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Entrepreneurship and Effective Small Business Management, 11e, Global Edition
(Scarborough)
Chapter 5 Choosing a Form of Ownership
1) The key to choosing the "right" form of ownership is:
A) knowing the cost factor in time and money.
B) understanding how each form affects both business and personal circumstances.
C) having an experienced attorney and accountant to advise you in the choice.
D) the fact you cannot change the form of ownership once your company is established.
2) When choosing a form of ownership, the entrepreneur should realize that:
A) it is difficult if not impossible to change forms of ownership once the company is established.
B) the expense of changing forms of ownership makes it prohibitively expensive to change.
C) the most common form of ownership is the partnership and is the least expensive to establish.
D) he/she will most likely change the form of ownership as the company grows in size and
revenues.
3) The most popular form of business ownership is the:
A) sole proprietorship.
B) partnership.
C) corporation.
D) S-corporation.
4) Juan is starting a software writing company. He is the owner and has only 3 employees. He
wants a simple inexpensive form of ownership that leaves him in control and that he can quickly
dissolve if he decides to change to another business. His best choice of form of ownership would
be:
A) S-corporation.
B) partnership.
C) corporation.
D) sole proprietorship.
5) Sole proprietorships characteristically are:
A) fairly complex to create.
B) subject to special legal restrictions.
C) expensive to create.
D) easy to discontinue.
6) The most critical disadvantage of the sole proprietorship is:
A) unlimited personal liability.
B) limited access to capital.
C) lack of continuity.
D) limited skills and capacities of the owner.
7) Which form of ownership generally has the least ability to accumulate capital?
A) Partnership
B) Sole proprietorship
C) Corporation
D) S-corporation
8) While a sole proprietorship gives the owner maximum flexibility in running the business, it
also:
A) makes the company a prime target for an acquisition or merger.
B) creates a sense of isolation.
C) makes it difficult to hire management talent to help grow the business.
D) makes it difficult to sell.
9) Common ownership interest in a business, sharing profits (or losses) of a business, and the
right to participate in managing the operations of the business are characteristics of a(n):
A) corporation.
B) sole proprietorship.
C) partnership.
D) S-corporation.
10) If a partnership is formed without an agreement, the partnership is automatically subject to
the:
A) Certification of Incorporation laws.
B) Uniform Partnership Act.
C) Limited Liability Company Act.
D) Revised Uniform Limited Partnership Act.
11) Probably the most important feature of a partnership agreement is:
A) that it identifies the name of the partnership.
B) that it states the purpose and location of the business.
C) that it determines how the partnership will pay taxes and fees.
D) that it resolves potential sources of conflict.
12) Which of the following is true about the content of a standard partnership agreement?
A) It does not specify how profits and losses will be distributed.
B) It includes the Certificate of Incorporation.
C) It specifies how the partnership may be dissolved and assets divided.
D) While it specifies the location of the business and its purpose, it does not name the partners or
their legal addresses in order to maintain privacy for the partners.
13) A partnership agreement sets 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 2 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.
14) The three key elements of any partnership are:
A) common ownership in the business, sharing the business' profits or losses, and the right to
participate in managing the business.
B) equal ownership in the business, sharing its profits and losses, and the right to participate in
managing the business.
C) equal ownership in the business, sharing its profits and losses, and the right to limited liability
for all partners.
D) common ownership in the business, sharing its profits and losses, and the right to limited
liability for all partners.
15) The Uniform Partnership Act outlines a number of general obligations that partners have
such as the obligation to:
A) give other partners complete information about all business affairs.
B) share in the management and operation of the business.
C) be compensated for personal expenses incurred.
D) have access to the business's books and records.
16) All partnerships must have:
A) at least three limited partners.
B) no dormant partners.
C) at least one general partner.
D) at least one silent or money partner.
