a business that is owned and usually managed by one person
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partnership
answer
a legal form of business with two or more owners
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corporation
answer
a legal entity with authority to act and have liability apart from its owners
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unlimited liability
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the responsibility of business owners for all the debts of the business
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general partnership
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a partnership in which all owners share in operating the business and in assuming liability for the business's debts
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limited partnership
answer
a partnership with one of more general partners and one or more limited partners
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general partner
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an owner (partner) who has unlimited liability and is active in managing the firm
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limited partner
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an owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment
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limited liability
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the responsibility of a business's owners for losses only up to the amount they invest; limited partners and share
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master limited partnership (MLP)
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a partnership that looks much like a corporation ( in that it acts like a corporation and is traded on the stock exchange) but is taxed like a partnership and thus avoids the corporate income tax
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limited liability partnership (LLP)
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a partnership that limits partners' risk of losing
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conventional corporation (C Corp)
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a state-chartered legal entity with authority to act and have liability separate from its owners
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S Corporation
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a unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships
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limited liability company (LLC)
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a company similar to an S corporation but without the special eligibility requirements
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merger
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the results of two firms forming one company
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acquisition
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one companys purchase of the property and obligations of another company
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vertical merger
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the joining of two companies involved in different stages of related business
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horizontal merger
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the joining of two firms in the same industry
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conglomerate merger
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the joining of firms in completely unrelated industries
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leverage buyout (LBO)
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an attempt by employees, management, or a group of investors to purchase an organization primarily through browsing
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franchise agreement
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an arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service to others in a given territory
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franchisor
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a company that develops a product concept and sells others the rights to make and sell the products
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franchise
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the rights to use a specific business's name and sell its products or services in a given territory
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franchisee
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a person who buys a franchise
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cooperative
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a business owned and controlled by the people who use it-producers, consumers, or workers with similar needs who pool their resources for mutual gain
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alien corporation
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does business in the US but is chartered (incorporated) in another country
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domestic corporation
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does business in the state in which its chartered (incorporated)
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foreign corporation
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does business in one states but is chartered in another. About one-third of all corps are chartered in Delaware because of its relatively attractive rules for incorporation. A foreign corporation must register in states where it operates
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closed (private) corporation
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bus whose stock is held by a few people and isnt available to the general public
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open (public) corp
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bus whose stock to the general public. GM and ExxonMobil are examples of public
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quasi-public corporation
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a corporation chartered by the gov as an approved monopoly to perform services to the general public. public utilities are examples of quasi-public corps
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professional corporation
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one whose owners offer professional services and shares arent publicly traded
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nonprofit corporation
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corporation that doesnt seek personal profit for its owners
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multinational corp
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firm that operates in several countries
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The corporation is the most common form of business ownership.
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Answer: False LG: 1/LL: 1 Page: 142
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The three major forms of business ownership in the U.S. are sole proprietorships, partnerships, and corporations.
answer
Answer: True LG: 1/LL: 1 Page: 142
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Once a business is established, it's almost impossible to change from one form of business ownership to another.
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Answer: False LG: 1/LL: 1 Page: 142
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A comparison of the three major forms of business ownership shows that sole proprietorships are usually the most difficult type of business to establish.
answer
Answer: False LG: 1/LL: 1 Page: 143
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The first step in starting a sole proprietorship is to fill out a proprietorship charter application form and file it with the state government.
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Answer: False LG: 1/LL: 1 Page: 143
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The profits of a sole proprietorship are taxed as the personal income of the owner.
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Answer: True LG: 1/LL: 1 Page: 143
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A major advantage of sole proprietorships is that an owner has limited liability for the debts of his or her business.
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Answer: False LG: 1/LL: 1 Page: 143
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The debts of a business operated as a sole proprietorship are considered to be the personal debts of the owner of the business.
