55) What is a partnership? Explain the advantages and the disadvantages of a partnership.
Mini Case 6-1: “Today, You Gotta’ Be a Corporation”
Duke has been a successful used car dealer for 25 years in the same location, operating as a
proprietorship. In those 25 years, he has expanded his operation and become the largest
independent car dealer in a city of 85,000 people. Few people in town can boast of a business
reputation better than Duke’s. As he says, “I’ve always done business in a fair and honest fashion,
and I’ve tried to give my customers an honest deal. The public has responded well, and last year
the business revenue increased to an all-time high of $830,000.”
As the business has grown, so have Duke’s liabilities. On a given day, Duke will have cars worth
from $350,000 to $450,000 as inventory on the lot. “Twenty years ago, if I’d asked the bank for a
line of credit of $200,000, they’d have tossed me out the front door. There is no question that
today business is different.”
Duke’s only daughter recently married a garage mechanic who has worked in the area for the past
three years. Though Duke thinks the boy is certainly nice enough, he does not believe he is very
smart. “The kid sure knows how to fix a car, but that’s as far as it goes,” says Duke. “On my last
visit to the accountant, he suggested I consider incorporating. I guess he knows what he’s talking
about. That’s all you hear today – ‘you gotta be a corporation.’ I guess he’s right. But, to tell you
the truth, I don’t know.”
56) Should Duke incorporate or should he remain a proprietorship? Why?
57) 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
58) 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
59) A corporation receives its charter from the ________.
A) federal government
B) state
C) board of directors
D) stockholders
60) 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.
61) 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
62) 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.
63) 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.
64) In the ________ form of ownership, the business itself pays income taxes.
A) proprietorship
B) partnership
C) corporation
D) All of the above
65) 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.
66) 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
67) 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.
68) 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
69) 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.
70) Corporations must obtain a federal charter before they can conduct any business.
71) Stockholders in the corporation have the same kind of liability as general partners in a
partnership.
72) When filing the corporate charter, a corporation must file in the state in which its
headquarters are located.
73) Outline the incorporation process.
74) What is a corporation? Explain the advantages and the disadvantages of a corporation.
75) What is an S corporation? Explain the advantages and the disadvantages of an S corporation.
Mini Case 6-1: “Today, You Gotta’ Be a Corporation”
Duke has been a successful used car dealer for 25 years in the same location, operating as a
proprietorship. In those 25 years, he has expanded his operation and become the largest
independent car dealer in a city of 85,000 people. Few people in town can boast of a business
reputation better than Duke’s. As he says, “I’ve always done business in a fair and honest fashion,
and I’ve tried to give my customers an honest deal. The public has responded well, and last year
the business revenue increased to an all-time high of $830,000.”
As the business has grown, so have Duke’s liabilities. On a given day, Duke will have cars worth
from $350,000 to $450,000 as inventory on the lot. “Twenty years ago, if I’d asked the bank for a
line of credit of $200,000, they’d have tossed me out the front door. There is no question that
today business is different.”
Duke’s only daughter recently married a garage mechanic who has worked in the area for the past
three years. Though Duke thinks the boy is certainly nice enough, he does not believe he is very
smart. “The kid sure knows how to fix a car, but that’s as far as it goes,” says Duke. “On my last
visit to the accountant, he suggested I consider incorporating. I guess he knows what he’s talking
about. That’s all you hear today – ‘you gotta be a corporation.’ I guess he’s right. But, to tell you
the truth, I don’t know.”
76) Would you recommend Duke establish an S corporation? What conditions would he have to
meet?
77) 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
78) A limited liability company is most like a(n) ________.
A) general partnership
B) master partnership
C) sole proprietorship
D) S corporation
79) Which of the following documents must an entrepreneur file to create a limited liability
company?
A) Articles of Organization
B) Articles of Incorporation
C) Operating Agreement
D) A and C only
80) 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.
Mini Case 6-1: “Today, You Gotta’ Be a Corporation”
Duke has been a successful used car dealer for 25 years in the same location, operating as a
proprietorship. In those 25 years, he has expanded his operation and become the largest
independent car dealer in a city of 85,000 people. Few people in town can boast of a business
reputation better than Duke’s. As he says, “I’ve always done business in a fair and honest fashion,
and I’ve tried to give my customers an honest deal. The public has responded well, and last year
the business revenue increased to an all-time high of $830,000.”
As the business has grown, so have Duke’s liabilities. On a given day, Duke will have cars worth
from $350,000 to $450,000 as inventory on the lot. “Twenty years ago, if I’d asked the bank for a
line of credit of $200,000, they’d have tossed me out the front door. There is no question that
today business is different.”
Duke’s only daughter recently married a garage mechanic who has worked in the area for the past
three years. Though Duke thinks the boy is certainly nice enough, he does not believe he is very
smart. “The kid sure knows how to fix a car, but that’s as far as it goes,” says Duke. “On my last
visit to the accountant, he suggested I consider incorporating. I guess he knows what he’s talking
about. That’s all you hear today – ‘you gotta be a corporation.’ I guess he’s right. But, to tell you
the truth, I don’t know.”
81) Would a limited liability corporation be any better for Duke? Why or why not?
82) C corporations, S corporations, and LLCs can be ________ to establish.
A) costly
B) easy
C) quick
D) cheap
83) The average cost to create a legal business entity is ________.
A) $2,000
B) $1,000
C) $500
D) $5,000