17) In her partnership, Ana has unlimited liability for the partnership's debts. She would be the
________ partner.
A) limited
B) dormant
C) nominal
D) general
18) Partnerships have a number of advantages over other forms of ownership, such as:
A) a larger pool of capital and little government regulation.
B) very easy liquidation of owners' investment.
C) limited liability for all partners.
D) they may be easily formed by an individual.
19) A partnership is:
A) taxed like a corporation.
B) not subject to the double taxation of some other forms of business.
C) taxed at the lowest rate for an individual.
D) taxed under capital gains laws as all profits are considered to come from appreciated assets.
20) Antonio is a limited partner and is neither active nor generally openly associated with the
firm. He is the ________ partner.
A) limited
B) secret
C) honorary
D) dormant
21) A significant disadvantage of a partnership is:
A) the unlimited personal liability for all partners.
B) the inability to attract either additional capital or new partners due to the complexity of
rewriting the agreement.
C) the difficulty of disposing a partnership interest without dissolving the partnership.
D) the regulatory complexity under which a partnership must be formed and operated.
22) Like a sole proprietorship, a partnership suffers from the disadvantage of:
A) poor capital accumulation.
B) limited liability for all owners.
C) double taxation of profits.
D) the complexity of regulations under which it must operate.
23) In a partnership, each partner acts as a(n) ________ for the business.
A) agent
B) manager
C) supporter
D) guarantor
24) A limited partnership is a modification of a(n) ________ form of ownership.
A) sole proprietorship
B) general partnership
C) corporation
D) S-corporation
25) In a limited partnership, the limited partners are treated like ________ by the law.
A) investors
B) general partners
C) sole proprietors
D) honorary partners
26) In a limited partnership, limited partners are treated as:
A) sole proprietors.
B) investors.
C) stakeholders.
D) directors.
27) The ________ is the most complex form of ownership and is a separate legal entity in the
eyes of the law.
A) sole proprietorship
B) partnership
C) corporation
D) joint venture
28) The ________ is a separate legal entity apart from its owners and may engage in business,
make contracts, sue and be sued, and pay taxes.
A) sole proprietorship
B) corporation
C) partnership
D) joint venture
29) A corporation receives its authority to operate from:
A) the federal government.
B) the state.
C) the board of certification.
D) the stockholders.
30) A corporation doing business in the state in which it is incorporated is considered to be a(n)
________ corporation.
A) alien
B) domestic
C) foreign
D) local
31) The "Das Spelunker" corporation, formed in Germany and conducting business in the United
States, is considered to be a(n) ________ corporation.
A) alien
B) domestic
C) foreign
D) local
32) 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
33) 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
34) The primary reason entrepreneurs choose to incorporate is because of:
A) the corporation's ability to attract capital.
B) the need to attract top quality management talent to grow the business.
C) the lower tax rates inherent in the corporate form of ownership.
D) the limited liability of stockholders.
35) The form of ownership with the greatest ability to accumulate capital is the:
A) sole proprietorship.
B) partnership.
C) joint venture.
D) corporation.
36) The corporate form of ownership has a significant advantage in that:
A) it is easy to transfer ownership.
B) it has a lower tax rate than either partnerships or sole proprietorships.
C) there is little cost to its formation.
D) there is little regulatory oversight by the government.
37) 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 and individuals
D) The lack of continuity
38) Carlos founded the "Taco Factory" 20 years ago as a family-oriented restaurant business.
Over the years as he grew the business, he incorporated and sold stock. Recently the
stockholders voted to seek liquor licenses and 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 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
39) This form of ownership is the same as a corporation in terms of legal characteristics even
though Congress is considering legislation that would further simplify its formation and running.
Its distinction from a corporation is made for federal income tax purposes only.
A) S-corporation
B) Master limited partnership
C) Sole proprietorship
D) Limited liability company
40) Jeff is forming a company. If he chooses a(n) ________ form of ownership, he can have no
more than 100 stockholders and must have only one class of stock.
