospective franchisees
know little about. Before buying, it is important to check out the facts, examine the franchisor’s
offering circular, and even consult with the Federal Trade Commission.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #178
Topic: Franchising
179. A cooperative is simply another name for a corporation.
FALSE
180. AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #179
Topic: Cooperatives
A cooperative consists of people with similar needs who pool their resources for mutual gain.
TRUE
181. AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #180
Topic: Cooperatives
It is not unusual for members of cooperatives to work for and help manage their cooperative.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #181
Topic: Cooperatives182. 183. 184. 185. 186. Farm cooperatives were originally established to help farmers increase their economic power by
acting as a group rather than as individuals.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #182
Topic: Cooperatives
The companies Blue Diamond, Ocean Spray, and Land O’Lakes are well-known cooperatives.
TRUE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #183
Topic: Cooperatives
A disadvantage of farm cooperatives is that they are subject to higher tax rates than corporations.
FALSE
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #184
Topic: Cooperatives
At one time there were many farm cooperatives, but more recently other forms of business ownership
have replaced them.
FALSE
Farm cooperatives have expanded their role over time and have become a multibillion-dollar industry.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #185
Topic: Cooperatives
Originally, food cooperatives were formed to provide better prices for farmers. These groups now
cooperatively buy farm equipment and other products, and realize economies of scale by banding
together for these things.
TRUE
By participating in a larger group, it is more affordable for farmers and other business people to buy
certain items that they would normally pay a lot more to purchase. By forming a cooperative, they
enjoy economies of scale.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #186
Topic: Cooperatives187. Jocelyn belongs to a food cooperative in her community. As a member, she can expect to have a vote
in the election of the cooperative’s board of directors.
TRUE
In cooperatives the members typically have the right to elect a board of directors. Members
democratically control these businesses by electing a board of directors that hires professional
management.
188. AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #187
Topic: Cooperatives
Jane has always disliked the notion that the customers, managers and workers of a business are
separate individuals with competing goals. She has joined with many other people in her community
who share this view to become a member, and part owner, of a child care center. Jane and the other
members operate the center for their own benefit, and each is expected to work at the center at least 12
hours each month. The type of organization Jane belongs to is known as a joint venture.
FALSE
Jane belongs to a cooperative, which is a special form of business organization that is owned by its
members/customers, who operate the business for their mutual gain. Many cooperatives expect their
members/customers to work a certain number of hours per month for the organization.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #188
Topic: Cooperatives
189. The
__________
A. partnership
B. corporation
C. joint venture
D. sole proprietorship
is the most common form of business ownership.
190. A
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #189
Topic: Sole Proprietorships
is a form of business that is owned, and usually managed, by one person.
___________
A. closed corporation
B. subchapter S corporation
C. sole proprietorship
D. limited partnership
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #190
Topic: Sole Proprietorships191.
comprise about 20% of all businesses but account for about 81% of U.S. business
____________
receipts.
A. Corporations
B. Partnerships
C. Sole proprietorships
D. Limited liability companies
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #191
Topic: Corporations
192. To many businesspeople, one of the major attractions of a sole proprietorship is:
A. the ability to obtain additional financial resources.
B. the protection of limited liability.
C. an unlimited lifespan.
D. the chance to be their own boss.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #192
Topic: Sole Proprietorships
193. The
__________
A. sole proprietorship
B. limited partnership
C. corporation
D. cooperative
is usually the easiest form of business to start and end.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #193
Topic: Sole Proprietorships
194. One of the major disadvantages of a sole proprietorship is the:
A. possibility of disagreements between owners.
B. unlimited liability the owner has for the debts of the firm.
C. fact that any income earned by this type of business is taxed twice.
D. high cost of starting or ending the company.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #194
Topic: Sole Proprietorships
195. Starting a new business as a sole proprietorship:
A. requires retaining the services of an attorney.
B. is simple, but the proprietorship fee is very expensive in some states.
C. is usually simpler and less expensive than starting other forms of ownership.
D. is very similar to starting a business as a corporation.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #195
Topic: Sole Proprietorships196. In a sole proprietorship, the profits earned by the business are:
A. taxed as income for the business, but exempt from the personal income tax paid by the owner.
B. taxed at the lowest corporate rate.
C. the property of the owner, except for taxes owed to the government.
D. tax-free if the appropriate exemption is filed with the local government.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #196
Topic: Sole Proprietorships
197. With respect to taxes, the sole proprietorship:
A. pays taxes on the profits of the business at the same rate that corporations pay taxes.
B. pays taxes on the profits of the business, at the owner’s personal tax rate.
C. pays taxes only if there are no expenses associated with the business.
D. is permitted to determine its own tax rate and schedule of payments.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #197
Topic: Sole Proprietorships
198. A significant disadvantage of owning a sole proprietorship is the:
A. possibility of limited liability.
B. heavy tax liability that must be assumed.
C. overwhelming time commitment often required of the owner.
D. lack of incentives to motivate the owner.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #198
Topic: Sole Proprietorships
199. When a sole proprietor dies:
A. the sole proprietor’s heirs have the option of taking over the business.
B. the business is sold to a larger corporation.
C. the company continues to function as it always has.
D. the company always closes down.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #199
Topic: Sole Proprietorships
200. Unlimited liability means:
A. when you own your own business you are responsible for all the business debts.
B. you are only liable for the money you invest in the business.
C. as a franchisee your franchisor is responsible for the debts of the franchise.
D. you are liable for whatever advertising promises your firm makes.
Unlimited liability means the owner is responsible for all the debts of the firm. If the firm should
land in bankruptcy court, the judge could liquidate the owner’s personal assets to pay the debts of the
business.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #200
Topic: Sole Proprietorships201. 202. 203. Any debts or damages incurred by a firm organized as a sole proprietorship are:
A. the responsibility of the owner.
B. limited to the amount the owner has invested in the firm.
C. paid for out of a reserve contingency fund that sole proprietors are required by law to set up.
D. normally covered by liability insurance.
A sole proprietor accepts unlimited liability. This means that he/she is responsible for all debts of the
business. If the firm should land in bankruptcy court, the judge could liquidate the owner’s personal
assets to pay the debts of the business.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #201
Topic: Sole Proprietorships
An entrepreneur who wishes to start a business with little delay or hassle, and who wants to be his or
her own boss, should organize the business as a:
A. sole proprietorship.
B. cooperative.
C. C corporation.
D. general partnership.
Two advantages of sole proprietorships are ease of starting (and ending) and being your own boss.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #202
Topic: Sole Proprietorships
Which of the following statements is the most accurate? Sole proprietorships:
A. are well suited for people who want to own a business and share in its profits without taking an
active role in management.
B. are taxed at the owner’s personal tax rate.
C. are the least risky form of business ownership.
D. must receive a state charter before they can legally conduct business.
One of the major advantages of sole proprietorships is that they are easy to form and end and taxed at
the owner’s personal tax rate.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #203
Topic: Sole Proprietorships204. Although sole proprietors do not pay any special taxes, as the owner of the business you are also an
employee of the business, which requires you to:
A. pay income tax only one time each year.
B. pay self-employment taxes.
C. pay for the right to get an employee identification number.
D. file an income tax return for the business.
Sole proprietors pay self-employment taxes such as Social Security and Medicare.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #204
Topic: Sole Proprietorships
205. Being your own boss means:
A. reducing your working hours.
B. having the freedom to set your own working hours and taking lots of vacations, particularly when
just beginning the business.
C. accepting accountability for the mistakes of the business.
D. having limited financial resources to throw into the business.
When you are your own boss, you must accept all mistakes as your mistakes.
206. AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #205
Topic: Sole Proprietorships
Joe Jackson operates a sole proprietorship, but he is in poor health and may be unable to continue
running the business. If Joe becomes incapacitated, his business:
A. automatically continues under new management as a sole proprietorship.
B. automatically converts into a public corporation with stock sold to interested investors.
C. ceases to exist unless sold or taken over by Joe’s heirs.
D. becomes the property of the most senior employee who wishes to continue operating the firm.
A sole proprietorship ceases to exist if the proprietor dies, retires, or becomes incapacitated, unless it
is sold or taken over by the owner’s heirs.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #206
Topic: Sole Proprietorships207. 208. 209. Maria has a lot of self-confidence and business knowledge. She recently opened a bakery as a sole
proprietor. She is expecting a high level of profits and is looking forward to:
A. the lower corporate tax rate paid by sole proprietorships.
B. keeping all of the money she earns except for the taxes she is required to pay.
C. keeping all of the money she earns since she does not have to pay taxes as a sole proprietor.
D. easily raising additional large sums of money from the capital markets since she is a sole
proprietor.
One of the advantages of a sole proprietorship is the retention of company profit. The owner can earn
as much as possible and not have to share that money with anyone else except the government, in
taxes.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #207
Topic: Sole Proprietorships
Kali owns Dog Trotters, a dog-walking business that she started to earn money after school and
supplement her allowance. She planned to keep all the profits, and has kept things simple by putting a
flier on the bulletin board at the local grocery store announcing that she was available to provide this
service. Kali’s business is a:
A. sole proprietorship.
B. franchise.
C. S corporation.
D. partnership.
Kali’s simple form of business ownership is a sole proprietorship. She, alone, keeps the profits from
her service.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #208
Topic: Sole Proprietorships
Nick wants to start his own business. Nick should consider a sole proprietorship if he:
A. expects rapid growth and wants to be able to raise a large sum of money.
B. wants to make it easy to attract qualified employees.
C. wants to be his own boss and can accept unlimited liability.
D. wants to minimize the financial risk he must accept as the owner of a business.
A sole proprietorship is a business that is owned and managed by a single individual. This form of
business ownership appeals to people who want to be their own boss.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #209
Topic: Sole Proprietorships210. 211. Javier is the sole proprietor of a golf shop. Because he is a sole proprietor, any profit Javier’s business
earns is:
A. totally tax-free.
B. taxed only as Javier’s personal income.
C. taxed twice, once as business income, then again as Javier’s personal income.
D. taxed only if and when it is distributed to investors.
A tax advantage of sole proprietorships is that their earnings are only taxed once, as personal income
to the owner.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #210
Topic: Sole Proprietorships
Selma owns a roofing business. She enjoys being her own boss, but her satisfaction comes at a price.
