The Legal Environment of Business, 8e (Kubasek)
Chapter 16 Law and Business Associations – I
1) Which of the following is an incorrect statement regarding factors influencing a business
manager’s choice of organizational form?
A) Provided that the business manager chooses correctly, there is an ideal form of business
venture.
B) Each organizational form has its advantages.
C) Each organizational form has its disadvantages.
D) The entrepreneur, with the counsel of an attorney and an accountant or a tax expert, should
carefully weigh the advantages and disadvantages of different organizational forms for the type
of business the entrepreneur wishes to engage in.
2) Which of the following is not a principal factor influencing a business manager’s choice of
organizational form?
A) tax ramifications
B) control considerations
C) potential liability of owner(s)
D) zoning and variances
3) Which of the following is not a principal factor influencing the choice of business
organizational form?
A) eminent domain
B) ease and expense of formation and operations
C) transferability of ownership interests
D) projected life of the organization
4) Which of the following is one of the principal factors influencing the choice of organizational
form?
A) number of competitors in the relevant industry
B) transferability of ownership interests
C) innovativeness of the proposed product or service
D) employee attrition rate
5) Which of the following is a characteristic of a sole proprietorship?
A) Ownership interests are nontransferable.
B) Profits are taxed as income to the organization and again as income to owners.
C) The lifetime of the organization is unlimited.
D) Liability of the owners is limited to loss of capital contribution.
6) Which of the following is a similarity between a public corporation and a limited liability
company?
A) Both have a limitation on the number of owners.
B) Both allow owners control over daily management decisions.
C) Both limit liability of owners to loss of capital contribution.
D) Both have their profits taxed as income to corporation and again as income to owners when
distributed as dividends.
7) Which of the following is a difference between a Subchapter S corporation and a limited
liability company?
A) A Subchapter S corporation has no limitation on number of members, whereas a limited
liability company limits ownership interests to no more than 35 shareholders.
B) In a Subchapter S corporation, each owner has unlimited personal liability for debts of the
organization, whereas in a limited liability company, liability of the owners is limited to loss of
capital contribution.
C) In a Subchapter S corporation, profits are taxed to owners as ordinary income and losses are
deducted by them, whereas in a limited liability company, profits are taxed as income to
corporation and again as income to owners when distributed as dividends.
D) A Subchapter S corporation does not allow the owners control over daily management
decisions, whereas a limited liability company does.
8) Which of the following is a characteristic of a public corporation?
A) The lifetime of the organization is limited to the lifetime of the decision-making committee or
the Chief Executive Officer, whichever is longer.
B) Profits are taxed as income to corporation and again as income to owners when distributed as
dividends.
C) Ownership interests are generally limited to no more than 35 shareholders.
D) Owners can exert control over daily management decisions.
9) Which of the following is a characteristic of a limited partnership?
A) The personal liability of each partner is unlimited.
B) The lifetime of the organization is unlimited.
C) Limited partners have control over daily management decisions.
D) The liability of a limited partner is limited to his or her capital contribution.
10) Solutions, Inc., a consultancy firm in the United States, has thirty-five shareholders. It
decides to raise capital by issuing shares to more people, thereby increasing the number of
shareholders. However, Solutions finds that the law prohibits it from doing so. Based on this
information, Solutions is a ________.
A) public corporation
B) sole proprietorship
C) limited liability company
D) Subchapter S corporation
11) There is no ideal form for a business venture.
12) Principle factors influencing the choice of business organizational form include tax
ramifications.
13) Principle factors influencing the choice of business organizational form include whether the
firm will likely choose to exercise its power of condemnation.
14) In a Subchapter S corporation, the owner has complete control over daily management
decisions.
15) In a limited partnership, ownership interests are limited to no more than 35 shareholders.
16) In a limited liability company, profits are taxed as income to corporation and again as
income to owners when distributed as dividends.
17) Discuss the principal factors influencing a business manager’s choice of organizational form.
18) A ________ is the easiest and least expensive way to create a business organization.
