Deck 5: How to Form a Business

Question 1

A major advantage of sole proprietorships is that an owner has limited liability for the debts of his or her business.

Answer 1

False

Question 2

The first step in starting a sole proprietorship is to fill out a proprietorship charter application form and file it with the state government.

Answer 2

False

Question 3

Partnerships are the most common form of business ownership.

Answer 3

False

Question 4

The debts of a business operated as a sole proprietorship are considered to be the personal debts of the owner of the business.

Question 5

Corporations represent 20 percent of all the businesses in the U.S. and earn over 80 percent of the total U.S. business receipts.

Question 6

A legal entity with authority to act and have liability separate from its owners is called a sole proprietorship.

Question 7

It is usually easy to start and end a sole proprietorship.

Question 8

The three major forms of business ownership in the U.S. are sole proprietorships, partnerships, and corporations.

Question 9

Sole proprietors sometimes have trouble competing with large firms for expert talent. Large firms can usually pay better and offer fringe benefits that are unaffordable to the sole proprietor.

Question 10

If the business is designated a sole proprietorship, profits are passed along to the owner. For tax purposes, these profits are accounted for with any other personal income the owner may have accumulated and taxed at the owner's personal income tax rate.

Question 11

Few people today start their own business.

Question 12

The profits of a sole proprietorship are taxed as the personal income of the owner.

Question 13

An advantage of forming a sole proprietorship is that it allows the owner to have more time for leisure activities.

Question 14

Once a business is established, it's almost impossible to change from one form of business ownership to another.

Question 15

The sole proprietorship form of ownership tends to be attractive to people who want to invest in a company without taking an active role in management.

Question 16

A drawback of sole proprietorships is that they usually have limited access to additional financial resources.

Question 17

A comparison of the three major forms of business ownership shows that sole proprietorships are usually the most difficult type of business to establish.

Question 18

One of the strengths of the sole proprietorship is its ability to sustain rapid growth by raising large amounts of financial resources.

Question 19

If a sole proprietorship fails, the owner may lose whatever was invested in the business, and the owner's personal assets are also at risk.

Question 20

When two or more people legally agree to become co-owners of a business, the form of business is called a partnership.

Question 21

One of the major disadvantages of a partnership is that profits must be divided equally.

Question 22

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.

Question 23

A general partner takes an active role in the management of the business.

Question 24

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.

Question 25

Limited partnerships are just like general partnerships, except that they are partners for a limited time period.

Question 26

Rhonda is convinced she has the best idea for a new business. Unfortunately, her business would require a fairly high initial investment and Rhonda has poor credit and very little personal wealth. She would be unlikely to find success if she organized her business as a sole proprietorship.

Question 27

Although shares of master limited partnerships can be purchased on one of the national stock exchanges, these companies are taxed like partnerships.

Question 28

A limited partnership consists of one or more general partners and one or more limited partners.

Question 29

According to the Uniform Partnership Act, the three key elements of any general partnership are (1) common ownership, (2) shared profits and losses, and (3) the right to participate in managing the operations of the business.

Question 30

All partners in a general partnership have limited liability for the debts of their firm.

Question 31

In order to protect all parties and minimize misunderstandings among partners, all terms of the partnership should be spelled out in writing.

Question 32

Unlike partnerships, if sole proprietorships find themselves in bankruptcy, they don't need to worry about a court requiring them to sell off personal assets to pay for the debts of the firm.

Question 33

In a general partnership, all partners are entitled to an equal share of the firm's profits.

Question 34

A recent study showed that partnerships are more likely to fail than sole proprietorships.

Question 35

Therese is a talented designer who wants to start her own women's swimwear and beach towel line. But first, she is trying to decide which form of business ownership is right for her. As a young mom who hopes to send her children to college some day, she does not want to jeopardize her savings in any way. In order to overcome these risks, Therese should start her business as a sole proprietorship.

Question 36

A limited partner is an owner who assumes no management responsibility and has no liability for losses beyond the amount invested.

Question 37

A general partner has unlimited liability for the debts of the partnership only if he or she personally approved the decisions that resulted in those debts.

Question 38

The Uniform Partnership Act is law in most states, except California, Oregon, and Colorado.

Question 39

In a general partnership, all partners share in management of the business and in the liability for the firm's debts.

Question 40

Attracted to the idea of being his own boss, Christian wants to start a new business. He is confident in his abilities, and knows his potential market is strong, so he is not particularly worried about the financial risks. All of these factors suggest that Christian may favor starting his business as a sole proprietorship.

Question 41

James and Reilly were arguing over who was the senior partner and who was the junior partner, even though they started the business at the same time. If you were brought on board as their business advisor, you would explain to them that all partnerships have at least one general partner (known as the senior partner) and one limited partner (known as the junior partner).

