96. (p. 128) When Erica Wayne decided to start a business she chose to form it as a corporation. This choice
ensures that, as the founder and incorporator of the company, Erica will remain in control of the firm’s
operations as long as she wants, no matter how large or complex the business becomes.
97. (p. 129) Mojo Motors is a rather small conventional corporation with only 212 stockholders. Eleven of the
stockholders are citizens of Mexico who live in Mexico City, and eight more are citizens of Canada who live in
Toronto. Mojo Motors should organize as an S corporation in order to save on taxes.
98. (p. 130) The partners at Edgar’s Microbrewery would like to switch to an S corporation. Unfortunately, their
lawyer has told them that they do not meet some of the requirements necessary to qualify as an S corporation.
An alternative form of business that would give them similar advantages is a limited liability company.
99. (p. 130) The owners of the new Chillout Ice Cream Company have chosen to organize their business as a
limited liability company. One drawback of this form of ownership is that the owners will pay higher taxes on
their earnings than a regular corporation if their company grows rapidly.
100. (p. 134; Dealing with Change box) Though popular during the early and middle 1900s, mergers and acquisitions were
quite rare in the 1990s and early 2000s.
101. (p. 132) In a merger, two firms combine to form one company.
102. (p. 132) The three major types of mergers are acquisitional, joint, and connective.
103. (p. 132-133) An acquisition is when one company buys the property and obligations of another company.
104. (p. 132) One of the major reasons for the wave of mergers in the late 1990s and early 2000s was the desire of
firms to expand within their own markets to save on costs.
105. (p. 133) Taking a firm private involves converting a firm from a corporation to a general partnership.
106. (p. 133) In a conglomerate merger, firms in the same industry merge to expand their share of the market.
107. (p. 133) The purpose of a conglomerate merger is to diversify operations and investments.
108. (p. 133) A merger between two businesses in different stages of related businesses is known as a vertical
merger.
109. (p. 133) A horizontal merger refers to a merger between two companies that are in entirely different markets.
110. (p. 133) A horizontal merger refers to a merger between two companies in the same industry.
111. (p. 133) A leveraged buyout is an attempt by top management to gain control of a company by issuing a large
amount of new stock.
112. (p. 133) When a group of investors take a firm private, they obtain all of the stock for themselves.
113. (p. 133) Foreign firms have been reluctant to merge with or acquire American corporations in recent years.
114. (p. 132-133) Wilson Office Supplies has announced plans to purchase all of the property and assume the
obligations of Brown & Craft Stationery, Inc., a firm that has been one of its major competitors. Wilson’s plans
are an example of a vertical merger.
115. (p. 133) In the past, the Beirderg’s Markets and Bronew’s Groceries have been fierce competitors in the
grocery market. However, they recently issued a joint announcement stating their decision to merge. The
announcement justified the proposed merger by claiming that the resulting firm would have more financial
resources, which would enable it to expand services and broaden offerings to consumers. This proposed merger
is an example of a horizontal merger.
116. (p. 133) Wizbang Computers, Inc., a major producer of personal computers, is considering a merger with
Outtel, a leading producer of microprocessors and other computer chips. Wizbang believes such a merger would
give them a guaranteed source of needed components, and would enable them to have better control over
quality. If this merger occurs, it would be an example of a horizontal merger.
117. (p. 133) A major objective of a leveraged buyout is to enable investors to gain control of a company by
issuing new shares of ownership, thus minimizing the use of debt.
118. (p. 133) Jane Gramm is leading a group of stockholders who want to take the Bigbux Corporation private. If
Jane’s group succeeds, Bigbux’s stock will no longer be available to investors on the open market.
119. (p. 133) The workers at Scrappy’s Metal Fabrication, Inc., have learned that the firm is about to close down.
They have devised a plan to use debt financing to buy the company’s stock from current shareholders with the
intention of keeping the company in business, thus saving their jobs. This strategy is called a leveraged buyout.
120. (p. 133) Taking a firm private involves an attempt to turn a profit-seeking corporation into a nonprofit
corporation in order to avoid a hostile takeover.
121. (p. 134) A franchise agreement is an arrangement where a franchisor sells the rights to a business name and
the right to sell a product or service within a given territory to a franchisee.
122. (p. 135) A franchise may be organized as a sole proprietorship, partnership, or corporation.
123. (p. 135) Recent figures suggest that franchising has declined in importance over the last ten years.