Her days are filled with organizing the activities of her employees and soliciting new customers. She
often misses activities with friends and family because of the obligations of running her own business.
She also knows that she has unlimited personal liability for any of her firm’s debts. Selma’s business is
organized as a(n):
A. joint venture.
B. C corporation.
C. S corporation.
D. sole proprietorship.
A key advantage of sole proprietors is that the owner is his or her own boss, and can run the business
the way they like. However, this freedom comes with a great deal of responsibility. Sole proprietors
have no one else to share the burdens of ownership and often must work very long hours to keep the
company on course. Another disadvantage of a sole proprietorship is that the owner has unlimited
liability.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #211
Topic: Sole Proprietorships212. 213. 214. 215. Halle wants to start a business. She has two goals. First, given her limited personal wealth and
eagerness to get started, she wants to get her business up and running with the least possible hassle
and expense. Second, she wants to minimize her personal risk in the event that her company
experiences difficulties. If Halle chooses a sole proprietorship, she would:
A. achieve both goals since this form of ownership is both the easiest to form and the least risky.
B
meet her first goal since sole proprietorships are easy and inexpensive to form. However, she would
.
expose herself to personal risk because owners of sole proprietorships have unlimited liability.
C. not achieve either goal since proprietorships are both costly to set up and subject to unlimited
liability.
D
achieve her second goal, since the owners of sole proprietorships are legally protected from losing
.
more than the amount they invest in their company. However, she would find that the start-up costs
would be higher than if she had incorporated her business.
One advantage of sole proprietorships is that they are relatively easy and inexpensive to start.
However, a major disadvantage is that the owner has unlimited personal liability for any debts of the
firm. This unlimited liability means that the owner is exposed to a high level of risk.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #212
Topic: Sole Proprietorships
In a partnership, a(n) __________ partner (owner) actively manages the company and has unlimited
liability for claims against the firm.
A. unlimited
B. limited
C. general
D. associate
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #213
Topic: Partnerships
A partner (owner) who invests money in a business does not take an active role in managing the
operation, and is only subject to losing the funds he/she invested.
A. implied partner.
B. limited partner.
C. partial partner.
D. corporate partner.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #214
Topic: Partnerships
The limited liability provided to limited partners means that they are not responsible for the debts of
the business beyond:
A. the firm’s total assets.
B. the amount they have invested in the company.
C. the percentage of profits they are entitled to earn.
D. their total personal assets.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #215
Topic: Partnerships216. 217. 218. 219. 220. According to the Uniform Partnership Act, the three key elements of any general partnership are:
A. a board of directors, a written partnership agreement, and a well-defined product or service.
B. two owners, an adequate financial base, and a written statement describing the manner in which
profits and losses will be divided.
C. common ownership, shared profits and losses, and right to participate in management.
D. common stock, a board of directors, and a statement of limited liability.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #216
Topic: Partnerships
A type of partnership called a
___________
acts much like a corporation and is traded on stock
exchanges, but it is taxed like a partnership with profits passing through to the owners and taxed as the
owner’s personal income.
A. limited partnership
B. combined general partnership
C. cooperative partnership
D. master limited partnership
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #217
Topic: Partnerships
Compared to a sole proprietorship, which of the following is considered an advantage of a general
partnership?
A. Ability to pool financial resources
B. Unlimited liability for all owners
C. Division of profits among owners
D. Ease and flexibility in transferring shares of ownership to others
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #218
Topic: Partnerships
In a limited liability partnership, each partner’s risk of losing personal assets is:
A. unlimited.
B. limited to losses that result from his/her own acts and omissions and the acts and omissions of those
who work under his/her supervision.
C. determined entirely by the maximum loss provision established by the articles of co-partnership.
D. nonexistent.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #219
Topic: Partnerships
Which of the following is an advantage of a partnership?
A. Ease of starting and ending the business
B. Unlimited liability
C. Shared management and pooled skills
D. Little time commitment
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #220
Topic: Partnerships221. 222. 223. 224. When entering into a new partnership, a good strategy is to:
A. avoid putting the agreement in writing since this would limit the flexibility of the partnership.
B. put the partnership agreement in writing.
C. plan to incorporate as soon as possible.
D. agree to put the first year’s profits back into the partnership.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #221
Topic: Partnerships
One difference between partnerships and sole proprietorships is that partnerships:
A. take less work to form.
B. are managed by an elected board of directors.
C. have the advantage of limited liability.
D. have a greater chance of long-term survival due to the accountability of each partner to the other.
Partners not only give the firm a stronger financial base and a broader range of expertise, they also
watch over each other, thus providing a more disciplined environment.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #222
Topic: Partnerships
Which of the following statements about partnerships is most accurate?
A. A partnership is a corporation with fewer than 100 owners.
B. A major advantage of a partnership is that it offers all owners limited liability.
C. A major drawback of a partnership is that it is difficult to terminate.
D. Partnerships are taxed at the lowest corporate tax rate.
Once partners commit to a partnership, the arrangement is often difficult to terminate. Questions of
who gets what and what happens next are usually hard to resolve when the business is closed.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #223
Topic: Partnerships
When comparing general partnerships to sole proprietorships, an advantage of partnerships is that
they:
A. are less risky, because each partner is responsible for only a specified fraction of the firm’s debts.
B. are easier to terminate.
C. cost less to organize.
D. give the firm a stronger financial foundation.
When a partnership is formed, two or more people can pool their financial resources to provide the
business with a stronger financial base.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #224
Topic: Partnerships225. A good reason why partners should spell out the details of their partnership arrangements in writing
is:
A. the partnership is not a legally recognized business unless they do so.
B. a written agreement will help reduce misunderstandings and disagreements among the partners.
C. putting the agreement in writing will limit the liability of each partner to a specified level.
D. doing so will make it easier to convert the business to a corporation at a later date.
A major drawback of a partnership is the potential for disagreements among the partners. Spelling out
the agreement in writing is a way to protect all parties and minimize misunderstandings.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #225
Topic: Partnerships
226. A master limited partnership (MLP) is:
A. not traded on the stock exchanges.
B. pays corporate income taxes.
C. taxed like a partnership.
D. the corporate form of choice for small groups of individuals.
The master limited partnership looks much like a corporation because it is traded on the stock
exchanges but it is taxed like a partnership and avoids the corporate income tax.
227. Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #226
Topic: Partnerships
Which of the following is not a disclosure that should be part of a partnership agreement?
A. The way profits will be divided among partners.
B. The list of personal assets of each partner.
C. The specific responsibilities of each partner.
D. The salaries and drawing accounts of each partner.
The Model Business Corporation Act recommends several things be written in a partnership
agreement, including the way profits will be divided, the responsibilities and duties of each partner,
and the salaries and drawing accounts of each partner. It does not ask for a list of personal assets of
each partner.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #227
Topic: Partnerships228. 229. 230. One way to eliminate some of the risk of your partners making costly mistakes that could jeopardize
your personal assets is to set up a:
A. Master Limited Partnership.
B. sole proprietorship.
C. limited amount of time each can actively spend in the business.
D. limited liability partnership.
A limited liability partnership (LLP) limits partners’ risk of losing their personal assets to the
outcomes of only their own acts and omissions and those of people under their supervision. If you are
a limited partner in an LLP, you can operate without the fear that one of your partners might commit
an act of malpractice resulting in a judgment that takes away the personal assets of those who did not
commit the errors.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #228
Topic: Partnerships
Finley is a limited partner in Gettout & Associates. Heywood U. Gettout, one of the general partners
in the company, must temporarily leave the company to attend to some personal matters. Heywood
has asked Finley to perform his managerial duties while he is gone. As a limited partner, Finley:
A. can fill in as a manager whenever necessary, as long as it is for only a limited time.
B. can make managerial decisions as long as they do not involve the payment of money.
C. cannot participate in the management of the partnership.
D. can manage the firm as long as he gets approval from the company’s other general partners.
A limited partner invests money in a partnership but cannot legally take an active role in its
management.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #229
Topic: Partnerships
Kristen and her brothers and sisters decided to form a partnership that specializes in home design
of all types. One of their goals is to maintain the loving relationship they currently enjoy, so they
are following the Model Business Corporation Act recommendations as they write the partnership
agreement. Which of the following is an accurate recommendation of the Act?
A
The business should be actively operating for an extended period before the partners decide who is
.
responsible for what business functions.
B. Family businesses never take on outside partners, so no discussion of this need take place.
C. There should be discussion and well-understood ways that the partners will handle disagreements.
D
Due to the fact that they are all under 40 years old and expect to work until they are 65 there is no
.
need to decide what will happen to the partnership if one decides to leave the business or retire, or
dies.
The Model Business Corporation Act recommends including a number of specifics in the written
partnership agreement including how disagreements will be handled.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #230
Topic: Partnerships231. 232. Maya plans to open a shop specializing in foods and cultural items from the Middle East. She wants
to be the firm’s only general partner, but she is trying to get several friends to participate as limited
partners. Apparently Maya wants to:
A. limit her personal liability to the amount she personally invests in the company.
B. keep all of the firm’s profits.
C. obtain a strong financial base for the firm while maintaining personal control over the firm’s
management.
D. meet the legal requirements of the Uniform Partnership Act.
Limited partners invest money in a business and share in the profits, but are not allowed to assume
any management responsibilities. Since Maya plans to be the only general partner, she will be the only
owner who has a direct role in managing the company.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #231
Topic: Partnerships
Zach and Mac own an auto repair business that they operate as co-owners. Both take an active role
in the management of the business, and each accepts unlimited liability. Zach and Mac operate as a
.
________
A. joint venture
B. general partnership
C. limited partnership
D. cooperative
Since Zach and Mac operate the business as co-owners, they have formed a general partnership. Since
both will manage the firm and accept unlimited liability, they are both general partners.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #232
Topic: Partnerships233. 234. Mel, Tim, and Bill agreed to partner in a small rehab business. Initially, they were enthusiastic
contributors until their first project took more work than Mel initially estimated; Tim wanted morning
meetings and long lunch hours; and Bill decided to go on vacation even though the project was not
complete and ready to sell. As Figure 5.2 indicates,
A. it’s smart to begin the partnership with honest communication of what each partner expects to give
and get from the partnership.
