Chapter 04
Options for Organizing Business
True / False Questions
1. Most sole proprietorships focus on the manufacturing of goods rather than on services.
True
False
2. Compared to other forms of business ownership, sole proprietorships have the greatest
degree of secrecy.
True
False
3. The inability to make immediate decisions is a disadvantage of sole proprietorships.
True
False
4. Compared to other forms of business ownership, sole proprietorships have the least
freedom from government regulations.
True
False
5. A sole proprietor has limited liability in meeting the debts of the business.
True
False
6. Sole proprietorships typically employ less than 50 people.
True
False
7. A general partnership involves a complete sharing in the management of a business.
True
False
8. In a limited partnership, both the general partner and the limited partner assume unlimited
liability.
True
False
9. All states require partnerships to have articles of partnership.
True
False
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10. Partnerships have fewer regulatory controls than corporations.
True
False
11. Limited partners have no voice in the management of the partnership.
True
False
12. In a general partnership, each partner is liable only for the debts he or she incurs.
True
False
13. The assets and liabilities of a corporation are separate from its owners.
True
False
14. S Corporations are more flexible than traditional C corporations.
True
False
15. In most states, corporations must have "corporation," "incorporated," or "limited" at the
end of their names to show that their owners have limited liability.
True
False
16. A public corporation is owned by one or a few people who manage the business.
True
False
17. In a corporate form of ownership, there is limited liability for its owners.
True
False
18. In a corporation, the preferred stockholders have the advantage of exercising voting rights
over common stockholders.
True
False
19. An acquisition occurs when one company purchases another company by buying most its
stock.
True
False
20. When firms that make and sell similar products to the same customers merge, it is known
as a horizontal merger.
True
False
21. A conglomerate merger results when two firms in unrelated industries merge.
True
False
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22. Most tender offers of corporate raiders are hostile.
True
False
23. Shark repellant is a method of avoiding a hostile corporate takeover in which
management requires a large majority of stockholders to approve the takeover.
True
False
24. A leverage buyout is a technique used to avoid a hostile takeover in which the threatened
firm allows stockholders to buy more shares of stock at prices lower than the current
market value.
True
False
25. Companies that are victims of hostile takeovers generally streamline their operations,
reduce unnecessary staff, and cut costs.
True
False
M ultiple Choice Questions
26. Which of the following forms of business ownership is the easiest to establish?
A. Partnership
B. Sole proprietorship
C. S
Corporation
D. J oint venture
E. C Corporation
27. Which of the following is an advantage of a sole proprietorship?
A. It is heavily regulated by the government.
B. It has limited liability for the debts incurred by the business.
C. It is hard to dissolve.
D. It is unaffected by the death or withdrawal of its owner.
E. It is easy and inexpensive to form.
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28. Barber shops, dog kennels, and independent grocery stores are typically:
A. S corporations.
B. nonprofit agencies.
C. s ole proprietorships.
D. p
artnerships.
E. C corporations.
29. Which of the following is an advantage of a sole proprietorship?
A. Ease of dissolving the business
B. Equally shared profits among owners
C. L
imited liability
D. V
aried sources of funds
E. Increased life expectancy
30. Judy has realized that she does not like working for others. She wants to open a business
in which she will have maximum control and the least interference from government
regulation. Which of the following forms of business is best suited for Judy's needs?
A. A joint venture
B. An S corporation
C. A
sole proprietorship
D. A
partnership
E. A C corporation
31. According to the U.S. Bureau of the Census, which form of business ownership is the
least used in the U.S.?
A. An S-corporation
B. A joint venture
C. A
sole proprietorship
D. A
C-corporation
E. A partnership
32. The income earned in sole proprietorships is:
A. taxed twice.
B. exempted from tax.
C. taxed as personal income.
D. q
uasi-taxable.
E. taxed as business income.
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33. All of the following are advantages of a sole proprietorship EXCEPT:
A. ease of formation.
B. secrecy.
C. u
nlimited liability.
