UNDERSTANDING BUSINESS 12TH EDITION BY NICKELS - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Understanding Business, 12e (Nickels) Chapter 05 How to Form a Business 1) Partnerships are the most common form of business ownership. Answer: FALSE Difficulty: 1 Easy Topic: …
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UNDERSTANDING BUSINESS 12TH EDITION BY NICKELS – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Understanding Business, 12e (Nickels)
Chapter 05 How to Form a Business
1) Partnerships are the most common form of business ownership.
Answer: FALSE
Difficulty: 1 Easy
Topic: The Importance of Small Business Ownership to the U.S. Economy
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) The three major forms of business ownership in the U.S. are sole proprietorships, partnerships, and corporations.
Answer: TRUE
Difficulty: 1 Easy
Topic: The Importance of Small Business Ownership to the U.S. Economy
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
3) Few people today start their own business.
Answer: FALSE
Difficulty: 1 Easy
Topic: The Importance of Small Business Ownership to the U.S. Economy
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
4) Once a business is established, it’s almost impossible to change from one form of business ownership to another.
Answer: FALSE
Difficulty: 1 Easy
Topic: The Importance of Small Business Ownership to the U.S. Economy
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
5) When two or more people legally agree to become co-owners of a business, the form of business is called a partnership.
Answer: TRUE
Difficulty: 1 Easy
Topic: The Importance of Small Business Ownership to the U.S. Economy
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
6) A legal entity with authority to act and have liability separate from its owners is called a sole proprietorship.
Answer: FALSE
Difficulty: 1 Easy
Topic: The Importance of Small Business Ownership to the U.S. Economy
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
7) Corporations represent 20 percent of all the businesses in the U.S. and earn over 80 percent of the total U.S. business receipts.
Answer: TRUE
Difficulty: 1 Easy
Topic: The Importance of Small Business Ownership to the U.S. Economy
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
8) A comparison of the three major forms of business ownership shows that sole proprietorships are usually the most difficult type of business to establish.
Answer: FALSE
Difficulty: 1 Easy
Topic: The Importance of Small Business Ownership to the U.S. Economy
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
9) The first step in starting a sole proprietorship is to fill out a proprietorship charter application form and file it with the state government.
Answer: FALSE
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
10) It is usually easy to start and end a sole proprietorship.
Answer: TRUE
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
11) The profits of a sole proprietorship are taxed as the personal income of the owner.
Answer: TRUE
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
12) 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.
Answer: FALSE
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
13) A major advantage of sole proprietorships is that an owner has limited liability for the debts of his or her business.
Answer: FALSE
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
14) One of the strengths of the sole proprietorship is its ability to sustain rapid growth by raising large amounts of financial resources.
Answer: FALSE
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
15) The debts of a business operated as a sole proprietorship are considered to be the personal debts of the owner of the business.
Answer: TRUE
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
16) A drawback of sole proprietorships is that they usually have limited access to additional financial resources.
Answer: TRUE
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
17) An advantage of forming a sole proprietorship is that it allows the owner to have more time for leisure activities.
Answer: FALSE
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
18) If a sole proprietorship fails, the owner may lose whatever was invested in the business, and the owner’s personal assets are also at risk.
Answer: TRUE
Explanation: Sole proprietors have unlimited liability for the debts of their business. This means that if their business gets into financial trouble they can lose their personal assets.
Difficulty: 2 Medium
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
19) 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.
Answer: TRUE
Explanation: The profits of a sole proprietorship are passed through to the owner, and taxed at the owner’s personal tax rate. However, owners do have to pay self-employment tax (for Social Security and Medicare). By law, sole proprietors are required to estimate their taxes and make quarterly payments to the government or suffer penalties for nonpayment.
Difficulty: 2 Medium
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
20) Sole proprietors sometimes 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.
Answer: TRUE
Explanation: Sole proprietors often find it difficult to attract qualified employees to help run the business because often they cannot compete with the salary and benefits offered by larger companies.
Difficulty: 2 Medium
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
21) Unlike partnerships, if sole proprietorships find themselves in bankruptcy, they don’t need to worry about a court requiring them to sell off personal assets to pay for the debts of the firm.
Answer: FALSE
Explanation: Sole proprietorships have unlimited liability. This means that the proprietor is financially responsible for all debts incurred by the company. In a court of law, a judge could require the owner/proprietor to liquidate personal assets to pay the debts of the business.
Difficulty: 2 Medium
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
22) Attracted to the idea of being his own boss, Christian wants to start a new business. He is confident in his abilities, and knows his potential market is strong, so he is not particularly worried about the financial risks. All of these factors suggest that Christian may favor starting his business as a sole proprietorship.
Answer: TRUE
Explanation: People who want to be their own boss often prefer to operate their business, at least initially, as a sole proprietorship. An advantage of the sole proprietorship is that it is a relatively easy and inexpensive form of business to set up. One drawback of a sole proprietorship is that the owner has unlimited liability. However, at this time, Eric is not worried about risk. The unlimited liability factor does not appear to be a problem for him.
Difficulty: 3 Hard
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23) Therese is a talented designer who wants to start her own women’s swimwear and beach towel line. But first, she is trying to decide which form of business ownership is right for her. As a young mom who hopes to send her children to college some day, she does not want to jeopardize her savings in any way. In order to overcome these risks, Therese should start her business as a sole proprietorship.
Answer: FALSE
Explanation: Therese is concerned about the risk of losing personal assets if her business does not succeed. Although the sole proprietorship is easy to set up, it may not be the best form of business ownership for Therese due to her need to protect personal assets. She may want to consider a form of ownership that provides limited liability, like a corporation.
Difficulty: 3 Hard
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24) Rhonda is convinced she has the best idea for a new business. Unfortunately, her business would require a fairly high initial investment and Rhonda has poor credit and very little personal wealth. She would be unlikely to find success if she organized her business as a sole proprietorship.
Answer: TRUE
Explanation: Funds available to sole proprietorships are often limited to the amount the owner can raise. Thus, Rhonda’s business would probably have a hard time raising enough money if she organized it as a sole proprietorship.
Difficulty: 3 Hard
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
25) A general partner takes an active role in the management of the business.
Answer: TRUE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
26) All partners in a general partnership have limited liability for the debts of their firm.
Answer: FALSE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
27) In a general partnership, all partners share in management of the business and in the liability for the firm’s debts.
Answer: TRUE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
28) In a general partnership, all partners are entitled to an equal share of the firm’s profits.
Answer: FALSE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
29) Limited partnerships are just like general partnerships, except that they are partners for a limited time period.
Answer: FALSE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
30) A limited partner is an owner who assumes no management responsibility and has no liability for losses beyond the amount invested.
Answer: TRUE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
31) A limited partnership consists of one or more general partners and one or more limited partners.
Answer: TRUE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
32) Although shares of master limited partnerships can be purchased on one of the national stock exchanges, these companies are taxed like partnerships.
Answer: TRUE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
33) The Uniform Partnership Act is law in most states, except California, Oregon, and Colorado.
Answer: FALSE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
34) 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.
Answer: FALSE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
35) According to the Uniform Partnership Act, the three key elements of any general partnership are (1) common ownership, (2) shared profits and losses, and (3) the right to participate in managing the operations of the business.
Answer: TRUE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
36) A recent study showed that partnerships are more likely to fail than sole proprietorships.
Answer: FALSE
Difficulty: 1 Easy
Topic: Advantages of Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
37) 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.
Answer: TRUE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
38) One of the major disadvantages of a partnership is that profits must be divided equally.
Answer: FALSE
Difficulty: 1 Easy
Topic: Disadvantages of Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
39) 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.
Answer: FALSE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
40) In order to protect all parties and minimize misunderstandings among partners, all terms of the partnership should be spelled out in writing.
Answer: TRUE
Difficulty: 1 Easy
Topic: Disadvantages of Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
41) One advantage of a partnership is that there is a simple process for partners to terminate their business.
Answer: FALSE
Difficulty: 1 Easy
Topic: Disadvantages of Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
42) Compared to sole proprietorships, an advantage of partnerships is their ability to obtain more financial resources.
Answer: TRUE
Difficulty: 1 Easy
Topic: Advantages of Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
43) 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.
Answer: FALSE
Difficulty: 1 Easy
Topic: Disadvantages of Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
44) Compared to sole proprietorships, partnerships offer the advantage of shared management and pooled knowledge.
Answer: TRUE
Difficulty: 1 Easy
Topic: Advantages of Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
45) A limited partnership refers to a partnership set up for a temporary purpose, such as a real estate development project.
Answer: FALSE
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
46) 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.
Answer: FALSE
Explanation: By definition, a limited partnership will consist of one or more general partners and one or more limited partners. The limited partners are passive investors. By law, they do not take an active role in the management of the business, yet they may share in the profits of the business and remain a partner for as long as the partnership exists.
Difficulty: 2 Medium
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
47) If a partner in a limited partnership dies, the partnership ceases to exist.
Answer: TRUE
Explanation: If a partner in any partnership dies, the partnership agreement automatically ceases to exist. Good partnership agreements usually have provisions for these situations.
Difficulty: 2 Medium
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
48) The authors suggest that potential partners discuss the types of skills that each brings to the business. Partners with complementary skills may enhance the business.
Answer: TRUE
Explanation: It is suggested that you ask yourself what types of skills you and your potential partners bring to the business, and whether those skills complement each other. Successful partners often come with varying backgrounds. Sometimes one partner will have the technical skills to get the job done, while others might have the business or accounting knowledge.
Difficulty: 2 Medium
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
49) One method to avoid conflicts between partners is to solicit the services of a lawyer to create a well-written partnership agreement.
Answer: TRUE
Explanation: One of the most important tasks to achieve before forming a partnership is to create a partnership agreement. The partnership agreement addresses a number of rules that will govern the activities of the partnership, including but not limited to: the duties of each partner; the rules for adding partners; contributions by each partner; and, how profits will be distributed.
Difficulty: 2 Medium
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
50) Attributes such as trust and integrity are not something you should get overly concerned about when selecting partners. This is a business decision, not a friendly game of golf.
Answer: FALSE
Explanation: Prospective partners should concern themselves with several aspects of the business relationship, including the values shared by partners who are entering into business together. Other things that you should ask yourself is whether the partners share the same goals and whether each partner’s skills complement the others.
Difficulty: 2 Medium
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
51) 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.
Answer: FALSE
Explanation: The partnership agreement should stipulate the way the business plans to share the profits. The partnership may not necessarily divide the profits equally among members. Several criteria may enter into the decision of how to share profits, including the expertise of each partner, the investment amount of each partner, and the amount of time each partner spends in the business.
Difficulty: 2 Medium
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
52) For 11 years, Dennis and Tom have owned a car wash business as partners. Now they would like their younger brother Jimmy to join them. Unfortunately, partnership law states that only two partners can participate in a partnership.
Answer: FALSE
Explanation: A partnership consists of two or more owners. Unless explicitly written in the original partnership agreement, the partnership can add partners.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
53) Janie is a general partner in a local bakery. All of her personal assets are legally protected from the debts of the business.
Answer: FALSE
Explanation: As a general partner, Janie assumes unlimited liability for the debts of her business.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
54) When two of Mercedes’s friends approached her about starting a business, Mercedes’s was sure she did not want to risk any amount beyond her initial investment or be involved with the day-to-day management. However, she was willing to invest in the business. Mercedes’s preferences suggest that she prefers a general partnership form of business ownership.
Answer: FALSE
Explanation: In a general partnership, all partners share in the management of the business, and have unlimited liability for the firm’s debts. Since Mercedes’s has no interest in managing a company and wants to limit her risk, she is more suited for a limited partnership, where her friends would serve as general partners and she would serve as a limited partner.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
55) Penny Pebble and Stuart Stone formed a partnership in a landscape business. Under their arrangement, Penny actively manages the company and assumes unlimited liability for its debts. Stuart 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. Penny and Stuart are in a limited partnership.
Answer: TRUE
Explanation: A limited partnership consists of at least one general partner, who has unlimited liability, and at least one limited partner, who risks only what he or she has invested. By law, the limited partner cannot actively manage the partnership.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
56) Huang has agreed to become a partner in his cousin’s waste management business. Since he provided 30 percent of the money to start the company and built an air-conditioned garage, he is entitled to 30 percent of any profits the company earns during its first year of operation.
Answer: FALSE
Explanation: The division of profits in a partnership is negotiable and is not necessarily tied to the amount of the initial investment.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Application
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
57) 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.
Answer: TRUE
Explanation: The Uniform Partnership Act (adopted in every state except Louisiana) stipulates: (1) common ownership; (2) shared profits and losses; and (3) the right to participate in managing the operations of the business. Rick has the right to know and be provided with regular financial statements that pertain to his business.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
58) Rafael is a limited partner in an online clothing company. As a limited partner, Rafael can be involved with the company for a maximum of five years.
Answer: FALSE
Explanation: A limited partner has limited liability and cannot actively manage the firm, but his involvement is not restricted as to length of time.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
59) James and Reilly were arguing over who was the senior partner and who was the junior partner, even though they started the business at the same time. If you were brought on board as their 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).
Answer: FALSE
Explanation: According to the Uniform Partnership Act adopted in every state except Louisiana, partners have the right to (1) common ownership; (2) shared profits and losses; and (3) the right to participate in managing the operations of the business. In some cases, partners may have differing skills and skill levels (or level of experience) of the other partners, but as partners they are on equal footing. A good partnership agreement will spell out the details of the partnership. Further, partnerships can be (1) general partnerships or (2) limited partnerships, but these variations do not hold the senior/junior designation.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
60) A conventional corporation is a state-chartered legal entity, with authority to act and have liability separate from its owners.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
61) In today’s economy, only large business enterprises should operate as corporations.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
62) The owners of a corporation are known as general corporate partners.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
63) A corporation can raise financial capital by selling shares of stock to interested investors.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
64) Stockholders in a corporation accept unlimited liability for the corporation’s debts.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
65) A disadvantage of corporations is that their charters are only valid for 99 years, so corporations are less permanent than other types of businesses.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
66) When one of the owners of a corporation dies, the corporation legally ceases to exist.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
67) Corporations are easy to start and easy to terminate.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
68) A disadvantage of corporations is that they generally require extensive paperwork.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
69) 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.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
70) Stockholders in a corporation normally exert a significant degree of control over the company’s daily operations.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
71) The stockholders in a corporation elect a board of directors to oversee the company’s major policy issues.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
72) Stockholders in a corporation have limited liability.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
73) Stockholders in a corporation entrust control over the company’s daily operations to managers selected by the board of directors to run the company.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
74) One advantage of corporations is that the initial cost of organization is usually lower than for other forms of business ownership.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
75) States may levy special taxes on corporations that are not imposed on other businesses.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
76) Most states have legal restrictions that prevent individuals from incorporating.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
77) One reason individuals incorporate is to obtain the advantage of limited liability.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
78) An alien corporation does business abroad but is chartered in the U.S.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
79) A domestic corporation does business in the state in which it’s chartered.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
80) A foreign corporation is chartered in a country outside the U.S.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
81) Delaware and Nevada are popular states in which to seek incorporation because these states’ business-oriented laws make the process easier than it is in other states.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
82) A closed corporation is one whose stock is held by a few people and is not available to the general public.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
83) A nonprofit corporation does not seek personal profit for its owners.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
84) A quasi-public corporation is a corporation chartered by the government as an approved monopoly to perform services to the general public.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
85) A multinational corporation is a firm that operates in several countries.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
86) To change ownership in a corporation you simply sell your stock to someone else.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
87) Stock options are the right to purchase shares of the corporation for a fixed price.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
88) An advantage of corporations is their ability to attract good talent by offering stock options and other employee benefits.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
89) It is said that corporations have perpetual life.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
90) One advantage of an S Corporation is that the profits are distributed to the owners and taxed as each owner’s personal income, thus avoiding the problem of double taxation.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
91) By filling out the correct paperwork annually, any corporation can qualify to be classified as an S corporation.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
92) A company that loses its status as an S corporation may not reelect this status for at least 5 years.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
93) An S corporation has fewer ownership rules than a limited liability company.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
94) A limited liability company is similar to an S corporation, but without the special eligibility requirements.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
95) Limited liability companies have both flexibility in tax treatment of earnings and limited liability protection for owners.
