Entrepreneurship and Effective Small Business Management, 11e (Scarborough)
Chapter 5 Choosing a Form of Ownership
1) The key to choosing the “right” form of ownership is:
A) knowing the cost factor in time and money.
B) understanding how each form affects both business and personal circumstances.
C) having an experienced attorney and accountant to advise you in the choice.
D) the fact you cannot change the form of ownership once your company is established.
Topic: Introduction
AACSB: Analytic Skills
2) When choosing a form of ownership, the entrepreneur should realize that:
A) it is difficult if not impossible to change forms of ownership once the company is established.
B) the expense of changing forms of ownership makes it prohibitively expensive to change.
C) the most common form of ownership is the partnership and is the least expensive to establish.
D) he/she will most likely change the form of ownership as the company grows in size and
revenues.
Topic: Introduction
AACSB: Analytic Skills
3) The most popular form of business ownership is the:
A) sole proprietorship.
B) partnership.
C) corporation.
D) S-corporation.
Topic: Sole Proprietorship
AACSB: Analytic Skills
4) Juan is starting a software writing company. He is the owner and has only 3 employees. He
wants a simple inexpensive form of ownership that leaves him in control and that he can quickly
dissolve if he decides to change to another business. His best choice of form of ownership would
be:
A) S-corporation.
B) partnership.
C) corporation.
D) sole proprietorship.
Topic: Sole Proprietorship
AACSB: Reflective Thinking
1
5) Sole proprietorships characteristically are:
A) fairly complex to create.
B) subject to special legal restrictions.
C) expensive to create.
D) easy to discontinue.
Topic: Sole Proprietorship: Easy to Discontinue
AACSB: Analytic Skills
6) The most critical disadvantage of the sole proprietorship is:
A) unlimited personal liability.
B) limited access to capital.
C) lack of continuity.
D) limited skills and capacities of the owner.
Topic: Sole Proprietorship: Unlimited Personal Liability
AACSB: Analytic Skills
7) Which form of ownership generally has the least ability to accumulate capital?
A) Partnership
B) Sole proprietorship
C) Corporation
D) S-corporation
Topic: Sole Proprietorship: Limited Access to Capital
AACSB: Analytic Skills
8) While a sole proprietorship gives the owner maximum flexibility in running the business, it
also:
A) makes the company a prime target for an acquisition or merger.
B) creates a sense of isolation.
C) makes it difficult to hire management talent to help grow the business.
D) makes it difficult to sell.
Topic: Sole Proprietorship: Feelings of Isolation
AACSB: Analytic Skills
2
9) Common ownership interest in a business, sharing profits (or losses) of a business, and the
right to participate in managing the operations of the business are characteristics of a(n):
A) corporation.
B) sole proprietorship.
C) partnership.
D) S-corporation.
Topic: Partnership
AACSB: Analytic Skills
10) If a partnership is formed without an agreement, the partnership is automatically subject to
the:
A) Certification of Incorporation laws.
B) Uniform Partnership Act.
C) Limited Liability Company Act.
D) Revised Uniform Limited Partnership Act.
Topic: Partnership
AACSB: Analytic Skills
11) Probably the most important feature of a partnership agreement is:
A) that it identifies the name of the partnership.
B) that it states the purpose and location of the business.
C) that it determines how the partnership will pay taxes and fees.
D) that it resolves potential sources of conflict.
Topic: Partnership
AACSB: Analytic Skills
12) Which of the following is true about the content of a standard partnership agreement?
A) It does not specify how profits and losses will be distributed.
B) It includes the Certificate of Incorporation.
C) It specifies how the partnership may be dissolved and assets divided.
D) While it specifies the location of the business and its purpose, it does not name the partners or
their legal addresses in order to maintain privacy for the partners.
Topic: Partnership
AACSB: Analytic Skills
3
13) A partnership agreement sets how the partners will be compensated. Normally:
A) partners are not entitled to salaries or wages, but are compensated by a share of the profits of
the business.
B) the general partner’s salary is set at 2 times the salaries of the limited partners.