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Answer: True LG: 1/LL: 1 Page: 143-144
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A drawback of sole proprietorships is that they usually have limited access to additional financial resources.
answer
Answer: True LG: 1/LL: 1 Page: 144
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An advantage of forming a sole proprietorship is that it allows the owner to have more time for leisure activities.
answer
Answer: False LG: 1/LL: 1 Page: 144
question
Jim wants to start a business. He is attracted by the idea of being his own boss, and wants to get started with a minimum of expense and hassle. He is very confident in his abilities, so he is not particularly worried about financial risks. All of these factors suggest that Jim would favor starting his business as a sole proprietorship.
answer
Answer: True LG: 1/LL: 2 Page: 143
Rationale: People who want to be their own boss often prefer to operate their business, at least initially, as a sole proprietorship. Another advantage of the sole proprietorship is that it is a relatively easy and inexpensive form of business to set up. One drawback of a sole proprietorship is that the owner has unlimited liability. However, Jim is not worried about risk, so this would not appear to be a major problem for him.
question
If a sole proprietorship fails, the owner may lose whatever was invested in the business, but the owner's personal assets are not at risk.
answer
Answer: False LG: 1/LL: 2 Page: 143-144
Rationale: Sole proprietors have unlimited liability for the debts of their business. This means that if their business gets into financial trouble they can lose their personal assets.
question
A general partner can take an active role in the management of the business.
answer
Answer: True LG: 2/LL: 1 Page: 145
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All of the partners in a general partnership have limited liability for the debts of their firm.
answer
Answer: False LG: 2/LL: 1 Page: 145
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In a general partnership, all owners share in both management of the business and in the assumption of liability for the firm's debts.
answer
Answer: True LG: 2/LL: 1 Page: 145
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A limited partner is an owner who takes no management responsibility and has no liability for losses beyond the amount invested.
answer
Answer: True LG: 2/LL: 1 Page: 145
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According to the Uniform Partnership Act, the three key elements of any general partnership are (1) shares of stock to represent ownership, (2) limited liability, and (3) ease of ownership transfer.
answer
Answer: False LG: 2/LL: 1 Page: 145
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A recent study showed that partnerships are more likely to fail than sole proprietorships.
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Answer: False LG: 2/LL: 1 Page: 146
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A major objective of limited liability partnerships (LLPs) is to limit each partner's personal liability to the consequences of their own acts and those of people under their supervision.
answer
Answer: True LG: 2/LL: 1 Page: 145
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In order to protect all parties and minimize misunderstandings among partners, all terms of the partnership should be spelled out in writing.
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Answer: True LG: 2/LL: 1 Page: 147
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One advantage of a partnership is that there is a simple process for partners to terminate their business.
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Answer: False LG: 2/LL: 1 Page: 147
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Compared to sole proprietorships, an advantage of partnerships is their ability to obtain more financial resources.
answer
Answer: True LG: 2/LL: 1 Page: 145
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Compared to sole proprietorships, partnerships offer the advantage of shared management and pooled knowledge.
answer
Answer: True LG: 2/LL: 1 Page: 145-146
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A limited partnership refers to a partnership set up for a temporary purpose, such as a real estate development project.
answer
Answer: False LG: 2/LL: 1 Page: 145
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Ted and Mark have been partners in a dry cleaning business for the past three years. They would like their brother Todd to join them. Unfortunately, partnership law states that only two partners can participate in a partnership.
answer
Answer: False LG: 2/LL: 2 Page: 145
Rationale: A partnership consists of two or more owners.
question
Sharon Pebble and Gilbert Stone have just formed a business partnership. Under their arrangement, Sharon will actively manage the company and assume unlimited liability for the firm's debts. Gilbert will invest several thousand dollars of his money and will share in the profits, but will not actively manage the firm and will not have liability for losses beyond his initial investment. Sharon and Gilbert have formed a limited partnership.
answer
Answer: True LG: 2/LL: 2 Page: 145
Rationale: A limited partnership consists of at least one general partner, who has unlimited liability, and at least one limited partner, who can lose only what he or she has invested. The limited partner cannot actively manage the partnership.