Answer: TRUE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
96) One of the drawbacks of a limited liability company is that most states do not yet recognize this form of ownership.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
97) Like stockholders of a C corporation, owners of a limited liability company (LLC) are free to sell their ownership without the approval of other members.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
98) The limited liability company requires a minimum of 10 members.
Answer: FALSE
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
99) The S corporation form of business would be particularly attractive to fast-growing companies that want to attract thousands of new stockholders.
Answer: FALSE
Explanation: S corporations can have no more than 100 shareholders.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
100) The organization structure of a corporation allows for stockholders to exert a significant degree of control over the company’s daily operations.
Answer: FALSE
Explanation: Stockholders elect the Board of Directors of a corporation. The Board of Directors appoints the management. The management operates separately from stockholders.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
101) Public utilities, like electricity and water, are examples of quasi-public corporations.
Answer: TRUE
Explanation: Quasi-public corporations are corporations authorized by the government to serve as regional monopolies.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
102) In order to establish a C corporation, it is a requirement that investors run the company, whereas in an S corporation, this is not the case.
Answer: FALSE
Explanation: In a C corporation, the investors elect the Board of Directors. The Board of Directors appoints the officers and management team. It is not a requirement that investors run the company. S corporations also have stockholders, directors, and employees, but S corporations are taxed differently from C corporations.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
103) If you want to sell your ownership in a publicly traded corporation, you find someone willing to buy your shares.
Answer: TRUE
Explanation: There is ease of ownership in a corporation. If you no longer want to be an owner/stockholder, you sell your shares to another party. The corporation has perpetual life, but your ownership does not need to be for life.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
104) The stockholders of large, publicly traded corporations have a daily pulse on the operation of the business.
Answer: FALSE
Explanation: The owners/stockholders elect a Board of Directors, who hire the officers of the corporation and oversee major policy issues. The owners/stockholders thus have some say in who runs the corporation but have little to no control over the daily operations.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
105) If a corporation distributes after-tax profits to its stockholders in the form of dividends, the government considers these distributions as part of each stockholder’s personal income. Stockholders pay taxes on these distributions.
Answer: TRUE
Explanation: A disadvantage of the corporate form of business ownership is double taxation. If corporations distribute after-tax profits to stockholders, these individuals are required to pay taxes on this income. Unfortunately, these amounts were already taxed once, when the corporation paid taxes on them.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
106) If a corporation has after-tax profits of $360,000, and elects to distribute this amount in the form of dividends to its stockholders, these distributions are free and clear of taxes because the corporation paid taxes on this amount prior to distribution.
Answer: FALSE
Explanation: A disadvantage of the corporate form of business ownership is double taxation. If corporations distribute after-tax profits to stockholders, these individuals are required to pay taxes on dividend income. Unfortunately, these amounts were already taxed once, when the corporation paid taxes on them, hence the term double taxation.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
107) Double taxation means that a corporation pays twice the amount of taxes as a sole proprietorship or partnership.
Answer: FALSE
Explanation: A disadvantage of the corporate form of business ownership is double taxation. If corporations distribute after-tax profits to stockholders, these individuals are required to pay taxes on dividend income. Unfortunately, these amounts were already taxed once, when the corporation paid taxes on them, hence the term double taxation.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
108) The major differences between an S corporation and a limited liability company are limits on the number of owners and the citizenship status of individuals who are owners.
Answer: TRUE
Explanation: A limited liability company (LLC) is similar to an S corporation but without the special eligibility requirements. S corporations require their owners to be U.S. citizens or the estates of U.S. citizens. The LLC does not have these requirements.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
109) The owners of a limited liability company (LLC) must pay self-employment taxes on any profits they earn, even if they did not obtain a salary from the company.
Answer: TRUE
Explanation: Although the LLC allows for profits to be distributed to owners and taxed at each owner’s personal tax rate, the owners must also pay self-employment taxes on those earnings. Self-employment taxes include Medicare and Social Security taxes.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
110) Dr. Limmer, Dr. Lowder, and Dr. Lynch want to incorporate their practice. There is no advantage due to the costs involved.
Answer: FALSE
Explanation: Many individuals choose to incorporate to obtain limited liability. In some cases, they may also receive tax savings by doing so.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
111) Doughboys is a small chain of cookie dough shops owned and operated by eight partners. With the rise of cookie dough shops around the country, the owners think that their chain has the potential for rapid growth. However, several of the partners are concerned about the growing financial risks that will accompany this growth. One way the partners could deal with this problem would be to incorporate their business.
Answer: TRUE
Explanation: An advantage of corporations is that they provide their owners (stockholders) with the protection of limited liability.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
112) Peter recently invented a new workout program that uses indoor surfboards. His equipment can simulate surfing on waves and is a new favorite core workout in his community. As the founder of a fast growing business, you think his goal of incorporating, “to remain in steadfast control of the firm’s operations for an indefinite number of years,” is good strategy.
Answer: FALSE
Explanation: One potential drawback of incorporation is the possibility of conflict between the entrepreneurs who originally start a business and the stockholders and board of directors who may eventually gain control.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
113) Motor Masters is a conventional corporation with 516 stockholders. A number of the stockholders are citizens of Canada and others are citizens of Mexico, though most are American. Due to its size and diversity in ownership, you would recommend that Motor Masters change to an S corporation.
Answer: FALSE
Explanation: Motor Masters does not satisfy the requirements for an S corporation—it has more than 100 stockholders, some of whom are not U.S. citizens or permanent residents of the United States.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
114) The owners of Game Guys are looking to become an S corporation. Unfortunately, after speaking with their lawyer, she advised them that they do not meet some of the requirements necessary to qualify as an S corporation. An alternative form of business that would give them similar advantages is a limited liability company.
Answer: TRUE
Explanation: Limited liability companies offer many of the same advantages as S corporations, including limited liability and the possibility of taxation like a partnership, without the special eligibility requirements required to qualify for S corporation status.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
115) The ownership of Dogs of Denver, a small company that designs and manufactures coats, sweaters, jackets, and rainwear for dogs, wants to organize as an LLC. All the owners are under forty and two are expecting children by the end of the year. This is good strategy because each member can choose to commit to limited or unlimited liability.
Answer: FALSE
Explanation: All members of an LLC have limited liability. There is no choice in that matter. The purpose of organizing as an LLC is to eliminate the risk of losing personal assets in an unprofitable venture. In terms of taxes, a limited liability company offers the best of both worlds, allowing the owners to choose to be taxed as a partnership or a corporation depending on which tax rates would benefit them the most.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
116) Two of your friends are horse fanatics. They inherited several acres of land that they turned into a retirement sanctuary for racehorses. Serenity Stables was originally incorporated as a limited liability company. The members are reevaluating this form of ownership. Unlike an S corporation, they now pay self-employment taxes on all company profits—not just on the salaries they pay themselves.
Answer: TRUE
Explanation: While S corporations have several restrictions, one advantage they have compared to the limited liability company is the self-employment tax requirements. Any profits earned by the LLC are considered part of the owner’s wages/salary/income. These wages are subject to self-employment taxes. The S corporation pays self-employment taxes only on those dollars designated as salary or wage expenses by the business. They do not pay self-employment taxes on the profits of the business.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
117) After a fruitful first five years, Serenity Stables, LLC (a retirement ranch for racehorses), thinks it may be able to attract donations from animal advocate groups and even the federal government if it becomes a nonprofit corporation. As its business advisor, you explain that as a nonprofit corporation, the owner(s) may earn a salary but the business should not seek after-tax profits.
Answer: TRUE
Explanation: If Serenity Stables decides to change its form of business ownership to a nonprofit corporation, it will not seek personal profits for its owners. If the owner(s) works in the business, he/she can expect a salary. By law, the firm cannot distribute any additional income to owners. It must put all revenues and/or contributions back into the business.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
118) Tee Time Golf Resort has the opportunity to buy 1,000 acres of property adjacent to its award-winning 18-hole golf course. After talking with her banker and her lawyer, the owner is encouraged to begin the paperwork to change from a limited liability company form of business ownership to a corporation. You applaud this strategy because she will eliminate the problem of double taxation.
Answer: FALSE
Explanation: C corporations (not LLCs) face the disadvantage of double taxation. A C corporation’s income is taxed twice. First the corporation pays tax on all income before it can distribute any, as dividends, to stockholders. The stockholders pay income tax on the dividends they receive.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
119) When two firms join together to form one company, it is called a merger.
Answer: TRUE
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
120) The three major types of mergers are acquisition, joint, and connective.
Answer: FALSE
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
121) An acquisition is when one company buys the property and obligations of another company.
Answer: TRUE
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
122) Taking a firm private involves converting a firm from a corporation to a general partnership.
Answer: FALSE
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
123) If firms wish to gain market share in their current market, they would consider a conglomerate merger.
Answer: FALSE
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
124) The purpose of a conglomerate merger is to diversify operations and investments.
Answer: TRUE
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
125) A merger between two businesses in different stages of related businesses is known as a vertical merger.
Answer: TRUE
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
126) A horizontal merger refers to a merger between two companies that serve entirely different markets.
Answer: FALSE
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
127) A horizontal merger refers to a merger between two companies in the same industry, and serving the same markets.
Answer: TRUE
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
128) A leveraged buyout is an attempt by top management to gain control of a company by issuing a large amount of new stock.
Answer: FALSE
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
129) When a group of investors take a firm private, they purchase all the company’s outstanding stock.
Answer: TRUE
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
130) In recent years, foreign firms were reluctant to merge with or acquire American corporations.
Answer: FALSE
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
131) A merger is a mutual agreement where companies join together, whereas an acquisition is when one firm purchases the assets and obligations of another firm.
Answer: TRUE
Explanation: When companies merge, there is a mutual agreement to join forces. Although the assets and obligations are combined, there is no offering of funds or stock by one company, for the other, as in an acquisition.
Difficulty: 2 Medium
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
132) One reason that a firm would choose to merge or acquire another company would be to gain market share.
Answer: TRUE
Explanation: Firms know that the fastest way, but not always the least expensive way, to acquire market share or expand their market is to merge with or buy out a competitor.
Difficulty: 2 Medium
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
133) One reason that a firm may choose to merge or acquire another company would be to diversify products or services.
Answer: TRUE
Explanation: When firms participate in conglomerate mergers, they purchase companies whose products and services are different or unrelated to what they currently offer. They choose to diversify the portfolio of business units and even the industries where they operate.
Difficulty: 2 Medium
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
134) The strategy of a leveraged buyout is used when employee talent is at a minimum.
Answer: FALSE
Explanation: If employees and/or management believe they can improve performance by running the company themselves, they will seek financial backing (borrow funds) and take ownership, by buying all available stock from the current stockholders.
Difficulty: 2 Medium
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
135) Taking a company private means turning a profit-seeking corporation into a nonprofit corporation in order to avoid a hostile takeover.
Answer: FALSE
Explanation: Taking a company private involves an effort by a group of stockholders or managers to gain control of all of a corporation’s outstanding stock.
Difficulty: 2 Medium
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
136) A major objective of a leveraged buyout is to enable investors to gain control of a company by issuing new shares of ownership, thus minimizing the use of debt.
Answer: FALSE
Explanation: Leveraged buyouts involve financing the acquisition of an organization through the use of debt financing.
Difficulty: 2 Medium
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
137) Tee Time Golf Club just announced plans to purchase the property and assume the obligations of Chipper’s Golf Resort, one of its major competitors. Tee Time Golf Club’s plans are an example of a merger.
Answer: FALSE
Explanation: Tee Time Golf Club’s actions are an acquisition rather than a merger. An acquisition refers to one firm’s purchase of the assets and obligations of another firm. Since the firms are competing in the same market rather than at different stages, this is a horizontal move.
Difficulty: 3 Hard
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
138) Two long-time competitors, Freddie’s Market and Greta’s Groceries, recently issued an announcement stating their decision to merge. The statement claimed that the new company would have more financial resources, which would enable it to expand services and broaden offerings to customers. This proposed merger is an example of a horizontal merger.
Answer: TRUE
Explanation: A merger between two firms in the same industry, such as two grocery stores, is a horizontal merger.
Difficulty: 3 Hard
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
139) GloboTech, Inc., a large manufacturer of laptops, is considering a merger with ChipComm, a leading producer of microprocessors and other computer chips. GloboTech believes such a merger would give it a guaranteed source of needed components, and enable it to have better control over quality. If this merger occurs, it would be an example of a horizontal merger.
Answer: FALSE
Explanation: A merger between two companies at different stages of related business is known as a vertical merger.
Difficulty: 3 Hard
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
140) Matthew is leading a group of stockholders who want to take the Cash Cow Corporation private. If Matthew’s group succeeds, Cash Cow’s stock will no longer be available to investors on the open market.
Answer: TRUE
Explanation: Taking a firm private involves gaining control of a firm’s stock so that it is no longer available to investors on the open market.
Difficulty: 3 Hard
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
141) Due to several years of poor performance, Stanley’s Metal Manufacturers, Inc., is closing. Through the use of debt financing, Stanley’s workers plan to purchase the company’s stock from current shareholders in order to buy the company, improve performance, and save jobs.
Answer: TRUE
Explanation: A leveraged buyout involves the use of debt financing to buy the stock of a company. Skilled workers want to save their jobs and make their company profitable again.
Difficulty: 3 Hard
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
142) A franchise agreement is an arrangement where a franchisor sells the rights to a business name and the right to sell a product or service within a given territory to a franchisee.
Answer: TRUE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
143) A franchise may be organized as a sole proprietorship, partnership, or corporation.
Answer: TRUE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
144) 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.
Answer: TRUE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
145) Franchisors give franchisees the right to use their name and product, with the understanding that franchisees obtain all financing and develop all marketing strategies on their own.
Answer: FALSE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
146) The most popular businesses for franchising are restaurants.
Answer: TRUE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
147) In a franchise arrangement, ownership remains in the hands of the franchisor.
Answer: FALSE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
148) One of the major advantages for the franchisee is instant business name recognition and important management assistance from the franchisor.
Answer: TRUE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
149) Franchisees must follow more rules, regulations, and procedures than if they operated independently owned businesses.
Answer: TRUE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
150) The coattail effect refers to the burden of corporate rules and regulations on franchisees.
Answer: FALSE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
151) The coattail effect refers to inevitable repercussions on your business if a fellow franchisee should fail.
Answer: TRUE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
152) One drawback of franchises is that they have a higher failure rate than other types of business ventures.
Answer: FALSE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
153) The franchisee pays the franchisor a share of profits or a percentage commission on sales, known as a royalty.
Answer: TRUE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
154) Many franchisors have rules that prohibit franchisees from sponsoring their own websites.
Answer: TRUE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
155) Because of the growth of minority-owned businesses in the U.S., franchisors are becoming more focused on recruiting minority franchisees.
Answer: TRUE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
156) It is impossible to run a franchise completely from home.
Answer: FALSE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
157) Franchising is popular in the United States, but legal barriers have limited its popularity in foreign countries.
Answer: FALSE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
158) Global franchising is unlikely to experience major growth due to the high costs of operations in global markets.
Answer: FALSE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
159) Franchising in global markets has demonstrated that high operating costs are counterbalanced by high profit opportunities.
Answer: TRUE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
160) Franchisors sometimes pay reverse royalties to franchisees if it is evident that the franchisor’s Internet sales have negatively impacted the profits of traditional bricks-and-mortar franchisee businesses.
Answer: TRUE
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
161) In a typical franchise agreement, the franchisor pays the franchisee a fee to manage its company, and the two of them split the profits based on the percentages established in the agreement.
