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Indicate whether the statement is true or false.
1. The board of directors is elected by the stockholders of a corporation.
a. True
b. False
2. An advisory board functions like a board of directors does, except that the members are compensated for their services
and the company must have Directors and Officers Liability insurance.
a. True
b. False
3. For the best success, strategic alliance partners should sign contracts with stated expectations and an “easy out” clause.
a. True
b. False
4. Typically strategic alliances are harder to set up than to maintain.
a. True
b. False
5. The liability of owners is greater with a sole proprietorship than with a general partnership.
a. True
b. False
6. A limited partnership must have at least two general partners and one or more limited partners.
a. True
b. False
7. The sole proprietorship is a business owned by two or more people but operated by only one person.
a. True
b. False
8. The concept of balance on the management team means that the entrepreneur should not be wrapped up too much in
one area, such as sales or production, but be well rounded.
a. True
b. False
9. A nonprofit corporation can be for civic, educational, charitable, or religious purposes and must pass the organizational
test of not making a profit.
a. True
b. False
10. A partnership reports the income it earns to the Internal Revenue Service, but the partnership itself does not pay any
taxes.
a. True
b. False
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11. An ownership interest does not automatically confer a right to act for or to share in the management of a corporation.
a. True
b. False
12. By utilizing the experience of a board of directors, the chief executive of a small corporation may have to relinquish
active control of its operations.
a. True
b. False
13. Incorporation will not protect a firm’s owners from liability if it is used to perpetrate a fraud, skirt a law, or commit
some wrongful act.
a. True
b. False
14. S corporations can have nonresident alien stockholders but no more than 50 stockholders.
a. True
b. False
15. The LLC differs from the C corporation in that the LLC avoids financial complications from double taxation.
a. True
b. False
16. Sometimes small business board members are given company stock in lieu of compensation.
a. True
b. False
17. Partners must contribute capital or assets to form a partnership.
a. True
b. False
18. There are no limits on the owner’s personal liability in a sole proprietorship.
a. True
b. False
19. In the term “B corporation,” the B stands for “business.”
a. True
b. False
20. A management team is often stronger than an individual entrepreneur because it provides a diversity of skills and
assurance of continuity.
a. True
b. False
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21. A partnership agreement states explicitly the rights and duties of partners with each party assuming joint and several
liability.
a. True
b. False
22. Partners always share profits and losses equally.
a. True
b. False
23. Creating a partnership allows a business to pool the managerial talents and capital of those individuals joining together
as partners.
a. True
b. False
24. A professional corporation shields owners from liability of other individuals in certain professional practices.
a. True
b. False
25. The management team of a small business should focus on competent insiders as opposed to outside specialists.
a. True
b. False
26. Sole proprietors often benefit from fringe benefits such as tax-free insurance plans.
a. True
b. False
27. Effective leadership is more important for prospective managerial personnel than for investors.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
28. Unlimited liability for business debts is imposed on
a. shareholders in a C corporation. b. shareholders in an S corporation.
c. sole proprietors. d. limited partners.
29. Hannah makes delicious baked goods but has no retail space. She has contracted with a local grocer to sell her wares
in the grocery store. This arrangement is known as a(n):
a. professional company. b. joint venture.
c. strategic alliance. d. partnership.
30. Larry Knave, MD, is an owner in a professional corporation. If Dr. Knave is sued for malpractice, what is the liability
of the rest of the owners?
a. They are protected from liability for his actions. b. They
are responsible for his actions.
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c. The professional corporation is liable for his actions. d.
No one is responsible for Dr. Knave’s actions.
31. A basic legal principle involving stockholders is that:
a. an ownership interest in a corporation does not confer a legal
right to manage the firm. b. the board of directors cannot elect the principal owner as
president.
c. all dividends are nontaxable. d. stockholders cannot buy
new stock until it is offered for public sale.