C) both general and limited partners are permitted salaries, but all silent or dormant partners are
compensated only by sharing in the profits.
D) while the agreement establishes payout schedules, it does not spell out what constitutes profit.
Topic: Partnership
AACSB: Analytic Skills
14) The three key elements of any partnership are:
A) common ownership in the business, sharing the business’ profits or losses, and the right to
participate in managing the business.
B) equal ownership in the business, sharing its profits and losses, and the right to participate in
managing the business.
C) equal ownership in the business, sharing its profits and losses, and the right to limited liability
for all partners.
D) common ownership in the business, sharing its profits and losses, and the right to limited
liability for all partners.
Topic: Uniform Partnership Act
AACSB: Analytic Skills
15) The Uniform Partnership Act outlines a number of general obligations that partners have
such as the obligation to:
A) give other partners complete information about all business affairs.
B) share in the management and operation of the business.
C) be compensated for personal expenses incurred.
D) have access to the business’s books and records.
Topic: Uniform Partnership Act
AACSB: Analytic Skills
16) All partnerships must have:
A) at least three limited partners.
B) no dormant partners.
C) at least one general partner.
D) at least one silent or money partner.
Topic: Partnership: Ability to Attract Limited Partners
AACSB: Analytic Skills
4
17) In her partnership, Ana has unlimited liability for the partnership’s debts. She would be the
________ partner.
A) limited
B) dormant
C) nominal
D) general
Topic: Partnership: Ability to Attract Limited Partners
AACSB: Reflective Thinking
18) Partnerships have a number of advantages over other forms of ownership, such as:
A) a larger pool of capital and little government regulation.
B) very easy liquidation of owners’ investment.
C) limited liability for all partners.
D) they may be easily formed by an individual.
Topic: Partnership: Advantages of the Partnership
AACSB: Analytic Skills
19) A partnership is:
A) taxed like a corporation.
B) not subject to the double taxation of some other forms of business.
C) taxed at the lowest rate for an individual.
D) taxed under capital gains laws as all profits are considered to come from appreciated assets.
Topic: Partnership: Taxation
AACSB: Analytic Skills
20) Antonio is a limited partner and is neither active nor generally openly associated with the
firm. He is the ________ partner.
A) limited
B) secret
C) honorary
D) dormant
Topic: Partnership: Limited Partners
AACSB: Reflective Thinking
5
21) A significant disadvantage of a partnership is:
A) the unlimited personal liability for all partners.
B) the inability to attract either additional capital or new partners due to the complexity of
rewriting the agreement.
C) the difficulty of disposing a partnership interest without dissolving the partnership.
D) the regulatory complexity under which a partnership must be formed and operated.
Topic: Partnership: Difficulty in Disposing of Partnership Interest
AACSB: Analytic Skills
22) Like a sole proprietorship, a partnership suffers from the disadvantage of:
A) poor capital accumulation.
B) limited liability for all owners.
C) double taxation of profits.
D) the complexity of regulations under which it must operate.
Topic: Partnership: Capital Accumulation
AACSB: Analytic Skills
23) In a partnership, each partner acts as a(n) ________ for the business.
A) agent
B) manager
C) supporter
D) guarantor
Topic: Partnership
AACSB: Analytic Skills
24) A limited partnership is a modification of a(n) ________ form of ownership.
A) sole proprietorship
B) general partnership
C) corporation
D) S-corporation
Topic: Limited Partnerships
AACSB: Analytic Skills
6
25) In a limited partnership, the limited partners are treated like ________ by the law.
A) investors
B) general partners
C) sole proprietors
D) honorary partners
Topic: Limited Partnerships
AACSB: Analytic Skills
26) In a limited partnership, limited partners are treated as:
A) sole proprietors.
B) investors.
C) stakeholders.
D) directors.
Topic: Limited Partnerships
AACSB: Analytic Skills
27) The ________ is the most complex form of ownership and is a separate legal entity in the
eyes of the law.
