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World Of Business Chapter 4
Terms in this set (47)
190. A ___________ is a form of business that is owned, and usually managed, by one person.
A. closed corporation
B. subchapter S corporation
C. sole proprietorship
D. limited partnership
191. ____________ comprise about 20% of all businesses but account for about 81% of U.S. business receipts.
C. Sole proprietorships
D. Limited liability companies
194. One of the major disadvantages of a sole proprietorship is the:
A. possibility of disagreements between owners.
B. unlimited liability the owner has for the debts of the firm.
C. fact that any income earned by this type of business is taxed twice.
D. high cost of starting or ending the company.
196. In a sole proprietorship, the profits earned by the business are:
A. taxed as income for the business, but exempt from the personal income tax paid by the owner.
B. taxed at the lowest corporate rate.
C. the property of the owner, except for taxes owed to the government.
D. tax-free if the appropriate exemption is filed with the local government.
197. With respect to taxes, the sole proprietorship:
A. pays taxes on the profits of the business at the same rate that corporations pay taxes.
B. pays taxes on the profits of the business, at the owner's personal tax rate.
C. pays taxes only if there are no expenses associated with the business.
D. is permitted to determine its own tax rate and schedule of payments.
200. Unlimited liability means:
A. when you own your own business you are responsible for all the business debts.
B. you are only liable for the money you invest in the business.
C. as a franchisee your franchisor is responsible for the debts of the franchise.
D. you are liable for whatever advertising promises your firm makes.
Unlimited liability means the owner is responsible for all the debts of the firm. If the firm should land in bankruptcy court, the judge could liquidate the owner's personal assets to pay the debts of the business.
206. Joe Jackson operates a sole proprietorship, but he is in poor health and may be unable to continue running the business. If Joe becomes incapacitated, his business:
A. automatically continues under new management as a sole proprietorship.
B. automatically converts into a public corporation with stock sold to interested investors.
C. ceases to exist unless sold or taken over by Joe's heirs.
D. becomes the property of the most senior employee who wishes to continue operating the firm.
A sole proprietorship ceases to exist if the proprietor dies, retires, or becomes incapacitated, unless it is sold or taken over by the owner's heirs.
210. Javier is the sole proprietor of a golf shop. Because he is a sole proprietor, any profit Javier's business earns is:
A. totally tax-free.
B. taxed only as Javier's personal income.
C. taxed twice, once as business income, then again as Javier's personal income.
D. taxed only if and when it is distributed to investors.
A tax advantage of sole proprietorships is that their earnings are only taxed once, as personal income to the owner.
213. In a partnership, a(n) __________ partner (owner) actively manages the company and has unlimited liability for claims against the firm.
214. A partner (owner) who invests money in a business does not take an active role in managing the operation, and is only subject to losing the funds he/she invested.
A. implied partner.
B. limited partner.
C. partial partner.
D. corporate partner.
215. The limited liability provided to limited partners means that they are not responsible for the debts of the business beyond:
A. the firm's total assets.
B. the amount they have invested in the company.
C. the percentage of profits they are entitled to earn.
D. their total personal assets.
216. According to the Uniform Partnership Act, the three key elements of any general partnership are:
A. a board of directors, a written partnership agreement, and a well-defined product or service.
B. two owners, an adequate financial base, and a written statement describing the manner in which profits and losses will be divided.
C. common ownership, shared profits and losses, and right to participate in management.
D. common stock, a board of directors, and a statement of limited liability.
217. A type of partnership called a ___________ acts much like a corporation and is traded on stock exchanges, but it is taxed like a partnership with profits passing through to the owners and taxed as the owner's personal income.
A. limited partnership
B. combined general partnership
C. cooperative partnership
D. master limited partnership
218. Compared to a sole proprietorship, which of the following is considered an advantage of a general partnership?
A. Ability to pool financial resources
B. Unlimited liability for all owners
C. Division of profits among owners
D. Ease and flexibility in transferring shares of ownership to others
225. A good reason why partners should spell out the details of their partnership arrangements in writing is:
A. the partnership is not a legally recognized business unless they do so.
B. a written agreement will help reduce misunderstandings and disagreements among the partners.
C. putting the agreement in writing will limit the liability of each partner to a specified level.
D. doing so will make it easier to convert the business to a corporation at a later date.
A major drawback of a partnership is the potential for disagreements among the partners. Spelling out the agreement in writing is a way to protect all parties and minimize misunderstandings.
226. A master limited partnership (MLP) is:
A. not traded on the stock exchanges.
B. pays corporate income taxes.
C. taxed like a partnership.
D. the corporate form of choice for small groups of individuals.
The master limited partnership looks much like a corporation because it is traded on the stock exchanges but it is taxed like a partnership and avoids the corporate income tax.
