c5
1. (p. 118) The corporation is the most common form of business ownership.
2. (p. 118) The three major forms of business ownership in the U.S. are sole proprietorships, partnerships, and
corporations.
3. (p. 118) Few people today start their own business.
4. (p. 118) Once a business is established, it’s almost impossible to change from one form of business ownership to
another.
5. (p. 118) When two or more people legally agree to become co-owners of a business, the organization is called a
partnership.
6. (p. 118) The legal entity with authority to act and have liability separate from its owners is called a partnership.
7. (p. 118) Corporations represent 20 percent of all the businesses in the U.S. and earn 81 percent of the total
receipts.
8. (p. 119) A comparison of the three major forms of business ownership shows that sole proprietorships are
usually the most difficult type of business to establish.
9. (p. 119) The first step in starting a sole proprietorship is to fill out a proprietorship charter application form and
file it with the state government.
10. (p. 119) It is usually easy to start and end a sole proprietorship.
11. (p. 119) The profits of a sole proprietorship are taxed as the personal income of the owner.
12. (p. 119) The sole proprietorship form of ownership tends to be attractive to people who want to invest in a
company without taking an active role in management.
13. (p. 119–120) A major advantage of sole proprietorships is that an owner has limited liability for the debts of his
or her business.
14. (p. 120) One of the strengths of the sole proprietorship is its ability to sustain rapid growth by raising large
amounts of financial resources.
15. (p. 119–120) The debts of a business operated as a sole proprietorship are considered to be the personal debts of
the owner of the business.
16. (p. 120) A drawback of sole proprietorships is that they usually have limited access to additional financial
resources.
17. (p. 120) An advantage of forming a sole proprietorship is that it allows the owner to have more time for leisure
activities.
18. (p. 119–120) Jim wants to start a business. He is attracted by the idea of being his own boss, and wants to get
started with a minimum of expense and hassle. He is very confident in his abilities, so he is not particularly
worried about financial risks. All of these factors suggest that Jim would favor starting his business as a sole
proprietorship.
19. (p. 119–120) If a sole proprietorship fails, the owner may lose whatever was invested in the business, but the
owner’s personal assets are not at risk.
20. (p. 119–120) Sandy Beech is a talented fashion designer who wants to start her own women’s sportswear
company. However, she is concerned about some problems she might face. She knows little about actual
production methods or the financial aspects of running a business, and has little personal wealth to put into the
company. In order to overcome these problems, Sandy should start her business as a sole proprietorship.
21. (p. 120) Rocky Rhodes is convinced that he has a great idea for a new business. Unfortunately, the type of
business he wants to start would require a fairly high initial investment and Rocky has a poor credit rating and
very little personal wealth. Rocky would be unlikely to find success if he organized his business as a sole
proprietorship.
22. (p. 121) A general partner can take an active role in the management of the business.
23. (p. 121) All of the partners in a general partnership have limited liability for the debts of their firm.
24. (p. 121) In a general partnership, all owners share in both management of the business and in the assumption of
liability for the firm’s debts.
25. (p. 121) In a general partnership, all active partners are entitled to an equal share of the firm’s profits.
26. (p. 121) Limited partnerships are just like general partnerships, except that they are organized to operate as a
going concern for only a limited time period.
27. (p. 121) A limited partner is an owner who takes no management responsibility and has no liability for losses
beyond the amount invested.
28. (p. 121) A limited partnership is a partnership with one or more general partners and one or more limited
partners.
29. (p. 121) Although ownership in master limited partnerships is traded on stock exchanges, these companies are
taxed like partnerships.
31. (p. 122) According to the Uniform Partnership Act, the three key elements of any general partnership are (1)
shares of stock to represent ownership, (2) limited liability, and (3) ease of ownership transfer.
32. (p. 122) According to the Uniform Partnership Act, the three key elements of any general partnership are (1)
common ownership, (2) shared profits and losses, and (3) the right to participate in managing the operations of
the business.
