Question 1

Emile has very little money with which to start his business so he wants to keep the cost of forming his company as low as possible.  Which form of ownership would you recommend for Emile?

Accepted Answer

A sole proprietorship is the simplest and most cost-effective form of ownership for a small business. It requires no formal registration or documentation, and the owner has complete control over the business. Additionally, there are no separate tax filings required, meaning the owner can report business income and expenses on their personal tax return. This makes it an ideal choice for someone like Emile who needs to keep costs low.

Question 2

The right to buy new shares of stock in proportion to stock already owned is called a:

Accepted Answer

The right to buy new shares of stock in proportion to stock already owned is called a preemptive right. This allows current shareholders to maintain their proportionate ownership in the company and prevent dilution of their shares. Stock rights and stock options are different forms of incentive plans for employees, while Section 1244 refers to a tax provision for small business stocks.

Question 3

A basic legal principle involving stockholders is that:

Accepted Answer

This principle is known as the separation of ownership and control. Stockholders have the right to vote for members of the board of directors, but they do not have the legal right to manage the daily affairs of the corporation. The board of directors, elected by the stockholders, is responsible for overseeing management and making important business decisions.

Question 4

Dylan has purchased stock in a new corporation.  As proof of ownership, Dylan will receive:

Accepted Answer

A stock certificate is physical proof of ownership in a corporation. Dividends are payments made to shareholders from the company's profits. A corporate charter is a legal document that establishes the existence of a corporation. A pre-emptive right is the right of existing shareholders to purchase newly issued shares before they are available to the public.

Question 5

Frank would like to avoid personal financial loss if his business idea does not work.  Which form of ownership would you suggest?

Accepted Answer

A corporation offers limited liability protection for its owners, meaning that the personal assets of shareholders are generally safe from business debts and obligations. This makes it a suitable choice for Frank to protect his personal financial interests in case his business idea fails.

Question 6

Glenda, an employee of a corporation, caused a traffic accident while on company business.  Who will pay for the damages?

Accepted Answer

Since Glenda was on company business at the time of the accident, the corporation can be held liable for any damages caused. The corporation may have insurance policies in place to cover such incidents, or they may have to pay out of pocket. However, the stockholders, board of directors, or founder would not be personally responsible for the damages, as the corporation is a separate legal entity.

Question 7

Stockholders have limited liability unless they:

Accepted Answer

Stockholders have limited liability in the sense that they are not personally responsible for the debts of the corporation beyond the amount of their investment. However, if they personally endorse company notes or loans, they may be held liable for those debts. Therefore, option B is the correct choice. Option A is incorrect because active involvement in management does not affect the limited liability protection. Option C is incorrect because owning preferred stock does not affect this protection either. Option D is incorrect because it is not possible to convert a share of stock to a partnership status.

Question 8

Because the corporation is a legal entity, one of its responsibilities is to:

Accepted Answer

As a legal entity, the corporation is required to file annual tax returns just like any other individual or organization. This is because the corporation is considered a separate legal entity from its owners or shareholders, and therefore must report its income and expenses separately. While the corporation may also choose to sell stock or pay dividends, these are not legal obligations but rather strategic decisions made by the corporation's management. Having its accounting records audited may also be a good business practice, but again, it is not a legal requirement.

Question 9

Upon the death of the majority stockholder in a corporation, direct control may pass to:

Accepted Answer

Upon the death of a majority stockholder, direct control of the corporation will pass to their estate and the executor of that estate.

Question 10

Jane and Randy have a partnership with their company of JR Enterprises . Which statements reflect how the partnership pays taxes?

Accepted Answer

The answer of Jane and Randy have a partnership with...

Question 11

A typical common stockholder of a corporation:

Accepted Answer

A common stockholder has the right to receive declared dividends, which are payments made by the corporation to its stockholders out of its profits. However, common stockholders do not have the right to act for the firm or fire employees, and they typically do not have a guaranteed right to buy new stock in proportion to what they already own.

Question 12

Ownership in a corporation:

Accepted Answer

Ownership in a corporation is in the form of stocks or shares, which are more easily transferable compared to ownership in other forms of organization such as partnerships or sole proprietorships.

Question 13

To maintain status as a corporation, the corporation must:

Accepted Answer

In order to maintain status as a corporation, the corporation must hold annual meetings of both the shareholders and the board of directors. This is required by law and failure to do so may result in the loss of corporate status. While corporations may choose to declare dividends, this is not a requirement for maintaining corporate status. Additionally, corporations do not need to reapply for a charter annually once they have been granted one. Finally, while bylaws are an important component of a corporation's governance structure, they do not need to be submitted to the secretary of state annually in order to maintain corporate status.

Question 14

In a limited partnership, which partner remains bound by all debts of the business?

Accepted Answer

In a limited partnership, the general partner retains unlimited liability and is responsible for all debts and obligations of the business. The limited partner's liability is limited to their investment in the partnership and they cannot be held responsible for debts beyond that amount.

Question 15

Which organizational type results in the business owner having unlimited liability?

Accepted Answer

A sole proprietorship is a business owned by one individual who is personally liable for all the debts and obligations of the business. This means that the owner's personal assets, such as their home or car, can be seized to pay off business debts. In contrast, LLCs, limited partnerships, and corporations offer some form of liability protection for their owners.

Question 16

Harvey would like to support his friend's new business financially but also wants to protect his assets in case the business fails. Which form of ownership would you recommend?

Accepted Answer

Limited partnership would be the best choice for Harvey because he can invest in the business as a limited partner, which means his liability is limited to the amount of his investment. This way, even if the business fails and incurs debts or legal problems, Harvey's assets will remain protected.

Question 17

Lauren, a partner in Jales & Jales Bonding Company , manages its day-to-day operations. She is considered to be a _____ partner.

Accepted Answer

A general partner in a partnership is involved in the day-to-day operations of the business, which aligns with Lauren's role in managing the day-to-day operations of Jales & Jales Bonding Company.

Question 18

Evan has received permission from his state to form a corporation for his startup, expecting his liability would be limited to the amount of his investment.  But his bank asked him to assume personal liability before it would grant him a business loan.  Why would the bank make this demand?

Accepted Answer

Without a credit history, the bank may consider the startup to be a higher risk for loan repayment. As a result, they may require Evan to assume personal liability to ensure that they have a source of repayment if the business fails to repay the loan.

Question 19

The two dimensions of management control of a small corporation usually involves which individuals?

Accepted Answer

Both stockholders and corporate officers are involved in the two dimensions of management control of a small corporation. Stockholders have control over major decisions such as changes in corporate structure or leadership, while corporate officers are responsible for the day-to-day operations of the business. Both groups work together to ensure the success of the corporation.

Question 20

Ralph formed a corporation as a fund manager.  He accepted money from his customers, promising to invest it and build cash value for them.  Instead, he kept the money for himself to enjoy a lavish lifestyle.  The court removed liability protection from his corporate entity because the incorporation had been used to perpetuate fraud.  This is an example of:

Accepted Answer

Piercing the corporate veil refers to the legal action of removing the protection of limited liability from a corporation and holding its owners or shareholders personally liable for the corporation's debts or misconduct. In this case, Ralph used his corporation to perpetuate fraud, and the court removed the liability protection as a consequence.

Quiz 8: The Organizational Plan Teams Legal Structures Alliances and Directors

Emile has very little money with which to start his business so he wants to keep the cost of forming his company as low as possible. Which form of ownership would you recommend for Emile?