Answer: FALSE
Explanation: The franchisor, who owns the rights to the company’s name and products, usually does not pay the franchisee. More typically, the franchisee pays the franchisor a royalty to use the company’s name and sell its products or services in a given area.
Difficulty: 2 Medium
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
162) Although franchise arrangements are a good source of income for the franchisee, these businesses do not contribute significantly toward job creation.
Answer: FALSE
Explanation: Franchised businesses contribute in a big way to job creation in the U.S. According to the International Franchising Association, the more than 733,000 franchised businesses operating in the U.S. create approximately 13.3 million jobs.
Difficulty: 2 Medium
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
163) It is correct to say that if a franchisor expects an 8% royalty fee on revenue, the franchisor earns 8 cents on each dollar of revenue the franchisee generates.
Answer: TRUE
Explanation: Shared profits is an important aspect of most franchise arrangements. The franchise agreement will stipulate the percent of revenues that the franchisor will collect from each franchisee. In this example, 8% of each dollar of revenue = 8 cents, or $.08 that will go to the franchisor.
Difficulty: 2 Medium
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
164) The financial advantage to the parent company (the franchisor) in a franchise arrangement is the upfront franchise fee and the collection of royalties if franchisees are successful.
Answer: TRUE
Explanation: Shared profits are an important aspect of most franchise arrangements. The franchisee will pay the franchisor an up-front fee for the opportunity to use the business name, and the right to sell the product or service. Besides this fee, the franchise agreement almost always includes royalty payments. The franchisee will pay the franchisor a percentage of revenues or profits for the entire contract period.
Difficulty: 2 Medium
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
165) If a firm is advertising that it is selling franchise opportunities, the prospective franchisee can be assured that the government has performed due diligence on this company, and has deemed it a safe investment.
Answer: FALSE
Explanation: Most franchisors are not large systems like McDonald’s and Subway. Many are small, rather obscure companies that prospective franchisees may know little about. Most are honest, but complaints to the Federal Trade Commission have increased about franchisors that delivered little or nothing of what they promised. Before you buy a franchise, make certain you check out the facts fully.
Difficulty: 2 Medium
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
166) If a franchisee decides he wants out of the business, he is free to close up shop or sell the business, just as if he were a sole proprietor or partnership outside of a franchise arrangement.
Answer: FALSE
Explanation: Unlike owners of private businesses, who can sell their companies to whomever they choose on their own terms, many franchisees face restrictions on the resale of their franchises. Franchisors want to reserve the right to select new owners.
Difficulty: 2 Medium
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
167) If an established franchisor agrees to provide you the opportunity to become a franchisee in its franchise system, the franchisor may also be willing to serve as a source of financing for your operation.
Answer: TRUE
Explanation: One advantage of entering into a franchise arrangement is that the franchisor will often provide financing. The financing may come in the form of a loan to get started, or an arrangement whereby you will pay the franchise fee over time.
Difficulty: 2 Medium
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
168) Ravi wants to be his own boss and run his own business. His friend, Josh, suggested that an inexpensive way to get started is to buy a franchise. Therefore he can limit his risk and he will have the freedom to run it exactly as he wants. After reading this chapter, you concur with this advice.
Answer: FALSE
Explanation: The start-up costs of franchising can be quite high, so becoming a franchisee is not necessarily an inexpensive way to start a business. Moreover, although they have some authority to run their franchise, franchisees generally follow a set of rules and procedures and meet certain standards established by the franchisor. This would limit Ravi’s freedom to run his business the way he wants.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
169) Indira paid a substantial franchise fee to obtain a Precision Printers franchise in Columbus, Ohio. With the franchise fee behind her, Indira can use her creative talents to make her print shop different and more attractive than other Precision Printers stores in the Columbus area.
Answer: FALSE
Explanation: Although they have a certain amount of managerial freedom, franchisees are expected to follow rules and procedures set by the franchisor. While this limits the freedom and flexibility of the franchisee, it also helps ensure quality and a predictable level of service.
Difficulty: 3 Hard
Topic: Disadvantages of Franchises
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
170) Jaheem owns a Far and Wide Travel Agency franchise. As a franchisee, Jaheem is guaranteed the right to retain all of his franchise’s revenues and profits.
Answer: FALSE
Explanation: Franchisees usually pay a royalty to the franchisor. This royalty is sometimes expressed as a share of the franchisee’s revenues or a share of the franchisee’s profits.
Difficulty: 3 Hard
Topic: Disadvantages of Franchises
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
171) Leanne, a franchisee, runs a chain of small restaurants with a well-known name. Due to her hard work and people skills, her locations are doing quite well. She has noticed that several other franchisees in the same franchise system have let their restaurants deteriorate, especially in terms of lack of upgrades. Leanne should be concerned about this trend, since it eventually could affect her own business.
Answer: TRUE
Explanation: The actions of less successful franchisees can hurt the success of others in the same franchise. This is known as the coattail effect.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
172) Maria is already a successful franchisee with Nite Lite, a chain of “no frills” motels that provide clean rooms and good service at affordable rates. The motel she currently operates is located in Texas, but she is considering an opportunity to open another Nite Lite motel in Canada. Although her costs of operating in a foreign nation may be higher, she has the benefit of an expanding market and less competition.
Answer: TRUE
Explanation: Franchisees often find that the costs of operating franchises in foreign countries are high, but these costs are counterbalanced by expanding markets and less competition.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
173) A well-known franchised food chain was brought to its knees when several customers got sick from tainted beef. Although the food chain recovered due to its quick and consistent action, several franchisees sued the parent company for loss of sales. The franchisees experienced the coattail effects of the bad publicity this event received.
Answer: TRUE
Explanation: The coattail effect occurs when bad publicity affects one or more of the businesses associated with a franchise chain. The coattail effect can negatively impact growth and profitability.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
174) Tadashi’s uncle passed away and left him a Realty Experts franchise. Tadashi is not a licensed agent or broker, nor does he know the first thing about the real estate business. He plans to sell his Realty Experts franchise to his friend Devonte, who recently got his real estate license. One of the advantages of owning a franchise is that you can decide to sell out to anyone you think is suitable for the business.
Answer: FALSE
Explanation: Most franchisors reserve the right to approve or disapprove the sale of new or existing franchises. A franchise owner usually cannot sell his/her business without the approval of the parent company.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
175) Your friend Bainbridge called to tell you he attended a pitch for a new franchise in website development. Bainbridge says, “We can get in for a few thousand dollars.” He wants to know if you are ready to invest too. Although both of you lack expertise in graphic design or html programming, this should be a safe investment since it is already advertised as a franchise system. It’s probably too good to pass up.
Answer: FALSE
Explanation: Fraudulent franchises exist. These are small, obscure companies that most prospective franchisees know little about. Before buying, it is important to check out the facts, examine the franchisor’s offering circular, and even consult with the Federal Trade Commission.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
176) A cooperative is simply another name for a corporation.
Answer: FALSE
Difficulty: 1 Easy
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
177) A cooperative consists of people with similar needs who pool their resources for mutual gain.
Answer: TRUE
Difficulty: 1 Easy
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
178) It is not unusual for members of cooperatives to work for and help manage their cooperative.
Answer: TRUE
Difficulty: 1 Easy
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
179) Farm cooperatives were originally established to help farmers increase their economic power by acting as a group rather than as individuals.
Answer: TRUE
Difficulty: 1 Easy
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
180) The companies Ace Hardware, Blue Diamond, and Sunkist are well-known cooperatives.
Answer: TRUE
Difficulty: 1 Easy
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
181) A disadvantage of farm cooperatives is that they are subject to higher tax rates than corporations.
Answer: FALSE
Difficulty: 1 Easy
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
182) At one time there were many farm cooperatives, but more recently other forms of business ownership have replaced them.
Answer: FALSE
Explanation: Farm cooperatives have expanded their role over time and have become a multibillion-dollar industry.
Difficulty: 2 Medium
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
183) Originally, farm cooperatives were formed to provide better prices for farmers. These groups now cooperatively buy farm equipment and other products, and realize economies of scale by banding together for these things.
Answer: TRUE
Explanation: By participating in a larger group, it is more affordable for farmers and other business people to buy certain items that they would normally pay a lot more to purchase. By forming a cooperative, they enjoy economies of scale.
Difficulty: 2 Medium
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
184) Josie belongs to a food cooperative in her community. As a member, she can expect to have a vote in the election of the cooperative’s board of directors.
Answer: TRUE
Explanation: In cooperatives the members typically have the right to elect a board of directors. Members democratically control these businesses by electing a board of directors that hires professional management.
Difficulty: 3 Hard
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
185) Harper has always disliked the concept that the customers, managers, and workers of a business are separate individuals with competing goals. She joined with many other people in her community who share this view to become a member, and part owner, of a childcare center. Harper and the other members operate the center for their own benefit, and each is expected to work at the center at least 12 hours each month. The type of organization Harper belongs to is known as a joint venture.
Answer: FALSE
Explanation: Harper belongs to a cooperative, which is a special form of business organization that is owned by its members/customers, who operate the business for their mutual gain. Many cooperatives expect their members/customers to work a certain number of hours per month for the organization.
Difficulty: 2 Medium
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
186) The ________ is the most common form of business ownership.
Answer: D
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
187) A ________ is a form of business that is owned, and usually managed, by one person.
Answer: C
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
188) ________ comprise about 20% of all businesses but account for about 81% of U.S. business receipts.
Answer: A
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
189) To many businesspeople, one of the major attractions of a sole proprietorship is
Answer: D
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
190) The ________ is usually the easiest form of business to start and end.
Answer: A
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
191) One of the major disadvantages of a sole proprietorship is the
Answer: B
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
192) Starting a new business as a sole proprietorship
Answer: C
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
193) In a sole proprietorship, the profits earned by the business are
Answer: C
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
194) With respect to taxes, the sole proprietorship
Answer: B
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
195) A significant disadvantage of owning a sole proprietorship is the
Answer: C
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
196) When a sole proprietor dies
Answer: A
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
197) Unlimited liability means
Answer: A
Explanation: Unlimited liability means the owner is responsible for all the debts of the firm. If the firm should land in bankruptcy court, the judge could liquidate the owner’s personal assets to pay the debts of the business.
Difficulty: 1 Easy
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
198) Any debts or damages incurred by a firm organized as a sole proprietorship are
Answer: A
Explanation: A sole proprietor accepts unlimited liability. This means that he/she is responsible for all debts of the business. If the firm should land in bankruptcy court, the judge could liquidate the owner’s personal assets to pay the debts of the business.
Difficulty: 2 Medium
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
199) An entrepreneur who wishes to start a business with little delay or hassle, and who wants to be his or her own boss, should organize the business as a
Answer: A
Explanation: Two advantages of sole proprietorships are ease of starting (and ending) and being your own boss.
Difficulty: 2 Medium
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
200) Which of the following statements is the most accurate?
Answer: B
Explanation: One of the major advantages of sole proprietorships is that they are easy to form and end and taxed at the owner’s personal tax rate.
Difficulty: 2 Medium
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
201) Although sole proprietors do not pay any special taxes, as the owner of the business you are also an employee of the business, which requires you to
Answer: B
Explanation: Sole proprietors pay self-employment taxes such as Social Security and Medicare.
Difficulty: 2 Medium
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
202) Being your own boss means
Answer: C
Explanation: When you are your own boss, you must accept all mistakes as your mistakes.
Difficulty: 2 Medium
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
203) Yoshi operates a shoe store as a sole proprietorship. However, he is in poor health and may be unable to continue running the business. If Yoshi becomes incapacitated, his business
Answer: C
Explanation: A sole proprietorship ceases to exist if the proprietor dies, retires, or becomes incapacitated, unless it is sold or taken over by the owner’s heirs.
Difficulty: 3 Hard
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
204) Amelia has a lot of business knowledge and is confident in her abilities to open a successful store. She recently opened a bakery as a sole proprietor. She is expecting a high level of profits and is looking forward to
Answer: B
Explanation: One of the advantages of a sole proprietorship is the retention of company profit. The owner can earn as much as possible and not have to share that money with anyone else except the government, in taxes.
Difficulty: 3 Hard
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
205) Sung owns a dog-walking business that she started in high school. Her first goal was to earn money after school and supplement her allowance. Now that she has finished college and maintains a long client list, she’s planning on running the business full time. She keeps all the profits and has kept things simple by posting fliers on the bulletin boards at local stores. Sung’s business is a(n)
Answer: A
Explanation: Sung’s simple form of business ownership is a sole proprietorship. She, alone, keeps the profits from her service.
Difficulty: 3 Hard
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
206) Oliver wants to start his own business. He should consider a sole proprietorship if he
Answer: C
Explanation: A sole proprietorship is a business that is owned and managed by a single individual. This form of business ownership appeals to people who want to be their own boss.
Difficulty: 3 Hard
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
207) Chipper is the sole proprietor of a golf shop. Because she is a sole proprietor, any profit Chipper’s business earns is
Answer: B
Explanation: A tax advantage of sole proprietorships is that their earnings are only taxed once, as personal income to the owner.
Difficulty: 3 Hard
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
208) Ramses owns a roofing business. He enjoys being his own boss, but it comes at a price. Often, his days are filled with organizing the activities of the employees and seeking out new customers. He often misses events with friends and family because of the obligations of running his own business. He also knows that he has unlimited personal liability for any of his firm’s debts. Ramses’s business is organized as a(n)
Answer: D
Explanation: A key advantage of sole proprietors is that the owner is his or her own boss, and can run the business the way he or she likes. However, this freedom comes with a great deal of responsibility. Sole proprietors have no one else to share the burdens of ownership and often must work very long hours to keep the company on course. Another disadvantage of a sole proprietorship is that the owner has unlimited liability.
Difficulty: 3 Hard
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
209) Autumn wants to start a business. She has two goals. First, she doesn’t have much money but she’s ready to get business up and running with the least possible hassle and expense. Second, she wants to minimize her personal risk in the event that her company experiences difficulties. If Autumn chooses a sole proprietorship, she would
Answer: B
Explanation: One advantage of sole proprietorships is that they are relatively easy and inexpensive to start. However, a major disadvantage is that the owner has unlimited personal liability for any debts of the firm. This unlimited liability means that the owner is exposed to a high level of risk.
Difficulty: 3 Hard
Topic: Sole Proprietorships
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
210) In a partnership, a(n) ________ partner (owner) actively manages the company and has unlimited liability for claims against the firm.
Answer: C
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
211) A partner (owner) who invests money in a business does not take an active role in managing the operation, and is only subject to losing the funds he/she invested is known as a(n) ________ partner.
Answer: B
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
212) The limited liability provided to limited partners means that they are not responsible for the debts of the business beyond
Answer: B
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
213) According to the Uniform Partnership Act, the three key elements of any general partnership are
Answer: C
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
214) A type of partnership called a ________ acts much like a corporation and is traded on stock exchanges, but it is taxed like a partnership with profits passing through to the owners and taxed as the owner’s personal income.
Answer: D
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
215) Compared to a sole proprietorship, which of the following is considered an advantage of a general partnership?
Answer: A
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
216) In a limited liability partnership, each partner’s risk of losing personal assets is
Answer: B
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
217) Which of the following is an advantage of a partnership?
Answer: C
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
218) When entering into a new partnership, a good strategy is to
Answer: B
Difficulty: 1 Easy
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
219) One difference between partnerships and sole proprietorships is that partnerships
Answer: D
Explanation: Partners not only give the firm a stronger financial base and a broader range of expertise, they also watch over each other, thus providing a more disciplined environment.
Difficulty: 2 Medium
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
220) Which of the following statements about partnerships is most accurate?
Answer: C
Explanation: Once partners commit to a partnership, the arrangement is often difficult to terminate. Questions of who gets what and what happens next are usually hard to resolve when the business is closed.