32. Evan has received permission from his state to form a corporation for his startup, expecting his liability would be
limited to the amount of his investment. But his bank asked him to assume personal liability before it would grant him a
business loan. Why would the bank make this demand?
a. Evan did not invest enough into the business. b. Evan is
the only stockholder.
c. Evan has more assets than the business. d. Evan’s business
has no credit history.
33. What form of corporate structure is used by a company that equally concerns itself with making money and doing
good in the world?
a. limited partnership b. B corporation
c. nonprofit corporation d. S corporation
34. Frank would like to avoid personal financial loss if his business idea does not work. Which form of ownership would
you suggest?
a. sole proprietorship b. partnership
c. professional corporation d. corporation
35. To be eligible to be an S corporation, a firm must:
a. have more than 75 stockholders. b. have no nonresident
alien stockholders.
c. have two or more classes of stock outstanding. d. be
international in scope.
36. A corporate charter should be:
a. very detailed. b. prepared by the founder.
c. broad in the statement of the firm’s power. d. lengthy and precise.
37. Which organizational form would be best if the new company owners intend to provide extensive fringe benefits for
owners or employees that would not be treated as taxable income to employees?
a. sole proprietorship b. partnership
c. C corporation d. limited liability company
38. An owner in a professional corporation is shielded from:
a. their own liability. b. the liability of other owners.
c. both their own liability and the liability of others. d. none of the above.
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39. Any person capable of ____ may legally become a business partner.
a. assenting to liability b. contracting
c. contributing capital d. having a claim on assets
40. The limited liability company form of organization
a. avoids the double taxation of C corporations. b. affords less
protection from liability than partnerships.
c. is a poor choice for new businesses. d. can offer stock
incentives to employees.
41. The strategic alliance between The Center for Systems Management and Technovative Marketing is an example of
how:
a. success can be obtained when a large and a small firm combine
technological expertise. b. difficulties of two cultures can be overcome when a common
goal is desired.
c. an alliance was formed due to a third party bringing two companies
together. d. the flexibility of a small company can be combined with the
financial backing of a larger firm.
42. Which organizational type results in the business owner having unlimited liability?
a. sole proprietorship b. LLC
c. limited partnership d. corporation
43. A typical common stockholder of a corporation:
a. has the right to act for the firm. b. has the right to
receive declared dividends.
c. can always buy new stock in proportion to stock already
owned. d. can fire employees of the corporation.
44. Linda has assembled a list of potential directors for her board. Whom should she not include?
a. her attorney b. an owner of a small non-competing company
c. her college professor d. an executive at a large non-competing company
45. Which group best defines a partnership?
a. A business owned and operated by one person who hires part time
employees b. A voluntary association of two persons to have a business for
profit
c. The governing body for a corporation d. A group of three
persons in which each person has limited personal liability
46. A strategic alliance is:
a. an organizational relationship that links two separate businesses. b.
an unimportant organizational form in today’s business environment.
c. an attempt to duplicate efforts between two firms. d. a
strategy that, as a result of its unwieldy nature, is falling from practice.
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47. To maintain status as a corporation, the corporation must:
a. reapply for a charter annually. b. submit its bylaws to the
secretary of the state of incorporation every year.
c. hold annual meetings of both the shareholders and the board of
directors. d. properly declare annual dividends.
48. Lothian has asked five of his friends to serve on the board of directors of his new corporation. Why is this not a good
idea?
a. Friends are too dispassionate about the operations of the
corporation. b. Friends are unlikely to disagree with the owner on matters
brought before the board.
c. Only stockholders can elect the board of directors so it is illegal for
the owner to invite friends. d. Friends will find out too much about Lothian’s personal
business.
49. Upon the death of the majority stockholder in a corporation, direct control may pass to:
a. an heir’s dependents. b. an executor.
c. the founder of the firm. d. employees as directed by an employee stock ownership
plan.
50. Upton was surprised to find his partner had signed an agreement to sell product to a customer at below cost. He tried
to cancel the contract but found out that:
a. partners have legal power of attorney to do as they please. b. each
partner is in essence a sole proprietor.
c. partners are seldom trustworthy. d. any partner can legally bind the
company without the consent of any other partner.
