Deck 5: How to Form a Business

Question 1

It is usually easy to start and end a sole proprietorship.

Answer 1

True

Question 2

A legal entity with authority to act and have liability separate from its owners is called a partnership.

Answer 2

False

Question 3

The three major forms of business ownership in the U.S.are sole proprietorships,partnerships,and corporations.

Answer 3

True

Question 4

A comparison of the three major forms of business ownership shows that sole proprietorships are usually the most difficult type of business to establish.

Question 5

Few people today start their own business.

Question 6

The corporation is the most common form of business ownership.

Question 7

The profits of a sole proprietorship are taxed as the personal income of the owner.

Question 8

Corporations represent 20 percent of all the businesses in the U.S.and earn 81 percent of the total U.S.business receipts.

Question 9

An advantage of forming a sole proprietorship is that it allows the owner to have more time for leisure activities.

Question 10

The debts of a business operated as a sole proprietorship are considered to be the personal debts of the owner of the business.

Question 11

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.

Question 12

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.

Question 13

One of the strengths of the sole proprietorship is its ability to sustain rapid growth by raising large amounts of financial resources.

Question 14

When two or more people legally agree to become co-owners of a business,the form of business is called a partnership.

Question 15

The first step in starting a sole proprietorship is to fill out a proprietorship charter application form and file it with the state government.

Question 16

A drawback of sole proprietorships is that they usually have limited access to additional financial resources.

Question 17

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.

Question 18

A major advantage of sole proprietorships is that an owner has limited liability for the debts of his or her business.

Question 19

Once a business is established,it's almost impossible to change from one form of business ownership to another.

Question 20

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.

Question 21

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.

Question 22

Limited partnerships are just like general partnerships,except that they are partners for a limited time period.

Question 23

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.

Question 24

In a general partnership,all partners share in management of the business and in the liability for the firm's debts.

Question 25

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.

Question 26

The Uniform Partnership Act is law in every state except Louisiana.

Question 27

A limited partnership consists of one or more general partners and one or more limited partners.

Question 28

In a general partnership,all partners are entitled to an equal share of the firm's profits.

Question 29

One of the major disadvantages of a partnership is that profits must be divided equally.

Question 30

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.

Question 31

In order to protect all parties and minimize misunderstandings among partners,all terms of the partnership should be spelled out in writing.

Question 32

A general partner takes an active role in the management of the business.

Question 33

Although shares of master limited partnerships can be purchased on one of the national stock exchanges,these companies are taxed like partnerships.

Question 34

All partners in a general partnership have limited liability for the debts of their firm.

Question 35

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.

Question 36

A recent study showed that partnerships are more likely to fail than sole proprietorships.

Question 37

the right to participate in managing the operations of the business.

Question 38

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.

Question 39

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.

Question 40

A limited partner is an owner who assumes no management responsibility and has no liability for losses beyond the amount invested.

Question 41

A limited partnership refers to a partnership set up for a temporary purpose,such as a real estate development project.

Question 42

In the Spotlight on Small Business box,titled,"Pick Your Partners Wisely",the writer suggests that potential partners discuss the types of skills that each brings to the business.Partners with complimentary skills may enhance the business.

Question 43

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.

Question 44

Compared to sole proprietorships,partnerships offer the advantage of shared management and pooled knowledge.

Question 45

Connie is a general partner in a retail cookie store.Her personal assets are legally protected from the debts of the business.

Question 46

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.

Question 47

Compared to sole proprietorships,an advantage of partnerships is their ability to obtain more financial resources.

Question 48

According to the Spotlight on Small Business box,"Pick Your Partners Wisely",it is really not necessary to interview your prospective partner carefully,especially if they are an old friend.

Question 49

If a partner in a limited partnership dies,the partnership ceases to exist.

Question 50

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.

Question 51

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.

Question 52

One method to avoid conflicts between partners is to solicit the services of a lawyer to create a well-written partnership agreement.

Question 53

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).

Question 54

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.

Question 55

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.

Question 56

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 build an air-conditioned barn,he is entitled to 30 percent of any profits the firm earns during its first year of operation.

Question 57

One advantage of a partnership is that there is a simple process for partners to terminate their business.

Question 58

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.

Question 59

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.

Question 60

According to the Spotlight on Small Business box,titled,"Pick Your Partners Wisely",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.

Question 61

Corporations are easy to start and easy to terminate.

Question 62

An alien corporation does business abroad but is chartered in the U.S.

Question 63

One reason individuals incorporate is to obtain the advantage of limited liability.

Question 64

The stockholders in a corporation elect a board of directors to oversee the company's major policy issues.

Question 65

Stockholders in a corporation entrust control over the company's daily operations to managers selected by the board of directors to run the company.

Question 66

Most states have legal restrictions that prevent individuals from incorporating.

Question 67

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.

Question 68

In today's economy,only large business enterprises should operate as corporations.

Question 69

Stockholders in a corporation accept unlimited liability for the corporation's debts.

Question 70

The owners of a corporation are known as general corporate partners.

Question 71

A corporation can raise financial capital by selling shares of stock to interested investors.

Question 72

A conventional corporation is a state-chartered legal entity,with authority to act and have liability separate from its owners.

Question 73

Stockholders in a corporation exert a significant degree of control over the company's daily operations.

Question 74

Stockholders in a corporation have limited liability.

Question 75

A disadvantage of corporations is that they generally require extensive paperwork.

Question 76

Stockholders in a corporation normally exert a significant degree of control over the company's daily operations.

Question 77

One advantage of corporations is that the initial cost of organization is usually lower than for other forms of business ownership.

Question 78

States may levy special taxes on corporations that are not imposed on other businesses.

Question 79

When one of the owners of a corporation dies,the corporation legally ceases to exist.

Question 80

A disadvantage of corporations is that their charters are only valid for 99 years,so corporations are less permanent than other types of businesses.