A) partnership
B) corporation
C) S-corporation
D) master limited partnership
41) 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
42) An owner should choose an S-corporation form of ownership when he/she:
A) has an established company that is suffering losses due to double taxation.
B) is starting up a company and anticipating either net losses or high profits with large dividends.
C) owns a company in which net profits before any compensation to shareholders are less than
$100,000 per year.
D) has an existing sole proprietorship and wants to lower the tax bill through deducting fringe
benefits as business expenses.
43) The limited liability company is most like a(n):
A) general partnership.
B) master partnership.
C) sole proprietorship.
D) S-corporation.
44) A limited liability company differs from an S-corporation in:
A) that it is not subject to the same amount of restrictions.
B) its ability to attract and accumulate capital.
C) that ownership is not transferable through the sale of stock.
D) that it is limited to only one class of stock.
45) A limited liability company is formed under:
A) a Certificate of Incorporation.
B) a Partnership Agreement.
C) Articles of Organization.
D) the Revised Uniform Partnership Act.
46) Which of the following is true about choosing a limited liability company form of
ownership?
A) It has no disadvantages except its newness.
B) It is ideal for a new company but difficult to convert to with an existing company.
C) It is inexpensive, easy to form, and covered by little regulation due to its newness.
D) It's an excellent conversion vehicle for existing businesses that are suffering from double
taxation but problematic for sole proprietorships.
47) Traditionally, ________ were always set up as nonprofit corporations.
A) businesses
B) corporations
C) social enterprises
D) partnerships
48) A ________ organization uses its revenues to pursue social value rather than create personal
value for investors.
A) business
B) nonprofit
C) venture
D) corporate
49) One major advantage of the ________ is that once the owner has paid all of the company's
expenses, he/she can keep the remaining profits (less taxes, of course).
A) partnership
B) corporation
C) sole proprietorship
D) limited liability company
50) The ________ is a document that states in writing all of the terms of operating the
partnership for the protection of each partner involved.
A) Certificate of Incorporation
B) Partnership Agreement
C) Certificate for Conducting Business as Partners
D) Partnership Document
51) ________ partners are not active in a business but generally are known to be members of the
partnership.
A) Dormant
B) General
C) Silent
D) Limited
52) ________ corporations have shares that are controlled by a relatively small number of
people—family members, relatives, or friends.
A) Closely held
B) Domestic
C) Foreign
D) Alien
53) Shares the corporation itself owns are called:
A) preferred stock.
B) bonds.
C) treasury stock.
D) common stock.
54) To maintain control over their ownership, many closely held corporations exercise this right,
known as:
A) right of first refusal.
B) right of refusal.
C) control rights.
D) corporate rights.
55) Corporations can also stimulate managers' and employees' incentive on the job by creating an
________ (ESOP).
A) Entrepreneur Stock Ownership Plan
B) Employee Stock Ownership Plan
C) Employee Shares Ownership Plan
D) Entrepreneur Shares Ownership Plan
56) In a closely held corporation, one of the steps that should be taken to avoid legal difficulties
is:
A) hold annual meetings to elect officers and directors.
B) make sure that the stockholders make all the major decisions.
C) mingle corporate assets and the personal assets.
D) None of the above
57) One disadvantage of the proprietorship is:
A) it is the least regulated form of business ownership.
B) limited personal liability.
C) excessive access to capital.
D) limited skills and abilities.
58) Which form of ownership is the least costly to form?
A) Sole proprietorship
B) Corporation
C) Partnership
D) Limited liability corporation
59) The ________ is a document that states in writing all of the terms of operating a business
among the partners.
A) Sole Proprietorship Agreement
B) Articles of Corporations
C) Partnership Agreement
D) Limited Liability Corporation Agreement
60) The ________ codifies the body of law dealing with partnerships in the United States.
A) Small Business Partnership Agreement
B) Uniform Partnership Act (UPA)
C) Partnership Agreement
D) None of the above