230. Kristen and her brothers and sisters decided to form a partnership that specializes in home design of all types. One of their goals is to maintain the loving relationship they currently enjoy, so they are following the Model Business Corporation Act recommendations as they write the partnership agreement. Which of the following is an accurate recommendation of the Act?
A. The business should be actively operating for an extended period before the partners decide who is responsible for what business functions.
B. Family businesses never take on outside partners, so no discussion of this need take place.
C. There should be discussion and well-understood ways that the partners will handle disagreements.
D. Due to the fact that they are all under 40 years old and expect to work until they are 65 there is no need to decide what will happen to the partnership if one decides to leave the business or retire, or dies.
The Model Business Corporation Act recommends including a number of specifics in the written partnership agreement including how disagreements will be handled.
232. Zach and Mac own an auto repair business that they operate as co-owners. Both take an active role in the management of the business, and each accepts unlimited liability. Zach and Mac operate as a ________.
A. joint venture
B. general partnership
C. limited partnership
Since Zach and Mac operate the business as co-owners, they have formed a general partnership. Since both will manage the firm and accept unlimited liability, they are both general partners.
236. Travis has agreed to invest $16,000 in a partnership with his sister and brother-in-law. He does not intend to actively work in the partnership, nor does he wish to risk any of his own assets other than the $16,000 he initially invests. The partnership has agreed to permit him to share in the profits. As an expert on forms of business ownership, you know that Travis is a ______________ in this partnership.
A. general partner
B. preferred stockholder
C. secondary partner
D. limited partner
A limited partner invests in a partnership, but has limited liability and does not take an active role in managing the business.
239. A(n) ___________________ is a state-chartered legal entity with authority to act and to have liability separate from its owners.
A. limited partnership
B. conventional corporation
C. unlimited partnership
D. nonprofit organization
240. An owner of a corporation is known as a(n):
A. general partner.
B. limited partner.
241. Which of the following statements about the operation of a corporation is correct?
A. A corporation receives its charter from a state government.
B. A corporate charter automatically expires in 99 years and must be renewed if the corporation wants to remain in business.
C. Owners of a corporation have unlimited liability for any claims against their company.
D. A corporation tends to be much easier to set up than a sole proprietorship or partnership.
244. Compared to partnerships and sole proprietorships, a major advantage of the C (conventional) corporation as a form of business ownership is that it:
A. has the ability to raise more money.
B. is easier and less expensive to form.
C. qualifies for simplified tax treatment.
D. creates unlimited liability for its owners.
245. Which of the following is normally considered a disadvantage of the corporate form of business?
A. Unlimited liability of owners.
B. Difficult transfer of ownership.
C. Limited life.
D. Double taxation of earnings.
246. The board of directors for a corporation is elected by its:
251. One reason many companies do not organize themselves as an S corporation is that this form of business:
A. is subject to a higher tax rate than a general partnership.
B. does not provide owners with limited liability.
C. has a special eligibility restriction, which many businesses are unable to meet.
D. is much more difficult to set up than C corporations.
254. _____________ are companies that are similar to S corporations but are not restricted with similar eligibility requirements.
A. Regulated equity companies
B. Corporate cooperatives
C. Limited liability companies
D. Private drawing companies
260. Which of the following statements about S corporations is most accurate?
A. The major attraction of S corporations is that they avoid the problem of double taxation.
B. S Corporations are similar to C corporations, except that the majority of owners are foreign investors.
C. Any corporation willing to pay the necessary fees and fill out the required paperwork can become an S Corporation.
D. Only large corporations with operations in more than one state can qualify to be classified as S corporations.
The S corporation does not file an income tax return separate from its owners. The profits of S corporations are distributed to the owners. Owners account for these earnings on their personal income tax returns, thus avoiding double taxation.
262. Which of the following statements is the most accurate? A foreign corporation:
A. does business in one or more states, but is chartered in another state.
B. is 50% owned by individuals or companies from another nation.
C. is headquartered in another nation.
D. is the same thing as a multinational corporation.
A foreign corporation is one that does business in one state while being chartered in another state.
265. Double taxation means:
A. if stockholders decide to sell their shares, they are subject to paying twice the amount of taxes on any capital gains.
B. as the owner of the company, you pay twice the amount in employment taxes on yourself, as you do on your employees.
C. corporations pay taxes on their profits. If they distribute after-tax profits to the stockholders, the stockholders also pay taxes on the distribution.
D. if the corporation doubles its profits from the previous year, the firm's tax rate (the percentage it pays in taxes) will also double.
A corporation files a separate tax return from its owners. It pays taxes on all profits earned after legitimate expenses are deducted. If any profits remain after taxes are paid, these are considered after-tax-profits and they can be distributed to owners in the form of dividends. These earnings are subject to double taxation because the government requires the recipient (the owner/stockholder) to pay taxes on the dividends, even though they were already taxed when they were part of the corporation's earnings.
268. Maria recently purchased 100 shares of stock in Idle Time Gaming, Inc. Maria is a(n) ______________ of this company.