A) sole proprietorship
B) partnership
C) corporation
D) joint venture
Topic: The Corporation
AACSB: Analytic Skills
28) The ________ is a separate legal entity apart from its owners and may engage in business,
make contracts, sue and be sued, and pay taxes.
A) sole proprietorship
B) corporation
C) partnership
D) joint venture
Topic: The Corporation
AACSB: Analytic Skills
7
29) A corporation receives its authority to operate from:
A) the federal government.
B) the state.
C) the board of certification.
D) the stockholders.
Topic: The Corporation
AACSB: Analytic Skills
30) A corporation doing business in the state in which it is incorporated is considered to be a(n)
________ corporation.
A) alien
B) domestic
C) foreign
D) local
Topic: The Corporation
AACSB: Analytic Skills
31) The “Das Spelunker” corporation, formed in Germany and conducting business in the United
States, is considered to be a(n) ________ corporation.
A) alien
B) domestic
C) foreign
D) local
Topic: The Corporation
AACSB: Reflective Thinking
32) Acme Corporation is chartered in Delaware, but its primary area of operation is in South
Carolina. In South Carolina, Acme would be considered a(n) ________ corporation.
A) alien
B) domestic
C) foreign
D) local
Topic: The Corporation
AACSB: Reflective Thinking
8
33) Which of the following generally is not required by a Certificate of Incorporation?
A) The names and the addresses of the incorporators
B) A statement of the corporation’s purpose
C) A statement of how stock proceeds will be used
D) The corporation’s bylaws
Topic: The Corporation: Requirements for Incorporation
AACSB: Analytic Skills
34) The primary reason entrepreneurs choose to incorporate is because of:
A) the corporation’s ability to attract capital.
B) the need to attract top quality management talent to grow the business.
C) the lower tax rates inherent in the corporate form of ownership.
D) the limited liability of stockholders.
Topic: The Corporation: Advantages of the Corporation
AACSB: Analytic Skills
35) The form of ownership with the greatest ability to accumulate capital is the:
A) sole proprietorship.
B) partnership.
C) joint venture.
D) corporation.
Topic: Advantages of the Corporation: Ability to Attract Capital
AACSB: Analytic Skills
36) The corporate form of ownership has a significant advantage in that:
A) it is easy to transfer ownership.
B) it has a lower tax rate than either partnerships or sole proprietorships.
C) there is little cost to its formation.
D) there is little regulatory oversight by the government.
Topic: Advantages of the Corporation: Transferable Ownership
AACSB: Analytic Skills
9
37) Which of the following is a disadvantage of the corporation form of ownership?
A) An inability to accumulate capital
B) The unlimited liability to the members of the board
C) Double taxation on profits and individuals
D) The lack of continuity
Topic: Disadvantages of the Corporation: Double Taxation
AACSB: Analytic Skills
38) Carlos founded the “Taco Factory” 20 years ago as a family-oriented restaurant business.
Over the years as he grew the business, he incorporated and sold stock. Recently the
stockholders voted to seek liquor licenses and sell beer and hard liquor in the restaurants. Carlos
opposed this, citing the history of the restaurant’s “family” environment, but was voted down.
Carlos experienced which drawback of the corporate form of ownership?
A) The inability to accumulate capital
B) The potential for diminished managerial incentives
C) Legal requirements and red tape
D) The potential loss of control
Topic: Disadvantages of the Corporation: Potential Loss of Control by the Founders
AACSB: Reflective Thinking
39) This form of ownership is the same as a corporation in terms of legal characteristics even
though Congress is considering legislation that would further simplify its formation and running.
Its distinction from a corporation is made for federal income tax purposes only.
A) S-corporation
B) Master limited partnership
C) Sole proprietorship
D) Limited liability company
Topic: The S-Corporation
AACSB: Reflective Thinking
40) Jeff is forming a company. If he chooses a(n) ________ form of ownership, he can have no
more than 100 stockholders and must have only one class of stock.
A) partnership
B) corporation
C) S-corporation
D) master limited partnership
Topic: The S-Corporation
AACSB: Reflective Thinking
10