Deck 5: Business Formation: Choosing the Form That Fits

Question 1

Suzie Kew just graduated with honours from a leading university with a degree in financial management.She wants (and expects)to get a job with excellent pay and benefits,as well as the opportunity for growth and advancement.Suzie is likely to be very interested in working for a company that is organized as a sole proprietorship.

Answer 1

False

Question 2

In terms of total revenue by form of ownership,the sole proprietorship is the largest form of business ownership; partnerships follow,with corporations being the smallest form.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

The first step in forming a sole proprietorship is filing the appropriate paperwork and paying the necessary filing fees.

Question 6

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

Question 7

Hennie Hanks has a great idea for a new business-one he is sure will make a ton of money.He's eager to get started,so he wants to form his business with a minimum of hassle,expense,and red tape.He also wants to be his own boss and have complete control over the company.Hennie's goals suggest that he should seriously consider operating his business as a sole proprietorship.

Question 8

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

Question 9

In a general partnership,each partner incurs unlimited liability only for claims resulting from his or her own negligence.

Question 10

A limited partnership is an agreement between two or more individuals to operate a business as co-owners for a limited period of time.

Question 11

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

Question 12

Sole proprietorships generally have a distinct advantage over other forms of business ownership when it comes to raising large sums of financial resources.

Question 13

Most sole proprietorships are small businesses with revenues that lag far behind those of partnerships and corporations.

Question 14

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

Question 15

Owners of sole proprietorships are personally responsible for any debts incurred by their business.

Question 16

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

Question 17

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

Question 18

In a general partnership,all owners have unlimited liability for the debts and obligations of their firm.

Question 19

Sole proprietorships are in every sector of the economy,but they are most common in professional and technical services,construction,and retail trade.

Question 20

Ralph Flores owns and operates his own business as a sole proprietor.Recently his company was sued.The fact that Ralph has organized his business as a sole proprietorship means that Ralph is protected against any financial loss if the company loses the lawsuit.

Question 21

As business entities,corporations may engage in virtually any business activity a natural person can,including buying and selling property and entering into binding contracts.

Question 22

The general partnership is the dominant form of business ownership,with the vast majority of large business organizations using this form of ownership.

Question 23

General corporations normally are at a distinct disadvantage compared to other forms of business ownership when it comes to raising financial capital.

Question 24

Unlike general corporations,not-for-profit corporations have no shareholders and pay no dividends.

Question 25

Limited partnerships and limited liability partnerships are just two names for exactly the same type of business organization.

Question 26

One advantage of a general corporation is that it is easy and inexpensive to form.

Question 27

Joe owns 500 shares of stock in the Megabux Corporation.He is pleased to learn that the company earned a very nice profit over the most recent operating period.The company has announced that they will pay each shareholder a dividend of $1 per share out of the after-tax profits.Because Megabux has already paid taxes on this profit,this payment will represent tax-free income to Joe.

Question 28

Bailey Nix is a limited partner in his company.A general partner in his company is going on an extended vacation and has asked Bailey to run the company while he is gone.If Bailey agrees to do so,he will no longer qualify as a limited partner.

Question 29

Families may be able to protect their personal assets from lawsuits and creditors by forming limited partnerships,with the parents as general partners and the children as limited partners.

Question 30

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

Question 31

Unlike other types of corporations,not-for-profit corporations cannot have shareholders and cannot pay dividends.

Question 32

Examples of institutional investors are mutual funds,insurance companies,and pension funds.

Question 33

Most shareholders in large corporations take an active role in managing their companies.

Question 34

Shareholders are required to purchase common stock before they can purchase preferred stock.

Question 35

Liza owns 1000 shares of common stock in Bigbux Inc.As a shareholder in the company,she may vote in the election of Bigbux's board of directors.

Question 36

The formation of a corporation requires filing a special form with the provincial or federal government.

Question 37

Corporations are more closely regulated and required to file more paperwork than other forms of business.

Question 38

In a limited partnership,all owners have limited liability for the debts and obligations of their company.

Question 39

Most provincial governments grant corporations the right to operate under a corporate charter for no more than 100 years,after which the corporation must be dissolved.

Question 40

Owners of corporations are known as shareholders.

Question 41

A key goal of horizontal mergers is to achieve tighter integration of production and increased control over supply of crucial inputs.

Question 42

Acquisition is a corporate restructuring in which one firm buys another.After the acquisition,the target firm ceases to exist as an independent entity,while the acquiring firm continues to operate.

Question 43

Fly By Knight and Air Pockets are two mid-sized regional airlines that serve much the same territory.If these two airlines merged,the result would be a horizontal merger.

Question 44

One of the biggest trends in franchising over the past several years has been a rapid expansion into foreign markets.

Question 45

A franchisee is the business entity in a franchise relationship that pays for the right to use resources supplied by the franchisor.

Question 46

A conglomerate merger is a combination of two firms in unrelated industries.

Question 47

Individuals who contribute money or property to a not-for-profit organization can take a tax deduction,making it easier for these organizations to raise funds from donations.

Question 48

A merger is a corporate restructuring that occurs when one firm,called the acquiring firm,buys another firm,called the target firm.

Question 49

One reason given to justify a conglomerate merger is the desire to diversify into new markets,thus reducing the risk associated with adverse conditions in any single market.

Question 50

Mergers and acquisitions basically mean the same thing; the only difference is the size of the companies involved.

Question 51

In an acquisition,the firm who is doing the buying is called the target firm.

Question 52

A business format franchise is a broad franchise agreement in which the franchisee pays for the right to use the name,trademark,and business and production methods of the franchisor.