33. (p. 122) A recent study showed that partnerships are more likely to fail than sole proprietorships.
34. (p. 122) A major objective of limited liability partnerships (LLPs) is to limit each partner’s personal liability to
the consequences of their own acts and those of people under their supervision.
35. (p. 123) One of the major disadvantages of a partnership is that profits must be divided according to very
specific legal guidelines.
36. (p. 121) A general partner has unlimited liability for the debts of the partnership only if he or she personally
approved the decisions that resulted in those debts.
37. (p. 123) In order to protect all parties and minimize misunderstandings among partners, all terms of the
partnership should be spelled out in writing.
38. (p. 123) One advantage of a partnership is that there is a simple process for partners to terminate their
business.
39. (p. 122) Compared to sole proprietorships, an advantage of partnerships is their ability to obtain more financial
resources.
40. (p. 123) Setting up a partnership under the terms of a written agreement is a bad idea, because written
agreements tend to be too inflexible and impersonal.
41. (p. 122) Compared to sole proprietorships, partnerships offer the advantage of shared management and pooled
knowledge.
42. (p. 121) A limited partnership refers to a partnership set up for a temporary purpose, such as a real estate
development project.
43. (p. 122) Ted and Mark have been partners in a dry cleaning business for the past three years. They would like
their brother Todd to join them. Unfortunately, partnership law states that only two partners can participate in a
partnership.
44. (p. 121) Two of Rolanda’s friends have approached her to see if she would like to join them in starting a new
business. Rolanda is willing to invest money in the business and share in its profits, but she has no desire to be
involved in the day-to-day management of the company. She is also very nervous about the risk of losing her
personal assets. Rolanda’s preferences suggest that she would like to see the business operated as a general
partnership.
45. (p. 121) Sharon Pebble and Gilbert Stone have just formed a business partnership. Under their arrangement,
Sharon will actively manage the company and assume unlimited liability for the firm’s debts. Gilbert will invest
several thousand dollars of his money and will share in the profits, but will not actively manage the firm and
will not have liability for losses beyond his initial investment. Sharon and Gilbert have formed a limited
partnership.
46. (p. 123) Alphonzo has agreed to become a partner in his brother’s new clothing store and has provided 30
percent of the startup capital for Remora’s Clothiers. Since he provided 30 percent of the money to start the
firm, he is entitled to 30 percent of any profits the firm earns during its first year of operations.
47. (p. 121) Ron and Jon want to go into business together. They do not want to bring in other partners, but they
both want to avoid unlimited liability for any debts incurred by their new company. Ron and Jon can achieve
their aims by organizing the firm as a limited partnership.
48. (p. 121) Marco is a limited partner in an e-commerce company. As a limited partner, Marco can be involved
with the company for a maximum of five years.
49. (p. 125; Spotlight on Small Business box) According to “Spotlight on Small Business” in Chapter 5, it is really not
necessary to interview your prospective partner carefully, especially if they are an old friend.
50. (p. 125; Spotlight on Small Business box) According to “Spotlight on Small Business” in Chapter 5, when you become
part of a partnership, you can make all of the decisions so you don’t have to consider the decision-making
capabilities of your prospective partner.
51. (p. 121) Connie is a general partner in a retail cookie store. Her personal assets are legally protected from the
debts of the business.
52. (p. 124–125) A conventional corporation is a state-chartered legal entity, with authority to act and have liability
separate from its owners.
53. (p. 124) In today’s economy, only large business enterprises should operate as corporations.
54. (p. 127, figure 5.4) The owners of a corporation are known as general corporate partners.
55. (p. 125) A corporation can raise financial capital by selling shares of stock to interested investors.
56. (p. 125) Stockholders in a corporation must accept unlimited liability for the corporation’s debts.
57. (p. 126) A disadvantage of corporations is that their charters are only valid for 99 years, so corporations are
less permanent than other types of businesses.
58. (p. 126) When one of the owners of a corporation dies, the corporation legally ceases to exist.