Difficulty: 2 Medium
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
221) When comparing general partnerships to sole proprietorships, an advantage of partnerships is that they
Answer: D
Explanation: When a partnership is formed, two or more people can pool their financial resources to provide the business with a stronger financial base.
Difficulty: 2 Medium
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
222) A good reason why partners should spell out the details of their partnership arrangements in writing is
Answer: B
Explanation: A major drawback of a partnership is the potential for disagreements among the partners. Spelling out the agreement in writing is a way to protect all parties and minimize misunderstandings.
Difficulty: 2 Medium
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
223) A master limited partnership (MLP) is
Answer: C
Explanation: The master limited partnership looks much like a corporation because it is traded on the stock exchanges, but it is taxed like a partnership and avoids the corporate income tax.
Difficulty: 2 Medium
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
224) One way to eliminate some of the risk of your partners making costly mistakes that could jeopardize your personal assets is to set up a
Answer: D
Explanation: A limited liability partnership (LLP) limits partners’ risk of losing their personal assets to the outcomes of only their own acts and omissions and those of people under their supervision. If you are a limited partner in an LLP, you can operate without the fear that one of your partners might commit an act of malpractice resulting in a judgment that takes away the personal assets of those who did not commit the errors.
Difficulty: 2 Medium
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
225) Finnegan is a limited partner in Gettout & Associates, a local financial consulting company. Heywood U. Gettout is one of the general partners in the company and is needing to temporarily leave the company to attend to some personal matters. Heywood has asked Finnegan to perform his managerial duties while he is gone. As a limited partner, Finnegan
Answer: C
Explanation: A limited partner invests money in a partnership but cannot legally take an active role in its management.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
226) Kiersten and her four siblings are starting their own home design business. One of their primary goals is keeping the loving relationship they currently enjoy, so they are following the Model Business Corporation Act recommendations as they write their partnership agreement. Which of the following is an accurate recommendation of the Act?
Answer: C
Explanation: The Model Business Corporation Act recommends including a number of specifics in the written partnership agreement, including how disagreements will be handled.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
227) Huong is opening an international food store. Though her products will span the globe, she wants to focus on items from the Middle East. She wants to be the firm’s only general partner, but she is trying to get several friends to participate as limited partners. It’s apparent Huong wants to
Answer: C
Explanation: Limited partners invest money in a business and share in the profits, but are not allowed to assume any management responsibilities. Since Huong plans to be the only general partner, she will be the only owner who has a direct role in managing the company.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
228) Mac and Charlie own a car repair shop that they operate as co-owners. Both take an active role in the management of the business, and each accepts unlimited liability. Mac and Charlie operate as a
Answer: B
Explanation: Since Mac and Charlie operate the business as co-owners, they have formed a general partnership. Since both will manage the firm and accept unlimited liability, they are both general partners.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
229) Melanie, Elliot, and Caleb agreed to partner in a small home rehab business. Initially, they were enthusiastic and eager workers. That is until their first project took more work than Melanie initially estimated, Elliot wanted morning meetings and long lunch hours, and Caleb decided to go on vacation even though the home was not complete and ready to sell. As Figure 5.2 indicates,
Answer: A
Explanation: This question is based on the material in Figure 5.2. This figure gives advice on questions to ask when choosing a partner. A key point made includes a question regarding each partner’s vision for the company.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
230) Angelica and Celeste invested all their savings in a small pizzeria they opened outside the University of Missouri. They operated the business as a general partnership. After 11 months, the business went broke and Angelica and Celeste were left with outstanding bills of $43,650, which was more than their initial investment in the company. Angelica and Celeste can
Answer: A
Explanation: General partners have unlimited liability for the debts of their business. This means their personal assets are at risk.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
231) Rowan and Vanessa plan to pool their money and talents to form a general partnership and start a music school. One of the first things Rowan and Vanessa should do is
Answer: B
Explanation: One problem with a partnership is the potential for disagreements and misunderstandings among the partners. Consulting an attorney and getting the agreement in writing helps minimize the risk of such problems.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
232) Beau has agreed to invest $19,000 in a partnership with his brother and sister-in-law. Not being in the same line of work as them, Beau does not intend to actively work in the partnership. He also does not want to risk any of his own assets other than the $19,000 investment. The partnership has agreed to permit him to share in the profits. As an expert on forms of business ownership, you know that Beau is a ________ in this partnership.
Answer: D
Explanation: A limited partner invests in a partnership, but has limited liability and does not take an active role in managing the business.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
233) Sean is one of several general partners who own Pints and Cans, a small chain of bar and grills located in Illinois and Indiana. Sean is interested in converting the partnership into a master limited partnership. If he convinces other partners to go along with his idea, Pints and Cans will
Answer: A
Explanation: Master limited partnerships act much like corporations with shares of ownership traded on the stock exchanges, but they are taxed like partnerships, where each owner adds his/her dividends to other personal income earned and pays taxes at the owner’s personal income tax rate.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
234) Katie and her siblings created a design company called Homeward Bound LLP. Although key business functions are centralized, each sibling is a licensed architect that designs, builds, and installs residential and commercial buildings for his/her own clients. Unfortunately, a recent design of Katie’s that was ultimately created and installed for one of their clients resulted in water damage to the basement of the client’s new home. The limited liability partnership
Answer: B
Explanation: A key advantage of a limited liability partnership is that it limits the liability of individual partners to damages or debts that result from their own decisions or actions, or to those of employees under their direct supervision.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
235) A(n) ________ is a state-chartered legal entity with authority to act and to have liability separate from its owners.
Answer: B
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
236) An owner of a corporation is known as a
Answer: D
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
237) Which of the following statements about the operation of a corporation is correct?
Answer: A
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
238) The form of business ownership best suited to raising large amounts of money for expansion is the
Answer: C
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
239) Which of the following is an advantage of the corporate form of business when compared to sole proprietorships and partnerships?
Answer: D
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
240) Compared to partnerships and sole proprietorships, a major advantage of the conventional (C) corporation as a form of business ownership is that it
Answer: A
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
241) Which of the following is normally considered a disadvantage of the corporate form of business?
Answer: D
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
242) What entity elects the board of directors for a corporation?
Answer: B
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
243) A separation between ownership and management is most likely to occur in a
Answer: C
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
244) One disadvantage of ________ is the initial cost of formation.
Answer: A
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
245) The form of business ownership that usually requires the most detailed record keeping is the
Answer: A
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
246) A major advantage of S corporations is that they
Answer: D
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
247) One reason many companies do not organize themselves as an S corporation is that this form of business
Answer: C
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
248) To qualify as an S corporation, a company must
Answer: B
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
249) The income generated by S corporations
Answer: A
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
250) ________ are companies that are similar to S corporations but are not restricted with similar eligibility requirements.
Answer: C
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
251) One disadvantage of a limited liability company is that it
Answer: B
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
252) One reason limited liability companies have become so popular is that they
Answer: A
Difficulty: 1 Easy
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
253) Earnings of C corporations can be
Answer: A
Explanation: Corporations must pay taxes on income before it is distributed to stockholders; then the stockholders must pay taxes on the income they receive from dividends. Dividend income ends up being taxed twice—once when it was part of the total net income of the company and then again when it is part of the owner/stockholder’s personal income.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
254) Which of the following is an attractive benefit of a corporation?
Answer: D
Explanation: Corporations can attract skilled employees by offering such benefits as stock options (the right to purchase shares of the corporation for a fixed price). Double taxation is a disadvantage of corporations. Owners of corporations have limited liability; and due to stock options and other benefits employees of corporations are quite often stockholders/owners of the corporations, as well.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
255) The reason a professional such as a lawyer or doctor would incorporate his/her business is
Answer: C
Explanation: Limited liability provides corporation owners protection from loss of personal assets if the business goes bankrupt. Although costlier to set up, the corporation provides the added protection by keeping the business assets separate from the owner’s personal assets. Your liability is limited to your investment in the business.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
256) Which of the following statements about S corporations is most accurate?
Answer: A
Explanation: The S corporation does not file an income tax return separate from its owners. The profits of S corporations are distributed to the owners. Owners account for these earnings on their personal income tax returns, thus avoiding double taxation.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
257) The organizational structure of a corporation permits
Answer: B
Explanation: Stockholders elect the board of directors. The board of directors selects the officers and top management of the firm. Officers hire managers that supervise employees.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
258) Which of the following statements is the most accurate?
Answer: A
Explanation: A foreign corporation is one that does business in one state while being chartered in another state.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
259) The S corporation is likely to be less popular in the future because
Answer: B
Explanation: Limited liability companies allow firms great flexibility to choose the most advantageous tax treatment, and avoid the special eligibility requirements that characterize S corporations. In 1995 the National Conference of Commissioners on Uniform State Laws approved the final version of the Uniform Limited Liability Company Act. By 1996, all 50 states and the District of Columbia recognized LLCs. Today more than half of new business registrations in some states are LLCs.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
260) Compared to the C corporation, the limited liability company is an attractive form of business ownership because
Answer: D
Explanation: The limited liability company can choose to be taxed as a partnership or a corporation, giving it the option to avoid double taxation. This form of business ownership files articles of organization; however, it does not hold annual meetings, nor does it need to file annually.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
261) Double taxation means
Answer: C
Explanation: A corporation files a separate tax return from its owners. It pays taxes on all profits earned after legitimate expenses are deducted. If any profits remain after taxes are paid, these are considered after-tax profits and they can be distributed to owners in the form of dividends. These earnings are subject to double taxation because the government requires the recipient (the owner/stockholder) to pay taxes on the dividends, even though they were already taxed when they were part of the corporation’s earnings.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
262) According to the box, “Kickstarting a Benefit Corporation,” a benefit corporation is
Answer: A
Explanation: Benefit (B) corporations are mission-based companies that are judged by how well they meet their own set of socially or environmentally beneficial goals.
Difficulty: 2 Medium
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
263) Lorenzo and Lila own all of the Double L Corporation’s stock. The stock of this corporation is not sold to the general public. Lorenzo and Lila own a(n)
Answer: D
Explanation: A closed corporation is one whose stock is all owned by only a few investors (or privately held), and isn’t available to the general public.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
264) Alani and Jeremy have considered creating their own company but are concerned about the possibility of losing all of their personal assets if the business fails. One way for Alani and Jeremy to avoid this risk would be to organize their firm as a
Answer: C
Explanation: A corporation has the advantage of limited liability for all of its owners. Although a limited partner also has limited liability, even a limited partnership must have at least one general partner with unlimited liability.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
265) Payton recently purchased 100 shares of stock in Game Guys, Inc. Payton is a(n)________ of this company.
Answer: A
Explanation: Stock represents shares of ownership in a corporation.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
266) Carter is a stockholder in ExtremeTrax, Inc., a C corporation that designs and manufactures amusement park roller coasters. The company recently lost a major court decision and is being forced into bankruptcy. In fact, the damages being awarded are so large that, even if all company assets are sold and the proceeds are used to pay its debts, ExtremeTrax is likely to still owe money to its creditors. If ExtremeTrax goes bankrupt, Carter and the other stockholders will
Answer: B
Explanation: Owners of a corporation have limited liability. This means that the most they can lose is the amount they invest in the corporation.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
267) Jose lives in Mexico City and is a Mexican citizen. He has several friends who are American citizens and own shares in an S corporation. Jose would like to invest in this company. Which statement is most accurate?
Answer: B
Explanation: S corporations are required to meet several special conditions that conventional corporations do not have to satisfy. One requirement is that all of the owners of an S corporation must be U.S. citizens or permanent residents of the United States.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
268) Although it is a small company, Zorn Enterprises owns a large number of inexpensive rental housing units in Texas and Louisiana. Currently, the company is a chartered C corporation, but the owners are interested in switching to be an S corporation. After consulting a lawyer, they learned that Zorn Enterprises does not qualify to be designated as an S corporation. Which of the following characteristics of Zorn Enterprises would prevent it from becoming an S corporation?
Answer: D
Explanation: An S corporation may earn no more than 25 percent of its income from passive sources such as rents, royalties, and interest.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
269) Mackenzie’s dream is to open a chain of salons. She hopes to attract investors to help finance growth. Having once considered forming a C corporation, Mackenzie wants to have more flexibility about how the new business will be taxed. She also wants to offer investors/owners limited liability. Mackenzie can satisfy her objectives by setting up a(n)
Answer: A
Explanation: Limited liability companies offer limited liability protection while allowing the company the choice of being taxed as a corporation or as a partnership. Although S corporations also offer limited liability, they do not offer the tax flexibility. Moreover, an S corporation has more stringent ownership rules.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
270) Your three friends from Wyoming inherited an old dude ranch. They now plan to turn it into a pasture for retired racehorses. Serenity Stables wants to open its doors by spring of 2020. After going to several small business seminars, your friends are certain they need limited liability. The high-risk, labor-intensive business will require a sizeable investment including an air-conditioned barn, several fenced-in pastures, and loads of animal feed. You explain to them that LLC ownership requires owners to pay self-employment taxes on the entire amount of earnings. You are fairly certain this is one tax liability your friends would like to avoid. You instead recommend
Answer: D
Explanation: Unlike the limited liability company, the S corporation form of business ownership avoids paying self-employment taxes on total earnings and still provides limited liability to business owners who are U.S. citizens.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
271) Double taxation is experienced by corporations that pay dividends. Which of the following scenarios is an accurate example of double taxation?
Answer: A
Explanation: The corporation is a separate entity, and as such, it pays its own taxes on its earnings. If there are earnings after taxes, the corporation may distribute these after-tax funds to its stockholders (owners) in the form of dividends. However, the stockholders must then claim the dividends as income on their individual tax returns. A portion of the firm’s earnings (the dividend portion) may be taxed twice. This constitutes double taxation.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
272) Joji is a 37-year-old married business owner. He runs a dry cleaning service with three locations in Toledo, Ohio. His personal obligations are the home that he owns with his wife, who works for a large financial consulting firm; the healthcare of his family; and his commitment toward saving for his three children’s college educations. Joji 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. Joji would certainly like to minimize his taxes. Which of the following forms of business ownership would you suggest for him?
Answer: D
Explanation: LLC provides the owner(s) with limited liability, which means the owners are only liable for the funds they have invested in the business. Personal assets are protected. It also permits the owner to account for his earnings on his individual tax return. The company does not submit a tax return. Company earnings are passed through to the owner’s individual return, just like a sole proprietorship or a general partnership.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
273) One reason that companies participate in mergers and acquisitions is
Answer: C
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
274) A ________ is two firms combining to form one company.
Answer: C
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
275) A(n) ________ occurs when one company buys the property and obligations of another company.
Answer: D
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
276) Three types of corporate mergers are
Answer: B
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
277) A ________ merger unites firms at different stages of related businesses.
Answer: A
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
278) When two companies in the same industry agree to become one firm, the result is called a
Answer: D
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
279) When two companies in completely unrelated industries agree to become one firm, the result is called a
Answer: C
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
280) A conglomerate merger will
Answer: A
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
281) One result of taking a firm private is
Answer: A
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
282) An attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing is called a(n)
Answer: D
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
283) If a group of stockholders or management obtain all the stock of a previously publicly traded firm for themselves, this is referred to as
Answer: D
Difficulty: 1 Easy
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
284) The difference between a merger and an acquisition is
Answer: C
Explanation: A merger is the result of two firms combining their resources and forming one company. An acquisition is when one firm purchases the assets and obligations of another firm.
Difficulty: 2 Medium
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
285) When two firms which do not participate in the same industries, for example, a software company and a fast food restaurant company, decide to merge, the result is called a ________ merger.
Answer: D
Explanation: A conglomerate merger involves two firms from different industries.
Difficulty: 2 Medium
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
286) A merger involving a commercial bakery and a grocery retailer would be an example of a ________ merger.
Answer: A
Explanation: A vertical merger involves two firms in different stages of related businesses. The bakery would make bread and other items to be sold in the grocery.