51. One benefit of an S corporation is that it allows shareholders to receive dividends without:
a. paying taxes. b. penalties and interest.
c. double taxation. d. partnership taxation.
52. Which legal form allows owners to contribute no capital but still play a part in managing the business and share in its
profits?
a. S corporation b. C corporation
c. partnership d. sole proprietorship
53. For a small firm, which step will increase the chance for success of a strategic alliance?
a. Be protective of any proprietary materials shared with the other company.
b. Discuss the proposed alliance in enough detail that limited adjustments are
needed after beginning the alliance.
c. Make sure the alliance is clearly a “win–win” opportunity. d. All of
these steps will increase success.
54. Glenda, an employee of a corporation, caused a traffic accident while on company business. Who will pay for the
damages?
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a. the stockholders b. the board of directors
c. the founder d. the corporation
55. Trevor is in his early 60s but still wants to “strike out on his own” by starting a new business. One roadblock he may
face is:
a. resistance from creditors to lend money for the enterprise. b.
resistance from his heirs about the distribution of assets at his death.
c. resistance from customers who fear he may become ill and unable to
fulfill their orders. d. resistance from the federal government regarding his tax
identification number.
56. The two dimensions of management control of a small corporation usually involves which individuals?
a. stockholders owning the majority of the voting common stock
b. corporate officers in conducting daily operations
c. both stockholders and corporate officers d. neither the
stockholders nor the corporate officers
57. Max chose to operate his production studio as a sole proprietorship even though his attorney cautioned that he was:
a. reducing its overall profit potential. b. increasing his taxable
income.
c. exposing himself to unlimited personal liability. d.
violating an existing partnership agreement.
58. Sam does not want to share the fruits of his labor with anyone. It is important to him that he have total control over
his new business. Which form of ownership would you recommend for Sam?
a. Partnership b. Sole proprietorship
c. Corporation d. Limited liability partnership
59. Zeno, Zella, and Zorro wish to form a partnership. Zeno is putting up 60% of the capital; Zella is putting up 40%, and
Zorro is putting in no capital but will manage the business. In the absence of a provision in the partnership agreement,
how will the liability and profits be distributed?
a. According to the input of capital b. According to the amount of work each
does in the business
c. Equally d. According to the laws of the state where the partnership is
formed
60. Jeanne, a Canadian citizen, would like to invest in Ingrid’s startup. If Ingrid organizes her business as a(n)
________________________, Jeanne is prohibited from investing.
a. sole proprietorship b. partnership
c. S corporation d. limited liability company
61. A corporate charter should:
a. be detailed. b. be in accord with state law.
c. include bylaws. d. indicate profit potential.
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62. Fiction County Sheltered Workshop is a 501(c)(3) corporation. Day Services, a C corporation operating in the same
county, has offered to buy FCSW. If this transaction occurs, what happens to the money Day Services will pay for
FCSW?
a. The money will go to another nonprofit corporation. b. The
money will be distributed to the founders of FCSW.
c. The money will be distributed to the clients of FCSW. d. The
money will go to the federal government.
63. An entrepreneur can best build social capital by:
a. joining several social networking sites. b. building
contacts through community organizations.
c. letting others know when the company has done something well.
d. using reciprocation.
64. A corporation’s board of directors:
a. is the governing body for corporate activity. b. directly
manages the corporation.
c. determines the taxability of dividends. d. usually designs the
organizational structure of the firm.
65. The key to strong management in a new firm is:
a. balance, with each member having competence in at least one
area. b. financial competence of the chief executive.
c. a strong marketing manager who understands financial
statements. d. close friendship among all members of the team.
66. Reciprocation is:
a. responding to competitor’s marketing efforts. b. a sense of
obligation to repay what has been done for you.
c. not important when building social capital. d. only important once you
have established your business.
67. Millie has a sole proprietorship that is her only source of income. What legal action should she take to prevent the
business from being ruined if she becomes incapacitated?
a. Give someone who is competent power of attorney to continue the
business. b. State in her will what she would like done with the company.
c. Find a partner and change the legal organization of the company.
d. Tell her heirs to sell as she can’t prevent ruin with a sole
proprietorship.
