Question 1

By filling out the correct paperwork annually, any corporation can qualify to be classified as an S corporation.

Accepted Answer

A) True 
 B)False

Question 2

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:

Accepted Answer

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.

Question 3

Double taxation means that a corporation pays twice the amount of taxes as a sole proprietorship or partnership.

Accepted Answer

A) True 
 B)False

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

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.

Accepted Answer

A) True 
 B)False

Question 9

The reason a professional such as a lawyer or doctor would incorporate his/her business is:

Accepted Answer

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.

Question 10

Being your own boss means:

Accepted Answer

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.

Question 11

____________ comprise about 20% of all businesses but account for about 81% of U.S. business receipts.

Accepted Answer

A)  Corporations 
B)  Partnerships 
C)  Sole proprietorships 
D)  Limited liability companies

Question 12

A limited liability company is similar to an S corporation, but without the special eligibility requirements.

Accepted Answer

A) True 
 B)False

Question 13

The difference between a merger and an acquisition is:

Accepted Answer

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.

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

To qualify as an S corporation, a company must:

Accepted Answer

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.

Question 16

Compared to a sole proprietorship, which of the following is considered an advantage of a general partnership?

Accepted Answer

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

Question 17

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 __________.

Accepted Answer

A)  owner; limited partner 
B)  co-signer; co-signee 
C)  franchisor; franchisee 
D)  franchisee; franchisor

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Javier is the sole proprietor of a golf shop. Because he is a sole proprietor, any profit Javier's business earns is:

Accepted Answer

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.

Question 20

A company that loses its status as an S corporation may not reelect this status for at least 5 years.

Accepted Answer

A) True 
 B)False

Exam 5: How to Form a Business

By filling out the correct paperwork annually, any corporation can qualify to be classified as an S corporation.

Double taxation means that a corporation pays twice the amount of taxes as a sole proprietorship or partnership.

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.

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.

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.

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

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

The reason a professional such as a lawyer or doctor would incorporate his/her business is:

Being your own boss means:

____________ comprise about 20% of all businesses but account for about 81% of U.S. business receipts.

A limited liability company is similar to an S corporation, but without the special eligibility requirements.

The difference between a merger and an acquisition is:

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.

To qualify as an S corporation, a company must:

Compared to a sole proprietorship, which of the following is considered an advantage of a general partnership?

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 .

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

Javier is the sole proprietor of a golf shop. Because he is a sole proprietor, any profit Javier's business earns is:

A company that loses its status as an S corporation may not reelect this status for at least 5 years.