Deck 6: Business Formation: Choosing the Form That Fits

Question 1

A(n) _____ is a form of business ownership that offers both restricted responsibility to its owners and flexible tax treatment.

A) limited liability company
B) S corporation
C) sole proprietorship
D) quasi corporation

Answer 1

A

Question 2

Which of the following is an advantage associated with a sole proprietorship?

A) Retention of control
B) Unlimited liability
C) Permanence
D) Ease of transfer of ownership

Answer 2

A

Question 3

A corporation is a separate entity from its owners where the:

A) owners are not personally responsible for the obligations of the company.
B) articles of incorporation are not required to set up the company.
C) company cannot enter into binding contracts in its name.
D) death or withdrawal of an owner dissolves the company.

Answer 3

A

Question 4

FoodieGo, a catering company, is owned by foreign investors and local businessmen. Its earnings are equally divided among its members. It does not face the problem of double taxation as taxes are only levied on the personal income of the members. The owners of FoodieGo do not have personal liability for any debts incurred by the company. In the given scenario, FoodieGo is an example of a _____.

A) limited liability company
B) corporation
C) limited partnership
D) sole proprietorship

Question 5

A _____ refers to a partnership in which all partners can take an active role in managing the business and have unlimited liability for any claims against the firm.

A) limited partnership
B) general partnership
C) limited liability partnership
D) publicly traded partnership

Question 6

Tasmeen owns a retail business along with four other people. Like the other owners, Tasmeen is not personally responsible for the debts of the company. Her personal assets are thus protected in case the company incurs losses. Given this information, it can be assumed that Tasmeen _____.

A) owns a corporation
B) has a general partnership
C) has a limited partnership
D) owns a proprietorship

Question 7

Amanda has always been inclined toward baking and wants to open her own bakery. She takes a loan of $20,000 from the bank and starts a bakery in her hometown. In the context of the four forms of business, Amanda most likely _____.

A) owns a limited liability company
B) has a sole proprietorship
C) has a general partnership
D) owns a statutory close corporation

Question 8

Charles wants to start a décor business and takes a loan of $35,000 from the bank to set up the business. Once the business is up and running, Charles will have full control of the business and its profits. However, he will also be responsible for any losses that the business incurs. In this scenario, which of the following forms of business ownership is Charles planning to start?

A) A limited liability company
B) A corporation
C) A limited partnership
D) A sole proprietorship

Question 9

A(n) _____ is a voluntary agreement under which two or more people act as co-owners of a business for profit.

A) vertical merger
B) partnership
C) S corporation
D) acquisition

Question 10

Which of the following is one of the reasons why many people prefer a sole proprietorship?

A) Pride of ownership
B) Unlimited liability
C) Permanence
D) Ease of transfer of ownership

Question 11

Francois is the sole owner of a photo studio and handles most of the work himself. All earnings from the studio become Francois's income. Given this information, Francois:

A) is obliged to pay both personal tax and company tax.
B) only pays taxes on his income as the owner.
C) is free to choose the taxation policy for his company.
D) has limited liability for the debts incurred by the studio.

Question 12

Albert is the owner of a car service center. As a sole proprietor, any profit that he earns is:

A) subjected to double taxation.
B) treated as Albert's personal income.
C) not subjected to any form of taxation.
D) taxable only when he acquires shareholders.

Question 13

Unlike a sole proprietorship, a corporation:

A) avoids the undesirable possibility of double taxation of earnings.
B) does not require the articles of incorporation to set up the company.
C) is considered to be a legal entity that is separate and distinct from its owners.
D) is a voluntary agreement under which two or more people act as co-owners.

Question 14

A sole proprietorship is a form of business ownership in which:

A) the company is considered a legal entity that is separate from its owners.
B) a single owner actively manages the company.
C) two or more people act as co-owners of the company.
D) the owners of the business are offered limited liability and flexible tax treatment.

Question 15

A _____ is a form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners.

A) sole proprietorship
B) partnership
C) cooperative
D) corporation

Question 16

In a sole proprietorship, any debts the company incurs are:

A) taxed only if the owner has not taken a loan.
B) treated as the owner's personal income.
C) considered to be the owner's personal liabilities.
D) used to purchase preferred stocks of the company.

Question 17

Which of the following statements is true of a limited liability company (LLC)?

A) It offers less flexibility than a corporation in terms of tax treatment.
B) It is by far the most common type of business organization in the United States.
C) It is a relatively new form of business ownership in the United States.
D) It is required to hold regular board meetings.