Difficulty: 2 Medium
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
287) A merger involving a software producer and a clothing manufacturer is an example of a ________ merger.
Answer: D
Explanation: A conglomerate merger is two firms from unrelated industries combining their resources.
Difficulty: 2 Medium
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
288) In a leveraged buyout, the managers of a firm, its employees, or other investors
Answer: C
Explanation: A leveraged buyout is an attempt by employees, management, or a group of investors to use borrowed funds to buy out the existing owners of a firm.
Difficulty: 2 Medium
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
289) When investors successfully take a firm private, the company’s stock is
Answer: C
Explanation: When investors take a firm private, they obtain all of the stock for themselves. The stock is no longer traded on the open market.
Difficulty: 2 Medium
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
290) Silver Screen Pictures, Inc. recently bought Superstar Entertainment, Inc. for an undisclosed amount of money. It now owns all of Superstar Entertainment’s properties and obligations. This is an example of a(n)
Answer: D
Explanation: When one company buys out another firm’s property and obligations, the result is called an acquisition.
Difficulty: 3 Hard
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
291) Intercontinental Provisions, a specialty grocery store, is considering a conglomerate merger with a company that makes storage solutions. A likely reason is
Answer: C
Explanation: A conglomerate merger is between firms in unrelated markets. One of the common motivations for this type of merger is the desire to diversify business operations and investments.
Difficulty: 3 Hard
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
292) Kooky Cookies Corporation purchased the Crazy Cookie Company. Although this was initially an acquisition, the merging of these two businesses was a ________ merger. Kooky Cookies went on to purchase several baking product companies. Joining forces with some of its suppliers would represent a ________ merger.
Answer: C
Explanation: A merger of two companies which compete in the same industry and for the same market is a horizontal merger. A merger between two firms at different stages of related businesses is a vertical merger.
Difficulty: 3 Hard
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
293) The strategy of investors who are attempting a leveraged buyout is to
Answer: B
Explanation: In a leveraged buyout, the objective of the investors is to use debt financing to gain control of the firm’s stock for themselves.
Difficulty: 3 Hard
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
294) Foreign investment in U.S. companies continues to be strong. When Belgian-based In-Bev purchased the largest beer company in the U.S., Anheuser-Busch, this action constituted a(n) ________ with a negotiated selling price of $52 billion.
Answer: C
Explanation: An outright buy-out or purchase is known as an acquisition. As noted in the textbook, In-Bev bought the largest brewer of beer in the U.S., Anheuser-Busch. The purchase included all of the company’s assets and all the companies it owned. This is known as an acquisition.
Difficulty: 3 Hard
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
295) Kevin is a major stockholder in Professional Transmission Services (PTS), a nationwide network of transmission repair shops founded in 1975 by his father. Currently, PTS stock is sold on the open market, but Kevin has talked to several relatives about his desire to get all of the PTS stock back in his family’s hands. Kevin is interested in ________.
Answer: A
Explanation: When a group of stockholders, such as a family, obtains all of the stock in a company for themselves, they have taken the firm private.
Difficulty: 3 Hard
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
296) Hidden Valley Communications, Inc., located in a remote area of Utah, made a special device that was used in LTE phones. After three years of local operations, the company that employed 4,000 people was planning to close its Utah operation and move the assembly offshore. Under the direction of a financial services company that financed the deal, the employees agreed to become owners of the company and continue to operate the business. The business concept that describes this arrangement is
Answer: B
Explanation: A leveraged buyout or LBO is an attempt by employees, management, or investors to buy out the stockholders in a company. This action usually requires the buyers to borrow a sizeable amount of funds.
Difficulty: 3 Hard
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
297) A(n) ________ is an arrangement whereby someone with a proven idea for a business sells the rights to use the business model, to sell a product or service to others in a given territory.
Answer: B
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
298) A(n) ________ is a company that has a proven business model and is willing to sell the rights to use the business model to others so that they can sell the same product or service within a given territory.
Answer: D
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
299) A person who buys the right to use a business name and sell a product within a given territory is called a
Answer: B
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
300) A franchise can be formed
Answer: D
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
301) The most popular type of business for franchising is
Answer: B
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
302) A ________ is the share of profits or percentage of sales a franchisee pays to a franchisor.
Answer: A
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
303) Which of the following is an advantage of franchises?
Answer: C
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
304) One reason franchises have become so popular is that this arrangement provides the franchisee with
Answer: A
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
305) Global franchising offers
Answer: C
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
306) Opening and operating a franchise in a different country
Answer: C
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
307) Franchisors may send reverse royalties to franchisees who
Answer: B
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
308) ________ is by far the most popular target for American franchisors seeking to establish franchises in other countries.
Answer: A
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
309) Franchised businesses are successful (both domestically and internationally) because
Answer: D
Difficulty: 1 Easy
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
310) An evaluation of franchising would conclude that this type of arrangement
Answer: B
Explanation: An advantage of franchising is that it allows franchisees to own their business while taking advantage of an established name and product.
Difficulty: 2 Medium
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
311) Which of the following statements best summarizes the experience of American franchisors in foreign countries?
Answer: D
Explanation: U.S.-based franchisors have many outlets in foreign countries. Even new and relatively small franchisors are finding success in other countries. The key to international success in franchising is the same as the key to success in the United States: providing the customer with convenience and a predictable level of service and quality.
Difficulty: 2 Medium
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
312) One important consideration when prospecting for a good franchise business is
Answer: B
Explanation: The market potential is very important. Your goal should be to establish yourself with a franchisor whose product or service has increasing demand in the area where you will operate. You do not want your idea to be saturated in your territory. You will want the franchisor to offer full disclosure of rules, policies, and procedures.
Difficulty: 2 Medium
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
313) Which of the following statements about buying a franchise is most accurate?
Answer: B
Explanation: This question is based on information in Figure 5.9. The figure provides a lengthy checklist of questions for evaluating a franchise, including questions about the franchise itself, the franchisor, the franchisee, and the market.
Difficulty: 2 Medium
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
314) Qiang is ready to become a franchise owner and open one of the 50 Southwest Diners, a very successful fast food chain specializing in dishes from the American Southwest. Which of the following problems is Qiang most likely to encounter if she agrees to become a franchisee?
Answer: A
Explanation: While franchisors often provide franchisees with financial and managerial assistance, they typically demand a fee just to obtain the rights to the franchise. The fees charged by successful franchisors can be quite high. In addition, most franchisors also require franchisees to pay a fee, called a royalty, based on profits or sales.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
315) Zach is a franchisee with Digger’s Doggies, a chain of hotdog shops. He was doing well until several other Digger’s Doggies franchisees got in trouble and were forced to close their shops. Soon afterward, Zach’s business declined and was also forced to close. This is an example of
Answer: B
Explanation: Coattail effects refer to situations where the actions of other franchisees can have an impact on the success or failure of a particular franchisee’s business.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
316) The Sandwich Emporium, Inc. sells the rights to use its name and sell its signature sandwiches in a given market area to those willing to pay agreed-upon fees and meet specific contractual terms. The Sandwich Emporium is
Answer: B
Explanation: A franchisor is someone with a good idea for a business who sells the rights to use the business name and to sell its products or services in a given territory.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
317) Midwest Auto Experts, Inc. sells franchises to prospective businesspersons who want to use the Midwest Auto Experts name and offer its products. In a franchise arrangement, Midwest Auto Experts would be the ________, and the buyer of the franchise is the ________.
Answer: C
Explanation: In a franchising arrangement, the person or company that sells the right to use the name and product is the franchisor, and the person who buys the rights is known as the franchisee.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
318) Ivy is investing in a home cleaning franchise called HomeKeepers. At her first interview with the franchisor’s selling agent, she was told the parent company expects 5% royalties. What are royalties?
Answer: D
Explanation: Franchisors usually require a royalty fee which can be a portion of the profits of each franchised operation, or a percentage of the revenues (net sales) of each operation. These are typically collected on a monthly basis.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
319) Enok, a prospective franchise owner, is looking to keep his monthly costs as low as possible. The franchisor he is checking out is advertising that royalty payments of 8% of sales could be as high as $300,000 per month. The franchisor is claiming that a franchisee can expect monthly sales to be as high as
Answer: C
Explanation: Royalties are monthly fees collected by the franchisor. These fees are a percentage of the total monthly sales. If the franchisee generates $3,750,000 in sales, he/she will pay 8% of that amount to the franchisor. 8% of $3,750,000 = $300,000. The mathematical question is: 8% of what revenue amount = $300,000? 8% of X = $300,000. X = $300,000/.08. X = $3,750,000.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
320) Lucy is preparing to invest in a new online franchise, Notable Moments. The franchisor provides the exclusive software and training for designing invitations and cards for special occasions such as weddings, graduations, and birth announcements. In return, the franchisee is required to pay a monthly fee to the franchisor. Lucy will use the Notable Moments software to create her own special designs that she will ultimately feature on her website. Order turnaround time must be fast. She can only take on as many clients as she can make good on delivery. An advantage of Lucy’s online franchise is that she
Answer: D
Explanation: A distinct advantage of online franchising is the unlimited territory regulations. The franchisee can sell to anyone, anywhere. This makes for an instant global business.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
321) Declan plans to open up three Pizza Pals franchises in the greater Phoenix area. He tells you that he plans to negotiate with the franchisor to get rid of the giant Preston the Pizza that sits on the roof of all Pizza Pal restaurants. Declan is likely to learn that
Answer: C
Explanation: Franchisors quite often require franchisees to adhere to strict rules when it comes to the design of their buildings, the signs that they use, and other mandates. The proven business model usually has centralized regulations that franchisees must follow.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
322) A ________ is an organization that is owned and controlled by the people who use it—producers, consumers, and workers with similar needs pool their resources for mutual gain.
Answer: D
Difficulty: 1 Easy
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
323) In rural areas electrical power is often sold by ________ that take advantage of the government’s policy to sell them electricity at wholesale rates.
Answer: D
Difficulty: 1 Easy
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
324) Some ________ ask members/customers to work at the organization for a number of hours a month as part of their duties.
Answer: D
Difficulty: 1 Easy
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
325) The purpose of a farm cooperative is to
Answer: A
Difficulty: 1 Easy
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
326) In a cooperative, members/customers
Answer: A
Difficulty: 1 Easy
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
327) People who form cooperatives
Answer: B
Explanation: People who form cooperatives dislike the notion of separating owners, managers, and customers into separate groups with separate goals. They tend to favor more cooperation and a more equal distribution of wealth.
Difficulty: 2 Medium
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
328) A distinguishing feature of a cooperative is that it
Answer: C
Explanation: A cooperative is an organization that is owned and operated by the people who use it—producers, consumers, and workers with similar needs who pool their resources for mutual gain.
Difficulty: 2 Medium
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
329) Which of the following statements about farm cooperatives is most accurate?
Answer: B
Explanation: Statistics and examples cited in the text clearly indicate that farm cooperatives, such as Welch’s, Sunkist, Land O’Lakes, Blue Diamond, and Ocean Spray, are a major force in U.S. agriculture.
Difficulty: 2 Medium
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
330) Which of the following people would be most interested in participating in a business organized as a cooperative?
Answer: A
Explanation: As its name implies, a cooperative emphasizes cooperation. A cooperative appeals to people who dislike the notion of having owners, managers, workers, and customers as separate groups with different goals. In a cooperative, the people who will use a product join together and pool resources to operate the business for their mutual gain.
Difficulty: 3 Hard
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
331) Several small vineyard owners in the Napa Valley region of California banded together to market their grapes and wine in an attempt to get better prices. Over the years they expanded the organization to include other services such as buying and selling farm supplies and equipment and providing financial and technical services. The arrangement established by these vineyard owners is an example of a
Answer: D
Explanation: A farm cooperative is an organization of farmers who have joined to gain more economic power than they would have as individuals. These organizations often buy and sell supplies and equipment, provide warehouses, offer insurance and financial and technical services, and even operate manufacturing facilities.
Difficulty: 3 Hard
Topic: Cooperatives
Learning Objective: 05-06 Explain the role of cooperatives.
Bloom’s: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
332) Although most new firms start out as sole proprietorships, few large firms are organized this way. Why is the sole proprietorship such a popular form of ownership for new firms? What features of the sole proprietorship make it unattractive to growing firms?
Answer: Sole proprietorships have many features that are attractive to people starting a new business, including the following: 1. They are relatively easy and inexpensive to set up. 2. The owner can be his or her own boss, which appeals to many entrepreneurs who want to do things their own way, without the need to consult others. 3. The owner can keep all of the profits (except what the government takes in taxes). 4. Proprietors can take a great deal of pride in owning their own independent business and running it as they see fit. 5. The owner’s work establishes a legacy on which future generations may build.6. There are no special taxes on proprietorships.However, sole proprietorships also have some disadvantages that limit their growth potential: 1. With only one owner, sole proprietorships have limited access to the financial capital needed by rapidly growing firms. 2. As the firm grows and becomes more complex, the owner may become overwhelmed with the tasks of running the firm and need to attract qualified help. 3. Unfortunately, qualified professional workers are often reluctant to work in a sole proprietorship. 4. One of the biggest drawbacks for sole proprietorships is the unlimited liability of the owner. This means that the owner can lose much more than the amount he or she initially invested in the company (including personal property and savings) if the company gets into severe financial trouble. In this respect, a sole proprietorship is a risky form of ownership. Many growing companies decide to change their form of ownership to a corporation to overcome these drawbacks.
Difficulty: 3 Hard
Topic: Sole Proprietorship
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Analyze
AACSB: Analytic Thinking
333) What is the difference between a general partner and a limited partner? Give an example of a situation in which a person would want to be a limited partner.
Answer: A general partner is an owner who has unlimited liability and is active in managing the firm. A limited partner invests money in the business and shares in the profits, but has limited liability and cannot legally assume any management responsibility.Students should be able to offer any number of examples. Among them might be: 1. Wealthy persons who want to invest in what they think could be a successful firm, but don’t want to risk their personal assets. 2. Persons who do not want the responsibility of managing a partnership. 3. Persons who are interested in a particular type of business but know nothing about the field.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Analyze
AACSB: Analytic Thinking
334) What is a C corporation? What are the major advantages and disadvantages of this form of business ownership?
Answer: The C corporation is a state-chartered legal entity with authority to act and have liability separate from its owners. The text identifies many advantages of corporations. Among the major advantages are: 1. More money for investment. A corporation can sell stock (shares of ownership) to large numbers of interested investors. This enables corporations to finance growth, modernize facilities, and invest in the latest technologies. 2. Limited liability. The personal assets of the stockholders are not at risk. This is a major advantage to investors who want to invest in a company but want to limit potential losses. 3. Perpetual life. Unlike a sole proprietorship or partnership, a corporation is separate from its owners, so its existence is not threatened by the death of an owner. 4. Ease of ownership change. Unlike the other major forms of business ownership, stockholders in corporations can easily transfer ownership by simply selling their stock. 5. Ability to attract talented employees. Because of their ability to grow and offer opportunities for advancement, as well as the ability to offer fringe benefits (including stock options), corporations often can attract talented and highly qualified employees. The text also mentions disadvantages of becoming a C corporation, including: 1. High initial cost of formation. It is generally more expensive and time consuming to form a corporation than to form a sole proprietorship or partnership. 2. Increased regulation and paperwork. Corporations are subject to closer government regulation than other forms of ownership, and must keep detailed records. 3. Possible conflicts between the corporation’s board of directors and management. Stockholders elect the board of directors, and may choose members who are at odds with top management. As the text points out, this can result in an entrepreneur being forced out of the very company he or she founded. 4. Double taxation. If a corporation pays dividends, its earnings are taxed both as income to the corporation and as income to the stockholders. In other forms of ownership, earnings are taxed only once.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Analyze
AACSB: Analytic Thinking
335) How does a limited liability company (LLC) compare to an S corporation? What are the major advantages and disadvantages of an LLC?
