Question 1

John and Lena sign a contract with the owner of Little Fairy, a well-known preschool chain, to start a preschool in their city. They take permission from the owner to use the name and products of Little Fairy. They also furnish their preschool in Little Fairy's trademark style. In this scenario, John and Lena are starting a _____.

Accepted Answer

A) corporation 
B) sole proprietorship company 
C) limited liability company 
D) franchise

Question 2

Which of the following is an advantage of limited liability companies (LLCs)?

Accepted Answer

A) They can have any number of owners. 
B) The process of formation of an LLC is simple and fast. 
C) They are exempted from paying annual franchise tax. 
D) They do not need to register as foreign companies when doing business in other states.

Question 3

Green Haven is an organization whose earnings are exempt from federal and state income taxes. Individuals who contribute money to the organization can avail the benefit of tax deduction. However, the organization is barred from distributing dividends to its members. Given this information, Green Haven is most likely a(n):

Accepted Answer

A) S corporation. 
B) C corporation. 
C) not-for-profit corporation. 
D) statutory close corporation.

Question 4

The stockholders of a construction firm decide to start a steel company, but they want to have limited liability. After completing the business plan, they initiate the process of establishing the company by filing articles of incorporation and paying the filing fees to the state government. In this scenario, the stockholders of the firm want to start a _____.

Accepted Answer

A) franchise 
B) general partnership company 
C) limited liability company 
D) C corporation

Question 5

Which of the following is a difference between limited liability companies (LLCs) and corporations?

Accepted Answer

A) Corporations can have any number of owners, whereas LLCs can have only a limited number of owners. 
B) Corporations are not required to hold board meetings, whereas LLCs must hold regular board meetings. 
C) LLCs are subject to fewer reporting requirements than corporations. 
D) LLCs offer less flexibility than corporations in terms of tax treatment.

Question 6

There is no limit on the number of partners who can participate in a general partnership.

Accepted Answer

A) True 
 B)False

Question 7

A firm considers _____ to increase size and market power within the industry.

Accepted Answer

A) a buyer-supplier consolidation 
B) a conglomerate consolidation 
C) vertical mergers 
D) horizontal mergers

Question 8

Matisse and Oliver own an antique furniture business. They are in a form of partnership where Oliver is only a dormant partner who contributes financially to the business, whereas Matisse actively manages the business and takes care of imports and exports. Matisse and Oliver are bound by an agreement where, unlike Oliver, Matisse is personally responsible for all the debts incurred by the business. In the given scenario, Matisse and Oliver have a _____.

Accepted Answer

A) general partnership 
B) limited partnership 
C) limited liability partnership 
D) joint liability partnership

Question 9

Which of the following is a difference between limited partnerships and limited liability partnerships?

Accepted Answer

A) In limited partnerships, only the general partners assume unlimited personal liability of the debts, whereas in limited liability partnerships, the partners do not hold any liabilities. 
B) In limited liability partnerships, all partners have limited liability of company debts, whereas in limited partnerships, both partners hold unlimited liabilities. 
C) In limited liability partnerships, all the partners actively participate in the management of the company, whereas in limited partnerships, only the general partners actively manage the company. 
D) In limited partnerships, only the limited partners actively participate in managing the company, whereas in limited liability partnerships, all the members participate in the management of the company.

Question 10

Razak's, a popular chain of fast-food restaurants in the Middle East, plans to expand its market in Asia and signs a contract with an Indian firm. The contract allows the firm to set up restaurants with Razak's name and trademark and use the supplies provided by Razak to make its products. Under the contract, the Indian firm is required to adhere to the same cooking procedures and use the same equipment that are used by other outlets of the restaurant. The given scenario exemplifies a _____.

Accepted Answer

A) sole proprietorship 
B) distributorship 
C) business format franchise 
D) conglomerate merger

Question 11

Michael owns 100 shares of stock in the Zanson Electricals Corporation, but as a stockholder, he does not have the right to vote in stockholders' meetings. In this scenario, Michael is a preferred stockholder.

Accepted Answer

A) True 
 B)False

Question 12

A sole proprietorship is a form of business ownership in which:

Accepted Answer

A) the company is considered a legal entity that is separate from its owners. 
B) a single owner actively manages the company. 
C) two or more people act as co-owners of the company. 
D) the owners of the business are offered limited liability and flexible tax treatment.

Question 13

Tasmeen owns a retail business along with four other people. Like the other owners, Tasmeen is not personally responsible for the debts of the company. Her personal assets are thus protected in case the company incurs losses. Given this information, it can be assumed that Tasmeen _____.

Accepted Answer

A) owns a corporation 
B) has a general partnership 
C) has a limited partnership 
D) owns a proprietorship

Question 14

Amanda has always been inclined toward baking and wants to open her own bakery. She takes a loan of $20,000 from the bank and starts a bakery in her hometown. In the context of the four forms of business, Amanda most likely _____.

Accepted Answer

A) owns a limited liability company 
B) has a sole proprietorship 
C) has a general partnership 
D) owns a statutory close corporation

Question 15

In the context of limited partnerships, which of the following is an aspect that differentiates limited partners from general partners?

Accepted Answer

A) Duration of the partnership in a company 
B) Sharing of the profits of a company 
C) Financial contribution to a company 
D) Participation in the management of a company

Question 16

A _____ is a type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it.

Accepted Answer

A) crave-out trade 
B) non-disclosure agreement 
C) distributorship 
D) divestiture

Question 17

Norman owns a large number of shares in a telecommunications corporation. Despite that, he does not have the right to vote in a meeting held specifically to elect the CEO of the company. In this scenario, Norman is most likely a _____.

Accepted Answer

A) general partner 
B) limited partner 
C) common stockholder 
D) preferred stockholder

Question 18

A(n) _____ is a form of business ownership that offers both restricted responsibility to its owners and flexible tax treatment.

Accepted Answer

A) limited liability company 
B) S corporation 
C) sole proprietorship 
D) quasi corporation

Question 19

In the context of an acquisition, the firm that is purchased by another firm is called the _____.

Accepted Answer

A) partnership firm 
B) target firm 
C) cooperative 
D) franchise

Question 20

Carla and Liang both have shares in HD&Z Corporation, a C corporation that offers limited liability to all its owners. In this context, Carla and Liang are the _____ of HD&Z Corporation.

Accepted Answer

A) beneficial owners 
B) directors 
C) stockholders 
D) channel partners

Exam 6: Business Formation: Choosing the Form That Fits

Which of the following is an advantage of limited liability companies (LLCs) ?