A) sole proprietorship
B) general partnership
C) public corporation
D) limited liability company
19) A business owned by one person, who has complete control over management and profits, is
known as a ________.
A) public corporation
B) general partnership
C) sole proprietorship
D) limited liability company
20) Which of the following is true of a sole proprietorship in the United States?
A) It is the most expensive way to create a business organization.
B) The daily management is controlled by the owner.
C) The transfer of ownership is a complex process.
D) The debt of the business is shared by all stakeholders.
21) Which of the following is an advantage of sole proprietorship?
A) The owner’s personal liability for all assets is the least.
B) The proprietor does not have to worry about day-to-day management decisions.
C) The proprietorship is subject to less government regulation at all levels.
D) The lifetime of such an organization is unlimited.
22) Which of the following is a disadvantage of the sole proprietorship form of business
organization?
A) The proprietor is personally liable for all losses incurred by the proprietorship.
B) The proprietor does not get to retain all profits of the business.
C) The proprietorship suffers double taxation.
D) Establishing the proprietorship requires more forms and other legal formalities than any other
form of organization.
23) A voluntary association of two or more persons formed to carry on a business as co-owners
for profit is known as a ________.
A) Subchapter S corporation
B) partnership
C) public corporation
D) limited liability company
24) Which of the following is true of the Revised Uniform Partnership Act?
A) It does not provide protection for the limited liability partner.
B) It has been adopted by all states of the United States.
C) It stipulates that no two partners can have equal share of the profits.
D) It states that a partnership need not dissolve just because a partner leaves.
25) A partnership in which management responsibilities and profits are divided usually equally
among the partners, and all partners have unlimited personal liability for the partnership’s debts
is called a(n) ________ partnership.
A) nominal
B) active
C) equal
D) general
26) Which of the following holds true for a general partnership where there is no partnership
agreement varying the usual provisions of partnership law?
A) Partners divide profits equally.
B) Partners divide profits in proportion to the work they do.
C) Partners divide profits in proportion to the capital they contribute.
D) Partners enjoy limited liability for the partnership’s debts.
27) Which of the following holds true for a general partnership if the partners have not entered
into a written agreement?
A) Partners are required to contribute equal capital to the partnership and bear equal
responsibilities.
B) Individual partners are exempted from federal income taxes because those taxes are paid by
the partnership.
C) Partners are required to file a partnership return with the Internal Revenue Service that shows
the partnership’s profit or loss.
D) The partnership is double-taxed because both the partnership and the individual partners pay
taxes.
28) Adrianna and Trevor have formed a partnership without a partnership agreement. Trevor
contributes twenty percent of the partnership capital and does sixty percent of the work. If the
partnership earns a profit of $10,000 after its first year, how much of the profit can Adrianna
legally claim?
A) $8,000
B) $2,000
C) $5,000
D) $4,000
29) Which of the following factors is the basis on which the Revised Uniform Partnership Act
(RUPA) determines that a partnership exists?
A) the nationality of the partners
B) age of the partners since the lifetime of the partnership will be determined by their age
C) a joint ownership of the business
D) number of partners since profits will need to be divided accordingly
30) Which of the following items is included in the partnership agreement?
A) age of each partner
B) duties of each partner
C) citizenship of each partner
D) net worth of each partner
31) Which of the following is true of the relationship between partners?
A) In most general partnerships, each partner has two votes in decisions pertaining to the
management of the business.
B) Each partner should have a fiduciary relationship with the partnership.
C) Decisions pertaining to merging with another partnership should never be decided by a
unanimous vote.
D) The duty of loyalty and a duty of good faith and fair dealings by partners are established by
the Uniform Partnership Act.
32) Which of the following is a reason for a partnership to “die”?
A) One of the partners starts a new business within the same company.
B) The partners decide to relocate the headquarters of the partnership.
C) One of the partners attempts to buy the share of the others.
D) The partnership is merged with another business.
33) On its “deathbed,” a partnership goes through a process called ________.