Answer: A limited liability company (LLC) has some similarities to S corporations. Both of these forms of ownership have the advantage of providing limited liability for their owners while allowing the earnings of the company to be taxed as a partnership, thus avoiding the problem of double taxation that is a disadvantage of the conventional (or C) corporation. S corporations must meet certain eligibility requirements. For example, they can have no more than 100 stockholders (entire families are considered one stockholder), and all of the stockholders must be either individuals or estates and the individuals must be citizens or permanent residents of the United States. LLCs avoid these special eligibility requirements. Moreover, LLCs offer even more flexibility than S corporations in the choice of taxation methods and they provide a great deal of flexibility in the way they are operated, and in the way profits and losses are distributed. For all of these reasons, LLCs have quickly become a very popular form of ownership. However, LLCs also have some disadvantages. For example, shares of ownership in LLCs are not transferable without the approval of other owners. In addition, LLCs have a limited life, and members of LLCs must pay self-employment taxes on profits. (In contrast, owners of S corporations pay self-employment taxes only on salary, not on the entire profits of their company.) LLCs cannot deduct the cost of fringe benefits as an expense, and there is more paperwork for an LLC than there is for a sole proprietorship. Thus, though LLCs offer many attractive benefits, they are not the best choice in all situations.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Analyze
AACSB: Analytic Thinking
336) Describe and differentiate between the three types of corporate mergers. Give an example of each type.
Answer: A vertical merger is the joining of two firms involved in different stages of related businesses. A horizontal merger joins two firms in the same industry and allows them to expand their product offerings and/or achieve efficiencies in production and distribution. A conglomerate merger unites completely unrelated firms for the purpose of diversifying operations and investments. Students should be able to come up with many different examples here. Probably most will draw from the examples in the chapter but other examples could include: 1. Vertical: a candy producer that merges with a sugar refiner. 2. Vertical: a swimming pool contractor that merges with a pool filter manufacturer to ensure a constant supply of filters. 3. Horizontal: a publisher of business textbooks merges with a publisher that specializes in legal and political texts. 4. Horizontal: a chain of donut shops merges with a company that operates a chain of shops selling fresh baked cookies and candy in shopping malls. 5. Conglomerate: an insurance company that merges with a magazine publisher. 6. Conglomerate: an auto parts manufacturer merges with a clothing store chain.
Difficulty: 3 Hard
Topic: Mergers and Acquisitions
Learning Objective: 05-04 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
Bloom’s: Analyze
AACSB: Analytic Thinking
337) Franchising is a key component of the U.S. economy. What are the major advantages and disadvantages of franchising?
Answer: Students should be able to identify and discuss several of the following advantages: 1. Management assistance: most franchisors offer franchisees advice and managerial assistance. 2. Personal ownership: the business is still owned by the franchisee. 3. Use of a nationally recognized name: Many franchises have established a national reputation. 4. Financial advice and assistance: Franchisors often provide franchisees with expert financial advice and may even be willing to provide financing to franchisees. 5. Lower failure rate than that of other business ventures. Again, students can select from several disadvantages cited in the text. Among them are: 1. Large start-up costs to obtain the franchise. 2. Sharing profits with the franchisor, or paying a royalty based on sales to the franchisor. 3. Management regulations: franchisees have to follow rules and regulations set by the franchisor that can limit their freedom. Thus, even though the franchisees own their business, they do not have as much control as owners of independent small businesses do. 4. Negative coattail effects: the owners of a successful outlet can be adversely affected by the problems and poor performance of less successful franchisees in the same franchise. 5. Restrictions on selling: many franchisees face restrictions in the reselling of their franchises. 6. Fraudulent franchisors: many franchisors are small, rather obscure companies that prospective franchisees may know little about. There has been an increase in complaints to the Federal Trade Commission about franchisors that delivered little or nothing of what they promised.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Analyze
AACSB: Analytic Thinking
Mini-Case
Genna Raiter’s passion has always been cars, cars, cars! As a teen, she would spend hours with her dad fixing the family car, and he taught her how to change the oil and make minor repairs. While still in high school, Genna got a job at a local garage. After high school graduation, she completed the auto mechanics degree at a local community college and quickly decided she wanted to be her own boss. She quit her job at her first garage, borrowed some money from her dad, and created her own repair shop, the Car Keepers Garage. Genna’s hard work gradually attracted a loyal clientele of satisfied customers. Her success has her thinking about expanding and opening garages in two other locations, but she lacks the financial resources needed for development. Furthermore, the success of her business is forcing Genna to spend more time managing the business and less time doing the actual technical work she still enjoys. She wants to find business partners who can help her with management and provide additional financial resources. She has approached a couple of friends she met in high school: Al Ternator and Lou Banfilter, to see if they would like to join the business.
338) Right now, Car Keepers Garage is operated as a
Answer: C
Explanation: A business that is owned, and usually managed, by one person (such as Genna) is a sole proprietorship.
Difficulty: 3 Hard
Topic: Sole Proprietorship
Learning Objective: 05-01 Compare the advantages and disadvantages of sole proprietorships.
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
339) Genna approached Al Ternator about joining the business as an owner. She offered to provide the technical expertise and deal directly with customers, while Al, who has a degree in finance, takes care of the financial side of running Car Keepers. In addition, Genna wants Al to contribute some much-needed money for expansion. Under Genna’s proposal, she and Al would operate the business together as
Answer: B
Explanation: Since both partners are taking an active role in the business, they would be considered general partners.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
340) Although Lou Banfilter, now a young attorney, is impressed with Car Keepers and believes it could be a good investment, he told Genna that his professional position at a law firm prevents him from taking an active role in the business. He is also concerned about accepting more risk since he and his wife are expecting a child. He mentioned a preference for limited liability. If Lou joined Genna and Al, the three might consider forming a
Answer: A
Explanation: A limited partner invests in the business and shares in the profits, but has limited liability and does not take an active role in the management of the company. This type of arrangement would meet Lou’s goals of investing without incurring unlimited liability.
Difficulty: 3 Hard
Topic: Partnerships
Learning Objective: 05-02 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
341) When Genna confided in Lou and Al that she too was concerned about adding additional risk, Lou suggested that they explore the possibility of a different type of business ownership, a(n) ________, which has very flexible ownership rules and would give them more choices in how the company’s earnings are taxed while still protecting all owners from high levels of risk.
Answer: D
Explanation: Limited liability companies offer the protection of limited liability, but allow the company a great deal of flexibility in how the earnings of the business are taxed. In many cases, the company will choose to have its earnings taxed as if it were a partnership, thus avoiding the problem of double taxation. However, the company can also choose to have its earnings taxed as a corporation if that is more advantageous.
Difficulty: 3 Hard
Topic: Corporations
Learning Objective: 05-03 Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
342) Al also suggested another way Genna could finance her expansion. He described setting up a chain of Car Keepers Garages by selling the rights to use the Car Keepers’ name, business model, garage design, and service ideas to others who would like to own a similar shop. These individuals would pay Car Keepers an initial fee and monthly royalties based on earnings. Al is suggesting that Genna set up a
Answer: B
Explanation: A franchise arrangement exists when someone with an idea for a business (the franchisor) sells the right to use the business name and to sell a product or a service (the franchise) to others (the franchisees) in a given territory. Franchisees usually pay the franchisor an initial fee and royalties. Many women have turned to franchising as a means of financing an expansion of their business.
Difficulty: 3 Hard
Topic: Franchising
Learning Objective: 05-05 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Bloom’s: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Understanding Business, 12e (Nickels)
Chapter 05 How to Form a Business
1) Partnerships are the most common form of business ownership.
2) The three major forms of business ownership in the U.S. are sole proprietorships, partnerships, and corporations.
3) Few people today start their own business.
4) Once a business is established, it’s almost impossible to change from one form of business ownership to another.
5) When two or more people legally agree to become co-owners of a business, the form of business is called a partnership.
6) A legal entity with authority to act and have liability separate from its owners is called a sole proprietorship.
7) Corporations represent 20 percent of all the businesses in the U.S. and earn over 80 percent of the total U.S. business receipts.
8) A comparison of the three major forms of business ownership shows that sole proprietorships are usually the most difficult type of business to establish.
9) The first step in starting a sole proprietorship is to fill out a proprietorship charter application form and file it with the state government.
10) It is usually easy to start and end a sole proprietorship.
11) The profits of a sole proprietorship are taxed as the personal income of the owner.
12) 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.
13) A major advantage of sole proprietorships is that an owner has limited liability for the debts of his or her business.
14) One of the strengths of the sole proprietorship is its ability to sustain rapid growth by raising large amounts of financial resources.
15) The debts of a business operated as a sole proprietorship are considered to be the personal debts of the owner of the business.
16) A drawback of sole proprietorships is that they usually have limited access to additional financial resources.
17) An advantage of forming a sole proprietorship is that it allows the owner to have more time for leisure activities.
18) If a sole proprietorship fails, the owner may lose whatever was invested in the business, and the owner’s personal assets are also at risk.
19) 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.
20) Sole proprietors sometimes 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.
21) Unlike partnerships, if sole proprietorships find themselves in bankruptcy, they don’t need to worry about a court requiring them to sell off personal assets to pay for the debts of the firm.
22) Attracted to the idea of being his own boss, Christian wants to start a new business. He is confident in his abilities, and knows his potential market is strong, so he is not particularly worried about the financial risks. All of these factors suggest that Christian may favor starting his business as a sole proprietorship.
23) Therese is a talented designer who wants to start her own women’s swimwear and beach towel line. But first, she is trying to decide which form of business ownership is right for her. As a young mom who hopes to send her children to college some day, she does not want to jeopardize her savings in any way. In order to overcome these risks, Therese should start her business as a sole proprietorship.
24) Rhonda is convinced she has the best idea for a new business. Unfortunately, her business would require a fairly high initial investment and Rhonda has poor credit and very little personal wealth. She would be unlikely to find success if she organized her business as a sole proprietorship.
25) A general partner takes an active role in the management of the business.
26) All partners in a general partnership have limited liability for the debts of their firm.
27) In a general partnership, all partners share in management of the business and in the liability for the firm’s debts.
28) In a general partnership, all partners are entitled to an equal share of the firm’s profits.
29) Limited partnerships are just like general partnerships, except that they are partners for a limited time period.
30) A limited partner is an owner who assumes no management responsibility and has no liability for losses beyond the amount invested.
31) A limited partnership consists of one or more general partners and one or more limited partners.
32) Although shares of master limited partnerships can be purchased on one of the national stock exchanges, these companies are taxed like partnerships.
33) The Uniform Partnership Act is law in most states, except California, Oregon, and Colorado.
34) 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.
35) According to the Uniform Partnership Act, the three key elements of any general partnership are (1) common ownership, (2) shared profits and losses, and (3) the right to participate in managing the operations of the business.
36) A recent study showed that partnerships are more likely to fail than sole proprietorships.
37) 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.
38) One of the major disadvantages of a partnership is that profits must be divided equally.
39) 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.
40) In order to protect all parties and minimize misunderstandings among partners, all terms of the partnership should be spelled out in writing.
41) One advantage of a partnership is that there is a simple process for partners to terminate their business.
42) Compared to sole proprietorships, an advantage of partnerships is their ability to obtain more financial resources.
43) 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.
44) Compared to sole proprietorships, partnerships offer the advantage of shared management and pooled knowledge.
45) A limited partnership refers to a partnership set up for a temporary purpose, such as a real estate development project.
46) 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.
47) If a partner in a limited partnership dies, the partnership ceases to exist.
48) The authors suggest that potential partners discuss the types of skills that each brings to the business. Partners with complementary skills may enhance the business.
49) One method to avoid conflicts between partners is to solicit the services of a lawyer to create a well-written partnership agreement.
50) Attributes such as trust and integrity are not something you should get overly concerned about when selecting partners. This is a business decision, not a friendly game of golf.
51) 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.
52) For 11 years, Dennis and Tom have owned a car wash business as partners. Now they would like their younger brother Jimmy to join them. Unfortunately, partnership law states that only two partners can participate in a partnership.
53) Janie is a general partner in a local bakery. All of her personal assets are legally protected from the debts of the business.
54) When two of Mercedes’s friends approached her about starting a business, Mercedes’s was sure she did not want to risk any amount beyond her initial investment or be involved with the day-to-day management. However, she was willing to invest in the business. Mercedes’s preferences suggest that she prefers a general partnership form of business ownership.
55) Penny Pebble and Stuart Stone formed a partnership in a landscape business. Under their arrangement, Penny actively manages the company and assumes unlimited liability for its debts. Stuart 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. Penny and Stuart are in a limited partnership.
56) Huang has agreed to become a partner in his cousin’s waste management business. Since he provided 30 percent of the money to start the company and built an air-conditioned garage, he is entitled to 30 percent of any profits the company earns during its first year of operation.
57) 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.
58) Rafael is a limited partner in an online clothing company. As a limited partner, Rafael can be involved with the company for a maximum of five years.
59) James and Reilly were arguing over who was the senior partner and who was the junior partner, even though they started the business at the same time. If you were brought on board as their 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).
60) A conventional corporation is a state-chartered legal entity, with authority to act and have liability separate from its owners.
61) In today’s economy, only large business enterprises should operate as corporations.
62) The owners of a corporation are known as general corporate partners.
63) A corporation can raise financial capital by selling shares of stock to interested investors.
64) Stockholders in a corporation accept unlimited liability for the corporation’s debts.
65) A disadvantage of corporations is that their charters are only valid for 99 years, so corporations are less permanent than other types of businesses.
66) When one of the owners of a corporation dies, the corporation legally ceases to exist.
67) Corporations are easy to start and easy to terminate.
68) A disadvantage of corporations is that they generally require extensive paperwork.
69) 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.
70) Stockholders in a corporation normally exert a significant degree of control over the company’s daily operations.
71) The stockholders in a corporation elect a board of directors to oversee the company’s major policy issues.
72) Stockholders in a corporation have limited liability.
73) Stockholders in a corporation entrust control over the company’s daily operations to managers selected by the board of directors to run the company.
74) One advantage of corporations is that the initial cost of organization is usually lower than for other forms of business ownership.
75) States may levy special taxes on corporations that are not imposed on other businesses.
76) Most states have legal restrictions that prevent individuals from incorporating.
77) One reason individuals incorporate is to obtain the advantage of limited liability.
78) An alien corporation does business abroad but is chartered in the U.S.
79) A domestic corporation does business in the state in which it’s chartered.
80) A foreign corporation is chartered in a country outside the U.S.
81) Delaware and Nevada are popular states in which to seek incorporation because these states’ business-oriented laws make the process easier than it is in other states.
82) A closed corporation is one whose stock is held by a few people and is not available to the general public.
83) A nonprofit corporation does not seek personal profit for its owners.
84) A quasi-public corporation is a corporation chartered by the government as an approved monopoly to perform services to the general public.
85) A multinational corporation is a firm that operates in several countries.
86) To change ownership in a corporation you simply sell your stock to someone else.
87) Stock options are the right to purchase shares of the corporation for a fixed price.
88) An advantage of corporations is their ability to attract good talent by offering stock options and other employee benefits.
89) It is said that corporations have perpetual life.
90) One advantage of an S Corporation is that the profits are distributed to the owners and taxed as each owner’s personal income, thus avoiding the problem of double taxation.
91) By filling out the correct paperwork annually, any corporation can qualify to be classified as an S corporation.
92) A company that loses its status as an S corporation may not reelect this status for at least 5 years.
93) An S corporation has fewer ownership rules than a limited liability company.
94) A limited liability company is similar to an S corporation, but without the special eligibility requirements.
95) Limited liability companies have both flexibility in tax treatment of earnings and limited liability protection for owners.
96) One of the drawbacks of a limited liability company is that most states do not yet recognize this form of ownership.
97) Like stockholders of a C corporation, owners of a limited liability company (LLC) are free to sell their ownership without the approval of other members.
98) The limited liability company requires a minimum of 10 members.