B
it’s smart to organize the business as a limited liability company to reduce the financial risks that put
.
pressure on members of the partnership.
C. it’s smart to designate one of the partners as the primary partner with final authority to call all the
shots.
D. it’s smart to enter into partnerships with people who have similar educational and cultural
backgrounds and similar personalities.
This question is based on the material in Figure 5.2. This figure gives advice on questions to ask
when choosing a partner. A key point made includes a question regarding each partner’s vision for the
company.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #233
Topic: Partnerships
Jamie and Maria invested all their savings in a small pizzeria they opened outside the University of
Western Kentucky. They operated the business as a general partnership. After 11 months, the business
went broke and Jamie and Maria were left with outstanding bills of $37,500, which was more than
their initial investment in the company. Jamie and Maria can:
A. lose their personal assets as the result of their company’s financial problems.
B. lose only the funds they originally invested in their company.
C. lose only the total value of the assets actually used to operate the business.
D
avoid any liability for these debts since a partnership is considered to be a business entity that is
.
separate and distinct from the partners who own it.
General partners have unlimited liability for the debts of their business. This means their personal
assets are at risk.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #234
Topic: Partnerships235. 236. 237. Randy and Mandy plan to pool their money and musical talents to form a general partnership and
begin booking weekend gigs. One of the first things Randy and Mandy should do is:
A. seal the deal with at least five clubs where they can book three months’ worth of gigs.
B. consult an attorney and put their agreement in writing.
C. pay the partnership formation fee to their state’s commerce commission.
D. file the limited liability paperwork at the courthouse in the county in which their partnership will be
formed.
One problem with a partnership is the potential for disagreements and misunderstandings among the
partners. Consulting an attorney and getting the agreement in writing helps minimize the risk of such
problems.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #235
Topic: Partnerships
Travis has agreed to invest $16,000 in a partnership with his sister and brother-in-law. He does not
intend to actively work in the partnership, nor does he wish to risk any of his own assets other than
the $16,000 he initially invests. The partnership has agreed to permit him to share in the profits.
As an expert on forms of business ownership, you know that Travis is a
in this
______________
partnership.
A. general partner
B. preferred stockholder
C. secondary partner
D. limited partner
A limited partner invests in a partnership, but has limited liability and does not take an active role in
managing the business.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #236
Topic: Partnerships
Jim is one of several general partners who own Beef ‘N Beer, a small chain of restaurants located in
Missouri and Illinois. Jim is interested in converting the partnership into a master limited partnership.
If he convinces other partners to go along with his idea, Beef ‘N Beer will:
A. offer shares of ownership that are traded on a stock exchange much like a corporation.
B. pay its taxes like a corporation.
C. begin to operate much like a sole proprietorship.
D. have to change its name to include the term Ltd. in its title to indicate its owners have limited
liability.
Master limited partnerships act much like corporations with shares of ownership traded on the stock
exchanges, but they are taxed like partnerships, where each owner adds his/her dividends to other
personal income earned and pays taxes at the owner’s personal income tax rate.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #237
Topic: Partnerships238. Kristen and her brothers and sisters set up a design firm called Houses by Design LLP. Although key
business functions are centralized, each sibling is a licensed architect that designs, builds, and installs
residential and commercial buildings for his/her own clients. Unfortunately, a design created and
installed for one of their clients resulted in water damage to the basement of the client’s new home.
The limited liability partnership:
A. guarantees that none of the company’s partners will lose more than the amount they invested in the
company.
B
guarantees that only those partners who were directly involved in designing and building this home
.
face unlimited liability for claims against the firm.
C. protects the partners from any suit by the client.
D. will enable the firm to quickly reorganize with only minor financial losses.
A key advantage of a limited liability partnership is that it limits the liability of individual partners to
damages or debts that result from their own decisions or actions, or to those of employees under their
direct supervision.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #238
Topic: Partnerships
is a state-chartered legal entity with authority to act and to have liability
239. A(n) ___________________
separate from its owners.
A. limited partnership
B. conventional corporation
C. unlimited partnership
D. nonprofit organization
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #239
Topic: Corporations
240. An owner of a corporation is known as a(n):
A. general partner.
B. limited partner.
C. director.
D. stockholder.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #240
Topic: Corporations
241. Which of the following statements about the operation of a corporation is correct?
A. A corporation receives its charter from a state government.
B. A corporate charter automatically expires in 99 years and must be renewed if the corporation wants
to remain in business.
C. Owners of a corporation have unlimited liability for any claims against their company.
D. A corporation tends to be much easier to set up than a sole proprietorship or partnership.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #241
Topic: Corporations242. The form of business ownership best suited to raising large amounts of money for expansion is
the:
A. sole proprietorship.
B. partnership.
C. corporation.
D. cooperative.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #242
Topic: Corporations
243. Which of the following is an advantage of the corporate form of business when compared to sole
proprietorships and partnerships?
A. Ease of formation
B. Lower taxes
C. Simplified paperwork
D. Limited liability of owners
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #243
Topic: Corporations
244. Compared to partnerships and sole proprietorships, a major advantage of the C (conventional)
corporation as a form of business ownership is that it:
A. has the ability to raise more money.
B. is easier and less expensive to form.
C. qualifies for simplified tax treatment.
D. creates unlimited liability for its owners.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #244
Topic: Corporations
245. Which of the following is normally considered a disadvantage of the corporate form of business?
A. Unlimited liability of owners.
B. Difficult transfer of ownership.
C. Limited life.
D. Double taxation of earnings.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #245
Topic: Corporations246. The board of directors for a corporation is elected by its:
A. creditors.
B. stockholders.
C. managers.
D. employees.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #246
Topic: Corporations
247. A separation between ownership and management is most likely to occur in a:
A. sole proprietorship.
B. general partnership.
C. corporation.
D. limited liability partnership.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #247
Topic: Corporations
248. One disadvantage of
_________
A. corporations
B. general partnerships
C. sole proprietorships
D. limited partnerships
is the initial cost of formation.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #248
Topic: Corporations
249. The form of business ownership that usually requires the most detailed record keeping is the:
A. corporation.
B. partnership.
C. sole proprietorship.
D. limited partnership.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #249
Topic: Corporations
250. A major advantage of S corporations is that they:
A. can have more stockholders than a C corporation.
B. can operate in foreign nations as if they were domestic corporations.
C. require less paperwork to set up than a C corporation does.
D. avoid the problem of double taxation associated with conventional corporations.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #250
Topic: Corporations251. One reason many companies do not organize themselves as an S corporation is that this form of
business:
A. is subject to a higher tax rate than a general partnership.
B. does not provide owners with limited liability.
C. has a special eligibility restriction, which many businesses are unable to meet.
D. is much more difficult to set up than C corporations.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #251
Topic: Corporations
252. To qualify as an S corporation, a company must:
A. have no more than 50 shareholders.
B. have shareholders who are individuals or estates and qualify as permanent residents of the U.S.
C. have a different class of stock for each owner.
D. have not more than 5 percent of income derived from passive sources.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #252
Topic: Corporations
253. The income generated by S corporations:
A. passes through to its owners, and each is taxed individually for this income.
B. is provided to nonprofit organizations, so it is considered a tax-free source of funds.
C. is taxed separately from its owners.
D. must be reinvested in the business. Owners should not expect dividends.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #253
Topic: Corporations
254.
are companies that are similar to S corporations but are not restricted with similar
_____________
eligibility requirements.
A. Regulated equity companies
B. Corporate cooperatives
C. Limited liability companies
D. Private drawing companies
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #254
Topic: Corporations
255. One disadvantage of a limited liability company is that it:
A. requires all earnings of the business be taxed at the corporate rate.
B. has a limited life span.
C. requires the owners to divide up profits and losses in a fixed proportion.
D. has a more restrictive ownership requirement than S corporations.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #255
Topic: Corporations256. One reason limited liability companies have become so popular is that they:
A
can be taxed either as a corporation or as a partnership, so owners can choose the tax treatment that
.
is most advantageous for their situation.
B. allow owners to sell their interests in the company without requiring approval from other owners.
C. have unlimited life.
D. permit owners to avoid paying self-employment taxes on the company’s profits.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
limited liability companies.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #256
Topic: Corporations
257. Earnings of C corporations can be:
A. taxed twice if they are distributed as dividends to stockholders.
B. taxed at twice the going rate of a partnership or sole proprietorship.
C. taxed by the federal government, but they are exempt from state taxes if the corporation owns any
facilities within that state.
D. taxed the same as a partnership.
Corporations must pay taxes on income before it is distributed to stockholders; then the stockholders
must pay taxes on the income they receive from dividends. Dividend income ends up being taxed
twice—once when it was part of the total net income of the company and then again when it is part of
the owner/stockholder’s personal income.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #257
Topic: Corporations
258. Which of the following is an attractive benefit of a corporation?
A. Corporations can enjoy double taxation.
B. Unlike limited partnerships, all owners of corporations are passive investors.
C. Corporations can protect their owners with unlimited liability.
D. Corporations can attract employees by offering stock options.
Corporations can attract skilled employees by offering such benefits as stock options (the right
to purchase shares of the corporation for a fixed price). Double taxation is a disadvantage of
corporations. Owners of corporations have limited liability; and due to stock options and other
benefits employees of corporations are quite often stockholders/owners of the corporations, as well.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #258
Topic: Corporations259. The reason a professional such as a lawyer or doctor would incorporate his/her business is:
A. to be assured that another professional firm would not take over and make decisions, similar to a
hostile takeover.
B. to comply with the law because insurance companies require that they be corporations.
C. to protect his/her other assets with limited liability.
D. to protect his/her assets with unlimited liability.
Limited liability provides corporation owners protection from loss of personal assets if the business
goes bankrupt. Although costlier to set up, the corporation provides the added protection by keeping
the business assets separate from the owner’s personal assets. Your liability is limited to your
investment in the business.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
260. AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #259
Topic: Corporations
Which of the following statements about S corporations is most accurate?