124. (p. 135) Franchisors give franchisees the right to use their name and product, but franchisees must obtain all
financing and develop all marketing strategies on their own.
125. (p. 135) Today, franchising accounts for nearly 10 percent of America’s gross domestic product (GDP).
126. (p. 135) In a franchise arrangement, ownership of all of the individual stores or outlets remains in the hands of
the franchisor.
127. (p. 135) One of the major advantages of a franchise system is the franchisee often gets instant recognition
from consumers.
128. (p. 136) Franchisees must follow more rules, regulations, and procedures than if they operated
independently-owned businesses.
129. (p. 137) The “coattail effect” refers to the burden of corporate rules and regulations on franchisees.
130. (p. 137) The “coattail effect” refers to being forced out of business as a profitable franchisee if your fellow
franchisees fail.
131. (p. 136) One drawback of franchises is that they have a much higher failure rate than other types of business
ventures.
132. (p. 136) The franchisee often must pay the franchisor a share of profits or a percentage commission on sales
known as a royalty.
133. (p. 138) The higher the cost of a franchise, the more likely a woman will own it.
134. (p. 140) Many franchisors have rules that prohibit franchisees from sponsoring their own websites.
135. (p. 139) Because of the growth of minority-owned businesses in the U.S., franchisors are becoming more
focused on recruiting minority franchisees.
136. (p. 139) It is impossible to run a franchise completely from home.
137. (p. 140) Franchising is popular in the United States, but legal barriers have limited its popularity in foreign
countries.
138. (p. 140) Global franchising is unlikely to experience major growth due to the high costs of operations in
global markets.
139. (p. 140) The most popular global market for U.S. franchisors has been Canada.
140. (p. 140) Franchising in global markets has demonstrated that high operating costs are counterbalanced by
high profit opportunities.
141. (p. 140) Franchisors sometimes pay reverse royalties to franchisees who believe the franchisor’s Internet sales
have hurt their bricks and mortar businesses.
142. (p. 134) In a typical franchise agreement, the franchisor pays the franchisee a fee to manage its company, and
the two of them split the profits based on the percentages established in the agreement.
143. (p. 136) Jill has always worked for others, but has become tired of following orders. She wants to find an
inexpensive way to start her own business so that she can have the freedom to run her business exactly as she
sees fit. Jill could achieve her goals by becoming a franchisee.
144. (p. 136) Marilyn has just paid several thousand dollars to obtain a Fontmaster Printers franchise in Cleveland,
Ohio. Now that she has paid her fee, she can look forward to having the freedom to use her own creative talents
to make her print shop different and more attractive than other Fontmaster shops in the Cleveland area.
145. (p. 136) Les is a franchisee in the Far Horizons Travel Agency franchise. As a franchisee, Les is guaranteed
the right to retain all of his franchise’s profits.
146. (p. 137) Leanne is a franchisee in a restaurant chain. Thanks mainly to her hard work and people skills, her
individual outlet is doing quite well. However, she has noticed that several other franchisees in the same chain
have let their businesses deteriorate, especially in terms of the quality of the food they offer. Leanne should be
very concerned about this trend, since it eventually could affect her own business.
147. (p. 140) Maria is already a successful franchisee with Nite Lite, a chain of “no frills” motels that provide
clean rooms and good service at affordable rates. The motel she currently operates is located in Texas, but she is
considering an opportunity to open another Nite Lite motel in Latin America. Although her costs of operating in
a new country may be higher, she will have the benefits of an expanding market and less competition.
148. (p. 141) A cooperative is simply another name for a corporation.
149. (p. 141) A cooperative consists of people with similar needs who pool their resources for mutual gain.
150. (p. 141) It is not unusual for members of cooperatives to work for and to help manage their cooperative.
151. (p. 141) Farm cooperatives were originally established to help farmers increase their economic power by
acting as a group rather than as individuals.
152. (p. 141) One thing large companies like Blue Diamond, Ocean Spray, and Land O’Lakes have in common is
that they all are cooperatives.
153. (p. 141) A disadvantage of farm cooperatives is that they are subject to higher tax rates than corporations.
154. (p. 141) Jocelyn belongs to food cooperative in her community. As a member, she can expect to have a vote
in the election of the cooperative’s board of directors.
