Chapter 05 – How to Form a Business
5-61
192. The __________ is the most common form of business ownership.
A. partnership
B. corporation
C. joint venture
D. sole proprietorship
193. A ___________ is a form of business that is owned, and usually managed, by one
person.
A. closed corporation
B. subchapter S corporation
C. sole proprietorship
D. limited partnership
194. ____________ comprise about 20% of all businesses but account for about 81% of
U.S. business receipts.
A. Corporations
B. Partnerships
C. Sole proprietorships
D. Limited liability companies
195.
Chapter 05 – How to Form a Business
5-62
To many businesspeople, one of the major attractions of a sole proprietorship is:
A. The ability to obtain additional financial resources.
B. The protection of limited liability.
C. An unlimited lifespan.
D. The chance to be their own boss.
196. The __________ is usually the easiest form of business to start and end.
A. sole proprietorship
B. limited partnership
C. corporation
D. cooperative
197. One of the major disadvantages of a sole proprietorship is the:
A. Possibility of disagreements between owners.
B. Unlimited liability the owner has for the debts of the firm.
C. Fact that any income earned by this type of business is taxed twice.
D. High cost of starting or ending the company.
198.
Chapter 05 – How to Form a Business
5-63
Starting a new business as a sole proprietorship:
A. Requires retaining the services of an attorney.
B. Is simple, but the proprietorship fee is very expensive in some states.
C. Is usually simpler and less expensive than starting other forms of ownership.
D. Is very similar to starting a business as a corporation.
199. In a sole proprietorship, the profits earned by the business are:
A. Taxed as income for the business, but is exempt from the personal income tax paid by
the owner.
B. Taxed at the lowest corporate rate.
C. The property of the owner, except for taxes owed to the government.
D. Tax-free if the appropriate exemption is filed with the local government.
200. With respect to taxes, the sole proprietorship:
A. Pays taxes on the profits of the business at the same rate that corporations pay taxes.
B. Pays taxes on the profits of the business, at the owner’s personal tax rate.
C. Pays taxes only if there are no expenses associated with the business.
D. Is permitted to determine its own tax rate and schedule of payments.
201.
Chapter 05 – How to Form a Business
5-64
A significant disadvantage of owning a sole proprietorship is the:
A. Possibility of limited liability.
B. Heavy tax liability that must be assumed.
C. Overwhelming time commitment often required of the owner.
D. Lack of incentives to motivate the owner.
202. When a sole proprietor dies:
A. The sole proprietor’s heirs have the option of taking over the business.
B. The business is sold to a larger corporation.
C. The company continues to function as it always has.
D. The company always closes down.
203. Unlimited liability means:
A. When you own your own business you are responsible for all the business debts.
B. You are only liable for the money you invest in the business.
C. As a franchisee your franchisor is responsible for the debts of the franchise.
D. You are liable for whatever advertising promises your firm makes.
Feedback: 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.
204.
Chapter 05 – How to Form a Business
5-65
Any debts or damages incurred by a firm organized as a sole proprietorship are:
A. The responsibility of the owner.
B. Limited to the amount the owner has invested in the firm.
C. Paid for out of a reserve contingency fund that sole proprietors are required by law to
set up.
D. Normally covered by liability insurance.
Feedback: 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
205. 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:
A. Sole proprietorship.
B. Cooperative.
C. C corporation.
D. General partnership.
Feedback: Two advantages of sole proprietorships are ease of starting (and ending) and being
your own boss.
206.
Chapter 05 – How to Form a Business
5-66
Which of the following statements is the most accurate? Sole proprietorships:
A. Are well suited for people who want to own a business and share in its profits without
taking an active role in management.
B. Are taxed at the owner’s personal tax rate.
C. Is the least risky form of business ownership.
D. Must receive a state charter before they can legally conduct business.
Feedback: 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.
207. 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:
A. Pay income tax only one time each year.
B. Pay self-employment taxes.
C. Pay for the right to get an employee identification number.
D. File an income tax return for the business.
Feedback: Sole proprietors pay self-employment taxes such as Social Security and Medicare.
208.
Chapter 05 – How to Form a Business
5-67
Being your own boss means:
A. Reducing your working hours.
B. Having the freedom to set your own working hours and taking lots of vacations,
particularly when just beginning the business.