D. c ontrol of the business.
E. limited government regulation.
34. Which of the following is NOT a source of funds for a sole proprietorship?
A. Bank loans
B. Family members
C. P
ersonal funds
D. S
elling stock
E. Small Business Administration
35. Which of the following is a disadvantage of sole proprietorships?
A. Sharing of profits with major stockholders
B. Lack of continuity
C. L
ack of business control
D. S
tringent government regulations
E. Absence of a tax-exempt retirement account
36. Which of the following forms of business ownership is directly linked to the life of its
owner?
A. A sole proprietorship
B. A limited partnership
C. A
corporation
D. A
cooperative
E. A joint venture
37. Which of the following forms of business ownership requires owners to perform many
functions and possess diverse skills to make decisions?
A. A corporation
B. A partnership
C. A
sole proprietorship
D. A
cooperative
E. A joint venture
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38. Which characteristic of a sole proprietorship can be considered both an advantage and a
disadvantage?
A. Secrecy
B. Fund sources
C. L
iability
D. C
ontinuity
E. Taxation
39. When are limited partnerships generally used?
A. When the firm sells its stock to the public
B. When a project is risky and the chance of loss is great
C. W
hen articles of incorporation are mandatory
D. W
hen all partners wish to share equal liability
E. When articles of partnership are mandatory
40. Josh has been asked to join a new partnership that is developing wind energy
technologies. Since the business involves high risk, he does not want to be held liable for
the firm's debts if the project fails. In this case, Josh might prefer to participate as a(n):
A. a member of a cooperative.
B. limited partner.
C. g
eneral partner.
D. o
wner of an S corporation.
E. sole proprietor.
41. The legal documents that identify the basic agreements between partners are called:
A. articles of proprietorship.
B. partnership charters.
C. a
rticles of incorporation.
D. a
rticles of partnership.
E. partnership bonds.
42. Articles of partnership are legal documents that set forth the basic agreement between
partners. The issues covered usually include all of the following EXCEPT:
A. the assets that each partner has contributed.
B. how the profits and losses will be divided.
C. w
hat duties each partners will have.
D. p
rovisions for leaving the partnership.
E. classes of public stock to be issued.
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43. It is easier to raise funds in a partnership than in a sole proprietorship because:
A. several partners mean greater earning power and credit.
B. some of the partners have unlimited liability.
C. p
artnerships have less regulatory controls than sole proprietorship.
D. a
ll the partners have limited liability.
E. a partnership can issue public stock with much less difficulty than a sole proprietorship.
44. The decision-making process in a partnership tends to be faster when:
A. there are numerous partners and a few are involved in the day-to-day activities of the
business.
B. there are two partners and both of them are involved in the day-to-day activities of the
business.
C. the partnership is a foreign corporation that conducts its business outside the state in
which it was incorporated.
D. the partnership is a domestic corporation with numerous partners.
E. there are numerous partners and the firm has issued public stock.
45. Which of the following is NOT a disadvantage of forming a partnership?
A. All partners sharing business responsibility
B. Unlimited liability of all the partners
C. F
ewer regulatory controls than in a corporation
D. B
usiness continuity when a partner withdraws or dies
E. Limited sources of funds
46. Which of the following is an advantage of a partnership?
A. Unlimited liability
B. Life of partnership
C. D
istribution of profits
D. L
ack of regulatory control
E. Business responsibility
47. Which of the following is a disadvantage of a partnership?
A. Difficulty in selling ownership
B. Difficulty of forming business
C. L
ack of specialization of partners
D. L
ack of capital and credit
E. Stringent government regulation
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48. Which of the following statements is true of taxation in partnerships?
A. They pay taxes before distributing profits.
B. They report their share of profits as partnership incomes.
C. T
hey are exempted from tax.
D. T
hey pay taxes at the income tax rate for individuals.
E. They are taxed based on the number of shareholders.
49. _____ are profits of a corporation that are distributed in the form of cash payments to
stockholders.