155. (p. 141) Jane has always disliked the notion that the customers, managers and workers of a business are
separate individuals with competing goals. She has joined with many other people in her community who share
this view to become a member, and part owner, of a child care center. Jane and the other members operate the
center for their own benefit, and each is expected to work at the center at least 12 hours each month. The type of
organization Jane belongs to is known as a joint venture.
156. (p. 142) Farm cooperatives at one time thrived but have largely been replaced by other forms of business
ownership.
157. (p. 118) The __________ is the most common form of business ownership.
A. partnership
158. (p. 118) A ___________ is a business organization that is owned, and usually managed, by one person.
A. closed corporation
159. (p. 118) ____________ comprise about 20% of all businesses but account for about 81% of all business
receipts.
D. Limited liability companies
160. (p. 119) To many businesspeople, one of the major attractions of a sole proprietorship is:
A. the ability to obtain additional financial resources.
161. (p. 119) The __________ is usually the easiest form of business to start and end.
D. cooperative
162. (p. 119) One of the major disadvantages of a sole proprietorship is the:
D. high cost of starting or ending the company.
163. (p. 119) Starting a new business as a sole proprietorship:
A. requires retaining the services of an attorney.
164. (p. 119) In a sole proprietorship, the profits earned by the business are:
A. taxed as income for the business, but is exempt from the personal income tax paid by the owner.
165. (p. 120) A significant disadvantage of owning a sole proprietorship is the:
A. possibility of limited liability.
166. (p. 120) When a sole proprietor dies, the business:
D. always closes down.
167. (p. 119) Unlimited liability means:
D. you are liable for whatever advertising promises your firm makes.
168. (p. 119) Any debts or damages incurred by a firm organized as a sole proprietorship are:
D. normally covered by liability insurance.
169. (p. 119) An entrepreneur who wishes to start a business with little delay or hassle, and who wants to be his or
her own boss, should organize the business as a:
D. general partnership.
170. (p. 120) Joe Jackson operates a sole proprietorship, but he is in poor health and may be unable to continue
running the business. If Joe becomes incapacitated, his business:
A. automatically continues under new management as a sole proprietorship.
171. (p. 119) Maria has a lot of self-confidence and business knowledge. She has recently opened a bakery as a
sole proprietorship. She is expecting a high level of profits and is looking forward to:
172. (p. 119) Cali has been told that starting her own dog-walking business is a way to earn extra money after
school. She would like to supplement her allowance so she decides to open Dog Trotters. All she had to do to
begin was to put up a flier in the local grocery store announcing she was available to walk the dogs in the
neighborhood. It appears that Cali’s business is a:
D. cooperative.
173. (p. 120) Harold wants to start his own business. Harold would be most likely to favor organizing his new
company as a sole proprietorship if he:
A. expects rapid growth and want to be able to raise a large sum of money.
174. (p. 119) Elroy is the sole proprietor of a gift shop in a small shopping center. Because he is a sole proprietor,
any profit Elroy’s business earns is:
D. taxed only if and when it is distributed to investors.
175. (p. 119) Yolanda owns a roofing business. She enjoys being her own boss, but her satisfaction comes at a
price. Her days are filled with organizing the activities of her employees and soliciting new customers. She
often misses activities with friends and family because of the obligations of running her own business. She also
knows that she has unlimited personal liability for any of her firm’s debts. It appears that Yolanda’s business is
organized as a(n):
A. joint venture.
176. (p. 119) Which of the following statements is the most accurate? Sole proprietorships:
A. are well suited for people who want to own a business and share in its profits without taking an active role in
management.
177. (p. 119) Ellen wants to start a business. She is leaning toward setting up her company as a sole proprietorship,
but she is also looking at other possibilities. Ellen has two major goals. First, given her limited personal wealth
and eagerness to get started, she wants to get her business up and running with the least possible hassle and
expense. Second, she wants to minimize her personal risk in the event that her company experiences difficulties.
If Ellen chooses a sole proprietorship, she would:
D. achieve her second goal, since the owners of sole proprietorships are legally protected from losing more than
the amount they invest in their company. However, she would find that the start-up costs would be higher than
if she had incorporated her business.
178. (p. 121) In a partnership, a(n) __________ partner is an owner who is active in managing the company and
has unlimited liability for claims against the firm.
A. unlimited
179. (p. 121) A partner who invests money in a business, but does not take an active role in management or
assume unlimited liability for the firm’s losses is known as a(n):
D. corporate partner.