C. Accepting accountability for the mistakes of the business.
D. Having limited financial resources to throw into the business.
Feedback: When you are your own boss, you must accept all mistakes as your mistakes.
209. Joe Jackson operates a sole proprietorship, but he is in poor health and may be unable
to continue running the business. If Joe becomes incapacitated, his business:
A. Automatically continues under new management as a sole proprietorship.
B. Automatically converts into a public corporation with stock sold to interested investors.
C. Ceases to exist unless sold or taken over by Joe’s heirs.
D. Becomes the property of the most senior employee who wishes to continue operating
the firm.
Feedback: 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.
210.
Chapter 05 – How to Form a Business
5-68
Maria has a lot of self-confidence and business knowledge. She recently opened a bakery
as a sole proprietor. She is expecting a high level of profits and is looking forward to:
A. The lower corporate tax rate paid by sole proprietorships.
B. Keeping all of the money she earns except for the taxes she is required to pay.
C. Keeping all of the money she earns since she does not have to pay taxes as a sole
proprietor.
D. Easily raising additional large sums of money from the capital markets since she is a
sole proprietor.
Feedback: 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.
211. Cali owns Dog Trotters, a dog-walking business that she started to earn money after
school and supplement her allowance. She planned to keep all the profits, and kept things
simple, by putting a flier on the bulletin board at the local grocery store announcing that
she was available to provide this service. Cali’s business is a:
A. Sole proprietorship.
B. Franchise.
C. S-corporation.
D. Partnership.
Feedback: Cali’s simple form of business ownership is a sole proprietorship. She, alone, keeps
the profits from her service.
212.
Chapter 05 – How to Form a Business
5-69
Nick wants to start his own business. Nick should consider a sole proprietorship if he:
A. Expects rapid growth and want to be able to raise a large sum of money.
B. Wants to make it easy to attract qualified employees.
C. Wants to be his own boss and can accept unlimited liability.
D. Wants to minimize the financial risk he must accept as the owner of a business.
Feedback: 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.
213. Javier is the sole proprietor of a golf shop. Because he is a sole proprietor, any profit
Javier’s business earns is:
A. Totally tax-free.
B. Taxed only as Javier’s personal income.
C. Taxed twice, once as business income, then again as Javier’s personal income.
D. Taxed only if and when it is distributed to investors.
Feedback: A tax advantage of sole proprietorships is that their earnings are only taxed once,
as personal income to the owner.
214.
Chapter 05 – How to Form a Business
5-70
Selma owns a roofing business. She enjoys being her own boss, but her satisfaction comes
at a price. Her days are filled with organizing the activities of her employees and soliciting
new customers. She often misses activities with friends and family because of the
obligations of running her own business. She also knows that she has unlimited personal
liability for any of her firm’s debts. Selma’s business is organized as a(n):
A. Joint venture.
B. C corporation.
C. S corporation.
D. Sole proprietorship.
Feedback: A key advantage of sole proprietors is that the owner is his or her own boss, and
can run the business the way they like. 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.
215.
Chapter 05 – How to Form a Business
5-71
Halle wants to start a business. She has two goals. First, given her limited personal wealth
and eagerness to get started, she wants to get her 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 Halle chooses a sole proprietorship, she
would:
A. Achieve both goals since this form of ownership is both the easiest to form and the
least risky.
B. Meet her first goal since sole proprietorships are easy and inexpensive to form.
However, she would expose herself to personal risk because owners of sole
proprietorships have unlimited liability.
C. Not achieve either goal since proprietorships are both costly to set up and subject to
unlimited liability.
D. Achieve her second goal, since the owners of sole proprietorships are legally protected
from losing more than the amount they invest in their company. However, she would find
that the start-up costs would be higher than if she had incorporated her business.
Feedback: 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.
216. In a partnership, a(n) __________ partner (owner) actively manages the company and
has unlimited liability for claims against the firm.
A. unlimited
B. limited
C. general
D. associate
217.
Chapter 05 – How to Form a Business
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.
