Essentials of Entrepreneurship & Small Business Mgmt., 7e (Scarborough)
Chapter 5 Forms of Business Ownership
1) The key to choosing the right form of ownership is:
A) envisioning where your business will be in 10 years.
B) understanding the characteristics of each form and knowing how they affect your business
and personal circumstances.
C) forming either an S corporation or a limited liability company since they are the only forms
that offer owners liability protection.
D) irrelevant since choosing a form of ownership is merely a technicality and has little impact on
the business and its owner(s).
2) Which of the following issues would influence an entrepreneur’s choice of a form of business
ownership?
A) Tax considerations
B) Management succession plans
C) Liability exposure
D) All of the above
3) The most common form of business ownership that is also the simplest to create is the:
A) sole proprietorship.
B) partnership.
C) corporation.
D) S corporation.
4) Marco is opening a new computer repair shop. He is owner and sole employee. He has paid
the appropriate fees and licensing costs and begun his business. This is an example of a(n):
A) S corporation.
B) partnership.
C) corporation.
D) sole proprietorship.
5) The most critical disadvantage of the sole proprietorship is:
A) the owner’s unlimited personal liability.
B) limited access to capital.
C) lack of continuity.
D) limited skills and abilities of the owner.
6) Which form of ownership generally has the least ability to accumulate capital?
A) Partnership
B) Sole proprietorship
C) Corporation
D) S corporation
7) A partnership agreement defines 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 two 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.
8) Probably the most important reason to have a partnership agreement is that:
A) it identifies the name of the partnership and protects that name from infringement by others.
B) it states the location and the purpose of the business.
C) it determines how the partnership and the partners will pay taxes.
D) it resolves potential sources of conflict that, if not addressed in advance, could later result in
partnership battles and dissolution of an otherwise successful business.
9) Which of the following issues would a typical partnership agreement address?
A) The contributions of each partner to the business
B) How the partnership profits (or losses) will be distributed
C) How a partner can sell her ownership in the business
D) All of the above
10) All of the following are advantages of a partnership except:
A) partnerships are relatively easy and inexpensive to establish.
B) partnerships avoid double taxation since the partnership itself is not subject to federal
taxation.
C) partnerships have the greatest ability to accumulate capital of all of the forms of ownership.
D) partnerships offer the ability to combine the management and business skills of two or more
people in a complementary and powerful fashion.
11) In a partnership, the ________ partner(s) has (have) unlimited liability for the partnership’s
debts.
A) limited
B) dormant
C) nominal
D) general
12) In a general partnership:
A) each partner is held responsible for an agreement/decision made by any one of the partners.
B) partners can be held responsible only for decisions they make personally.
C) no partner can be held legally responsible for decisions since the partnership itself is a legal
entity.
D) no decision is binding unless all partners agree to it in writing.
13) Which of the following is required to form a partnership?
A) A general partner
B) A limited partner
C) A secret partner
D) A silent partner
14) A special type of limited partnership in which all partners who, in many states must be
considered to be professionals, are limited partners.
A) Limited liability partnership (LLP)
B) Master limited partnership (MLP)
C) General partnership
D) Limited partnership
15) Which of the following is not true of a limited liability partnership?
A) All partners are limited partners.
B) Most states restrict this form of ownership to certain types of professions such as attorneys,
physicians, dentists, accountants, etc.
C) Although LLPs have many of the characteristics of partnerships, they are taxed as a
corporation.
D) It must involve a general partner, a limited partner, a silent partner, and a dormant partner.
16) A ________ partner is a person who makes financial investments in a partnership, does not
take an active role in managing the business, and whose liability for the partnerships’ debts is
limited to the amount they have invested.
A) limited
B) master
C) dormant
D) silent
17) A ________ partnership is composed of at least one general partner and at lease one limited
partner.
A) general
B) limited
C) silent
D) passive
18) 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
19) A special type of partnership in which all partners, who in many states must be professionals,
are limited partners is called:
A) general partnership
B) limited partnership
C) silent partnership
D) limited liability partnership.
20) The “Das Spelunker” corporation, formed in Germany and conducting business in the U.S.,
is considered to be a(n) ________ corporation.
A) alien
B) domestic
C) foreign
D) distant
21) Which of the following is true regarding the corporate form of ownership?
A) Generally has the greatest ability to accumulate capital
B) Most complex form of ownership
C) Separate legal entity in the eyes of the law
D) All of the above
22) A corporation receives its charter from:
A) the federal government.
B) the state.
C) the board of directors.
D) the stockholders.
23) 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
24) Which of the following statement(s) is/are true?
A) Closely held corporations are owned by only a few shareholders, often family members.
B) Most closely held corporations require shareholders interested in selling their stock to offer it
first to the corporation. This is known as the right of first refusal.