Question 18

Ronnie is the owner of a pet store and manages the store by himself. Any profit that Ronnie's store earns is:

A) used to purchase preferred stocks of the store.
B) treated as Ronnie's personal income.
C) not subjected to any form of taxation.
D) taxed only if Ronnie has taken a loan.

Question 19

Clara and Sandra collaborate to open a cafe. They come to an arrangement wherein Sandra manages the cafe from Monday to Wednesday, Clara manages it from Thursday to Saturday, and both jointly manage it on Sunday. Both Clara and Sandra share the profits of the business equally while facing a personal liability for any debts or losses that the cafe may incur. In this scenario, Clara and Sandra most likely _____.

A) own a corporation
B) have a general partnership
C) have a limited partnership
D) own a limited liability company

Question 20

Samuel and Dexter start a logistics company together. Both of them have an equal right to participate in the company's management and share in the company's profits. In this scenario, Samuel and Dexter most likely _____.

A) own a corporation
B) have a limited partnership
C) have a general partnership
D) own a limited liability company

Question 21

Which of the following is an issue associated with general partnerships?

A) Complexities related to the formation of the company
B) Double taxation of the partners
C) Difficulty faced by a partner when withdrawing from the company
D) Weaker financial base when compared to that of a sole proprietorship

Question 22

Which of the following statements is true of the formation of general partnerships?

A) Expert legal assistance can be acquired when drawing up a partnership agreement.
B) It is illegal to start a partnership on the basis of a verbal agreement.
C) A general partnership consists of a limited number of members.
D) A general partnership refers to business unions formed through involuntary partnership agreements.

Question 23

A _____ is a partnership arrangement that includes at least one general partner and at least one limited partner.

A) general partnership
B) limited partnership
C) joint liability partnership
D) mutual-bondage partnership

Question 24

Joshua and Hubert are the co-owners of a shoe manufacturing company. They have a disagreement over company policies and business methods. Following the discord, Joshua withdraws from the company and comes under the obligation to pay a sum of $10,000-the debts of the firm that are due at the time of his withdrawal. In the given scenario, Joshua and Hubert most likely _____.

A) have a general partnership
B) own an S corporation
C) own a statutory close corporation
D) have a limited liability partnership

Question 25

In the context of limited partnerships, which of the following is an aspect that differentiates limited partners from general partners?

A) Duration of the partnership in a company
B) Sharing of the profits of a company
C) Financial contribution to a company
D) Participation in the management of a company

Question 26

Which of the following features of a sole proprietorship proves that it is a risky endeavor?

A) The complications associated with operating in more than one state
B) Its lack of continuity
C) The potential for disagreements
D) Its unlimited liability

Question 27

Chloe and Tamara start a vintage fashion boutique. While both invest equally in the store and are entitled to equal profits, it is Tamara who looks after the day-to-day business transactions and manages the store. Chloe does not actively participate in managing the store, and her personal wealth is not at risk in case the business suffers losses. In this scenario, Chloe is a _____.

A) general partner
B) limited partner
C) common stockholder
D) preferred stockholder

Question 28

Since sole proprietorships are extensions of their owners, they:

A) lack permanence.
B) offer limited liability.
C) have the ability to pool financial resources.
D) lack tax advantage.

Question 29

Melvin is the co-owner of a gadget store. Unlike his partner who only provides monetary support to the business, Melvin is responsible for handling the daily operations of the store and bears complete personal liability for any debts incurred by the store. Melvin and his partner, however, share the profits of the store equally. In this scenario, Melvin is a _____.

A) general partner
B) limited partner
C) dormant partner
D) nominal partner

Question 30

Which of the following is an advantage of general partnerships?

A) Partners capitalize on complementary skills.
B) All partners have limited liability.
C) A partner's investment stays with the company even when he or she withdraws.
D) Partnerships have negligible scope for disagreements.

Question 31

Jovi's Corner, a toy store, abruptly closes down after the death of its owner. Without an heir or an experienced person to manage the store, Jovi's Corner is shut down, and the property is sold off to another party. The profits are donated to an orphanage. In the given scenario, Jovi's Corner is most likely an example of a _____.

A) limited liability company
B) corporation
C) limited partnership
D) sole proprietorship

Question 32

Which of the following is a similarity between a general partner and a limited partner in a limited partnership?

A) Both can actively participate in the management of the company.
B) Both lack the protection of limited liability.
C) Both have no share in the company's profits.
D) Both contribute financially to the company.

Question 33

Which of the following is a similarity between a sole proprietorship and a partnership?

