Question 1

Which form of business ownership is a particularly poor choice for an aggressive entrepreneurial firm?

Accepted Answer

A)  C corporation 
B)  sole proprietorship 
C)  subchapter S corporation 
D)  limited partnership 
E)  limited liability corporation

Question 2

Which of the following statements about limited partnerships is incorrect?

Accepted Answer

A)  A limited partnership is a modified form of a general partnership. 
B)  Limited partnerships are common in real estate and oil and gas exploration. 
C)  A limited partnership is usually formed to raise money or to spread out the risk of a venture without forming a corporation. 
D)  Both the limited partners and the general partners are responsible for the debts and obligations of the partnership. 
E)  A limited partnership contains two classes of owners: general partners and limited partners.

Question 3

All of the following is an advantage of a sole proprietorship except:

Accepted Answer

A)  creating one is easy and inexpensive 
B)  limited liability 
C)  it is not subject to double taxation 
D)  the owner maintains complete control of the business 
E)  business losses can be deducted against the sole proprietor's other sources of income

Question 4

It is usually easier for a corporation to raise investment capital than a sole proprietorship or a general partnership because the shareholders are not liable beyond their investment in the firm.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is an advantage of a C Corporation?

Accepted Answer

A)  Setting up and maintaining one is more difficult than for a sole proprietorship or a partnership. 
B)  Stock is liquid if traded on a major stock exchange. 
C)  Business losses cannot be deducted against the shareholders' other sources of income. 
D)  Income is subject to double taxation. 
E)  Small shareholders typically have little voice in the management of the firm.

Question 6

Which of the following statements is incorrect regarding common stock?

Accepted Answer

A)  Common stock is issued more narrowly than preferred stock. 
B)  The common stockholders have voting rights. 
C)  The common stockholders get paid after the creditors in the event the liquidation of the corporation. 
D)  Common stock is the form of stock that most shareholders of a corporation own. 
E)  The common stockholders elect the board of directors.

Question 7

Corporations are organized as either C Corporations, T Corporation, or subchapter S corporations.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is not one of the standards that a business must meet to qualify for status as a subchapter S corporation?

Accepted Answer

A)  The business cannot be a subsidiary of another corporation. 
B)  All shareholders must agree to have the corporation formed as a subchapter S corporation. 
C)  It can have no more than 75 members (husbands and wives count as one member). 
D)  It can have only one class of stock issued and outstanding. 
E)  The shareholders must be U.S. citizens.

Question 9

Which of the following is not one of the four factors identified in the textbook as critical in selecting a form of business ownership?

Accepted Answer

A)  the cost of setting up and maintaining the legal form 
B)  the number and types of investors involved 
C)  accounting and financial reporting considerations 
D)  tax considerations 
E)  the extent to which personal assets can be shielded from the liabilities of the business

Question 10

A ________ is a written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated for the cash or the "sweat equity" they put into the firm, and how long the founder will have to remain with the firm for their shares to fully vest.

Accepted Answer

A)  entrepreneurs' agreement 
B)  creators' agreement 
C)  founders' agreement 
D)  initiators' agreement 
E)  originators' agreement

Question 11

A ________ agreement binds an employee or another part to not disclose a company's trade secret. A ________ agreement prevents an individual from competing against a former employer for a specific period of time.

Accepted Answer

A)  nondisclosure, noncompete 
B)  non breach-of-trust, nonchallenge 
C)  voluntary truth, nonparticipate 
D)  binding confidentiality, noncompete 
E)  ethics, nonparticipate

Question 12

RealKidz, the company profiled in the opening feature for Chapter 7, experienced one particularly startling legal challenge early in the life of the firm. What was the challenge?

Accepted Answer

A)  It did not obtain the proper business licenses. 
B)  It hired an employee who misrepresented the company in a contract negotiation. 
C)  It got into a legal dispute with an investor. 
D)  It hired an accountant who stole money from the firm. 
E)  It contracted with a clothing designer who turned out to be a scam artist.

Question 13

Describe what is meant by a "general partnership" and a "limited partnership." Describe the major difference between the two.

Accepted Answer

The answer of Describe what is meant by a "general...

Question 14

What is meant by the term "piercing the corporate veil"? How can the corporate veil be pierced?

Accepted Answer

The answer of What is meant by the term "piercing...

Question 15

Corporations are organized as either:

Accepted Answer

A)  permanent corporations or temporary corporations 
B)  general corporations or limited corporations 
C)  voluntary corporations or statutory corporations 
D)  C corporations or subchapter S corporations 
E)  regular corporations or limited liability corporations

Exam 7: Preparing the Proper Ethical and Legal Foundation