A. Common stocks
B. Bonds
C. R
etained earnings
D. D
ividends
E. Preferred stocks
50. _____ is a legal document that the state issues to a company based on information the
company provides in the articles of incorporation.
A. State bond
B. Corporation contract
C. C
orporate charter
D. A
rticles of proprietorship
E. Articles of partnership
51. A corporation doing business outside the state in which it is chartered is known as a(n)
_____ corporation.
A. conglomerate
B. horizontal
C. d
omestic
D. a
lien
E. foreign
52. A private corporation is one:
A. that can be bought, sold, or traded by anyone.
B. that does not pay taxes on its income.
C. w
hose stock is not traded in public markets.
D. w
hose stock can be purchased on the New York Stock Exchange.
E. that discloses proprietary information to the public.
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53. Organizations such as the National Aeronautics and Space Administration (NASA) and
the U.S. Postal Service that are owned by the federal, state, or local governments are
known as _____.
A. S corporations
B. sole proprietorships
C. p
rivate corporations
D. q
uasi-public corporations
E. limited liability companies
54. Which of the following is a corporation that provides a service, but does not focus on
earning profits, nor is it owned by the government?
A. An S corporation
B. A limited liability company
C. A
nonprofit corporation
D. A
quasi-public corporation
E. A C corporation
55. A(n) _____ is elected by the stockholders of a corporation to oversee its general operation
and set long-term objectives.
A. board of stockholders
B. preferred stockholder
C. b
oard of directors
D. c hief executive
E. silent partner
56. Common stockholders do not have the right to:
A. vote for the board of directors.
B. vote by proxy.
C. a
ttend the stockholders' meetings.
D. e
xercise preemptive rights.
E. receive dividends before preferred stockholders.
57. Which of the following statements is true of preferred stockholders?
A. They are eligible to vote by proxy.
B. They are the voting owners of a corporation.
C. T
hey have the right to exercise preemptive rights.
D. T
hey have a claim to profits before other stockholders do.
E. They are generally the decision-makers in the day-to-day running of an organization.
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58. Which type of stockholders usually has the right to vote and control the board of
directors?
A. Preferred
B. Common
C. C
apital
D. P
erpetual
E. Proxy
59. A written authorization that assigns a stockholder's voting privilege to another is called a:
A. profit deed.
B. stock certificate.
C. p
reemptive right.
D. leveraged buyout.
E. proxy.
60. The right of common stockholders to have the opportunity to purchase new shares of
stock is called a:
A. first offer right.
B. preemptive right.
C. s tock-split right.
D. p
rofit-sharing right.
E. cooperative right.
61. The form of ownership that has the ability to raise capital most easily is a(n):
A. public corporation.
B. private corporation.
C. s ole proprietorship.
D. joint venture.
E. limited partnership.
62. All of the following are advantages of a corporation EXCEPT:
A. limited liability.
B. lower frequency of taxation.
C. p
erpetual life of organization.
D. e
ase of transfer of ownership.
E. external funding sources.
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63. Which of the following organizational forms is the most expensive to set up?
A. A sole proprietorship
B. A general partnership
C. A
limited liability company
D. A
limited partnership
E. A corporation
64. Which of the following is a typical characteristic of a corporation?
A. Lack of regulatory controls
B. Unlimited liability
C. A
bsence of perpetual life
D. E
mployee-owner separation
E. Lack of expansion potential
65. Which of the following statements is true of joint ventures?
A. It enjoys reduced government regulations when compared to general partnerships.
B. It is a form of business ownership that is taxed as though it were a partnership.
C. It is set up not to make money as an entity but so that its members can become more
profitable or save money.
D. It is popular in situations that call for large investments.
E. It restricts the number and types of shareholders in the organization.
66. Which of the following forms of business organizations restricts the number and types of
shareholders and is difficult to form and operate?
A. A sole proprietorship
B. A cooperative
C. A
limited liability company
D. A
n S corporation
E. A C corporation
67. Which of the following forms of business ownership provides limited liability, but is taxed
like a partnership?