A. The major attraction of S corporations is that they avoid the problem of double taxation.
B. S Corporations are similar to C corporations, except that the majority of owners are foreign
investors.
C. Any corporation willing to pay the necessary fees and fill out the required paperwork can become
an S Corporation.
D. Only large corporations with operations in more than one state can qualify to be classified as S
corporations.
The S corporation does not file an income tax return separate from its owners. The profits of S
corporations are distributed to the owners. Owners account for these earnings on their personal income
tax returns, thus avoiding double taxation.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #260
Topic: Corporations
261. The organizational structure of a corporation permits:
A. the company management to elect the Board of Directors.
B. stockholders to elect the Board of Directors.
C. stockholders to elect the officers and management team.
D. employees (by committee) to elect the officers of the company.
Stockholders elect the Board of Directors. The Board of Directors selects the officers and top
management of the firm. Officers hire managers that supervise employees.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #261
Topic: Corporations262. Which of the following statements is the most accurate? A foreign corporation:
A. does business in one or more states, but is chartered in another state.
B. is 50% owned by individuals or companies from another nation.
C. is headquartered in another nation.
D. is the same thing as a multinational corporation.
A foreign corporation is one that does business in one state while being chartered in another state.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
263. AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #262
Topic: Corporations
The S corporation is likely to be less popular in the future because:
A
congress repealed the limited liability protection of S corporations and limited them to companies
.
with earnings of less than $3 million per year.
B
limited liability companies, which do not have the restrictive eligibility requirements of S
.
corporations and offer greater flexibility in the choice of tax treatment, are now legal in all 50 states.
C
many states significantly increased the annual fee that S corporations must pay to maintain their tax
status, thus eliminating the financial advantages of this form of ownership.
.
D
S corporations have been made illegal in several states as a reaction to widespread abuse of the
.
special benefits available to this type of business.
Limited liability companies allow firms great flexibility to choose the most advantageous tax
treatment, and avoid the special eligibility requirements that characterize S corporations. In 1995
the National Conference of Commissioners on Uniform State Laws approved the final version of
the Uniform Limited Liability Company Act. By 1996, all 50 states and the District of Columbia
recognized LLCs. Today more than half of new business registrations in some states are LLCs.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
264. AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #263
Topic: Corporations
Compared to the C corporation, the limited liability company is an attractive form of business
ownership because:
A. even though it is a little more expensive to form, it has a longer life than the C corporation.
B. a limited liability company permits one owner to own all the stock of the company, whereas a C
corporation requires several owners.
C
once formed, the limited liability company is a legal form of business ownership, worldwide,
whereas the C corporation must file for corporate status in each nation it elects to do business.
.
D
once formed, the limited liability company does not require the firm to hold annual meetings, and
.
has the option to avoid double taxation.
The limited liability company can choose to be taxed as a partnership or a corporation, giving it
the option to avoid double taxation. This form of business ownership files articles of organization;
however, it does not hold annual meetings, nor does it need to file annually.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #264
Topic: Corporations265. Double taxation means:
A. if stockholders decide to sell their shares, they are subject to paying twice the amount of taxes on
any capital gains.
B. as the owner of the company, you pay twice the amount in employment taxes on yourself, as you do
on your employees.
C
corporations pay taxes on their profits. If they distribute after-tax profits to the stockholders, the
.
stockholders also pay taxes on the distribution.
D. if the corporation doubles its profits from the previous year, the firm’s tax rate (the percentage it
pays in taxes) will also double.
A corporation files a separate tax return from its owners. It pays taxes on all profits earned after
legitimate expenses are deducted. If any profits remain after taxes are paid, these are considered after-
tax-profits and they can be distributed to owners in the form of dividends. These earnings are subject
to double taxation because the government requires the recipient (the owner/stockholder) to pay
taxes on the dividends, even though they were already taxed when they were part of the corporation’s
earnings.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
266. AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
limited liability companies.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #265
Topic: Corporations
Trevor and Tyler own all the stock in the Double T Corporation. The stock of this corporation is not
sold to the general public. Trevor and Tyler own a:
A. limited liability company.
B. master limited partnership.
C. alien corporation.
D. closed corporation.
A closed corporation is one whose stock is all owned by only a few investors (or privately held), and
isn’t available to the general public.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #266
Topic: Corporations267. Tess and Tijuana have considered starting their own business but are concerned about the possibility
of losing their personal assets if the business fails. One way for Tess and Tijuana to avoid this risk
would be to organize their firm as a(n):
A. general partnership.
B. limited partnership.
C. corporation.
D. sole proprietorship.
A corporation has the advantage of limited liability for all of its owners. Although a limited partner
also has limited liability, even a limited partnership must have at least one general partner with
unlimited liability.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #267
Topic: Corporations
268. Maria recently purchased 100 shares of stock in Idle Time Gaming, Inc. Maria is a(n)
of this company.
______________
A. owner
B. manager
C. creditor
D. partner
Stock represents shares of ownership in a corporation.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #268
Topic: Corporations
269. Dane is a stockholder in SmallWorld, Inc., a C corporation that manufactures amusement park rides.
The company recently lost a major court decision and will probably be forced into bankruptcy. In fact,
the damages awarded are so great that, even if all company assets are sold and the proceeds are used
to pay its debts, SmallWorld is likely to still owe money to its creditors. If SmallWorld goes bankrupt,
Dane and the other stockholders will:
A. be personally responsible for all remaining debts.
B. lose their investment but nothing else.
C. be entitled to full reimbursement of any investment losses.
D. automatically qualify for federal reimbursement for any losses suffered by the firm.
Owners of a corporation have limited liability. This means that the most they can lose is the amount
they invest in the corporation.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #269
Topic: Corporations270. Ramon lives in Mexico City and is a Mexican citizen. He has several friends in the United States who
own shares in an S corporation. Ramon would like to invest in this company. Ramon:
A. can invest in this company, but must pay both U.S. and Mexican taxes.
B. cannot become a shareholder since he is not a citizen or permanent resident of the U.S.
C. can become a shareholder but cannot become a manager, and his income must be paid in pesos.
D. needs approval from the Mexican government before he can invest.
S corporations are required to meet several special conditions that conventional corporations do not
have to satisfy. One requirement is that all of the owners of an S corporation must be U.S. citizens or
permanent residents of the United States.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #270
Topic: Corporations
271. Although it is a small company, Zorn Enterprises owns a large number of inexpensive rental housing
units in Texas and Louisiana. Currently, the company is a chartered C corporation, but the owners
are interested in switching to be an S corporation. After consulting a lawyer, they learned that
Zorn Enterprises does not qualify to be designated as an S corporation. Which of the following
characteristics of Zorn Enterprises would prevent it from becoming an S corporation?
A. The firm has fewer than 75 stockholders.
B. The firm is chartered in one state, but owns property in another.
C. The firm has only one class of stock, all owned by U.S. citizens.
D. The firm receives more than 70 percent of its income from rents and other passive sources.
An s-corporation may earn no more than 25 percent of its income from passive sources such as rents,
royalties and interest.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #271
Topic: Corporations
272. Emily wants to open a chain of hair styling salons and hopes to attract investors to help finance
growth. She considered forming a C corporation, but wants to have more flexibility about how the
new business will be taxed. She also wants to offer investors/owners limited liability. Emily can
satisfy her objectives by setting up a(n):
A. limited liability company.
B. S corporation.
C. alien corporation.
D. general partnership.
Limited liability companies offer limited liability protection while allowing the company the choice of
being taxed as a corporation or as a partnership. Although S corporations also offer limited liability,
they do not offer the tax flexibility. Moreover, an S corporation has more stringent ownership rules.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #272
Topic: Corporations273. A few years back, your three U.S. born friends that live in the State of Wyoming inherited a dude
ranch that they plan to turn into a retirement haven for race horses. Peaceful Pastures wants to open its
doors by spring of 2018. After attending several small business seminars, the three friends are certain
they need limited liability. The high-risk, labor-intensive business will require a sizeable investment
including an air-conditioned barn, several fenced-in pastures and loads of animal feed. You recently
heard that one form of business ownership requires owners to pay self-employment taxes on the entire
amount of earnings. You are fairly certain this is one tax liability your friends would like to avoid.
You recommend:
A. sole proprietorship
B. general partnership
C. limited liability company
D. S corporation
Unlike the limited liability company, the S corporation form of business ownership avoids paying self-
employment taxes on total earnings and still provides limited liability to business owners who are U.S.
citizens.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #273
Topic: Corporations
274. Double taxation is experienced by corporations that pay dividends. Which of the following scenarios
is an accurate example of double taxation?
A
If Idle Time Gaming, Inc., distributes 20% of its net profit after taxes to its stockholders, these funds
will be taxed again, when each individual stockholder claims his/her portion as earnings.
.
B
By law, Idle Time Gaming, Inc., is permitted to tax its executive employees twice on their earnings,
.
and then pass those funds on to its stockholders in the form of dividends.
C
Due to the fact that it is a corporation, the accountants of Idle Time Gaming, Inc., calculate 35% of
.
the company’s earnings, multiply it by 2, and then distribute that amount to the federal government
each year for taxes.
D
If Idle Time Gaming, Inc., fails to pay its taxes on time during any given year, it must pay the
.
current year and the delinquent year, in order to stay in business, similar to being taxed two times.
The corporation is a separate entity, and as such, it pays its own taxes on its earnings. If there are
earnings after taxes, the corporation may distribute these after-tax funds to its stockholders (owners)
in the form of dividends. However, the stockholders must then claim the dividends as income on their
individual tax returns. A portion of the firm’s earnings (the dividend portion) may be taxed twice. This
constitutes double taxation.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #274
Topic: Corporations275. Khalid is a 39-year-old married business owner who runs a dry cleaning service with three locations.