Question 42

Penny Pebble and Stuart Stone formed a partnership in a landscape business. Under their arrangement, Penny actively manages the company and assumes unlimited liability for its debts. Stuart has invested several thousand dollars of his money with plans to share in the profits, but does not actively make management decisions, nor will he assume liability beyond his initial investment. Penny and Stuart are in a limited partnership.

Question 43

One method to avoid conflicts between partners is to solicit the services of a lawyer to create a well-written partnership agreement.

Question 44

Huang has agreed to become a partner in his cousin's waste management business. Since he provided 30 percent of the money to start the company and built an air-conditioned garage, he is entitled to 30 percent of any profits the company earns during its first year of operation.

Question 45

Compared to sole proprietorships, an advantage of partnerships is their ability to obtain more financial resources.

Question 46

One advantage of a partnership is that there is a simple process for partners to terminate their business.

Question 47

The fairest way to handle profits in any partnership arrangement is to divide things evenly. If there are two owners in the business, each gets 50%. If there are three owners (even if one is a limited partner), each gets 33.333% of any accumulated profits.

Question 48

Janie is a general partner in a local bakery. All of her personal assets are legally protected from the debts of the business.

Question 49

If a partner in a limited partnership dies, the partnership ceases to exist.

Question 50

Setting up a partnership under the terms of a written agreement is a bad idea, because written agreements tend to be too inflexible and impersonal.

Question 51

The authors suggest that potential partners discuss the types of skills that each brings to the business. Partners with complementary skills may enhance the business.

Question 52

Attributes such as trust and integrity are not something you should get overly concerned about when selecting partners. This is a business decision, not a friendly game of golf.

Question 53

A conventional corporation is a state-chartered legal entity, with authority to act and have liability separate from its owners.

Question 54

For 11 years, Dennis and Tom have owned a car wash business as partners. Now they would like their younger brother Jimmy to join them. Unfortunately, partnership law states that only two partners can participate in a partnership.

Question 55

Rafael is a limited partner in an online clothing company. As a limited partner, Rafael can be involved with the company for a maximum of five years.

Question 56

After spending a summer "down under," two Oregon friends, Rick and Mick, created a general partnership to import emu from Australia to the U.S. After a year, Rick found himself at the mercy of Mick, who seemed to keep the books and seldom share the financial results, even though Rick was out selling the emu idea to farmers and ecologically conscious consumers and shipments were increasing. As their consultant, one of the first things that you inquire about is whether they are familiar with the UPA (Uniform Partnership Act), specifically the right to participate in managing the operations of the business.

Question 57

A limited partnership refers to a partnership set up for a temporary purpose, such as a real estate development project.

Question 58

In a limited partnership, the general partners should encourage the limited partners to take a more active role in the operations of the business. After all, the limited partner has comparable liability in the business, even though he/she may not be a partner for as long a period of time as the general partners.

Question 59

When two of Mercedes's friends approached her about starting a business, Mercedes's was sure she did not want to risk any amount beyond her initial investment or be involved with the day-to-day management. However, she was willing to invest in the business. Mercedes's preferences suggest that she prefers a general partnership form of business ownership.

Question 60

Compared to sole proprietorships, partnerships offer the advantage of shared management and pooled knowledge.

Question 61

One advantage of corporations is that the initial cost of organization is usually lower than for other forms of business ownership.

Question 62

One reason individuals incorporate is to obtain the advantage of limited liability.

Question 63

Most states have legal restrictions that prevent individuals from incorporating.

Question 64

A disadvantage of corporations is that an owner must get the approval of all other owners before selling his or her interest in the firm to another investor.

Question 65

Stockholders in a corporation have limited liability.

Question 66

In today's economy, only large business enterprises should operate as corporations.

Question 67

Stockholders in a corporation entrust control over the company's daily operations to managers selected by the board of directors to run the company.

Question 68

An alien corporation does business abroad but is chartered in the U.S.

Question 69

A disadvantage of corporations is that their charters are only valid for 99 years, so corporations are less permanent than other types of businesses.

Question 70

When one of the owners of a corporation dies, the corporation legally ceases to exist.

Question 71

The stockholders in a corporation elect a board of directors to oversee the company's major policy issues.

Question 72

A disadvantage of corporations is that they generally require extensive paperwork.

Question 73

Stockholders in a corporation normally exert a significant degree of control over the company's daily operations.

Question 74

States may levy special taxes on corporations that are not imposed on other businesses.

Question 75

The owners of a corporation are known as general corporate partners.

Question 76

A foreign corporation is chartered in a country outside the U.S.

Question 77

Corporations are easy to start and easy to terminate.

Question 78

Stockholders in a corporation accept unlimited liability for the corporation's debts.

Question 79

A domestic corporation does business in the state in which it's chartered.

Question 80

A corporation can raise financial capital by selling shares of stock to interested investors.