Chapter 10—Choosing the Legal Form of Organization
TRUE/FALSE
1. DBA stands for a certificate of doing business under an assumed name.
2. Sole proprietorships, partnerships, S-corporations, and limited liability companies all permit
pass-through earnings and losses, but S-corporations and LLCs offer more protection from liability.
3. In a sole proprietorship, the owner is the only person responsible for the activities of the business and,
therefore, is the only one to enjoy the profits and suffer the losses.
4. A high-growth venture cannot be started as a sole proprietorship.
5. In terms of its treatment of income, expenses, and taxes, a partnership is essentially a sole
proprietorship consisting of more than one person.
6. The law requires a partnership to draw up a written partnership agreement based on the Uniform
Partnership Act.
7. Common stockholders are entitled to vote at stockholder meetings.
8. LLCs are becoming a popular vehicle for companies that may have global investors, because the
C-corporation does not permit foreign ownership.
9. Having a strategic plan in place for the venture enables the entrepreneur to choose a legal form that
won’t have to be changed or one that can easily be shifted to when the time is right.
10. Nonprofit corporations are not allowed to make a profit, according to the Internal Revenue Service.
MULTIPLE CHOICE
1. More than 76 percent of all businesses in the United States are ____.
a.
limited partnerships
b.
nonprofit businesses
c.
dormant partnerships
d.
sole proprietorships
e.
limited liability companies
2. ____ make(s) all partners responsible for the obligations that each incurs in the course of doing
business.
a.
Limited partnerships
b.
General partnership
c.
Ostensible authority
d.
Sole proprietorship
e.
Limited liability
3. In a/an ____, all partners assume unlimited personal liability and responsibility for the management of
the business.
a.
limited partnerships
b.
general partnership
c.
ostensible authority
d.
sole proprietorship
e.
LLC
4. Upon the death of a partner, the insurance proceeds can be used to keep the business going or to buy
out the deceased partner’s interest under a/an ____.
a.
buy/sell agreement
b.
partnership agreement
c.
ostensible authority
d.
sole proprietorship
e.
None of these choices
5. Only about 25 percent of all U.S. businesses are ____, but they account for 67 percent of all sales
transactions.
a.
nonprofits
b.
LLCs
c.
corporations
d.
sole proprietorships
e.
None of these choices
6. In forming a ____, the entrepreneur gives up proprietary interest in the organization and dedicates all
the assets and resources of the corporation to tax-exempt activities.
a.
sole proprietorship
b.
LLC
c.
C-corporation
d.
S-corporation
e.
nonprofit corporation
7. ____ partners typically provide capital but do not actively participate in the management of the
business.
a.
Secret
b.
Silent
c.
Dormant
d.
Limited
e.
General
8. ____ life insurance is a policy on the life of principal members of the partnership, usually the senior
partners.
a.
Principal
b.
Uniform partnership
c.
First-partner
d.
Key-person
e.
None of these choices
9. A ____ corporation is chartered in a state other than in the one in which it will do business.
a.
closely held
b.
domestic
c.
foreign
d.
S-
e.
C-
10. ____ pay taxes on profits and their shareholders pay taxes on dividends they receive, resulting in
double taxation.
a.
S-corporations
b.
C-corporations
c.
LLCs
d.
Foreign corporations
e.
None of these choices
11. The owner is the only person responsible for the activities of the business in a ____.
a.
limited partnership
b.
nonprofit business
c.
dormant partnership
d.
sole proprietorship
e.
limited liability company
12. To operate as a sole proprietor requires nothing more than a ____.
a.
stock certificate
b.
“Certificate of Doing Business Under an Assumed Name”
c.
limited liability certificate
d.
retained earnings statement
e.
visit to an attorney
13. Sole proprietorships offer several advantages, which include all of the following except ____.
a.
they are easy and inexpensive to create
b.
they give the owner complete authority
c.
dividends are paid to owners
d.
the income from the business is taxed only once, at the owner’s personal income tax rate
e.
there are no major reporting requirements, as with a corporation
14. Often small businesses such as pizza parlors and boutiques are run as ____.
a.
sole proprietorships
b.
silent partnerships
c.
general partnerships
d.
nonprofit businesses
e.
an LLC
15. When two or more people share the assets, liabilities, and profits of the business, the legal structure is
a ____.
a.
sole proprietorship
b.
corporation
c.
partnership
d.
limited partnership
e.