99) The S corporation form of business would be particularly attractive to fast-growing companies that want to attract thousands of new stockholders.
100) The organization structure of a corporation allows for stockholders to exert a significant degree of control over the company’s daily operations.
101) Public utilities, like electricity and water, are examples of quasi-public corporations.
102) In order to establish a C corporation, it is a requirement that investors run the company, whereas in an S corporation, this is not the case.
103) If you want to sell your ownership in a publicly traded corporation, you find someone willing to buy your shares.
104) The stockholders of large, publicly traded corporations have a daily pulse on the operation of the business.
105) If a corporation distributes after-tax profits to its stockholders in the form of dividends, the government considers these distributions as part of each stockholder’s personal income. Stockholders pay taxes on these distributions.
106) If a corporation has after-tax profits of $360,000, and elects to distribute this amount in the form of dividends to its stockholders, these distributions are free and clear of taxes because the corporation paid taxes on this amount prior to distribution.
107) Double taxation means that a corporation pays twice the amount of taxes as a sole proprietorship or partnership.
108) The major differences between an S corporation and a limited liability company are limits on the number of owners and the citizenship status of individuals who are owners.
109) The owners of a limited liability company (LLC) must pay self-employment taxes on any profits they earn, even if they did not obtain a salary from the company.
110) Dr. Limmer, Dr. Lowder, and Dr. Lynch want to incorporate their practice. There is no advantage due to the costs involved.
111) Doughboys is a small chain of cookie dough shops owned and operated by eight partners. With the rise of cookie dough shops around the country, the owners think that their chain has the potential for rapid growth. However, several of the partners are concerned about the growing financial risks that will accompany this growth. One way the partners could deal with this problem would be to incorporate their business.
112) Peter recently invented a new workout program that uses indoor surfboards. His equipment can simulate surfing on waves and is a new favorite core workout in his community. As the founder of a fast growing business, you think his goal of incorporating, “to remain in steadfast control of the firm’s operations for an indefinite number of years,” is good strategy.
113) Motor Masters is a conventional corporation with 516 stockholders. A number of the stockholders are citizens of Canada and others are citizens of Mexico, though most are American. Due to its size and diversity in ownership, you would recommend that Motor Masters change to an S corporation.
114) The owners of Game Guys are looking to become an S corporation. Unfortunately, after speaking with their lawyer, she advised them that they do not meet some of the requirements necessary to qualify as an S corporation. An alternative form of business that would give them similar advantages is a limited liability company.
115) The ownership of Dogs of Denver, a small company that designs and manufactures coats, sweaters, jackets, and rainwear for dogs, wants to organize as an LLC. All the owners are under forty and two are expecting children by the end of the year. This is good strategy because each member can choose to commit to limited or unlimited liability.
116) Two of your friends are horse fanatics. They inherited several acres of land that they turned into a retirement sanctuary for racehorses. Serenity Stables was originally incorporated as a limited liability company. The members are reevaluating this form of ownership. Unlike an S corporation, they now pay self-employment taxes on all company profits—not just on the salaries they pay themselves.
117) After a fruitful first five years, Serenity Stables, LLC (a retirement ranch for racehorses), thinks it may be able to attract donations from animal advocate groups and even the federal government if it becomes a nonprofit corporation. As its business advisor, you explain that as a nonprofit corporation, the owner(s) may earn a salary but the business should not seek after-tax profits.
118) Tee Time Golf Resort has the opportunity to buy 1,000 acres of property adjacent to its award-winning 18-hole golf course. After talking with her banker and her lawyer, the owner is encouraged to begin the paperwork to change from a limited liability company form of business ownership to a corporation. You applaud this strategy because she will eliminate the problem of double taxation.
119) When two firms join together to form one company, it is called a merger.
120) The three major types of mergers are acquisition, joint, and connective.
121) An acquisition is when one company buys the property and obligations of another company.
122) Taking a firm private involves converting a firm from a corporation to a general partnership.
123) If firms wish to gain market share in their current market, they would consider a conglomerate merger.
124) The purpose of a conglomerate merger is to diversify operations and investments.
125) A merger between two businesses in different stages of related businesses is known as a vertical merger.
126) A horizontal merger refers to a merger between two companies that serve entirely different markets.
127) A horizontal merger refers to a merger between two companies in the same industry, and serving the same markets.
128) A leveraged buyout is an attempt by top management to gain control of a company by issuing a large amount of new stock.
129) When a group of investors take a firm private, they purchase all the company’s outstanding stock.
130) In recent years, foreign firms were reluctant to merge with or acquire American corporations.
131) A merger is a mutual agreement where companies join together, whereas an acquisition is when one firm purchases the assets and obligations of another firm.
132) One reason that a firm would choose to merge or acquire another company would be to gain market share.
133) One reason that a firm may choose to merge or acquire another company would be to diversify products or services.
134) The strategy of a leveraged buyout is used when employee talent is at a minimum.
135) Taking a company private means turning a profit-seeking corporation into a nonprofit corporation in order to avoid a hostile takeover.
136) A major objective of a leveraged buyout is to enable investors to gain control of a company by issuing new shares of ownership, thus minimizing the use of debt.
137) Tee Time Golf Club just announced plans to purchase the property and assume the obligations of Chipper’s Golf Resort, one of its major competitors. Tee Time Golf Club’s plans are an example of a merger.
138) Two long-time competitors, Freddie’s Market and Greta’s Groceries, recently issued an announcement stating their decision to merge. The statement claimed that the new company would have more financial resources, which would enable it to expand services and broaden offerings to customers. This proposed merger is an example of a horizontal merger.
139) GloboTech, Inc., a large manufacturer of laptops, is considering a merger with ChipComm, a leading producer of microprocessors and other computer chips. GloboTech believes such a merger would give it a guaranteed source of needed components, and enable it to have better control over quality. If this merger occurs, it would be an example of a horizontal merger.
140) Matthew is leading a group of stockholders who want to take the Cash Cow Corporation private. If Matthew’s group succeeds, Cash Cow’s stock will no longer be available to investors on the open market.
141) Due to several years of poor performance, Stanley’s Metal Manufacturers, Inc., is closing. Through the use of debt financing, Stanley’s workers plan to purchase the company’s stock from current shareholders in order to buy the company, improve performance, and save jobs.
142) A franchise agreement is an arrangement where a franchisor sells the rights to a business name and the right to sell a product or service within a given territory to a franchisee.
143) A franchise may be organized as a sole proprietorship, partnership, or corporation.
144) 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.
145) Franchisors give franchisees the right to use their name and product, with the understanding that franchisees obtain all financing and develop all marketing strategies on their own.
146) The most popular businesses for franchising are restaurants.
147) In a franchise arrangement, ownership remains in the hands of the franchisor.
148) One of the major advantages for the franchisee is instant business name recognition and important management assistance from the franchisor.
149) Franchisees must follow more rules, regulations, and procedures than if they operated independently owned businesses.
150) The coattail effect refers to the burden of corporate rules and regulations on franchisees.
151) The coattail effect refers to inevitable repercussions on your business if a fellow franchisee should fail.
152) One drawback of franchises is that they have a higher failure rate than other types of business ventures.
153) The franchisee pays the franchisor a share of profits or a percentage commission on sales, known as a royalty.
154) Many franchisors have rules that prohibit franchisees from sponsoring their own websites.
155) Because of the growth of minority-owned businesses in the U.S., franchisors are becoming more focused on recruiting minority franchisees.
156) It is impossible to run a franchise completely from home.
157) Franchising is popular in the United States, but legal barriers have limited its popularity in foreign countries.
158) Global franchising is unlikely to experience major growth due to the high costs of operations in global markets.
159) Franchising in global markets has demonstrated that high operating costs are counterbalanced by high profit opportunities.
160) Franchisors sometimes pay reverse royalties to franchisees if it is evident that the franchisor’s Internet sales have negatively impacted the profits of traditional bricks-and-mortar franchisee businesses.
161) In a typical franchise agreement, the franchisor pays the franchisee a fee to manage its company, and the two of them split the profits based on the percentages established in the agreement.
162) Although franchise arrangements are a good source of income for the franchisee, these businesses do not contribute significantly toward job creation.
163) It is correct to say that if a franchisor expects an 8% royalty fee on revenue, the franchisor earns 8 cents on each dollar of revenue the franchisee generates.
164) The financial advantage to the parent company (the franchisor) in a franchise arrangement is the upfront franchise fee and the collection of royalties if franchisees are successful.
165) If a firm is advertising that it is selling franchise opportunities, the prospective franchisee can be assured that the government has performed due diligence on this company, and has deemed it a safe investment.
166) If a franchisee decides he wants out of the business, he is free to close up shop or sell the business, just as if he were a sole proprietor or partnership outside of a franchise arrangement.
167) If an established franchisor agrees to provide you the opportunity to become a franchisee in its franchise system, the franchisor may also be willing to serve as a source of financing for your operation.
168) Ravi wants to be his own boss and run his own business. His friend, Josh, suggested that an inexpensive way to get started is to buy a franchise. Therefore he can limit his risk and he will have the freedom to run it exactly as he wants. After reading this chapter, you concur with this advice.
169) Indira paid a substantial franchise fee to obtain a Precision Printers franchise in Columbus, Ohio. With the franchise fee behind her, Indira can use her creative talents to make her print shop different and more attractive than other Precision Printers stores in the Columbus area.
170) Jaheem owns a Far and Wide Travel Agency franchise. As a franchisee, Jaheem is guaranteed the right to retain all of his franchise’s revenues and profits.
171) Leanne, a franchisee, runs a chain of small restaurants with a well-known name. Due to her hard work and people skills, her locations are doing quite well. She has noticed that several other franchisees in the same franchise system have let their restaurants deteriorate, especially in terms of lack of upgrades. Leanne should be concerned about this trend, since it eventually could affect her own business.
172) Maria is already a successful franchisee with Nite Lite, a chain of “no frills” motels that provide clean rooms and good service at affordable rates. The motel she currently operates is located in Texas, but she is considering an opportunity to open another Nite Lite motel in Canada. Although her costs of operating in a foreign nation may be higher, she has the benefit of an expanding market and less competition.
173) A well-known franchised food chain was brought to its knees when several customers got sick from tainted beef. Although the food chain recovered due to its quick and consistent action, several franchisees sued the parent company for loss of sales. The franchisees experienced the coattail effects of the bad publicity this event received.
174) Tadashi’s uncle passed away and left him a Realty Experts franchise. Tadashi is not a licensed agent or broker, nor does he know the first thing about the real estate business. He plans to sell his Realty Experts franchise to his friend Devonte, who recently got his real estate license. One of the advantages of owning a franchise is that you can decide to sell out to anyone you think is suitable for the business.
175) Your friend Bainbridge called to tell you he attended a pitch for a new franchise in website development. Bainbridge says, “We can get in for a few thousand dollars.” He wants to know if you are ready to invest too. Although both of you lack expertise in graphic design or html programming, this should be a safe investment since it is already advertised as a franchise system. It’s probably too good to pass up.
176) A cooperative is simply another name for a corporation.
177) A cooperative consists of people with similar needs who pool their resources for mutual gain.
178) It is not unusual for members of cooperatives to work for and help manage their cooperative.
179) Farm cooperatives were originally established to help farmers increase their economic power by acting as a group rather than as individuals.
180) The companies Ace Hardware, Blue Diamond, and Sunkist are well-known cooperatives.
181) A disadvantage of farm cooperatives is that they are subject to higher tax rates than corporations.
182) At one time there were many farm cooperatives, but more recently other forms of business ownership have replaced them.
183) Originally, farm cooperatives were formed to provide better prices for farmers. These groups now cooperatively buy farm equipment and other products, and realize economies of scale by banding together for these things.
184) Josie belongs to a food cooperative in her community. As a member, she can expect to have a vote in the election of the cooperative’s board of directors.
185) Harper has always disliked the concept that the customers, managers, and workers of a business are separate individuals with competing goals. She joined with many other people in her community who share this view to become a member, and part owner, of a childcare center. Harper and the other members operate the center for their own benefit, and each is expected to work at the center at least 12 hours each month. The type of organization Harper belongs to is known as a joint venture.
186) The ________ is the most common form of business ownership.
187) A ________ is a form of business that is owned, and usually managed, by one person.
188) ________ comprise about 20% of all businesses but account for about 81% of U.S. business receipts.
189) To many businesspeople, one of the major attractions of a sole proprietorship is
190) The ________ is usually the easiest form of business to start and end.
191) One of the major disadvantages of a sole proprietorship is the
192) Starting a new business as a sole proprietorship
193) In a sole proprietorship, the profits earned by the business are
194) With respect to taxes, the sole proprietorship
195) A significant disadvantage of owning a sole proprietorship is the
196) When a sole proprietor dies
197) Unlimited liability means
198) Any debts or damages incurred by a firm organized as a sole proprietorship are
199) An entrepreneur who wishes to start a business with little delay or hassle, and who wants to be his or her own boss, should organize the business as a
200) Which of the following statements is the most accurate?
201) Although sole proprietors do not pay any special taxes, as the owner of the business you are also an employee of the business, which requires you to
202) Being your own boss means
203) Yoshi operates a shoe store as a sole proprietorship. However, he is in poor health and may be unable to continue running the business. If Yoshi becomes incapacitated, his business
204) Amelia has a lot of business knowledge and is confident in her abilities to open a successful store. She recently opened a bakery as a sole proprietor. She is expecting a high level of profits and is looking forward to
205) Sung owns a dog-walking business that she started in high school. Her first goal was to earn money after school and supplement her allowance. Now that she has finished college and maintains a long client list, she’s planning on running the business full time. She keeps all the profits and has kept things simple by posting fliers on the bulletin boards at local stores. Sung’s business is a(n)
206) Oliver wants to start his own business. He should consider a sole proprietorship if he
207) Chipper is the sole proprietor of a golf shop. Because she is a sole proprietor, any profit Chipper’s business earns is
208) Ramses owns a roofing business. He enjoys being his own boss, but it comes at a price. Often, his days are filled with organizing the activities of the employees and seeking out new customers. He often misses events with friends and family because of the obligations of running his own business. He also knows that he has unlimited personal liability for any of his firm’s debts. Ramses’s business is organized as a(n)
209) Autumn wants to start a business. She has two goals. First, she doesn’t have much money but she’s ready to get business up and running with the least possible hassle and expense. Second, she wants to minimize her personal risk in the event that her company experiences difficulties. If Autumn chooses a sole proprietorship, she would
210) In a partnership, a(n) ________ partner (owner) actively manages the company and has unlimited liability for claims against the firm.
211) A partner (owner) who invests money in a business does not take an active role in managing the operation, and is only subject to losing the funds he/she invested is known as a(n) ________ partner.
212) The limited liability provided to limited partners means that they are not responsible for the debts of the business beyond
213) According to the Uniform Partnership Act, the three key elements of any general partnership are
214) A type of partnership called a ________ acts much like a corporation and is traded on stock exchanges, but it is taxed like a partnership with profits passing through to the owners and taxed as the owner’s personal income.
215) Compared to a sole proprietorship, which of the following is considered an advantage of a general partnership?
216) In a limited liability partnership, each partner’s risk of losing personal assets is
217) Which of the following is an advantage of a partnership?
218) When entering into a new partnership, a good strategy is to
219) One difference between partnerships and sole proprietorships is that partnerships
220) Which of the following statements about partnerships is most accurate?
221) When comparing general partnerships to sole proprietorships, an advantage of partnerships is that they
222) A good reason why partners should spell out the details of their partnership arrangements in writing is
223) A master limited partnership (MLP) is
224) One way to eliminate some of the risk of your partners making costly mistakes that could jeopardize your personal assets is to set up a
225) Finnegan is a limited partner in Gettout & Associates, a local financial consulting company. Heywood U. Gettout is one of the general partners in the company and is needing to temporarily leave the company to attend to some personal matters. Heywood has asked Finnegan to perform his managerial duties while he is gone. As a limited partner, Finnegan
226) Kiersten and her four siblings are starting their own home design business. One of their primary goals is keeping the loving relationship they currently enjoy, so they are following the Model Business Corporation Act recommendations as they write their partnership agreement. Which of the following is an accurate recommendation of the Act?