Stock represents shares of ownership in a corporation.
277. A ____________ is two firms combining to form one company.
A. joint tenancy
B. tenancy in common
D. leveraged buyout
278. A(n) _________ occurs when one company buys the property and obligations of another company.
B. hostile takeover
C. leveraged buyout
279. Three types of corporate mergers are:
A. economic, geographic, and financial.
B. vertical, horizontal, and conglomerate.
C. flexible, differentiated, and conditional.
D. explicit, implicit, and intrinsic.
283. A conglomerate merger will:
A. diversify business operations and investments.
B. allow the firm to have a less dominant position in its market.
C. enable the firm to enjoy a higher degree of specialization.
D. give the firm a more secure access to needed materials and components and better control over quality.
287. The difference between a merger and an acquisition is:
A. a merger does not combine the assets and liabilities of firms, whereas an acquisition combines assets and liabilities.
B. a merger combines the assets of the two firms, but each company continues to assume its own liabilities, whereas an acquisition is a total buyout of one firm by another.
C. a merger is the joining of resources of two companies, whereas an acquisition is a buyout of one firm by the other. The new company concerns itself with merging of resources.
D. a merger is always something smaller tagging onto something larger, like a merging lane onto an interstate, whereas an acquisition is two firms that are relatively the same size agreeing to continue as one, more like two major interstates that come together and travel as one for several miles.
A merger is the result of two firms combining their resources and forming one company. An acquisition is when one firm purchases the assets and obligations of another firm.
295. Several years ago, Regis Corporation, a very large hair styling salon company, purchased 60 "Your Father's Mustache" salons. Although this was initially an acquisition, the merging of these two businesses was a(n) __________. Regis went on to purchase several hair care product companies. Joining forces with hair care product companies would represent a ___________.
A. conglomerate merger; horizontal merger
B. vertical merger; horizontal merger
C. horizontal merger; vertical merger
D. conglomerate merger; conglomerate merger
A merger of two companies which compete in the same industry and for the same market is a horizontal merger. A merger between two firms at different stages of related businesses is a vertical merger.
301. A(n) _____________ is a company that has a proven business model and is willing to sell the rights to use the business model to others so that they can sell the same product or service within a given territory.
C. limited partner
302. A person who buys the right to use a business name and sell a product within a given territory is called a:
C. limited franchisor.
D. venture capitalist.
305. A ____________ is the share of profits or percentage of sales a franchisee pays to a franchisor.
312. Franchised businesses are successful (both domestically and internationally) because:
A. they require very little start-up revenue.
B. people prefer the owners and employees of franchised businesses.
C. laws require franchisors to provide the same level of service to franchisees.
D. customers like the predictability of the product and/or service.
319. Marco is a franchisee with Daggies, a chain of sandwich shops. His business was doing well until several Daggies franchisees got in trouble and were forced to close their shops. Soon afterward, Marco's business deteriorated and he too was forced to close. This is an example of:
A. an economic shakeout at work.
B. the coattail effect.
C. the law of diminishing returns.
D. management by exception.
Coattail effects refer to situations where the actions of other franchisees can have an impact on the success or failure of a particular franchisee's business.
321. Midas Muffler sells franchises to prospective businesspersons who want to use the Midas name and offer Midas products. In a franchise arrangement, Midas would be the ________, and the buyer of the franchise is the ________.
A. owner; limited partner
B. co-signer; co-signee
C. franchisor; franchisee
D. franchisee; franchisor
In a franchising arrangement, the person or company that sells the right to use the name and product is the franchisor, and the person who buys the rights is known as the franchisee.
326. A ___________ is an organization that is owned and controlled by the people who use it—producers, consumers and workers with similar needs pool their resources for mutual gain.
B. limited partnership
C. mutual fund
329. The purpose of a farm cooperative is to:
A. give members more economic power as a group than they would have as individuals.
B. give each farm an equal share in the running of the cooperative.
C. equalize the members' standard of living.
D. allow socialism a foothold in the U.S.
332. A distinguishing feature of a cooperative is that it:
A. maintains a distinct separation between ownership and management.
B. is only intended to operate for a limited period of time.
C. is owned and operated by the people who use it.
D. can have no more than 75 owners, all of whom must be citizens of the United States.
A cooperative is an organization that is owned and operated by the people who use it—producers, consumers and workers with similar needs who pool their resources for mutual gain.
333. Which of the following statements about farm cooperatives is most accurate? Farm cooperatives have:
A. declined in importance in recent years.
B. become a major force in American agriculture.
C. run afoul of U.S. antitrust laws in recent years.
D. increased in number, but decreased in size in recent years.
Statistics and examples cited in the text clearly indicate that farm cooperatives, such as Sunkist, Land O'Lakes, Blue Diamond, and Ocean Spray, are a major force in U.S. agriculture.
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