.
question
Alphonzo has agreed to become a partner in his brother's new clothing store and has provided 30 percent of the startup capital for Remora's Clothiers. Since he provided 30 percent of the money to start the firm, he is legally entitled to 30 percent of any the profits the firm earns during its first year of operations.
answer
Answer: False LG: 2/LL: 2 Page: 146-147
Rationale: The division of profits in a partnership is negotiable and is not necessarily tied to the amount of the initial investment.
question
Ron and Jon want to go into business together. They do not want to bring in other partners, but they both want to avoid unlimited liability for any debts incurred by their new company. Ron and Jon can achieve their aims by organizing the firm as a limited partnership.
answer
Answer: False LG: 2/LL: 2 Page: 145
Rationale: All partnerships, including limited partnerships, must include at least one general partner. The general partners in a limited partnership must accept unlimited liability. Thus, if Ron and Jon form a limited partnership they will either have to bring in another person to be the general partner, or one of them will have to be the general partner and accept unlimited liability.
question
Connie is a general partner in a retail cookie store. Her personal assets are protected from the debts of the business.
answer
Answer: False LG: 2/LL: 2 Page: 145
Rationale: As a general partner, Connie assumes unlimited liability for the debts of her business.
question
A conventional corporation is a state-chartered legal entity, with authority to act and have liability separate from its owners.
answer
Answer: True LG: 3/LL: 1 Page: 149
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A corporation can raise financial capital by selling shares of stock to interested investors.
answer
Answer: True LG: 3/LL: 1 Page: 150
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Stockholders in a corporation must accept unlimited liability for the corporation's debts.
answer
Answer: False LG: 3/LL: 1 Page: 149
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When one of the owners of a corporation dies, the corporation legally ceases to exist.
answer
Answer: False LG: 3/LL: 1 Page: 150
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Corporations are easy to start and easy to terminate.
answer
Answer: False LG: 3/LL: 1 Page: 151
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A disadvantage of corporations is that they generally require extensive paperwork.
answer
Answer: True LG: 3/LL: 1 Page: 151
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The stockholders in a corporation elect a board of directors to oversee the company's major policy issues.
answer
Answer: True LG: 3/LL: 1 Page: 150-151
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Stockholders in a corporation have limited liability for the debts of the corporation.
answer
Answer: True LG: 3/LL: 1 Page: 149
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One advantage of corporations is that the initial cost of setting them up is usually lower than for other forms of ownership.
answer
Answer: False LG: 3/LL: 1 Page: 151
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One reason Individuals incorporate is to obtain the advantage of limited liability.
answer
Answer: True LG: 3/LL: 1 Page: 152
question
One advantage of an S Corporation is that the profits of the business are taxed as regular personal income of the owners, thus avoiding the problem of double taxation.
answer
Answer: True LG: 3/LL: 1 Page: 152-153
question
Any corporation can qualify to be classified as an S corporation as long as it fills out and files the proper paperwork with the appropriate state agency on an annual basis.
answer
Answer: False LG: 3/LL: 1 Page: 153
question
The advantages of limited liability companies are not available to providers of personal services like doctors and lawyers.
answer
Answer: False LG: 3/LL: 1 Page: 153
question
A limited liability company is similar to an S corporation, but without the special eligibility requirements.
answer
Answer: True LG: 3/LL: 1 Page: 153
question
Limited liability companies have both flexibility in tax treatment of earnings and limited liability protection for owners.
answer
Answer: True LG: 3/LL: 1 Page: 153
question
Like stockholders of a C corporation, owners of a limited liability company (LLC) are free to sell their ownership without the approval of other members.
answer
Answer: False LG: 3/LL 1 Page: 154
question
Owners of limited liability companies (LLCs) must pay self-employment taxes on any profits they earn.
answer
Answer: True LG: 3/LL: 1 Page: 154
question
Dr. Wright is interested in incorporating as an individual. While this is legally possible, there are really no advantages to doing so.
answer
Answer: False LG: 3/LL: 2 Page: 152
Rationale: Many individuals choose to incorporate to obtain limited liability. In some cases, they may also receive tax savings by doing so.
question
Nutty Dough is a small chain of donut shops that is currently owned and operated by a group of seven partners. The owners think that their chain has the potential for rapid growth, but several of the partners are concerned about the growing financial risks that will accompany this growth. One way the partners could deal with this problem would be to incorporate their business.
answer
Answer: True LG: 3/LL: 2 Page: 150
Rationale: Because they can issue shares of stock and bonds, and often find it easier to obtain loans from financial institutions, corporations usually have easier access to financial resources than unincorporated businesses. Another advantage of corporations is that they provide their owners (stockholders) with the protection of limited liability.