His personal obligations are the home that he owns with his wife who works for a well-known
insurance company; the health needs of his family; and his commitment toward saving for the
future higher education needs of his three children. Khalid knows that two of his locations require
a large infusion of cash to pay for new and expensive dry cleaning equipment. Although his wife’s
job provides the family with health insurance, it also places the family in a higher income tax
bracket. Khalid would certainly like to minimize his taxes. Which of the following forms of business
ownership would you suggest for Khalid? Khalid should consider:
A. a sole proprietorship due to the fact that it pays its own taxes and it has limited liability.
B. a sole proprietorship due to the fact that it has unlimited liability and it will protect the family’s
personal assets.
C. a corporation because he can avoid the negative aspect of limited liability. Corporations are always
taxed at a lower rate than individuals.
D
a limited liability company because he will only be liable for what he has invested in the business.
.
His personal assets will be protected, and he can be taxed like a sole proprietorship.
LLC provides the owner(s) with limited liability, which means the owners are only liable for the funds
they have invested in the business. Personal assets are protected. It also permits the owner to account
for his earnings on his individual tax return. The company does not submit a tax return. Company
earnings are passed through to the owner’s individual return, just like a sole proprietorship or a general
partnership.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #275
Topic: Corporations
276. One reason that companies participate in mergers and acquisitions is:
A. to do the same thing as the competition because it makes for a highly leveraged company.
B. to convert a sole proprietorship into a partnership.
C. to expand within their own field or enter new markets.
D. to take the first step toward a join venture.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #276
Topic: Mergers and Acquisitions
277. A
is two firms combining to form one company.
____________
A. joint tenancy
B. tenancy in common
C. merger
D. leveraged buyout
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #277
Topic: Mergers and Acquisitions278. A(n) _________
company.
A. cooperative
B. hostile takeover
C. leveraged buyout
D. acquisition
occurs when one company buys the property and obligations of another
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #278
Topic: Mergers and Acquisitions
279. Three types of corporate mergers are:
A. economic, geographic, and financial.
B. vertical, horizontal, and conglomerate.
C. flexible, differentiated, and conditional.
D. explicit, implicit, and intrinsic.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #279
Topic: Mergers and Acquisitions
280. A
______________
A. vertical
B. horizontal
C. diagonal
D. conglomerate
merger unites firms at different stages of related businesses.
281. Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #280
Topic: Mergers and Acquisitions
When two companies in the same industry agree to become one firm, the result is called a:
A. vertical merger.
B. joint venture.
C. monopoly.
D. horizontal merger.
282. AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #281
Topic: Mergers and Acquisitions
When two companies in completely unrelated industries agree to become one firm, the result is called
a:
A. vertical merger.
B. joint venture.
C. conglomerate merger.
D. horizontal merger.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #282
Topic: Mergers and Acquisitions283. A conglomerate merger will:
A. diversify business operations and investments.
B. allow the firm to have a less dominant position in its market.
C. enable the firm to enjoy a higher degree of specialization.
D. give the firm a more secure access to needed materials and components and better control over
quality.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #283
Topic: Mergers and Acquisitions
284. One result of taking a firm private is:
A. the firm’s stock is no longer available for purchase on the open market.
B. managers lose some control as the number of stockholders increases.
C. the public image of the firm will suffer.
D. the firm will have access to more capital.
285. AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #284
Topic: Mergers and Acquisitions
An attempt by employees, management, or a group of investors to purchase an organization primarily
through borrowing is called a(n):
A. golden parachute.
B. arbitrage agreement.
C. factor transaction.
D. leveraged buyout.
286. AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #285
Topic: Mergers and Acquisitions
If a group of stockholders or management obtain all the stock of a previously publicly traded firm for
themselves, this is referred to as:
A. capitalizing.
B. stock turning.
C. turning the equity.
D. taking the firm private.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #286
Topic: Mergers and Acquisitions287. 288. 289. The difference between a merger and an acquisition is:
A. a merger does not combine the assets and liabilities of firms, whereas an acquisition combines
assets and liabilities.
B
a merger combines the assets of the two firms, but each company continues to assume its own
.
liabilities, whereas an acquisition is a total buyout of one firm by another.
C
a merger is the joining of resources of two companies, whereas an acquisition is a buyout of one
.
firm by the other. The new company concerns itself with merging of resources.
D
a merger is always something smaller tagging onto something larger, like a merging lane onto an
.
interstate, whereas an acquisition is two firms that are relatively the same size agreeing to continue as
one, more like two major interstates that come together and travel as one for several miles.
A merger is the result of two firms combining their resources and forming one company. An
acquisition is when one firm purchases the assets and obligations of another firm.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #287
Topic: Mergers and Acquisitions
When two firms which do not participate in the same industries, for example, a software company and
a fast food restaurant company, decide to merge, the result is called a
____________
merger.
A. vertical
B. horizontal
C. linear
D. conglomerate
A conglomerate merger involves two firms from different industries.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #288
Topic: Mergers and Acquisitions
A merger involving a commercial bakery and a grocery retailer would be an example of a:
A. vertical merger.
B. horizontal merger.
C. linear merger.
D. conglomerate merger.
A vertical merger involves two firms in different stages of related businesses. The bakery would make
bread and other items to be sold in the grocery.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #289
Topic: Mergers and Acquisitions290. 291. 292. A merger involving a software producer and a clothing manufacturer is an example of a:
A. vertical merger.
B. horizontal merger.
C. linear merger.
D. conglomerate merger.
A conglomerate merger is two firms from unrelated industries combining their resources.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #290
Topic: Mergers and Acquisitions
In a leveraged buyout, the managers of a firm, its employees, or other investors:
A. move the company elsewhere and start over.
B. obtain the assets of the company through bankruptcy proceedings.
C. borrow funds to buy out the firm’s stockholders.
D. negotiate a merger with another firm to create a conglomerate.
A leveraged buyout is an attempt by employees, management, or a group of investors to use borrowed
funds to buy out the existing owners of a firm.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #291
Topic: Mergers and Acquisitions
When investors successfully take a firm private, the firm’s stock is:
A. converted into bonds.
B. converted into cash.
C. no longer sold to investors on the open market.
D. pledged as collateral to its bondholders.
When investors take a firm private, they obtain all of the stock for themselves. The stock is no longer
traded on the open market.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #292
Topic: Mergers and Acquisitions293. 294. 295. Modern Screen Entertainment, Inc., recently bought Star Power Pictures, Inc., for an undisclosed
amount of money. It now owns all of Star Power Picture’s properties and obligations. This is an
example of a(n):
A. merger.
B. combination.
C. expropriation.
D. acquisition.
When one company buys out another firm’s property and obligations, the result is called an
acquisition.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #293
Topic: Mergers and Acquisitions
Continental Foods is considering a conglomerate merger with a company that makes storage solutions.
A likely reason is:
A. expand its market share.
B. develop spin-off companies.
C. diversification.
D. meet the requirements to convert to a limited liability company.
A conglomerate merger is between firms in unrelated markets. One of the common motivations for
this type of merger is the desire to diversify business operations and investments.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #294
Topic: Mergers and Acquisitions
Several years ago, Regis Corporation, a very large hair styling salon company, purchased 60 “Your
Father’s Mustache” salons. Although this was initially an acquisition, the merging of these two
businesses was a(n) __________
. Regis went on to purchase several hair care product companies.
Joining forces with hair care product companies would represent a
.
___________
A. conglomerate merger; horizontal merger
B. vertical merger; horizontal merger
C. horizontal merger; vertical merger
D. conglomerate merger; conglomerate merger
A merger of two companies which compete in the same industry and for the same market is a
horizontal merger. A merger between two firms at different stages of related businesses is a vertical
merger.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #295
Topic: Mergers and Acquisitions296. 297. 298. The strategy of investors who are attempting a leveraged buyout is to:
A. shape up the company for quick resale.
B. use debt to finance the buyout of the firm’s stockholders and gain control of the firm themselves.
C. secure ownership of all of the existing stock in a company by issuing and selling large amounts of
new stock.
D. use investment tax credits from the government to acquire all of the physical assets owned by the
firm.
In a leveraged buyout, the objective of the investors is to use debt financing to gain control of the
firm’s stock for themselves.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #296
Topic: Mergers and Acquisitions
Foreign investment in U.S. companies continues to be strong. When Belgian-based In-Bev
purchased the largest beer company in the U.S., Anheuser-Busch, this action constituted a(n)
with a negotiated selling price of $52 billion.
_________________
A. merger
B. aggregate
C. acquisition
D. unequivocal buy-in
An outright buy-out or purchase is known as an acquisition. As noted in the textbook, In-Bev bought
the largest brewer of beer in the U.S., Anheuser-Busch. The purchase included all of the company’s
assets and all the companies it owned. This is known as an acquisition.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #297
Topic: Mergers and Acquisitions
Adam is a major stockholder in Precision Transmission Services (PTS), a nationwide network of
transmission repair shops founded by his father. Currently, PTS stock is sold on the open market, but
Adam has talked to several relatives about his desire to get all of the PTS stock back in his family’s
hands. Adam is interested in
.
_____________________________
A. taking the firm private
B. a hostile takeover of the firm
C. converting the firm to a general partnership
D. forming a master limited partnership
When a group of stockholders, such as a family, obtains all of the stock in a company for themselves,
they have taken the firm private.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #298
Topic: Mergers and Acquisitions299. Hidden Valley Communications, Inc., located in a remote area of Utah, made a special device that was
used in LTE phones. After three years of local operations, the company that employed 4,000 people
was planning to close its Utah operation and move the assembly offshore. Under the direction of a
financial services company that financed the deal, the employees agreed to become owners of the
company and continue to operate the business. The business concept that describes this arrangement
is:
A. IPO (initial public offering).
B. LBO (leveraged buyout).
C. EPO (equity public offering).
D. HM (horizontal merger).
A leveraged buyout or LBO is an attempt by employees, management, or investors to buy out the
stockholders in a company. This action usually requires the buyers to borrow a sizeable amount of
funds.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #299
Topic: Mergers and Acquisitions
300. A(n) ___________
is an arrangement whereby someone with a proven idea for a business sells the
rights to use the business model, to sell a product or service to others in a given territory.
A. conditional grant
B. franchise agreement
C. trade contract
D. extended ownership agreement
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #300
Topic: Franchising
301. A(n) _____________
is a company that has a proven business model and is willing to sell the rights
to use the business model to others so that they can sell the same product or service within a given
territory.