A) Both their earnings are untouched by the Internal Revenue Service.
B) Both offer limited liability to the owners.
C) Both are subject to double taxation.
D) Both have stronger financial bases than a limited liability company.

Question 34

Which of the following statements is true of sole proprietors?

A) They mostly pay high salaries and substantial perks to their employees.
B) Their death or retirement does not legally cease the company from existing.
C) They often must perform tasks in areas where they lack expertise.
D) Their earnings are taxed only as income of the company.

Question 35

Which of the following statements is true of the formation of a partnership?

A) Working out the details of a partnership agreement is always a simple process.
B) Forming a partnership requires issuance of fresh stock to the public.
C) Partnerships are created by filing a document called the articles of organization.
D) Partnerships can be established based on a simple verbal agreement.

Question 36

Which of the following is a disadvantage associated with sole proprietorships?

A) Raising money to finance growth can be tough for business owners.
B) Taxes are levied directly on the earnings of business owners.
C) Controlling power cannot be retained by the business owners.
D) The costs of formation of a firm are more compared to other business forms.

Question 37

In the context of limited partnerships, which of the following statements is true of limited partners?

A) Their ultimate authority in the business often compels them to perform tasks or make decisions in areas where they lack expertise.
B) They assume unlimited personal liability for debts incurred by the company.
C) They are not only liable for their own mistakes but also for that of their partners.
D) Their personal wealth is not at risk as long as they do not actively participate in managing the company.

Question 38

The benefits of a general partnership include its _____.

A) ability to pool financial resources
B) ease of withdrawal
C) limited liability
D) permanence

Question 39

A typical partnership agreement includes details about:

A) how partners will solve the issue of unlimited liability.
B) how partners will settle disagreements.
C) selling company shares to the public.
D) raising financial capital through corporate bonds.

Question 40

Matisse and Oliver own an antique furniture business. They are in a form of partnership where Oliver is only a dormant partner who contributes financially to the business, whereas Matisse actively manages the business and takes care of imports and exports. Matisse and Oliver are bound by an agreement where, unlike Oliver, Matisse is personally responsible for all the debts incurred by the business. In the given scenario, Matisse and Oliver have a _____.

A) general partnership
B) limited partnership
C) limited liability partnership
D) joint liability partnership

Question 41

Heinrich Chemical Corporation holds an annual meeting in which it invites all individuals who hold shares in the company. The occasion is also set aside for the election of a new member to the company's board of directors. However, the company ensures that only individuals who have the right to vote participate in the election. In this scenario, the _____ of the company take part in the voting process.

A) general partners
B) limited partners
C) common stockholders
D) preferred stockholders

Question 42

Ronald, Jamie, Ben, and Joseph are colleagues who want to start a company of their own. All of them want to be actively involved in managing the business. However, they do not want any personal liability for any debts incurred by the company. In this scenario, they should most likely get involved in a _____.

A) general partnership
B) joint liability partnership
C) limited liability partnership
D) limited partnership

Question 43

An owner of a C corporation is called a _____.

A) director
B) sole proprietor
C) stockholder
D) chief executive officer

Question 44

Three brothers of a family own a furniture showroom. Each of them is actively involved in handling the day-to-day business activities. However, when the business suffered huge losses at the end of the last fiscal year, the personal wealth and assets of the brothers did not get affected. This is most likely because the brothers have a:

A) general partnership.
B) several liability partnership.
C) limited liability partnership.
D) limited partnership.

Question 45

IFGI Life Insurance, an insurance company, is one of the stockholders of a pharmaceutical company. Given this information, IFGI Life Insurance is most likely a(n) _____.

A) venture capitalist
B) depository institution
C) mortgage bank
D) institutional investor

Question 46

Which of the following statements is true of the board of directors of a corporation?

A) It elects the stockholders of the corporation.
B) It establishes the corporation's mission.
C) The board members of a corporation often take an active role in the day-to-day management of the corporation.
D) The board members of a corporation assume unlimited personal liability for the corporation's debts.

Question 47

Which of the following statements is true of a limited liability partnership (LLP)?

A) It does not need to distinguish between limited and general partners.
B) The amount of liability protection offered by LLPs varies among states.
C) All partners of an LLP cannot take an active role in management.
D) It is completely different from a limited partnership.

Question 48

Glossamer Inc., a company owned by George and Alex, faces huge debts and is eventually shut down due to bankruptcy. The company's financial loss affects Alex personally, and his house and other personal assets are seized by the bank. However, George's personal assets are not affected. This is most likely because George is a(n) _____.

