Essentials of Entrepreneurship and Small Business Management, 9e (Scarborough)
Chapter 6 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/his 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) ________ is 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 least 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 ________ partnership.
A) general
B) limited
C) silent
D) limited liability
20) Changing from one form of ownership to another once a business is up and running can be
difficult, expensive, and complicated.
21) Some forms of ownership are much more costly and involved to create.
22) 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).
23) The sole proprietorship is the best form of ownership for entrepreneurs launching their first
businesses.
24) Of all U.S. business firms, sole proprietorships are the most common, accounting for
approximately 71 percent of businesses.
25) The sole proprietorship is the easiest form of ownership to create, but once formed, it is
subject to the greatest number of regulations.
26) All the profits of a sole proprietorship are taxed as current income of the owner even if they
are not withdrawn from the business.
27) If a sole proprietorship fails, the owner is not liable for its debts since the business is a
separate legal entity.
28) In a sole proprietorship, the owner has limited liability.
29) The sole proprietorship is the form of ownership with the least ability to accumulate capital.
30) If a sole proprietor dies, retires, or becomes incapacitated, the business automatically
terminates.
31) The most common form of business ownership in the United States is the partnership.
32) 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.
33) State law requires that individuals creating a partnership file the Articles of Partnership with
the Secretary of State.
34) Defining the duties, responsibilities, contributions, and roles of the partners in a partnership
agreement is not necessary since the law covers these provisions automatically.
35) In a partnership, profits (and losses) must be shared according to the ratio of capital
originally invested in the partnership.
36) If a partnership agreement does not exist, the partnership will be governed by the Uniform
Partnership Act.
37) There is no limit to the number of general partners a partnership may have, but it must have
at least one general partner.
38) Profits earned by a partnership are taxed in the same fashion as those earned by a sole
proprietorship.
39) The partnership, like the proprietorship, avoids the disadvantage of double taxation.
40) In a partnership, the business itself is subject to federal income tax.
41) A general partner is personally liable only for the amount of money he has invested in the
partnership.
42) One of the advantages of a partnership over a proprietorship is the increased sources of
capital and credit it offers.
43) If a limited partner withdraws, sells his ownership in the partnership, or dies, the partnership
is not forced into dissolution.
44) One disadvantage of the partnership form of ownership is the great potential for personality
and authority conflicts.
45) A common denominator in many partnership disputes is the lack of a written agreement
clearly spelling out the roles, rights, and responsibilities of each partner.
46) A limited partner is personally liable only for the amount of money she/he has invested in the
partnership.
47) A limited partner is treated as an investor in a business venture and does not take an active
role in managing it.
48) Each partner in a limited liability partnership is a limited partner; there are no general
partners.
49) Limited liability partnerships (LLP) are where all partners in a business are limited partners,
which offers the advantage of limited liability for the debts of the partnership.
50) A corporation formed and chartered in Kansas is considered a domestic corporation when
doing business in Kansas, and a foreign corporation when doing business in Missouri.
51) A corporation formed in Taiwan doing business in the United States is a foreign corporation.
52) Most states do not require a Certificate of Incorporation or a charter to be filed for a new
corporation.
53) What factors should an entrepreneur consider when choosing a form of ownership?
54) What is a sole proprietorship? Explain the advantages and the disadvantages of a sole
proprietorship.