A. A sole proprietorship
B. A cooperative
C. A
C corporation
D. A
n S corporation
E. A limited liability company
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68. Big Lite Inc. purchases Canton Bulbs, its direct competitor, by buying most of its stock.
Big Lite Inc. is involved in a(n) ____.
A. conglomerate merger
B. acquisition
C. v ertical merger
D. leveraged buyout
E. white knight
69. Eastern Sandwiches merges with its supplier, All Sauce, in an effort to have a constant
supply of sauce for its sandwiches. This is an example of a(n):
A. shark repellant.
B. vertical merger.
C. c onglomerate merger.
D. w
hite knight.
E. horizontal merger.
70. Aztex Inc., an automobile manufacturing firm, merges with Blaze Inc., a firm that
manufactures tires, in order to limit the uncertainty of fluctuating supply of automobile tires
and reduce the production cost for its cars. This merger is an example of a(n):
A. vertical merger.
B. leveraged buyout.
C. h
orizontal merger.
D. s hark repellant merger.
E. conglomerate merger.
71. When a corporate raider wants to acquire or take over another company, it first offers to
buy some or all of the other company's stock at a premium over its current price in a
____.
A. leveraged buyout
B. preemptive merger
C. c onglomerate merger
D. v ote by proxy
E. tender offer
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72. If a firm issues a poison pill when facing a hostile takeover attempt:
A. it fires its board of directors for incompetence.
B. it allows stockholders to buy shares of stock at prices lower than the market value.
C. it involves the firing of the entire executive committee before a takeover.
D. it requires a majority of stockholders to approve the takeover.
E. it files a lawsuit to avoid the takeover.
73. Big City Financial is attempting to avoid a hostile takeover by a corporate raider by
allowing stockholders to buy more shares of stock at prices lower than its current market
value. Which of the following methods is being used to avoid the takeover?
A. A leveraged buyout
B. A tender offer
C. A
white knight
D. A
poison pill
E. A shark repellant
74. In the context of corporations, what is a white knight?
A. A more acceptable firm that is willing to acquire the firm threatened by hostile takeover
B. An attempt to fend off a hostile takeover by selling stock at prices below the market
value
C. A
n attempt to fend off a hostile takeover by requiring the deal to be approved by a
majority of shareholders
D. A
n attempt to find off a hostile takeover by raising capital through an initial public
offering
E. A group of investors that has borrowed money to acquire a firm
75. Tim and Andy, wealthy industrialists, borrow money from the United Bank to acquire Solar
Corp. They promise to repay the bank using the assets of Solar Corp. as collateral. Tim
and Andy are involved in a(n):
A. horizontal merger.
B. vertical merger.
C. leveraged buyout.
D. c onglomerate merger.
E. poison pill.
Essay Questions
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76. What are the advantages of sole proprietorships over other forms of business
organizations?
77. Briefly discuss unlimited liability as a disadvantage of sole proprietorships.
78. How can taxation be disadvantageous in sole proprietorships?
79. Discuss the two basic types of partnerships.
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80. What are articles of partnership?
81. Why is it more difficult to value a partnership share than a share of stock in a
corporation?
82. Discuss limited sources of funds as a disadvantage in partnerships.
83. Explain taxation of partnerships.
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84. Briefly discuss domestic, foreign, alien, private, and public corporations.
85. How do preferred stockholders differ from the common stockholders of a corporation?
86. What is the preemptive right of common stockholders in a corporation?
87. How is disclosure of information a disadvantage to corporations?
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88. Discuss employee-owner separation in corporations.
89. Describe joint venture as a form of business ownership.
90. What is an S corporation? Discuss its advantages and disadvantages.
91. What is a limited liability company (LLC)? Why do some consider it the best form of
business ownership?
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92. Discuss a cooperative as a form of business ownership.
93. Discuss horizontal and vertical mergers.
94. Discuss the techniques to head off a hostile takeover attempt.
95. What is a leveraged buyout? Discuss some of the advantages of mergers and
acquisitions.
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