Deck 6: Business Formation: Choosing the Form That Fits

Question 1

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 1

A

Question 2

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.

Answer 2

C

Question 3

Choice of ownership determines the degree to which each owner has personal liability for the firm's debts.

Answer 3

True

Question 4

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 5

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 6

The owner of a sole proprietorship must share any after-tax profits with the company's shareholders.

Question 7

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.

Question 8

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 9

A corporation is a voluntary agreement under which two people act as co-owners of a business for profit.

Question 10

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 11

Signing a franchise agreement exempts the franchisee from making any form of payments to use a franchisor's products.

Question 12

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 13

It is possible to establish a corporation by a simple verbal agreement.

Question 14

A premium brand of men's wear introduces a new range of dinner suits and licenses its franchisees to sell this product. However, the brand retains the production rights. This scenario exemplifies a(n) _____.

A)sole proprietorship
B)distributorship
C)acquisition
D)merger

Question 15

Which of the following is a disadvantage of franchising for a franchisee?

A)The Dunning-Kruger effect
B)The endowment effect
C)The false-consensus effect
D)The negative halo effect

Question 16

An owner of a C corporation is called a _____.

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

Question 17

Franchising is used by companies to move into foreign markets.

Question 18

Razak's, a popular chain of fast-food restaurants in the Middle East, plans to expand its market in Asia and signs a contract with an Indian firm. The contract allows the firm to set up restaurants with Razak's name and trademark and use the supplies provided by Razak to make its products. Under the contract, the Indian firm is required to adhere to the same cooking procedures and use the same equipment that are used by other outlets of the restaurant. The given scenario exemplifies a _____.

A)sole proprietorship
B)distributorship
C)business format franchise
D)conglomerate merger

Question 19

Michael owns 100 shares of stock in the Zanson Electricals Corporation, but as a stockholder, he does not have the right to vote in stockholders' meetings. In this scenario, Michael is a preferred stockholder.

Question 20

There is no limit on the number of partners who can participate in a general partnership.

Question 21

A large film production company merges with a popular sound processing studio, resulting in the formation of a new company out of the two previously independent firms. This is most likely an example of a _____.

A)market extension merger
B)conglomerate merger
C)vertical merger
D)horizontal merger

Question 22

A _____ is a type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it.

A)crave-out trade
B)non-disclosure agreement
C)distributorship
D)divestiture

Question 23

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 24

Hot and Black Tide Inc., an electronics manufacturer, merges with Crimp Corp., a food manufacturing brand, to make the firms less vulnerable to adverse conditions in any single market. This scenario is an example of a(n) _____.

A)asset acquisition
B)carryover
C)conglomerate merger
D)divestiture

Question 25

In the context of an acquisition, the firm that is purchased by another firm is called the _____.

A)partnership firm
B)target firm
C)cooperative
D)franchise

Question 26

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 27

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 28

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 29

Scoopjoe, an ice cream brand in Wisconsin, has ten other outlets in Illinois, Michigan, and Ohio. As part of the agreement between Scoopjoe's main outlet and the other outlets, the former not only supplies raw materials to the latter but also provides help with site selection, training of staff, and finance. The given scenario exemplifies a:

A)sole proprietorship.
B)distributorship.
C)business format franchise.
D)conglomerate merger.

Question 30

Sarcosine Chemicals Corp. issues stock in one of its operating units and sets it up as a separate company called Prussic Corp., with its own board of directors and corporate officers. Sarcosine Chemicals Corp. then distributes the stock in Prussic Corp. to its existing stockholders. Which of the following forms of divestitures does this scenario exemplify?

A)A spin-off
B)A tender offer
C)A carve-out
D)A stock swap

Question 31

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 32

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 33

Arocare International, a general hospital, converts its cancer unit into a new hospital called Miracle. Arocare then issues stock in the new hospital and sells the stock to outside investors. This helps Arocare raise additional funds. This scenario exemplifies:

A)a deployment plan.
B)lateral expansion.
C)a carve-out.
D)asset stripping.

Question 34

Which of the following is a disadvantage of franchising?

A)The franchisee seldom receives any support or training from the franchisor about running the business.
B)The franchisee is unable to attain instant brand-name recognition among customers.
C)The franchise agreement usually requires the franchisee to follow the franchisor's procedures to the letter.
D)The franchisee faces funding challenges as bankers are often reluctant to fund franchisees.

Question 35

A(n) _____ is a corporation that has limited number of owners that operates under simpler, less formal rules than a C corporation.

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

Question 36

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 37

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 38

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 39

An advantage of franchising is:

A)the franchisee's ability to freely expand its territory.
B)minimal setup costs.
C)easier access to funding.
D)the franchisee's ability to take control of the business.

Question 40

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 41

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 42

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 43

CofBean Corp. and Coffeedust Inc. are leading producers and distributors of coffee beans. They join together to become the world's largest distributor of coffee. This association allows the amalgamated company to increase its size and market power within the coffee industry. This is an example of a(n) _____.