A. intrapreneur
B. franchisee
C. limited partner
D. franchisor
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #301
Topic: Franchising
302. A person who buys the right to use a business name and sell a product within a given territory is called
a:
A. stockholder.
B. franchisee.
C. limited franchisor.
D. venture capitalist.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #302
Topic: Franchising303. A franchise can be formed:
A. only as a general partnership.
B. only as a corporation.
C. as either a corporation or partnership, but not as a sole proprietorship.
D. as a corporation, partnership or sole proprietorship.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #303
Topic: Franchising
304. The most popular type of business for franchising is:
A. consumer wholesale firms.
B. restaurants.
C. specialty steel manufacturing.
D. medical services.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #304
Topic: Franchising
305. A
is the share of profits or percentage of sales a franchisee pays to a franchisor.
____________
A. royalty
B. dividend
C. premium
D. co-pay
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #305
Topic: Franchising
306. Which of the following is an advantage of franchises?
A. Shared profit.
B. Management regulation.
C. Management and marketing assistance.
D. Coattail effects.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #306
Topic: Franchising
307. One reason franchises have become so popular is that this arrangement provides the franchisee
with:
A. a nationally recognized name and product.
B. a low cost way to start a business.
C. limited liability.
D. the right to retain all profits earned by their franchise.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #307
Topic: Franchising308. Global franchising offers:
A. few opportunities for American investors.
B. opportunities for large franchise systems, but not small ones.
C. opportunities for both large and small franchises.
D. American firms the opportunity to market goods overseas without any need to adjust for cultural
differences.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
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global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #308
Topic: Franchising
309. Opening and operating a franchise in a different country:
A. is illegal according to the Clayton Antitrust Act.
B. is no different than setting up a franchise in the domestic market.
C. may require the owner to adapt to social and cultural differences.
D. is much less risky than owning a domestically based franchise.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
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global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #309
Topic: Franchising
310. Franchisors may send reverse royalties to franchisees who:
A. have not yet created their own website.
B. feel their sales have been hurt by the franchisor’s Internet sales.
C. are using e-commerce to expand their sales territory.
D. desire to streamline their communication with employees, customers, and vendors.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
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global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #310
Topic: Franchising
311.
_____________
is by far the most popular target for American franchisors seeking to establish
franchises in other countries.
A. Canada
B. Mexico
C. Great Britain
D. Japan
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
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global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #311
Topic: Franchising
312. Franchised businesses are successful (both domestically and internationally) because:
A. they require very little start-up revenue.
B. people prefer the owners and employees of franchised businesses.
C. laws require franchisors to provide the same level of service to franchisees.
D. customers like the predictability of the product and/or service.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
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global franchising.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #312
Topic: Franchising313. An evaluation of franchising would conclude that this type of arrangement:
A
.
has become the dominant form of business organization in the United States because it has many
advantages and almost no disadvantages.
B. appeals to people who want to own a business, but are not comfortable starting a company from
scratch.
C. has a much higher risk of failure than independent companies.
D. has little chance of success outside the United States because many foreign countries do not allow
such arrangements.
An advantage of franchising is that it allows franchisees to own their business while taking advantage
of an established name and product.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
314. AACSB: Reflective Thinking
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global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #313
Topic: Franchising
Which of the following statements best summarizes the experience of American franchisors in foreign
countries?
A. Very few American franchisors of any size have had success in international markets.
B
Large franchisors have had success in other nations, but newer and smaller franchisors have lacked
.
the financial strength and reputation to succeed in global markets.
C. The only nations in which American franchisors have achieved any success are Great Britain and
Mexico.
D
Both large and small franchises have found success in foreign countries by providing convenience
.
and a predictable level of service and quality.
Literally hundreds of U.S.
-based franchisors have outlets in foreign countries. Even new and relatively
small franchisors are finding success in other countries. The key to international success in franchising
is the same as the key to success in the United States: providing the customer with convenience and a
predictable level of service and quality.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
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global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #314
Topic: Franchising315. One important consideration when prospecting for a good franchise business is:
A. the saturation rate of the franchise. The more saturation the better.
B. the market potential for the product or service, at the prices you need to charge.
C. the population level of the area where you will operate. Large populations are too overwhelming,
often needlessly increasing demand.
D. a limited disclosure statement, and being mindful that any disclosure statement may limit your
success.
The market potential is very important. Your goal should be to establish yourself with a franchisor
whose product or service has increasing demand in the area where you will operate. You do not want
your idea to be saturated in your territory. You will want the franchisor to offer full disclosure of
rules, policies, and procedures.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
316. AACSB: Reflective Thinking
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global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #315
Topic: Franchising
Which of the following statements about buying a franchise is most accurate?
A
One of the advantages of buying a franchise is that franchisors are so closely regulated that there is
virtually no chance for scams to succeed.
.
B
Before purchasing a franchise, the buyer should carefully evaluate the franchise, the franchisor, his
or her own situation, and the nature of the market.
.
C
Franchise agreements are simple to evaluate, since federal law requires that all such agreements
.
must be written in plain English with all fees and terms clearly explained.
D
Buying a franchise is the simplest and least expensive way to set up a business, since the franchisor
.
has already worked out all of the details for setting up and running the business.
This question is based on information in Figure 5.9. The figure provides a lengthy checklist of
questions for evaluating a franchise, including questions about the franchise itself, the franchisor, the
franchisee, and the market.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Reflective Thinking
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global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #316
Topic: Franchising317. Which of the following statements about operating a U.S.
-based franchise in a foreign country is most
accurate?
A
U.S.
-based franchises are most likely to succeed in a foreign market if they use the same strategies
.
and procedures used by franchises in the United States.
B
There are limited opportunities for U.S.
-based franchises to open in foreign countries because, aside
.
from Canada, Mexico, and a small number of European countries, most foreign nations do not allow
American-owned franchises to operate within their borders.
C
The operating costs for franchises in foreign countries may be fairly high, but chances for success
.
are quite good, because competition is likely to be less intense and the customer base in many
foreign countries is expanding.
D
It is difficult for U.S.
-based franchises to succeed in most foreign countries because the low incomes
.
of most households in these countries result in weak demand.
Franchises in foreign countries can be more expensive, but this is usually counterbalanced by less
competition and a rapidly expanding consumer base.
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Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #317
Topic: Franchising
318. Sierra is interested in becoming a franchise owner, by opening and operating one of 50 Cactus Katie’s
Grills, a very successful fast food chain specializing in food dishes from the American southwest.
Which of the following problems is Sierra most likely to encounter if she agrees to become a
franchisee?
A. High initial costs and fees
B. Poor name recognition and visibility
C. Lack of financing
D. Lack of managerial assistance
While franchisors often provide franchisees with financial and managerial assistance, they typically
demand a fee just to obtain the rights to the franchise. The fees charged by successful franchisors
can be quite high. In addition, most franchisors also require franchisees to pay a fee, called a royalty,
based on profits or sales.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
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global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #318
Topic: Franchising319. Marco is a franchisee with Daggies, a chain of sandwich shops. His business was doing well until
several Daggies franchisees got in trouble and were forced to close their shops. Soon afterward,
Marco’s business deteriorated and he too was forced to close. This is an example of:
A. an economic shakeout at work.
B. the coattail effect.
C. the law of diminishing returns.
D. management by exception.
Coattail effects refer to situations where the actions of other franchisees can have an impact on the
success or failure of a particular franchisee’s business.
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Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #319
Topic: Franchising
320. Daggie’s Sandwiches, Inc., sells the rights to use its name and sell its sandwiches in a given market
area to aspiring businesspeople who are willing to pay agreed-upon fees and meet certain contractual
terms. Daggie’s:
A. is offering investors the opportunity to form limited partnerships.
B. is a franchisor.
C. creates private subsidiary companies.
D. offers a tax-free investment potential.
A franchisor is someone with a good idea for a business who sells the rights to use the business name
and to sell its products or services in a given territory.
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Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #320
Topic: Franchising
321. Midas Muffler sells franchises to prospective businesspersons who want to use the Midas name and
offer Midas products. In a franchise arrangement, Midas would be the
________, and the buyer of the
franchise is the
.
________
A. owner; limited partner
B. co-signer; co-signee
C. franchisor; franchisee
D. franchisee; franchisor
In a franchising arrangement, the person or company that sells the right to use the name and product is
the franchisor, and the person who buys the rights is known as the franchisee.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Knowledge Application
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global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #321
Topic: Franchising322. Jenna plans to invest in a cleaning service franchise called Spare Time. At her first interview with the
franchisor’s selling agent, she learned that the parent company expects royalties of 5%. These are:
A. the initial investment, also known as the franchise fee paid to the franchisor.
B. the cost of supplies that she will purchase one time each month from the parent company.
C. milestones that the parent company expects her to reach. With each milestone, she will be rewarded
with commissions.
D. a share of the profits or a percentage share of revenues (net sales).
Franchisors usually require a royalty fee which can be a portion of the profits of each franchised
operation, or a percentage of the revenues (net sales) of each operation. These are typically collected
on a monthly basis.
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Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #322
Topic: Franchising
323. A prospective franchise owner wants to keep his monthly costs at a minimum. The franchisor he is
reviewing is advertising that royalty payments of 8% of sales could be as high as $250,000 per month.
The franchisor is claiming that a franchisee can expect monthly sales to be as high as:
A. $2,125,000
B. $2,000,000
C. $3,125,000
D. $200,000
Royalties are monthly fees collected by the franchisor. These fees are a percentage of the total
monthly sales. If the franchisee generates $2,125,000 in sales, he/she will pay 8% of that amount to
the franchisor. 8% of $3,125,000 = $250,000. The mathematical question is: 8% of what revenue
amount = $250,000? 8% of X = $250,000. X = $250,000/.08. X = $3,125,000.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Analytical Thinking
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Blooms: Analyze
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #323
Topic: Franchising324. Naomi is planning to invest in a new online franchise, the Novel Artist, Inc. The franchisor provides
proprietary software and training for designing invitations and cards for special occasions such as
weddings, graduations, and birth announcements. The franchisee is obligated to pay a monthly fee to
the franchisor. Naomi will use the software to create her own special designs that she will ultimately
feature on her website. Order turn-around time must be fast. She can only take on as many clients as
she can make good on delivery. An advantage of Naomi’s online franchise is:
A. She has a limited territory.
B. She has a narrow product offering.
C. She does not need name recognition or marketing assistance.
D. She has an unlimited territory.
A distinct advantage of online franchising is the unlimited territory regulations. The franchisee can
sell to anyone, anywhere. This makes for an instant global business.