68. Ralph formed a corporation as a fund manager. He accepted money from his customers, promising to invest it and
build cash value for them. Instead, he kept the money for himself to enjoy a lavish lifestyle. The court removed liability
protection from his corporate entity because the incorporation had been used to perpetuate fraud. This is an example of:
a. piercing the corporate veil. b. unlimited liability.
c. reciprocation. d. a preemptive right.
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69. Emile has very little money with which to start his business so he wants to keep the cost of forming his company as
low as possible. Which form of ownership would you recommend for Emile?
a. sole proprietorship b. partnership
c. C corporation d. S corporation
70. Jane and Randy have a partnership with their company of JR Enterprises. Which statements reflect how the
partnership pays taxes?
a. JR Enterprises does not pay any taxes. b. JR Enterprises pays
taxes only as a partnership.
c. Jane and Randy each pay taxes on the total income. d. Jane
and Randy do not pay taxes since they are married.
71. Startup owners may increase their chances for success by seeking _____ over a management team with family and
friends.
a. a good CPA b. an outstanding law firm
c. members with a balance of expertise d. a business consultant team
72. An advisory board, as compared to a board of directors,
a. may be perceived as less of a threat to an owner than a board of
directors. b. is always compensated, unlike persons serving on a board of
directors.
c. have increased legal liability, requiring the company to increase their
insurance levels. d. have greater levels of decision making, requiring them to work
more cooperatively.
73. Abby, Adam, and Arnold are partners. They have planned to continue the partnership even after the death of any one
partner. To this end, the partners have:
a. stipulated in their wills that their share of the partnership is bequeathed to
the other two partners. b. purchased life insurance policies naming the other two partners as
beneficiaries.
c. created trust funds that can be used to pay off the heirs of the deceased
partner. d. secretly signed documents to be opened only after the death that the
deceased partner relinquishes all claims to the partnership.
74. Stockholders have limited liability unless they:
a. are active in the management of the corporation. b.
personally endorse company notes.
c. own preferred stock. d. convert their shares to
partnership status.
75. For a corporate charter to be obtained,
a. one or more persons must apply to the secretary of state for
permission to incorporate. b. the owner(s) must agree to be interviewed by a state
department official.
c. the owner(s) must negotiate an incorporation fee. d. the
partners involved must outline a division of assets.
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76. As she considered becoming a partner in a new business venture, Valerie asked her potential partner about a(n)
___________ in the event that the partnership did not work out as expected.
a. liquidation plan b. equity split
c. exit strategy d. asset distribution plan
77. Vicenzo is the sole owner and manager of a startup company. As the business grows, he finds it more difficult to
fulfill the needs of all the management positions. Although he is the creative genius behind the company, he lacks
experience in other areas. At this point, Vicenzo should:
a. seek the advice of an investment banker. b. hire a
management team with expertise in complementary areas.
c. encourage his advisors to take an active role in managing the
company. d. form an alliance with another startup company.
78. Dylan has purchased stock in a new corporation. As proof of ownership, Dylan will receive:
a. a dividend b. a stock certificate.
c. a corporate charter. d. a pre-emptive right.
79. The right to buy new shares of stock in proportion to stock already owned is called a:
a. stock right. b. stock option.
c. Section 1244 right. d. preemptive right.
80. If partners cannot resolve disputes between themselves they may be wise to hire a(n):
a. business mediator. b. arbitrator.
c. business judge. d. business attorney.
81. After working together for a few months, disputes begin to arise between two of the young company’s leaders. Their
differences seem to be irreconcilable. The owner’s best action is to:
a. let one or both of the individuals go. b. call in an arbitrator.
c. sell the business. d. form a strategic alliance with a larger company.