question
When Erica Wayne decided to start a business she chose to form it as a corporation. This choice ensures that, as the founder and incorporator of the company, Erica will remain in control of the firm's operations as long as she wants, no matter how large or complex the business becomes.
answer
Answer: False LG: 3/LL: 2 Page: 151
Rationale: One potential drawback of incorporation is the possibility of conflict between the entrepreneurs who originally start a business and the stockholders and board of directors who may eventually gain control. The text cites the cases of Rod Canion of Compaq and Steve Jobs of Apple Computer as examples of entrepreneurs who were forced out of the very companies they founded.
question
Mojo Motors is a rather small conventional corporation with only 212 stockholders. Eleven of the stockholders are citizens of Mexico who live in Mexico City, and eight more are citizens of Canada who live in Toronto. Mojo Motors should organize as an S corporation in order to save on taxes.
answer
Answer: False LG: 3/LL: 2 Page: 153
Rationale: Mojo Motors does not satisfy the requirements for an S corporation--it has more than 75 stockholders, some of whom are not U.S. citizens or permanent residents of the United States.
question
The partners at Edgar's Microbrewery would like to switch to an S corporation. Unfortunately, their lawyer has told them that they do not meet some of the requirements necessary to qualify as an S corporation. An alternative form of business that would give them similar advantages is a limited liability company.
answer
Answer: True LG: 3/LL: 2 Page: 153
Rationale: Limited liability companies offer many of the same advantages as S corporations, including limited liability and the possibility of taxation like a partnership, without the special eligibility requirements required to qualify for S corporation status.
question
The owners of the new Chillout Ice Cream Company have chosen to organize their business as a limited liability company. One drawback of this form of ownership is that the owners will pay higher taxes on their earnings than a regular corporation if their company grows rapidly.
answer
Answer: False LG: 3/LL: 2 Page: 153
Rationale: In terms of taxes, a limited liability company offers the best of all worlds, allowing the owners to choose to be taxed as a partnership or a corporation depending on which tax rates would benefit them the most.
question
In a merger, two firms combine to form one company.
answer
Answer: True LG: 4/LL: 1 Page: 156
question
An acquisition is when one company buys the property and obligations of another company.
answer
Answer: True LG: 4/LL: 1 Page: 156
question
In a conglomerate merger, firms in the same industry merge to expand their share of the market.
answer
Answer: False LG: 4/LL: 1 Page: 157
question
A merger between two businesses in different stages of related businesses is known as a vertical merger.
answer
Answer: True LG: 4/LL: 1 Page: 156
question
When a group of investors take a firm private, they obtain all of the stock for themselves.
answer
Answer: True LG: 4/LL: 1 Page: 157
question
In the past, the Beirderg's Markets and Bronew's Groceries have been fierce competitors in the grocery market. However, they recently issued a joint announcement stating their decision to merge. The announcement justified the proposed merger by claiming that the resulting firm would have more financial resources, which would enable it to expand services and broaden offerings to consumers. This proposed merger is an example of a horizontal merger.
answer
Answer: True LG: 4/LL: 2 Page: 157
Rationale: A merger between two firms in the same industry, such as two grocery store chains, is a horizontal merger.
question
A major objective of a leveraged buyout is to enable investors to gain control of a company by issuing new shares of ownership, thus minimizing the use of debt.
answer
Answer: False LG: 4/LL: 2 Page: 157
Rationale: Leveraged buyouts involve financing the acquisition of an organization through the use of debt financing.
question
Jane Gramm is leading a group of stockholders who want to take the Bigbux Corporation private. If Jane's group succeeds, Bigbux's stock will no longer be available to investors on the open market.
answer
Answer: True LG: 4/LL: 2 Page: 157
Rationale: Taking a firm private involves gaining control of a firm's stock so that it is no longer available to investors on the open market.
question
The workers at Scrappy's Metal Fabrication, Inc., have learned that the firm is about to close down. They have devised a plan to use debt financing to buy the company's stock from current shareholders with the intention of keeping the company in business, thus saving their jobs. This strategy is called a leveraged buyout.