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Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #324
Topic: Franchising
325. Greg plans to open up three Hottie Pata′tee franchises in the greater Denver area. He just informed
you that he plans to negotiate with the franchisor to eliminate the Big Potato Head that graces the roof
of these restaurants. Greg is likely to learn that:
A. the parent company will give him a start-up cost break for the same amount that it would have to
pay for three of these signs.
B
he is making a smart decision because it is not the sign that will bring customers to his potato bar. It
.
is the wide-selection of toppings and six different ways he will cook potatoes.
C. it is nonnegotiable due to company rules.
D. his failure rate will not increase or decrease because franchises traditionally have low failure rates.
Franchisors quite often require franchisees to adhere to strict rules when it comes to the design of
their buildings, the signs that they use, and other mandates. The proven business model usually has
centralized regulations that franchisees must follow.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Knowledge Application
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global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #325
Topic: Franchising
326. A
___________
is an organization that is owned and controlled by the people who use it—producers,
consumers and workers with similar needs pool their resources for mutual gain.
A. corporation
B. limited partnership
C. mutual fund
D. cooperative
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Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #326
Topic: Cooperatives327. In rural areas electrical power is often sold by ____________
policy to sell them electricity at wholesale rates.
A. franchises
B. limited partnerships
C. mutual funds
D. cooperatives
that take advantage of the government’s
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Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #327
Topic: Cooperatives
328. Some
__________
as part of their duties.
A. franchises
B. limited partnerships
C. mutual funds
D. cooperatives
ask members/customers to work at the organization for a number of hours a month
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Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #328
Topic: Cooperatives
329. The purpose of a farm cooperative is to:
A. give members more economic power as a group than they would have as individuals.
B. give each farm an equal share in the running of the cooperative.
C. equalize the members’ standard of living.
D. allow socialism a foothold in the U.S.
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Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #329
Topic: Cooperatives
330. In a cooperative, members/customers:
A. democratically control their businesses by electing a board of directors.
B. are known as limited partners.
C. each have unlimited liability for the debts of the firm.
D. take turns serving on the board that manages the company.
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Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 1 Easy
Nickels – Chapter 05 #330
Topic: Cooperatives331. People who form cooperatives:
A. believe the government should play a larger role in the economy.
B. dislike the notion of having owners, managers, and customers as separate individuals with separate
goals.
C. see competitive behavior as the key to ensuring rapid economic growth.
D. want to find a way to supply basic necessities free of charge to everyone.
People who form cooperatives dislike the notion of separating owners, managers, and customers
into separate groups with separate goals. They tend to favor more cooperation and a more equal
distribution of wealth.
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Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #331
Topic: Cooperatives
332. A distinguishing feature of a cooperative is that it:
A. maintains a distinct separation between ownership and management.
B. is only intended to operate for a limited period of time.
C. is owned and operated by the people who use it.
D. can have no more than 75 owners, all of whom must be citizens of the United States.
A cooperative is an organization that is owned and operated by the people who use it—producers,
consumers and workers with similar needs who pool their resources for mutual gain.
333. AACSB: Reflective Thinking
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Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #332
Topic: Cooperatives
Which of the following statements about farm cooperatives is most accurate? Farm cooperatives
have:
A. declined in importance in recent years.
B. become a major force in American agriculture.
C. run afoul of U.S. antitrust laws in recent years.
D. increased in number, but decreased in size in recent years.
Statistics and examples cited in the text clearly indicate that farm cooperatives, such as Sunkist, Land
O’Lakes, Blue Diamond, and Ocean Spray, are a major force in U.S. agriculture.
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Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 2 Medium
Nickels – Chapter 05 #333
Topic: Cooperatives334. Which of the following people would be most interested in participating in a business organized as a
cooperative?
A
Joe is intrigued by the idea of combining his time and resources with many other people to operate a
.
business providing a good or service that they all will use.
B
Joan wants to be an owner of a business and share in its profits, but has no desire to take an active
.
role in managing the company or participating in its daily operations.
C
Jeff wants to work for a government-owned business because he believes government ownership
.
ensures a more equitable distribution of income and wealth.
D. Jennifer prefers to work for a charitable organization that emphasizes helping people who are less
fortunate than she is.
As its name implies, a cooperative emphasizes cooperation. A cooperative appeals to people who
dislike the notion of having owners, managers, workers, and customers as separate groups with
different goals. In a cooperative, the people who will use a product join together and pool resources to
operate the business for their mutual gain.
335. AACSB: Analytical Thinking
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Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #334
Topic: Cooperatives
Twenty-six years ago, several small vineyard owners in California joined voluntarily to market their
grapes and wine in an attempt to get better prices. Over the years they expanded the organization to
include other services such as buying and selling farm supplies and equipment and providing financial
and technical services. The arrangement established by these vineyard owners is an example of
a(n):
A. closed corporation.
B. joint venture.
C. limited agricultural partnership.
D. farm cooperative.
A farm cooperative is an organization of farmers who have joined to gain more economic power
than they would have as individuals. These organizations often buy and sell supplies and equipment,
provide warehouses, offer insurance and financial and technical services, and even operate
manufacturing facilities.
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Learning Objective: 05-06 Explain the role of cooperatives.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #335
Topic: Cooperatives
Mini-Case
For as long as she could remember, Jenna Raiter’s passion was cars. As a teenager, she spent hours
with her dad tinkering with the family car, learning to change the oil and making minor repairs. She
got a job at a local garage while still in high school. A few years after graduating from high school and
completing the auto mechanics degree at a local community college, Jenna decided she wanted to be
her own boss. She quit her job, borrowed some money from her dad, and began her own repair shop,
the AutoMotion Garage. Jenna’s hard work gradually attracted a loyal clientele of satisfied customers.
Her success has her thinking about opening garages in two other locations, but she lacks the financial
resources needed for expansion. Furthermore, the success of her business is forcing Jenna to spend
more time managing the business and less time doing the actual technical work she still enjoys. She
wants to find business partners who can help her with management and provide additional financial
resources. She has approached a couple of friends she met in high school: Al Ternator and Lew
Banfilter, to see if they would like to join the business.
Nickels – Chapter 05336. 337. 338. Currently, AutoMotion Garage is operated as a(n):
A. limited liability company.
B. cooperative.
C. sole proprietorship.
D. solitary subsidiary.
A business that is owned, and usually managed, by one person (such as Jenna) is a sole proprietorship.
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Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #336
Topic: Sole Proprietorships
Jenna approached Al Ternator about joining the business as an owner. She proposed that she continue
to provide the technical expertise and deal directly with customers, while Al, who has a college degree
in finance, handles many of the financial aspects of running AutoMotion. In addition, Jenna wants
Al to contribute some much-needed money for expansion. Under Jenna’s proposal, she and Al would
operate the business together as:
A. limited partners.
B. general partners.
C. majority shareholders.
D. business consultants.
Since both partners are taking an active role in the business, they would be considered general
partners.
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Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #337
Topic: Partnerships
Although Lew Banfilter, now a young attorney, is impressed with AutoMotion and believes it could
be a place to invest money, he informed Jenna that his professional position at a law firm prevents him
from taking an active role in the business. He is also concerned about accepting more risk since he
has a young family. He mentioned a preference for unlimited liability. If Lew joined Jenna and Al, the
three might consider forming a(n):
A. limited partnership.
B. general partnership.
C. sole proprietorship.
D. Master Limited Partnership.
A limited partner invests in the business and shares in the profits, but has limited liability and does not
take an active role in the management of the company. This type of arrangement would meet Lew’s
goals of investing without incurring unlimited liability.
Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
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Level of Difficulty: 3 Hard
Nickels – Chapter 05 #338
Topic: Partnerships339. When Jenna confided in Lew and Al that she too was concerned about adding additional risk, Lew
suggested that they explore the possibility of one of the newest forms of business ownership, a(n)
__________, which has very flexible ownership rules and would give them more choices in how the
company’s earnings are taxed while still protecting all owners from high levels of risk.
A. alien corporation
B. master limited partnership
C. limited partnership
D. limited liability company
Limited liability companies offer the protection of limited liability, but allow the company a great deal
of flexibility in how the earnings of the business are taxed. In many cases, the company will choose
to have its earnings taxed as if it were a partnership, thus avoiding the problem of double taxation.
However, the company can also choose to have its earnings taxed as a corporation if that is more
advantageous.
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Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #339
Topic: Corporations
340. Al also suggested another way Jenna could finance her expansion. He described setting up a chain
of AutoMotion Garages by selling the rights to use AutoMotion’s name, business model, garage
design and service ideas to others who would like to own a similar shop. These individuals would pay
AutoMotion an initial fee and monthly royalties based on earnings. Al is suggesting that Jenna set up
a:
A. joint venture.
B. franchise arrangement.
C. C corporation.
D. master limited partnership.
A franchise arrangement exists when someone with an idea for a business (the franchisor) sells
the right to use the business name and to sell a product or a service (the franchise) to others (the
franchisees) in a given territory. Franchisees usually pay the franchisor an initial fee and royalties.
Many women have turned to franchising as a means of financing an expansion of their business.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Analytical Thinking
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Blooms: Analyze
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #340
Topic: Franchising341. With all these choice, Jenna’s head is swirling with ideas. She knows that Al and Lew have expertise
in business and management, but she also knows that she will need to read on her own for more
information. Referring back to a textbook she had in her Introduction to Business class in college, she
comes upon the following statement:
A. All forms of business ownership ultimately offer the same liability protection.
B. An S corporation is a suitable form of business ownership for all businesses, while an LLC is
limited to ownership by U.S. citizens.
