Chapter 1
Discussion Questions
1-1. What advantages does a sole proprietorship offer? What is a major drawback of this
type of organization?
A sole proprietorship offers the advantage of simplicity of decision making and low
organizational and operating costs. A major drawback is that there is unlimited liability to
the owner.
1-2. What form of partnership allows some of the investors to limit their liability? Explain
briefly.
A limited partnership allows some of the partners to limit their liability. Under this
arrangement, one or more partners are designated general partners and have unlimited
liability for the debts of the firm; other partners are designated limited partners and are
liable only for their initial contribution. The limited partners are normally prohibited from
being active in the management of the firm.
1-3. In a corporation, what group has the ultimate responsibility for protecting and
managing the stockholders interests?
The board of directors.
1-4. What document is necessary to form a corporation?
The articles of incorporation.
1-5. What issue does agency theory examine? Why is it important in a public corporation
rather than in a private corporation?
Agency theory examines the relationship between the owners of the firm and the managers
of the firm. In privately owned firms, management and the owners are usually the same
people. Management operates the firm to satisfy its own goals, needs, financial
requirements and the like. As a company moves from private to public ownership,
management now represents all owners. This places management in the agency position of
making decisions in the best interest of all shareholders.
1-6. Why are institutional investors important in todays business world?