A. Implied partner.
B. Limited partner.
C. Partial partner.
D. Corporate partner.
218. The limited liability provided to limited partners means that they are not responsible for
the debts of the business beyond:
A. The firm’s total assets.
B. The amount they have invested in the company.
C. The percentage of profits they are entitled to earn.
D. Their total personal assets.
219. According to the Uniform Partnership Act, the three key elements of any general
partnership are:
A. A board of directors, a written partnership agreement, and a well-defined product or
service.
B. Two owners, an adequate financial base, and a written statement describing the manner
in which profits and losses will be divided.
C. Common ownership, shared profits and losses, and right to participate in management.
D. Common stock, a board of directors, and a statement of limited liability.
5-73
220.
Chapter 05 – How to Form a Business
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.
A. limited partnership
B. combined general partnership
C. cooperative partnership
D. master limited partnership
221. Compared to a sole proprietorship, which of the following is considered an advantage
of a general partnership?
A. Ability to pool financial resources
B. Unlimited liability for all owners
C. Division of profits among owners
D. Ease and flexibility in transferring shares of ownership to others
222. In a limited liability partnership, each partner’s risk of losing personal assets is:
A. Unlimited.
B. Limited to losses that result from his/her own acts and omissions and the acts and
omissions of those who work under his/her supervision.
C. Determined entirely by the maximum loss provision established by the articles of co-
partnership.
D. Nonexistent.
5-75
223.
Chapter 05 – How to Form a Business
Which of the following is an advantage of a partnership?
A. Ease of starting and ending the business
B. Unlimited liability
C. Shared management and pooled skills
D. Little time commitment
224. When entering into a new partnership, a good strategy is to:
A. Avoid putting their agreement in writing since this would limit the flexibility of the
partnership.
B. Put the partnership agreement in writing.
C. Plan to incorporate as soon as possible.
D. Agree to put the first year’s profits back into the partnership.
225. One difference between partnerships and sole proprietorships is that partnerships:
A. Take less work to form.
B. Are managed by an elected board of directors.
C. Have the advantage of limited liability.
D. Have a greater chance of long term survival due to the accountability of each partner to
the other.
Feedback: The text cites a study that indicates that partnerships are four times more likely to
succeed than sole proprietorships. 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.
5-77
226.
Chapter 05 – How to Form a Business
5-78
Which of the following statements about partnerships is most accurate?
A. A partnership is a corporation with fewer than 100 owners.
B. A major advantage of a partnership is that it offers all owners limited liability.
C. A major drawback of a partnership is that it is difficult to terminate.
D. Partnerships are taxed at the lowest corporate tax rate.
Feedback: 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.
227. When comparing general partnerships to sole proprietorships, an advantage of
partnerships is that they:
A. Are less risky, because each partner is responsible for only a specified fraction of the
firm’s debts.
B. Are easier to terminate.
C. Cost less to organize.
D. Give the firm a stronger financial foundation.
Feedback: When a partnership is formed, two or more people can pool their financial
resources to provide the business with a stronger financial base.
228.
Chapter 05 – How to Form a Business
5-79
A good reason why partners should spell-out the details of their partnership arrangements
in writing is:
A. The partnership is not a legally recognized business unless they do so.
B. A written agreement will help reduce misunderstandings and disagreements among the
partners.
C. Putting the agreement in writing will limit the liability of each partner to a specified
level.
D. Doing so will make it easier to convert the business to a corporation at a later date.
Feedback: 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.
229. A master limited partnership (MLP) is:
A. Not traded on the stock exchanges.
B. Pays corporate income taxes.
C. Taxed like a partnership.
D. The corporate form of choice for small groups of individuals.
Feedback: 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.
230.
Chapter 05 – How to Form a Business
Which of the following is not a disclosure that should be part of a partnership agreement?
A. The way profits will be divided among partners.
B. The list of personal assets of each partner.
C. The specific responsibilities of each partner.
D. The salaries and drawing accounts of each partner.
Feedback: The Model Business Corporation Act recommends several things be written in a
partnership agreement, including the way profits will be divided; the responsibilities and
duties of each partner, and the salaries and drawing accounts of each partner. It does not ask
for a list of personal assets of each partner.
231. 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:
A. Master Limited Partnership.
B. Sole proprietorship.
C. Limited amount of time each can actively spend in the business.
D. Limited Liability Partnership.
Feedback: 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.
232.