A)acquisition
B)horizontal merger
C)conglomerate consolidation
D)divestiture

Question 44

A firm considers _____ to increase size and market power within the industry.

A)a buyer-supplier consolidation
B)a conglomerate consolidation
C)vertical mergers
D)horizontal mergers

Question 45

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 46

Lancelock Inc. buys a less accomplished firm by directly signing a deal with the target firm's shareholders. The move is vehemently opposed by the board of directors and the top management of the target firm. This is an example of a _____.

A)creeping acquisition
B)hostile takeover
C)bootstrap acquisition
D)lobster trap

Question 47

Which of the following statements is true of a franchisor-franchisee relationship?

A)A franchisee is free to make its own judgments when operating a business.
B)A franchisor limits the franchisee's territory from expanding into other areas.
C)A franchisee is exempted from paying any kind of royalty to the franchisor.
D)A franchisor fully pays for the costs involved in national advertising campaigns.

Question 48

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 49

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 50

John and Lena sign a contract with the owner of Little Fairy, a well-known preschool chain, to start a preschool in their city. They take permission from the owner to use the name and products of Little Fairy. They also furnish their preschool in Little Fairy's trademark style. In this scenario, John and Lena are starting a _____.

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

Question 51

A(n)__________is a combination of two firms that are in unrelated industries.

A)divestiture
B)acquisition
C)horizontal union
D)conglomerate merger

Question 52

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 53

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 54

Which of the following is a difference between limited liability companies (LLCs) and corporations?

A)Corporations can have any number of owners, whereas LLCs can have only a limited number of owners.
B)Corporations are not required to hold board meetings, whereas LLCs must hold regular board meetings.
C)LLCs are subject to fewer reporting requirements than corporations.
D)LLCs offer less flexibility than corporations in terms of tax treatment.

Question 55

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

Question 56

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 57

Fabotels is a hotel aggregator that buys budget hotels that succumb to financial losses and then refurbishes them under the company's brand name. Fabotels recently purchased Ravine Comforts, a small lodge that was running into huge debts. The business deal between Fabotels and Ravine Comforts exemplifies a(n) _____.

A)acquisition
B)horizontal merger
C)corporate spin-off
D)divestiture

Question 58

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 59

A group of five people wants to start a limited liability company (LLC) in their city. The group files a document with the state government to establish the existence of the LLC. In this scenario, which of the following documents is filed by the group?

A)A letter of credit
B)Customs declaration
C)Articles of organization
D)A turnaround document

Question 60

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 61

The owners of limited liability companies (LLCs) are called members because:

A)they can only be individuals and not foreign investors or other corporations.
B)LLCs are not considered separate and distinct from their owners.
C)they share the same interests in the firm as common stockholders.
D)LLCs are neither corporations nor partnerships.

Question 62

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 63

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 64

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 65

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 66

Which of the following is a characteristic of limited liability companies (LLCs)?

A)They are made to pay an annual franchise tax in many states.
B)They are subject to double taxation.
C)They do not allow foreign investors to serve as owners.
D)They are required to produce a larger amount of paperwork than corporations.

Question 67

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 68

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 69

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 70

Tangypop and Fizzmania, two giant soft drink companies in Brazil, join together to form a new company out of the two previously independent firms. They take this step to reduce competition, leverage economies of scale, and increase their size and market power within the soft drink industry. This association is most likely an example of a _____.

A)sole proprietorship
B)horizontal merger
C)conglomerate merger
D)divestiture

Question 71

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 72

The nature of work and the workflow in the animation department of Hanzel Talkies, a movie production company, completely differs from that of other departments in the company. Hence, Hanzel Talkies decides to branch the animation department out into a new company by selling the stock to outside investors. In this scenario, Hanzel Talkies is using a strategy called a(n):

A)conglomerate merger.
B)acquisition.
C)carve-out.
D)cross-boundary subsidization.

Question 73

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 74

In the context of franchising, which of the following statements is true of a business format franchise?

A)It is an agreement that a franchisee sends to the franchisor to acquire the items required to set up the franchise.
B)It is an arrangement which allows a franchisor to make a product and issue a license to a franchisee to sell it.
C)It is an agreement that a franchisor sends to a franchisee, communicating all the standard requirements that the franchisor expects him to follow.
D)It is an agreement in which franchisor grants the franchisee the right to both make and sell its good or service.

Question 75

Which of the following is an advantage of limited liability companies (LLCs)?

A)They can have any number of owners.
B)The process of formation of an LLC is simple and fast.
C)They are exempted from paying annual franchise tax.
D)They do not need to register as foreign companies when doing business in other states.

Question 76

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 77

A(n)__________, a type of divestiture, occurs when a company issues stock in one of its own divisions or operating units and sets it up as a separate company-complete with its own board of directors and corporate officers.

A)spin-off
B)stub
C)away swing
D)bowl-out

Question 78

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 79

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 80

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.