59. (p. 128) Corporations are easy to start and easy to terminate.
60. (p. 127) A disadvantage of corporations is that they generally require extensive paperwork.
61. (p. 126) A disadvantage of corporations is that an owner must get the approval of all other owners before
selling his or her interest in the firm to another investor.
62. (p. 127) Stockholders in a corporation normally exert a significant degree of control over the company’s daily
operations.
63. (p. 127, figure 5.4) The stockholders in a corporation elect a board of directors to oversee the company’s major
policy issues.
64. (p. 125) Stockholders in a corporation have limited liability for the debts of the corporation.
65. (p. 128) One advantage of corporations is that the initial cost of setting them up is usually lower than for other
forms of ownership.
66. (p. 127–128) States may levy special taxes on corporations that are not imposed on other businesses.
67. (p. 128) Most states have legal restrictions that prevent individuals from incorporating.
68. (p. 125) One reason Individuals incorporate is to obtain the advantage of limited liability.
69. (p. 126, figure 5.3) An alien corporation does business abroad but is chartered in the U.S.
70. (p. 126, figure 5.3) A domestic corporation does business in the state in which it’s chartered.
71. (p. 126, figure 5.3) A foreign corporation is chartered in a country outside the U.S.
72. (p. 126, figure 5.3) About one-third of all corporations are chartered in Delaware because of its relatively attractive
rules for incorporation.
73. (p. 126, figure 5.3) A closed corporation is one whose stock is held by a few people and isn’t available to the
general public.
74. (p. 126, figure 5.3) An open corporation is an non-profit corporation.
75. (p. 126, figure 5.3) A quasi-public corporation is a corporation chartered by the government as an approved
monopoly to perform services to the general public.
76. (p. 126, figure 5.3) Public utilities are examples of quasi-public corporations.
77. (p. 126, figure 5.3) A multinational corporation is a firm that operates in several countries.
78. (p. 126) To change ownership in a corporation you simply need to sell your stock to someone else.
79. (p. 126) Stock options are the right to purchase shares of the corporation for a fixed price.
80. (p. 127) Corporate income is taxed just once.
81. (p. 128) Corporations are relatively difficult to terminate.
82. (p. 129) One advantage of an S Corporation is that the profits of the business are taxed as regular personal
income of the owners, thus avoiding the problem of double taxation.
83. (p. 129) Any corporation can qualify to be classified as an S corporation as long as it fills out and files the
proper paperwork with the appropriate state agency on an annual basis.
84. (p. 129) A company that loses its status as an S corporation may not reelect this status for at least 5 years.
85. (p. 130) The advantages of limited liability companies are not available to providers of personal services like
doctors and lawyers.
86. (p. 130) An S corporation has fewer ownership rules than a limited liability company.
87. (p. 129) The S corporation form of business would be particularly attractive to fast growing companies that
want to attract hundreds or thousands of new stockholders.
88. (p. 130) A limited liability company is similar to an S corporation, but without the special eligibility
requirements.
89. (p. 130) Limited liability companies have both flexibility in tax treatment of earnings and limited liability
protection for owners.
90. (p. 130) One of the drawbacks of a limited liability company is that most states do not yet recognize this form
of ownership.
91. (p. 130) Like stockholders of a C corporation, owners of a limited liability company (LLC) are free to sell their
ownership without the approval of other members.
92. (p. 130) Owners of limited liability companies (LLCs) must pay self-employment taxes on any profits they
earn.
93. (p. 130) The limited liability company is one of the oldest forms of business ownership.
94. (p. 129) Dr. Wright is interested in incorporating as an individual. While this is legally possible, there are
really no advantages to doing so.
95. (p. 126) Nutty Dough is a small chain of donut shops that is currently owned and operated by a group of seven
partners. The owners think that their chain has the potential for rapid growth, but several of the partners are
concerned about the growing financial risks that will accompany this growth. One way the partners could deal
with this problem would be to incorporate their business.