C) Shares of stock the corporation itself owns are called treasury stock.
D) All of the above
25) Which of the following is not an advantage of the corporate form of ownership?
A) Limited liability for the owners
B) It is the easiest and least expensive form of ownership to create.
C) Easy transfer of ownership
D) Perpetual life
26) 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
D) The lack of continuity
27) In the ________ form of ownership, the business itself pays income taxes.
A) proprietorship
B) partnership
C) corporation
D) All of the above
28) Carlos founded the “Taco Factory” 20 years ago as a family-oriented restaurant. Over the
years as they grew the business, he incorporated and sold stock to outside investors. Recently the
stockholders voted to seek liquor licenses and to 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 has 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
29) A disadvantage of the corporate form of ownership is when profits are taxed at the corporate
rate and at the individual rate and this is referred to as:
A) double taxation.
B) limited liability.
C) double liability.
D) single taxation.
30) An S corporation form of ownership overcomes which disadvantage of the regular or C
corporation form of ownership?
A) The double taxation issue
B) The expense and difficulty of formation
C) The amount of regulation and red tape involved in its operation
D) The potential loss of control by the founder
31) Which of the following would be most likely to benefit from choosing S corporation status?
A) Startup companies anticipating net losses
B) Corporations where net profits before any compensation to shareholders is less than $100,000
per year
C) Highly profitable firms with substantial dividends to pay out to shareholders
D) A and C only
32) Which of the following statements is not true regarding the liquidation of an S corporation?
A) The owners pay all taxes, debts, and creditors.
B) The owners obtain the written approval of shareholders to dissolve the company.
C) The owners file a statement of intent to dissolve with the secretary of state’s office in each
state where they conduct business.
D) The owners distribute all assets of the corporation to the shareholders.
33) A limited liability company:
A) is similar to an S corporation in that it is a cross between a partnership and a corporation.
B) prevents owners who want to maintain their limited liability status from actively managing
the company.
C) can have a maximum of 50 owners.
D) All of the above
34) A limited liability company is most like a(n):
A) general partnership.
B) master partnership.
C) sole proprietorship.
D) S corporation.
35) Which of the following documents must an entrepreneur file to create a limited liability
company?
A) The articles of organization
B) The articles of incorporation
C) The operating agreement
D) A and C only
36) Which of the following is not true regarding the limitations of professional corporations?
A) Seventy-five percent of the shares of stock must be owned and held by individuals licensed in
the profession of the corporation.
B) At least one of the incorporators, one director, and one officer must be licensed in the
profession.
C) The Articles of Incorporation, in addition to all other requirements, must designate the
professional services to be provided by the corporation.
D) The professional corporation must obtain from the appropriate licensing board a certification
that declares the shares of stock are owned by individuals who are duly licensed in the
profession.
37) A joint venture is different from a partnership in that the joint venture:
A) can be formed only by two individuals.
B) is formed for a specific purpose.
C) continues indefinitely.
D) requires that profits be shared equally.
38) Income from a joint venture is taxed as the income from a(n):
A) sole proprietorship.
B) partnership.
C) corporation.
D) S corporation.
39) Changing from one form of ownership to another once a business is up and running can be
difficult, expensive, and complicated.
40) Some forms of ownership are much more costly and involved to create.
41) Entrepreneurs should not spend much time selecting a form of ownership for their businesses
because making the choice is merely a technicality, which has little impact on the business and
its owner(s).
42) The sole proprietorship is the best form of ownership for entrepreneurs launching their first
businesses.
43) Of all U.S. business firms, sole proprietorships are the most common, accounting for
approximately 71 percent of businesses.
44) The sole proprietorship is the easiest form of ownership to create, but once formed, it is
subject to the greatest number of regulations.
45) All the profits of a sole proprietorship are taxed as current income of the owner even if they
are not withdrawn from the business.
46) If a sole proprietorship fails, the owner is not liable for its debts since the business is a
separate legal entity.
47) In a sole proprietorship, the owner has limited liability.
48) The sole proprietorship is the form of ownership with the least ability to accumulate capital.
49) If a sole proprietor dies, retires, or becomes incapacitated, the business automatically
terminates.
50) The most common form of business ownership in the United States is the partnership.
51) Although not required by law, a written partnership agreement that spells out the terms of
operating the partnership and the status of each partner should be developed.
52) State law requires that individuals creating a partnership file the Articles of Partnership with
the secretary of state.
53) Defining the duties, responsibilities, contributions, and roles of the partners in a partnership
agreement is not necessary since the law covers these provisions automatically.
54) In a partnership, profits (and losses) must be shared according to the ratio of capital
originally invested in the partnership.
55) If a partnership agreement does not exist, the partnership will be governed by the Uniform
Partnership Act.