answer
Answer: True LG: 4/LL: 2 Page: 157
Rationale: A leveraged buyout involves the use of debt financing to buy the stock of a company. This is what the workers are attempting to do in this example.
question
A franchise agreement is an arrangement where a franchisor sells the rights to a business name and to sell a product or service within a given territory to a franchisee.
answer
Answer: True LG: 5/LL: 1 Page: 158
question
A franchise may be organized as a sole proprietorship, partnership, or corporation.
answer
Answer: True LG: 5/LL: 1 Page: 158
question
In a franchise arrangement, ownership of all of the individual stores or outlets remains in the hands of the franchisor.
answer
Answer: False LG: 5/LL: 1 Page: 159
question
One of the major advantages of a franchise system is the franchisee often gets instant recognition from consumers.
answer
Answer: True LG: 5/LL: 1 Page: 159
question
Franchisees must follow more rules, regulations, and procedures than if they operated independently owned businesses.
answer
Answer: True LG: 5/LL: 1 Page: 160
question
The "coattail effect" refers to the burden of corporate rules and regulations on franchisees.
answer
Answer: False LG: 5/LL: 1 Page: 160
question
The franchisee often must pay the franchisor a share of profits or a percentage commission on sales known as a royalty.
answer
Answer: True LG: 5/LL: 1 Page: 160
question
Franchising in global markets has demonstrated that high operating costs are counterbalanced by high profit opportunities.
answer
Answer: True LG: 5/LL: 1 Page: 164
question
Les is a franchisee in the Far Horizons Travel Agency franchise. As a franchisee, Les is guaranteed the right to retain all of his franchise's profits.
answer
Answer: False LG: 5/LL: 2 Page: 160
Rationale: Franchisees usually pay a royalty to the franchisor. This royalty is sometimes expressed as a share of the franchisee's profits.
question
Leanne is a franchisee in a restaurant chain. Thanks mainly to her hard work and people skills, her individual outlet is doing quite well. However, she has noticed that several other franchisees in the same chain have let their businesses deteriorate, especially in terms of the quality of the food they offer. Leanne should be very concerned about this trend, since it eventually could affect her own business.
answer
Answer: True LG: 5/LL: 2 Page: 160
Rationale: The actions of less successful franchisees can hurt the success of others in the same franchise. This is known as the coattail effect.
question
A cooperative consists of people with similar needs who pool their resources for mutual gain.
answer
Answer: True LG: 6/LL: 1 Page: 165
question
It is not unusual for members of cooperatives to work for and help manage their cooperative.
answer
Answer: True LG: 6/LL: 1 Page: 165
question
Farm cooperatives were originally established to help farmers increase their economic power by acting as a group rather than as individuals.
answer
Answer: True LG: 6/LL: 1 Page: 165
question
The ___________ is the most common form of business ownership.
A) partnership.
B) corporation.
C) joint venture.
D) sole proprietorship.
answer
Answer: D LG: 1/LL: 1 Page: 142
question
A ___________ is a business organization that is owned, and usually managed, by one person.
A) closed corporation.
B) subchapter S corporation.
C) sole proprietorship.
D) limited partnership.
answer
Answer: C LG: 1/LL: 1 Page: 142
question
____________ comprise about 20% of all businesses but account for about 87% of all business receipts.
A) Corporations
B) Partnerships
C) Sole proprietorships
D) Limited liability companies
answer
Answer: A LG: 1/LL: 1 Page: 142
question
Any debts or damages incurred by a firm organized as a sole proprietorship are:
A) the sole responsibility of the owner.
B) limited to the amount the owner has invested in the firm.
C) paid for out of a reserve contingency fund that sole proprietors are required by law to set up.
D) normally covered by liability insurance.
answer
Answer: A LG: 1/LL: 1 Page: 143-144
question
An entrepreneur who wishes to start a business with little delay or hassle, and who wants to be his or her own boss, should organize the business as a:
A) sole proprietorship.
B) cooperative.
C) C corporation.
D) general partnership.
answer
Answer: A LG: 1/LL: 2 Page: 143
Rationale: Two advantages of sole proprietorships are ease of starting (and ending) and being your own boss.
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