A) general partner
B) limited partner
C) active partner
D) quasi partner

Question 49

When people use the term "corporation" without specifying which type, they are generally referring to a(n) _____.

A) statutory close corporation
B) nonprofit corporation
C) S corporation
D) C corporation

Question 50

Which of the following is an example of an institutional investor?

A) An angel investor
B) A mutual fund
C) A corporate bond
D) A robo-advisor

Question 51

Which of the following statements is true of stockholders of corporations?

A) They actively participate in the management of the company.
B) They do not have to be individuals.
C) They do not elect a board of directors.
D) They appoint the chief executive officer of the company.

Question 52

Which of the following is a difference between limited partnerships and limited liability partnerships?

A) In limited partnerships, only the general partners assume unlimited personal liability of the debts, whereas in limited liability partnerships, the partners do not hold any liabilities.
B) In limited liability partnerships, all partners have limited liability of company debts, whereas in limited partnerships, both partners hold unlimited liabilities.
C) In limited liability partnerships, all the partners actively participate in the management of the company, whereas in limited partnerships, only the general partners actively manage the company.
D) In limited partnerships, only the limited partners actively participate in managing the company, whereas in limited liability partnerships, all the members participate in the management of the company.

Question 53

Which of the following statements is true of forming C corporations?

A) They include preferred stockholders who vote in stockholders' meetings.
B) They require the adoption of corporate bylaws.
C) They are cheaper than forming a partnership.
D) They can be formed through a verbal agreement.

Question 54

Tania starts a bookstore with her friend. However, owing to other commitments, Tania is unable to help with the daily operations of the bookstore. Therefore, Tania proposes that she would not actively participate in managing the business but would provide financial support to the business. By doing this, she would be sharing the profits equally with her friend, without incurring any of the business debts personally. In this scenario, Tania is a(n) _____.

A) general partner
B) limited partner
C) quasi partner
D) active partner

Question 55

A textile corporation has two hundred odd stockholders. As it is inconvenient for so many stockholders to manage the company, the stockholders elect a group of individuals to oversee the company's operation and to represent their interests. In this scenario, the stockholders elect a _____.

A) board of valuers
B) board of directors
C) board of corporators
D) board of regents

Question 56

Carla and Liang both have shares in HD&Z Corporation, a C corporation that offers limited liability to all its owners. In this context, Carla and Liang are the _____ of HD&Z Corporation.

A) beneficial owners
B) directors
C) stockholders
D) channel partners

Question 57

The basic rules governing how a corporation is organized and how it conducts its business are known as _____.

A) corporate bylaws
B) articles of business management
C) certificates of organization
D) prospectuses

Question 58

The stockholders of a construction firm decide to start a steel company, but they want to have limited liability. After completing the business plan, they initiate the process of establishing the company by filing articles of incorporation and paying the filing fees to the state government. In this scenario, the stockholders of the firm want to start a _____.

A) franchise
B) general partnership company
C) limited liability company
D) C corporation

Question 59

Norman owns a large number of shares in a telecommunications corporation. Despite that, he does not have the right to vote in a meeting held specifically to elect the CEO of the company. In this scenario, Norman is most likely a _____.

A) general partner
B) limited partner
C) common stockholder
D) preferred stockholder

Question 60

The shareholders of a C corporation fill in all the required paperwork with a government agency. They also adopt a set of rules that will govern the way the corporation is organized and conducts its business. Given this information, the shareholders most likely adopt _____.

A) instruments of accession
B) corporate bylaws
C) articles of incorporation
D) rules of origin

Question 61

A(n) _____ cannot contribute funds to a political campaign.

A) S corporation
B) C corporation
C) not-for-profit corporation
D) statutory close corporation

Question 62

Svelter Corporation does not face the problem of double taxation as the Internal Revenue Service (IRS) does not tax the earnings of the company separately. Instead, taxes are only levied on the personal income of the stockholders. A limitation, however, is that the company is only allowed to have a maximum number of 100 stockholders at a time. Given this information, Svelter Corporation is a(n) _____.

A) S corporation
B) C corporation
C) not-for-profit corporation
D) statutory close corporation

Question 63

A(n) _____ cannot distribute dividends to its members.

A) S corporation
B) C corporation
C) not-for-profit corporation
D) statutory close corporation

Question 64

Inkglot Technologies, a medium-sized corporation, is allowed to have only 35 stockholders at any point of time. However, all stockholders of the company can actively participate in the management of the company while still maintaining limited liability. Given this information, Inkglot Technologies is most likely a(n):

A) S corporation.
B) C corporation.
C) not-for-profit corporation.
D) statutory close corporation.