Question 53

If an oil company merged with a company that produced motion pictures,the result would be a vertical merger.

Question 54

A vertical merger is a combination of firms at different stages in the production of a good or service.

Question 55

Franchisors seldom succeed in their attempts to move into foreign markets.

Question 56

A closed corporation is also known as a not-for-profit corporation.

Question 57

Franchising is a contractual relationship in which an established business entity allows others to operate a business using the unique resources it supplies in exchange for monetary payments and other considerations.

Question 58

A horizontal merger is a combination of two firms that are in the same industry.

Question 59

The earnings of not-for-profit corporations are exempt from federal and provincial income taxes.

Question 60

A business entity that allows others to operate a business using its name,trademark,business methods,and products in exchange for money and other considerations is called a franchisee.

Question 61

Allison Peterson has opened a new downtown boutique.She wants to pay minimal taxes and she wants to remain in complete control of her company and be her own boss.What form of ownership should she choose?

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

Question 62

From the standpoint of an owner,what is a major advantage of a sole proprietorship?

A)retention of control
B)permanence of the business
C)ability to capitalize on complementary skills
D)ability to pool financial resources

Question 63

Justin Rolando decided to operate his own Web design firm and is leaning toward organizing it as a sole proprietorship.What is one factor Justin should realize in choosing this form of business?

A)He will be creating a business that is legally separate and distinct from himself.
B)He will be required to fill out special forms and pay proprietorship fees to get the company legally established.
C)He will incur the problem of double taxation.
D)He will be exposing himself to unlimited personal liability for the company's debts.

Question 64

Sole proprietorships make up what percentage of all registered businesses?

A)5%
B)70%
C)25%
D)95%

Question 65

One of the great success stories of franchising is that immigrants have a higher success rate.

Question 66

One drawback of operating a franchise is the greater risk of failure relative to independently owned businesses.

Question 67

How are most businesses in Canada formed?

A)as sole proprietorships
B)as limited liability partnerships
C)as corporations
D)as partnerships

Question 68

Historically,what have been the three basic forms of business ownership in Canada?

A)full partnership, nominal partnership, and silent partnership
B)joint venture, cooperative, and holding company
C)sole proprietorship, partnership, and corporation
D)monopoly, duopoly, and oligopoly

Question 69

Individuals who want to be their own boss and use their own methods are likely to have difficulty accepting the terms of a typical franchise agreement.

Question 70

Which of the following is a disadvantage of sole proprietorships?

A)lack of permanence
B)unlimited liability
C)single taxation of earnings
D)easy to start up and shut down

Question 71

Which of the following is a disadvantage of a sole proprietorship?

A)It is hard to attract and retain talented employees.
B)It is expensive and difficult to set up this type of business.
C)It is heavily regulated by most provincial and local governments.
D)There is limited liability.

Question 72

Lakesia Wiley is a bright,hard-working,and responsible young woman who has always wanted to own a business.However,she realizes that she lacks training and experience in some areas of running a business and doesn't have confidence in her ability to start a new company from scratch.She also is nervous about the amount of risk involved in business ownership.These concerns suggest that Lakesia might be interested in becoming a franchisee in a business format franchise.

Question 73

Which of the following is a key advantage of a sole proprietorship?

A)The owner has limited liability for the debts for this type of business.
B)It is easy and inexpensive to form this type of business.
C)The business has a perpetual life.
D)It is very easy to raise financial capital for this type of business.

Question 74

Which of the following is a serious drawback of sole proprietorships?

A)They are heavily regulated by the federal government.
B)They expose their owners to unlimited liability for the company's debts.
C)They are difficult and inexpensive to form.
D)They result in double taxation of the company's earnings.

Question 75

A franchise agreement is the contractual arrangement between a franchisor and franchisee that details the duties and responsibilities of both parties.

Question 76

Under a business format franchise,the franchisees pay royalties for the right to sell the product of the franchisor,but otherwise they have complete freedom as to how they manage their businesses.

Question 77

The first recognized business format franchise arrangement was established in 1891 when Martha Matilda Harper began offering franchises in her hair salon business.

Question 78

Dana wants to open her own business after completing college.As a fine arts student,she is planning to provide services as a graphic artist.She wants the freedom to be her own boss and doesn't want to deal with a lot of rules and regulations.But she is nervous about risking her personal wealth.She is thinking about forming a sole proprietorship and asks you for your opinion about this form of business.Which of the following statements is most accurate?

A)Forming a sole proprietorship can help you protect your personal assets, but it is a poor choice for individuals who want to be their own boss because this form of business is heavily regulated.
B)Forming a sole proprietorship is a great idea. It gives you the ability to be your own boss while also protecting your personal assets from loss.
C)Forming a sole proprietorship is a bad choice. Not only is a sole proprietorship subject to extensive government regulation that will limit your ability to run your business, it also exposes you to unlimited liability.
D)Forming a sole proprietorship will enable you to be your own boss. But if you are really nervous about risking your personal assets, you might want to consider some other form of ownership because it will also expose you to unlimited liability.

Question 79

Which of the following is a key reason most sole proprietorships remain relatively small?

A)Their shareholders would rather receive dividends than have earnings reinvested to finance growth.
B)The owners often disagree about the need to take on additional risk associated with growth.
C)They have limited ability to raise funds needed to finance growth.
D)Government regulations limit their ability to expand into new areas of business.

Question 80

What type of liability do sole proprietors have for the debts of their companies?

A)shared liability
B)unlimited liability
C)limited liability
D)no liability