C. Even if you sell the rights to others to own a similar business, you still need to commit to a form of
business ownership.
D
The least risky form of business ownership is still the sole proprietorship, and that is precisely the
.
reason that so many are formed each year.
A franchised business is an arrangement. It is not a form of business ownership. If Jenna agrees to
become a franchisor, she is still required by law to commit to a form of business ownership.
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Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #341
Topic: Franchising
342. Although most new firms start out as sole proprietorships, few large firms are organized this way.
Why is the sole proprietorship such a popular form of ownership for new firms? What features of the
sole proprietorship make it unattractive to growing firms?
Sole proprietorships have many features which are attractive to people starting a new business,
including the following:
1. They are relatively easy and inexpensive to set up.
2. The owner can be his or her own boss, which appeals to many entrepreneurs who want to do things
their own way, without the need to consult others.
3. The owner can keep all of the profits (except the share the government takes in taxes).
4. Proprietors can take a great deal of pride in owning their own independent business and running it
as they see fit.
5. The owner’s work establishes a legacy on which future generations may build.
6. There are no special taxes on proprietorships.
However, sole proprietorships also have some disadvantages that limit their growth potential:
1. With only one owner, sole proprietorships have limited access to the financial capital needed by
rapidly growing firms.
2. As the firm grows and becomes more complex, the owner may become overwhelmed with the tasks
of running the firm and need to attract qualified help.
3. Unfortunately, qualified professional workers are often reluctant to work in a sole proprietorship.
4. One of the biggest drawbacks for sole proprietorships is the unlimited liability of the owner. This
means that the owner can lose much more than the amount he or she initially invested in the company
(including personal property and savings) if the company gets into severe financial trouble. In this
respect, a sole proprietorship is a risky form of ownership.
Many growing companies decide to change their form of ownership to a corporation to overcome
these drawbacks.
AACSB: Knowledge Application
Blooms: Apply
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #342
Topic: Sole Proprietorships343. What is the difference between a general partner and a limited partner? Give an example of a situation
in which a person would want to be a limited partner.
A general partner is an owner (partner) who has unlimited liability and is active in managing the firm.
A limited partner invests money in the business and shares in the profits, but has limited liability and
cannot legally assume any management responsibility.
Students could offer any number of examples. Among them might be:
1. Wealthy persons who want to invest in what they think could be a successful firm, but don’t want to
risk their personal assets.
2. Persons who do not want the responsibility of managing a partnership.
3. Persons who are interested in a particular type of business but know nothing about the field.
344. Learning Objective: 05-02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
AACSB: Knowledge Application
Blooms: Apply
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #343
Topic: Partnerships
What is a C corporation? What are the major advantages and disadvantages of this form of business
ownership?
The C corporation is a state-chartered legal entity with authority to act and have liability separate from
its owners.
The text identifies many advantages of corporations. Among the major advantages are:
1. More money for investment. A corporation can sell stock (shares of ownership) to large numbers of
interested investors. This enables corporations to finance growth, modernize facilities and invest in the
latest technologies.
2. Limited liability. The personal assets of the stockholders are not at risk. This is a major advantage
to investors who want to invest in a company but want to limit potential losses.
3. Perpetual life. Unlike a sole proprietorship or partnership, a corporation is separate from its owners,
so its existence is not threatened by the death of an owner.
4. Ease of ownership change. Unlike the other major forms of business ownership, stockholders in
corporations can easily transfer ownership by simply selling their stock.
5. Ability to attract talented employees. Because of their ability to grow and offer opportunities for
advancement, as well as the ability to offer fringe benefits (including stock options), corporations
often can attract talented and highly qualified employees.
The text also mentions disadvantages of becoming a C corporation, including:
1. High initial cost of formation. It is generally more expensive and time consuming to form a
corporation than to form a sole proprietorship or partnership.
2. Increased regulation and paperwork. Corporations are subject to closer government regulation than
other forms of ownership, and must keep detailed records.
3. Possible conflicts between the corporation’s board of directors and management. Stockholders elect
the board of directors, and may choose members who are at odds with top management. As the text
points out, this can result in an entrepreneur being forced out of the very company he or she founded.
4. Double taxation. If a corporation pays dividends, its earnings are taxed both as income to the
corporation and as income to the stockholders. In other forms of ownership, earnings are taxed only
once.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Knowledge Application
Blooms: Apply
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #344
Topic: Corporations345. What is a limited liability company (LLC)? How does it compare to an S corporation? What are the
major advantages and disadvantages of an LLC?
A limited liability company (LLC) is a relatively new form of business organization that has been
called the “business entity of the future.
” LLCs have some similarities to S corporations. Both of these
forms of ownership have the advantage of providing limited liability for their owners while allowing
the earnings of the company to be taxed as a partnership, thus avoiding the problem of double taxation
that is a disadvantage of the conventional (or C) corporation. S corporations must meet certain
eligibility requirements. For example, they can have no more than 100 stockholders (entire families
are considered one stockholder), and all of the stockholders must be either individuals or estates and
the individuals must be citizens or permanent residents of the United States. LLCs avoid these special
eligibility requirements. Moreover, LLCs offer even more flexibility than S corporations in the choice
of taxation methods and they provide a great deal of flexibility in the way they are operated, and
in the way profits and losses are distributed. For all of these reasons, LLCs have quickly become a
very popular form of ownership. However, LLCs also have some disadvantages. For example, shares
of ownership in LLCs are not transferable without the approval of other owners. In addition, LLCs
have a limited life, and members of LLCs must pay self-employment taxes on profits. (In contrast,
owners of S corporations pay self-employment taxes only on salary, not on the entire profits of their
company.) LLCs cannot deduct the cost of fringe benefits as an expense, and there is more paperwork
for an LLC than there is for a sole proprietorship. Thus, though LLCs offer many attractive benefits,
they are not the best choice in all situations.
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporations; and
AACSB: Knowledge Application
Blooms: Apply
limited liability companies.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #345
Topic: Corporations
346. Describe and differentiate between the three types of corporate mergers. Give an example of each
type.
A vertical merger is the joining of two firms involved in different stages of related businesses.
A horizontal merger joins two firms in the same industry and allows them to expand their product
offerings and/or achieve efficiencies in production and distribution.
A conglomerate merger unites completely unrelated firms for the purpose of diversifying operations
and investments.
Students could come up with many different examples here. Probably most will draw from the
examples in the chapter but other examples could include:
1. Vertical: a candy producer that merges with a sugar refiner.
2. Vertical: a swimming pool contractor that merges with a pool filter manufacturer to ensure a
constant supply of filters.
3. Horizontal: a publisher of business textbooks merges with a publisher that specializes in legal and
political texts.
4. Horizontal: a chain of donut shops merges with a company that operates a chain of shops selling
fresh baked cookies and candy in shopping malls.
5. Conglomerate: an insurance company that merges with a magazine publisher.
6. Conglomerate: an auto parts manufacturer merges with a clothing store chain.
Learning Objective: 05-04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm private.
AACSB: Knowledge Application
Blooms: Apply
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #346
Topic: Mergers and Acquisitions347. Franchising has certainly become a key component of the U.S. economy. What are the major
advantages and disadvantages of franchising?
Students should be able to identify and discuss several of the following advantages:
1. Management assistance: most franchisors offer franchisees advice and managerial assistance.
2. Personal ownership: the business is still owned by the franchisee.
3. Use of a nationally recognized name: Many franchises have established a national reputation.
4. Financial advice and assistance: Franchisors often provide franchisees with expert financial advice
and may even be willing to provide financing to franchisees.
5. Lower failure rate than that of other business ventures.
Again, students can select from several disadvantages cited in the text. Among them are:
1. Large start-up costs to obtain the franchise.
2. Sharing profits with the franchisor, or paying a royalty based on sales to the franchisor.
3. Management regulations: franchisees have to follow rules and regulations set by the franchisor that
can limit their freedom. Thus, even though the franchisees own their business, they do not have as
much control as owners of independent small businesses do.
4. Negative coattail effects: the owners of a successful outlet can be adversely affected by the
problems and poor performance of less successful franchisees in the same franchise.
5. Restrictions on selling: many franchisees face restrictions in the reselling of their franchises.
6. Fraudulent franchisors: many franchisors are small, rather obscure companies that prospective
franchisees may know little about. There has been an increase in complaints to the Federal Trade
Commission about franchisors that delivered little or nothing of what they promised.
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challenges of
AACSB: Knowledge Application
Blooms: Apply
global franchising.
Level of Difficulty: 3 Hard
Nickels – Chapter 05 #347
Topic: Franchising
5 Summary
Category # of Questions
AACSB: Analytical Thinking 40
AACSB: Knowledge Application 50
AACSB: Reflective Thinking 257
Accessibility: Keyboard Navigation 341
Blooms: Analyze 39
Blooms: Apply 53
Blooms: Remember 184
Blooms: Understand 71
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships. 50
Learning Objective: 05-
64
02 Describe the differences between general and limited partners; and compare the advantages and disadvantages of partnerships.
Learning Objective: 05-
100
03 Compare the advantages and disadvantages of corporations; and summarize the differences between C corporations; S corporati
ons; and limited liability companies.
Learning Objective: 05-
48
04 Define and give examples of three types of corporate mergers; and explain the role of leveraged buyouts and taking a firm priva
te.
Learning Objective: 05-
65
05 Outline the advantages and disadvantages of franchises; and discuss the opportunities for diversity in franchising and the challe
nges of global franchising.
Learning Objective: 05-06 Explain the role of cooperatives. 20
Level of Difficulty: 1 Easy 184
Level of Difficulty: 2 Medium 73
Level of Difficulty: 3 Hard 90
Nickels – Chapter 05 348
Topic: Advantages of Partnerships 3
Topic: Cooperatives 20
Topic: Corporations 101
Topic: Disadvantages of Franchises 2
Topic: Disadvantages of Partnerships 4
Topic: Franchising 63
Topic: Mergers and Acquisitions 48
Topic: Partnerships 57
Topic: Sole Proprietorships 41
Topic: The Importance of Small Business Ownership to the U.S. Economy 8
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