227) Huong is opening an international food store. Though her products will span the globe, she wants to focus on items from the Middle East. She wants to be the firm’s only general partner, but she is trying to get several friends to participate as limited partners. It’s apparent Huong wants to
228) Mac and Charlie own a car repair shop that they operate as co-owners. Both take an active role in the management of the business, and each accepts unlimited liability. Mac and Charlie operate as a
229) Melanie, Elliot, and Caleb agreed to partner in a small home rehab business. Initially, they were enthusiastic and eager workers. That is until their first project took more work than Melanie initially estimated, Elliot wanted morning meetings and long lunch hours, and Caleb decided to go on vacation even though the home was not complete and ready to sell. As Figure 5.2 indicates,
230) Angelica and Celeste invested all their savings in a small pizzeria they opened outside the University of Missouri. They operated the business as a general partnership. After 11 months, the business went broke and Angelica and Celeste were left with outstanding bills of $43,650, which was more than their initial investment in the company. Angelica and Celeste can
231) Rowan and Vanessa plan to pool their money and talents to form a general partnership and start a music school. One of the first things Rowan and Vanessa should do is
232) Beau has agreed to invest $19,000 in a partnership with his brother and sister-in-law. Not being in the same line of work as them, Beau does not intend to actively work in the partnership. He also does not want to risk any of his own assets other than the $19,000 investment. The partnership has agreed to permit him to share in the profits. As an expert on forms of business ownership, you know that Beau is a ________ in this partnership.
233) Sean is one of several general partners who own Pints and Cans, a small chain of bar and grills located in Illinois and Indiana. Sean is interested in converting the partnership into a master limited partnership. If he convinces other partners to go along with his idea, Pints and Cans will
234) Katie and her siblings created a design company called Homeward Bound LLP. Although key business functions are centralized, each sibling is a licensed architect that designs, builds, and installs residential and commercial buildings for his/her own clients. Unfortunately, a recent design of Katie’s that was ultimately created and installed for one of their clients resulted in water damage to the basement of the client’s new home. The limited liability partnership
235) A(n) ________ is a state-chartered legal entity with authority to act and to have liability separate from its owners.
236) An owner of a corporation is known as a
237) Which of the following statements about the operation of a corporation is correct?
238) The form of business ownership best suited to raising large amounts of money for expansion is the
239) Which of the following is an advantage of the corporate form of business when compared to sole proprietorships and partnerships?
240) Compared to partnerships and sole proprietorships, a major advantage of the conventional (C) corporation as a form of business ownership is that it
241) Which of the following is normally considered a disadvantage of the corporate form of business?
242) What entity elects the board of directors for a corporation?
243) A separation between ownership and management is most likely to occur in a
244) One disadvantage of ________ is the initial cost of formation.
245) The form of business ownership that usually requires the most detailed record keeping is the
246) A major advantage of S corporations is that they
247) One reason many companies do not organize themselves as an S corporation is that this form of business
248) To qualify as an S corporation, a company must
249) The income generated by S corporations
250) ________ are companies that are similar to S corporations but are not restricted with similar eligibility requirements.
251) One disadvantage of a limited liability company is that it
252) One reason limited liability companies have become so popular is that they
253) Earnings of C corporations can be
254) Which of the following is an attractive benefit of a corporation?
255) The reason a professional such as a lawyer or doctor would incorporate his/her business is
256) Which of the following statements about S corporations is most accurate?
257) The organizational structure of a corporation permits
258) Which of the following statements is the most accurate?
259) The S corporation is likely to be less popular in the future because
260) Compared to the C corporation, the limited liability company is an attractive form of business ownership because
261) Double taxation means
262) According to the box, “Kickstarting a Benefit Corporation,” a benefit corporation is
263) Lorenzo and Lila own all of the Double L Corporation’s stock. The stock of this corporation is not sold to the general public. Lorenzo and Lila own a(n)
264) Alani and Jeremy have considered creating their own company but are concerned about the possibility of losing all of their personal assets if the business fails. One way for Alani and Jeremy to avoid this risk would be to organize their firm as a
265) Payton recently purchased 100 shares of stock in Game Guys, Inc. Payton is a(n)________ of this company.
266) Carter is a stockholder in ExtremeTrax, Inc., a C corporation that designs and manufactures amusement park roller coasters. The company recently lost a major court decision and is being forced into bankruptcy. In fact, the damages being awarded are so large that, even if all company assets are sold and the proceeds are used to pay its debts, ExtremeTrax is likely to still owe money to its creditors. If ExtremeTrax goes bankrupt, Carter and the other stockholders will
267) Jose lives in Mexico City and is a Mexican citizen. He has several friends who are American citizens and own shares in an S corporation. Jose would like to invest in this company. Which statement is most accurate?
268) Although it is a small company, Zorn Enterprises owns a large number of inexpensive rental housing units in Texas and Louisiana. Currently, the company is a chartered C corporation, but the owners are interested in switching to be an S corporation. After consulting a lawyer, they learned that Zorn Enterprises does not qualify to be designated as an S corporation. Which of the following characteristics of Zorn Enterprises would prevent it from becoming an S corporation?
269) Mackenzie’s dream is to open a chain of salons. She hopes to attract investors to help finance growth. Having once considered forming a C corporation, Mackenzie wants to have more flexibility about how the new business will be taxed. She also wants to offer investors/owners limited liability. Mackenzie can satisfy her objectives by setting up a(n)
270) Your three friends from Wyoming inherited an old dude ranch. They now plan to turn it into a pasture for retired racehorses. Serenity Stables wants to open its doors by spring of 2020. After going to several small business seminars, your friends are certain they need limited liability. The high-risk, labor-intensive business will require a sizeable investment including an air-conditioned barn, several fenced-in pastures, and loads of animal feed. You explain to them that LLC ownership requires owners to pay self-employment taxes on the entire amount of earnings. You are fairly certain this is one tax liability your friends would like to avoid. You instead recommend
271) Double taxation is experienced by corporations that pay dividends. Which of the following scenarios is an accurate example of double taxation?
272) Joji is a 37-year-old married business owner. He runs a dry cleaning service with three locations in Toledo, Ohio. His personal obligations are the home that he owns with his wife, who works for a large financial consulting firm; the healthcare of his family; and his commitment toward saving for his three children’s college educations. Joji 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. Joji would certainly like to minimize his taxes. Which of the following forms of business ownership would you suggest for him?
273) One reason that companies participate in mergers and acquisitions is
274) A ________ is two firms combining to form one company.
275) A(n) ________ occurs when one company buys the property and obligations of another company.
276) Three types of corporate mergers are
277) A ________ merger unites firms at different stages of related businesses.
278) When two companies in the same industry agree to become one firm, the result is called a
279) When two companies in completely unrelated industries agree to become one firm, the result is called a
280) A conglomerate merger will
281) One result of taking a firm private is
282) An attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing is called a(n)
283) If a group of stockholders or management obtain all the stock of a previously publicly traded firm for themselves, this is referred to as
284) The difference between a merger and an acquisition is
285) When two firms which do not participate in the same industries, for example, a software company and a fast food restaurant company, decide to merge, the result is called a ________ merger.
286) A merger involving a commercial bakery and a grocery retailer would be an example of a ________ merger.
287) A merger involving a software producer and a clothing manufacturer is an example of a ________ merger.
288) In a leveraged buyout, the managers of a firm, its employees, or other investors
289) When investors successfully take a firm private, the company’s stock is
290) Silver Screen Pictures, Inc. recently bought Superstar Entertainment, Inc. for an undisclosed amount of money. It now owns all of Superstar Entertainment’s properties and obligations. This is an example of a(n)
291) Intercontinental Provisions, a specialty grocery store, is considering a conglomerate merger with a company that makes storage solutions. A likely reason is
292) Kooky Cookies Corporation purchased the Crazy Cookie Company. Although this was initially an acquisition, the merging of these two businesses was a ________ merger. Kooky Cookies went on to purchase several baking product companies. Joining forces with some of its suppliers would represent a ________ merger.
293) The strategy of investors who are attempting a leveraged buyout is to
294) Foreign investment in U.S. companies continues to be strong. When Belgian-based In-Bev purchased the largest beer company in the U.S., Anheuser-Busch, this action constituted a(n) ________ with a negotiated selling price of $52 billion.
295) Kevin is a major stockholder in Professional Transmission Services (PTS), a nationwide network of transmission repair shops founded in 1975 by his father. Currently, PTS stock is sold on the open market, but Kevin has talked to several relatives about his desire to get all of the PTS stock back in his family’s hands. Kevin is interested in ________.
296) Hidden Valley Communications, Inc., located in a remote area of Utah, made a special device that was used in LTE phones. After three years of local operations, the company that employed 4,000 people was planning to close its Utah operation and move the assembly offshore. Under the direction of a financial services company that financed the deal, the employees agreed to become owners of the company and continue to operate the business. The business concept that describes this arrangement is
297) A(n) ________ is an arrangement whereby someone with a proven idea for a business sells the rights to use the business model, to sell a product or service to others in a given territory.
298) A(n) ________ is a company that has a proven business model and is willing to sell the rights to use the business model to others so that they can sell the same product or service within a given territory.
299) A person who buys the right to use a business name and sell a product within a given territory is called a
300) A franchise can be formed
301) The most popular type of business for franchising is
302) A ________ is the share of profits or percentage of sales a franchisee pays to a franchisor.
303) Which of the following is an advantage of franchises?
304) One reason franchises have become so popular is that this arrangement provides the franchisee with
305) Global franchising offers
306) Opening and operating a franchise in a different country
307) Franchisors may send reverse royalties to franchisees who
308) ________ is by far the most popular target for American franchisors seeking to establish franchises in other countries.
309) Franchised businesses are successful (both domestically and internationally) because
310) An evaluation of franchising would conclude that this type of arrangement
311) Which of the following statements best summarizes the experience of American franchisors in foreign countries?
312) One important consideration when prospecting for a good franchise business is
313) Which of the following statements about buying a franchise is most accurate?
314) Qiang is ready to become a franchise owner and open one of the 50 Southwest Diners, a very successful fast food chain specializing in dishes from the American Southwest. Which of the following problems is Qiang most likely to encounter if she agrees to become a franchisee?
315) Zach is a franchisee with Digger’s Doggies, a chain of hotdog shops. He was doing well until several other Digger’s Doggies franchisees got in trouble and were forced to close their shops. Soon afterward, Zach’s business declined and was also forced to close. This is an example of
316) The Sandwich Emporium, Inc. sells the rights to use its name and sell its signature sandwiches in a given market area to those willing to pay agreed-upon fees and meet specific contractual terms. The Sandwich Emporium is
317) Midwest Auto Experts, Inc. sells franchises to prospective businesspersons who want to use the Midwest Auto Experts name and offer its products. In a franchise arrangement, Midwest Auto Experts would be the ________, and the buyer of the franchise is the ________.
318) Ivy is investing in a home cleaning franchise called HomeKeepers. At her first interview with the franchisor’s selling agent, she was told the parent company expects 5% royalties. What are royalties?
319) Enok, a prospective franchise owner, is looking to keep his monthly costs as low as possible. The franchisor he is checking out is advertising that royalty payments of 8% of sales could be as high as $300,000 per month. The franchisor is claiming that a franchisee can expect monthly sales to be as high as
320) Lucy is preparing to invest in a new online franchise, Notable Moments. The franchisor provides the exclusive software and training for designing invitations and cards for special occasions such as weddings, graduations, and birth announcements. In return, the franchisee is required to pay a monthly fee to the franchisor. Lucy will use the Notable Moments software to create her own special designs that she will ultimately feature on her website. Order turnaround time must be fast. She can only take on as many clients as she can make good on delivery. An advantage of Lucy’s online franchise is that she
321) Declan plans to open up three Pizza Pals franchises in the greater Phoenix area. He tells you that he plans to negotiate with the franchisor to get rid of the giant Preston the Pizza that sits on the roof of all Pizza Pal restaurants. Declan is likely to learn that
322) A ________ is an organization that is owned and controlled by the people who use it—producers, consumers, and workers with similar needs pool their resources for mutual gain.
323) In rural areas electrical power is often sold by ________ that take advantage of the government’s policy to sell them electricity at wholesale rates.
324) Some ________ ask members/customers to work at the organization for a number of hours a month as part of their duties.
325) The purpose of a farm cooperative is to
326) In a cooperative, members/customers
327) People who form cooperatives
328) A distinguishing feature of a cooperative is that it
329) Which of the following statements about farm cooperatives is most accurate?
330) Which of the following people would be most interested in participating in a business organized as a cooperative?
331) Several small vineyard owners in the Napa Valley region of California banded together to market their grapes and wine in an attempt to get better prices. Over the years they expanded the organization to include other services such as buying and selling farm supplies and equipment and providing financial and technical services. The arrangement established by these vineyard owners is an example of a
332) Although most new firms start out as sole proprietorships, few large firms are organized this way. Why is the sole proprietorship such a popular form of ownership for new firms? What features of the sole proprietorship make it unattractive to growing firms?
333) What is the difference between a general partner and a limited partner? Give an example of a situation in which a person would want to be a limited partner.
334) What is a C corporation? What are the major advantages and disadvantages of this form of business ownership?
335) How does a limited liability company (LLC) compare to an S corporation? What are the major advantages and disadvantages of an LLC?
336) Describe and differentiate between the three types of corporate mergers. Give an example of each type.
337) Franchising is a key component of the U.S. economy. What are the major advantages and disadvantages of franchising?
Mini-Case
Genna Raiter’s passion has always been cars, cars, cars! As a teen, she would spend hours with her dad fixing the family car, and he taught her how to change the oil and make minor repairs. While still in high school, Genna got a job at a local garage. After high school graduation, she completed the auto mechanics degree at a local community college and quickly decided she wanted to be her own boss. She quit her job at her first garage, borrowed some money from her dad, and created her own repair shop, the Car Keepers Garage. Genna’s hard work gradually attracted a loyal clientele of satisfied customers. Her success has her thinking about expanding and opening garages in two other locations, but she lacks the financial resources needed for development. Furthermore, the success of her business is forcing Genna to spend more time managing the business and less time doing the actual technical work she still enjoys. She wants to find business partners who can help her with management and provide additional financial resources. She has approached a couple of friends she met in high school: Al Ternator and Lou Banfilter, to see if they would like to join the business.
338) Right now, Car Keepers Garage is operated as a
339) Genna approached Al Ternator about joining the business as an owner. She offered to provide the technical expertise and deal directly with customers, while Al, who has a degree in finance, takes care of the financial side of running Car Keepers. In addition, Genna wants Al to contribute some much-needed money for expansion. Under Genna’s proposal, she and Al would operate the business together as
340) Although Lou Banfilter, now a young attorney, is impressed with Car Keepers and believes it could be a good investment, he told Genna that his professional position at a law firm prevents him from taking an active role in the business. He is also concerned about accepting more risk since he and his wife are expecting a child. He mentioned a preference for limited liability. If Lou joined Genna and Al, the three might consider forming a
341) When Genna confided in Lou and Al that she too was concerned about adding additional risk, Lou suggested that they explore the possibility of a different type of business ownership, a(n) ________, which has very flexible ownership rules and would give them more choices in how the company’s earnings are taxed while still protecting all owners from high levels of risk.
342) Al also suggested another way Genna could finance her expansion. He described setting up a chain of Car Keepers Garages by selling the rights to use the Car Keepers’ name, business model, garage design, and service ideas to others who would like to own a similar shop. These individuals would pay Car Keepers an initial fee and monthly royalties based on earnings. Al is suggesting that Genna set up a
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