Question 65

Mikhail, a Korean, wishes to be a stockholder in an airline company in the United States. However, he is told that he cannot buy shares of the company as he is neither a U.S. citizen nor a permanent resident of the country. Besides this, he can become a stockholder only if any of the current stockholders decide to sell their shares as the company already has 100 stockholders. Given this information, it can be assumed that Mikhail wants to be a stockholder of a(n) _____.

A) S corporation
B) C corporation
C) not-for-profit corporation
D) statutory close corporation

Question 66

Which of the following is an advantage of an S corporation?

A) Its stockholders have limited liability.
B) It can be owned by foreigners or other corporations.
C) Its earnings are exempt from federal and state income taxes.
D) It can have more than 100 stockholders.

Question 67

Happta is a corporation with tax-exempt status. It has members but cannot have stockholders. Given this information, Happta is most likely a(n):

A) S corporation.
B) C corporation.
C) not-for-profit corporation.
D) statutory close corporation.

Question 68

Which of the following is a difference between a C corporation and an S corporation?

A) The members of a C corporation have unlimited liability, whereas the members of an S corporation enjoy limited liability.
B) The members of a C corporation have limited liability, whereas the members of an S corporation have unlimited liability.
C) A C corporation is double taxed, whereas an S corporation is taxed as a partnership.
D) A C corporation is taxed as a partnership, whereas an S corporation is double taxed.

Question 69

All owners of a _____ can actively participate in management while still having limited liability.

A) statutory close corporation
B) Z corporation
C) general partnership
D) sole proprietorship

Question 70

One of the reasons why C corporations have an edge over sole proprietorships is:

A) the ease of its formation.
B) because single individuals can retain the total profits of the company.
C) because members have unlimited liability toward the company.
D) the permanence of the business.

Question 71

Harry is one of the top managers in RPLD Corporation. He, along with seven other members, takes the major decisions of the company and oversees its operation. Although Harry is not the owner of the corporation, he holds stocks in the company and has the power to appoint a chief executive officer (CEO) for the company. In this scenario, Harry is part of the _____ of RPLD Corporation.

A) board of valuers
B) board of directors
C) board of corporators
D) board of regents

Question 72

Conall is appointed by a nine-member board of directors of a real estate company to manage the company on a daily basis. The board ensures that Conall acts in a manner that is consistent with the interests of the stockholders. Given this information, Conall is most likely a _____.

A) non-executive director
B) chief executive officer
C) chief business officer
D) human resource manager

Question 73

Harvey, a shareholder in Braxwell Technologies, reinvests 10% of the dividends received from the company back into it, partly to evade taxes and partly to support the company. This scenario reflects the concept of _____.

A) cash disbursements
B) tunneling
C) retained earnings
D) asset stripping

Question 74

In the case of C corporations, shareholders don't pay income taxes on _____.

A) non-operating incomes
B) dividend covers
C) gross margins
D) retained earnings

Question 75

When a business that is incorporated in one state does business in other states, it is called a(n) _____ in the state where it is incorporated.

A) statutory corporation
B) overseas corporation
C) domestic corporation
D) alien corporation

Question 76

A(n) _____ can operate under simpler arrangements than conventional corporations.

A) statutory close corporation
B) Z corporation
C) S corporation
D) nonprofit corporation

Question 77

Which of the following is an advantage of a C corporation?

A) Its formation is simple and inexpensive.
B) The members are entitled to choose the mode of tax treatment.
C) It is free from double taxation.
D) Shareholders have limited liability in the firm.

Question 78

Several prominent owners of a uranium mining company pass away within a period of two years. However, the company continues to operate as it remains financially viable and a majority of its stockholders wish for the continuation of the business. In this scenario, the uranium mining company is an example of a _____.

A) sole trader
B) limited partnership company
C) general partnership company
D) C corporation

Question 79

Yadira works for an organization whose earnings are exempt from federal and state income taxes. The organization is barred from funding any political campaign. Given this information, Yadira most likely works for a(n):

A) S corporation.
B) C corporation.
C) not-for-profit corporation.
D) statutory close corporation.

Question 80

Green Haven is an organization whose earnings are exempt from federal and state income taxes. Individuals who contribute money to the organization can avail the benefit of tax deduction. However, the organization is barred from distributing dividends to its members. Given this information, Green Haven is most likely a(n):

A) S corporation.
B) C corporation.
C) not-for-profit corporation.
D) statutory close corporation.