82. Lauren, a partner in Jales & Jales Bonding Company, manages its day-to-day operations. She is considered to be a
_____ partner.
a. directing b. general
c. limited d. operating
83. Becky wants to organize her startup as a regular corporation. One of the first steps Becky should take is:
a. hire the officers (president, treasurer, etc.) of her company. b.
file her corporate charter with the secretary of state
c. apply for permission to incorporate in her state. d. obtain
financing for her venture.
84. In a limited partnership, which partner remains bound by all debts of the business?
a. limited partner b. special partner
c. partner with the greatest capital investment d. general partner
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85. Large manufacturers have been known to form strategic alliances with small manufacturers in order to benefit from
the smaller firms’:
a. financial resources. b. operational expertise.
c. research. d. product development efforts.
86. A risk for a small firm creating a strategic alliance with a larger company is:
a. not being able to keep up with the fast speed of a large company.
b. not having enough creative talent to join forces effectively.
c. being squeezed financially. d. being too rigid for a large
company’s standards.
87. Ownership in a corporation:
a. is difficult to transfer. b. is more easily transferable than
ownership in other forms of organization.
c. is transferred in much the same way as stock in a partnership. d.
noticeably affects the operation of the business.
88. Ingrid has asked 110 of her closest friends to invest in her company, promising them protection from personal
liability. Which form of ownership would you recommend Ingrid use?
a. professional corporation b. nonprofit corporation
c. S corporation d. limited liability company
89. Because the corporation is a legal entity, one of its responsibilities is to:
a. have its accounting records audited. b. sell stock.
c. pay dividends. d. file annual tax returns.
90. Harvey would like to support his friend’s new business financially but also wants to protect his assets in case the
business fails. Which form of ownership would you recommend?
a. sole proprietorship b. partnership
c. limited partnership d. 501(c)(3) corporation
91. A corporation:
a. is chartered under state laws. b. is chartered under
federal laws.
c. remains in existence only as long as its owners are alive.
d. shifts liability of its debts to its owners.
92. What legal form has the smallest percentage of new businesses?
a. sole proprietorship b. partnership
c. C corporation d. S corporation
93. The legal document that spells out the partners’ rights and duties is called the
a. articles of incorporation. b. partnership agreement.
c. partnership by-laws. d. SS-4 form.
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94. The compensation paid to board members:
a. varies from no pay to $10,000 per meeting. b. may
include a percentage of the profits.
c. is typically the primary motivation for someone agreeing to be a
member. d. typically includes Directors and Officers Liability
Insurance.
95. As it relates to new businesses, one function of a social network is to:
a. promote the enterprise during conversations with potential rivals. b.
provide a pool of candidates for leadership positions.
c. assure a steady flow of applicants for production positions. d. connect
the enterprise to a web of contacts that provides access to a wide range of resources.
96. Collin’s Classic for Children with Cancer is a 501(c)3 nonprofit corporation that sells shirts. The organization will be
taxed as a ____________.
a. partnership b. C corporation
c. S corporation d. It is not taxed.
97. Robbie’s financial advisor referred a customer to Robbie’s new business. Under the concept of ___________, Robbie
is now obligated to return the favor.
a. reciprocation b. social capital
c. social networking d. unlimited liability
98. Cameron is creating the document that specifies the size of the board, the duties of the directors, voting rights,
etc. This document is known as:
a. the corporate bylaws. b. the partnership agreement.
c. the employment contract. d. the stock certificate.
99. Among the advantages of hiring family for leadership positions in a new company is the fact that:
a. federal wage and hour laws do not apply to family members.
b. the owner does not have to provide fringe benefits for them.
c. they will often work for less compensation than non-family
candidates. d. they share liability in the event of a business failure.
100. A key characteristic of a partnership is that each partner
a. must contribute capital to the business. b. shares in company assets upon
the dissolution of the partnership.
c. is capable of legally contracting. d. must manage the business.
101. Which entity is liable for a corporation’s debts?
a. stockholders b. board of directors
c. the corporation itself d. the corporation’s president
102. A significant difference between a board of directors and an advisory board is:
a. the advisory board has unlimited liability for the actions of the
corporation. b. the advisory board is made up only of insiders.