None of these choices
16. Each partner owns and has use of the property acquired by the partnership, unless otherwise stated in
____.
a.
the corporate charter
b.
the partnership agreement
c.
the commercial code
d.
proprietary bylaws
e.
SEC regulations
17. The U.S. Supreme Court has defined the ____ as an artificial being, invisible, intangible, and existing
only in contemplation of the law.
a.
corporation
b.
sole proprietorship
c.
partnership
d.
joint venture
e.
closely held corporation
18. In a/an ____, corporate stock is owned privately by a few individuals and is not traded publicly on a
securities exchange.
a.
partnership
b.
sole proprietorship
c.
closely held corporation
d.
open corporation
e.
limited partnership
19. A corporation that is chartered in the state in which it will do business and issue stock is a/an ____.
a.
foreign corporation
b.
domestic corporation
c.
secret partnership
d.
alien corporation
e.
closely held corporation
20. By creating a corporation and issuing stock, the entrepreneur is giving up a measure of control to the
____.
a.
creditors
b.
government
c.
partnership
d.
board of directors
e.
SEC
21. A financial vehicle that enjoys limited liability in that its owners are liable for its debts and obligations
only to the limit of their investment is a ____.
a.
sole proprietorship
b.
S-corporation
c.
C-corporation
d.
joint venture
e.
limited partnership
22. Which of the following statements is not true of an S-corporation?
a.
It may have no more than 100 shareholders.
b.
Shareholders must be U.S. citizens or residents.
c.
Profits and losses must be allocated in proportion to shareholder interests.
d.
Partnerships may be shareholders.
e.
Shareholders may not deduct losses in an amount greater than their original investment.
23. Professionals such as lawyers, doctors, and accountants frequently employ the legal structure of a
____.
a.
sole proprietorship
b.
S-corporation
c.
partnership
d.
C-corporation
e.
None of these choices
24. A corporate form that enjoys the pass-through tax benefits of partnerships in addition to the limited
liability of a C-corporation is known as a ____.
a.
multinational corporation
b.
secret partnership
c.
silent partnership
d.
limited liability company (LLC)
e.
closely held partnership
25. When one or more people agree to assume unlimited personal liability and responsibility for
management of the business, a ____ exists.
a.
secret partnership
b.
general partnership
c.
silent partnership
d.
joint venture
e.
LLC
26. All of the following are types of nonprofit organizations except ____.
a.
religious organizations
b.
novelty shops
c.
schools
d.
museums
e.
shelters
27. State law permits certain professionals, such as health care professionals, engineers, accountants, and
lawyers, to form corporations called ____.
a.
professional service corporations
b.
S-corporations
c.
C-corporations
d.
DBAs
e.
ostensible authorities
28. A corporation established for charitable, public (scientific, literary, or educational), or religious
purposes or for mutual benefit (trade associations, tennis clubs), as recognized by federal and state
laws, is a ____.
a.
nonprofit corporation
b.
joint venture
c.
syndicate operation
d.
limited partnership
e.
sole proprietorship
29. Income derived from for-profit activities in a nonprofit corporation is subject to ____.
a.
withholding
b.
distribution
c.
income taxation
d.
reinvestment
e.
dividend payments
30. If a nonprofit corporation is ever dissolved, its assets must be distributed ____.
a.
to the owners
b.
at public auction
c.
to another tax-exempt organization
d.
to the shareholders
e.
to the federal government
SHORT ANSWER
1. What are the advantages of sole proprietorships?
2. What are the added advantages of a partnership over a sole proprietorship?
3. What are the critical issues a partnership should address in a buy-sell agreement?
4. Define the two types of partnerships.
5. What are the disadvantages of a limited liability company (LLC)?
6. Define a nonprofit corporation.
7. What are the advantages of a C-corporation?
8. List the various legal structural forms available to an entrepreneur according to the level of risk of
each.
9. What questions should entrepreneurs answer when determining which legal form is best for their
venture?
ANS:
10. What are the disadvantages of a sole proprietorship?