A) dissolution and winding-up
B) bankruptcy
C) realignment and merger
D) foreclosure
34) Which of the following is prevented by dissolution after partners have initiated termination
proceedings?
A) finalizing the accounting records
B) paying the outstanding debts of the partnership
C) transacting any new business
D) dividing any profits between the partners
35) Which section of the general partnership agreement form contains miscellaneous
information, such as arbitration and accounting year?
A) Article I
B) Article II
C) Article III
D) Article IV
36) Which section of the general partnership agreement form contains information about a
partner’s right to demand property?
A) Article I
B) Article II
C) Article III
D) Article IV
37) Which of the following is a duty among partners?
A) duty of obedience
B) judiciary duty
C) duty of devotion
D) auxiliary duty
38) ________ refers to the process of completing all unfinished transactions, paying off
outstanding debts, distributing assets, and dividing remaining profits when a partnership is on its
“deathbed.”
A) Winding-up
B) Liquidation
C) Litigation
D) Rolling-over
39) Which of the following is an advantage of a general partnership?
A) It has an unlimited lifetime.
B) Taxes are levied on a partnership and not on its owners.
C) Expenses required for creating a partnership are low.
D) Ownership interests are easily transferable.
40) Which of the following is a disadvantage of a general partnership?
A) The control of a partnership is skewed in favor of the partner who invests most capital.
B) Partnerships do not have perpetual existence.
C) Both a partnership and its individual partners are taxed separately.
D) The partnership agreement does not allow partners to leave the business.
41) A(n) ________ partnership has one general partner, who is responsible for managing the
business, and one or more partners, who invest in the partnership but do not participate in its
management and whose liability is restricted to the amount of capital they contribute.
A) active
B) limited
C) unlimited
D) nominal
42) Shelly wishes to invest in Mark and Rhonda’s partnership, but she has no desire to take part
in its management. Furthermore, she prefers to limit her liability to her investment. Which of the
following organizational forms would accommodate Shelly’s wishes?
A) general partnership with Shelly as a limited partner
B) general partnership with Shelly as a general partner
C) limited partnership with Shelly as a general partner
D) limited partnership with Shelly as a limited partner
43) The primary law governing limited partnerships is the ________.
A) Revised Uniform Partnership Act (RUPA)
B) Uniform Partnership Act (UPA)
C) Revised Uniform Limited Partnership Act (RULPA)
D) Revised Limited Partnership Act (RLPA)
44) Which of the following statements is true under the 2001 revision to the Revised Uniform
Limited Partnership Act (RULPA)?
A) A limited partner cannot be held liable for the partnership debts unless he or she participates
in the management of the limited partnership.
B) A limited partner can be held liable for the partnership debts under any circumstance.
C) A limited partner can be held liable for the partnership debts if he or she receives profits.
D) A limited partner cannot be held liable for the partnership debts even if he or she participates
in the management and control of the limited partnership.
45) Which of the following is a similarity between general partnerships and limited partnerships?
A) They are created by a contractual agreement between two or more persons.
B) Losses are divided equally among the partners.
C) The personal liability of all partners is unlimited.
D) All partners have an equal role in the management of the organization.
46) A sole proprietor generally pays only personal income taxes on profits.
47) A public corporation is the easiest and least expensive way to create a business organization.
48) The Revised Uniform Partnership Act states that a partnership will be dissolved if a partner
leaves.
49) The Revised Uniform Partnership Act provides protection for general partners, but not for
limited liability partners.
50) In a general partnership, liability of partners is limited to loss of capital contribution.
51) In the absence of a written agreement in a partnership, partners are required to share profits
equally.
52) The net worth of each partner is one of the items included in a general partnership
agreement.
53) A partnership does not have perpetual existence and can “die” when the partnership
agreement expires.
54) When winding-up is complete, a partnership’s legal existence is terminated.
55) A limited liability limited partnership differs from a limited partnership in that liability is the
same for a general partner as for a limited partner.
56) List the advantages and disadvantages of a sole proprietorship over other forms of business
organization.