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Business in Action, 6e (Bovee/Thill)Chapter 5 Forms of Ownership

1) Owner has limited personal liability for the business's financial obligations in sole proprietorships.

2) Establishing a corporation is more complicated and expensive compared to establishing a sole proprietorship.

3) The federal government recognizes a sole proprietorship as an independent taxable entity.

4) Unlimited liability is a legal condition under which any damages or debts incurred by a business are the owner's personal responsibility.

5) A partnership is a company that is owned by two or more people but is not a corporation.

6) All partners have joint authority to make decisions for the firm in a general partnership.

7) A master limited partnership is not allowed to raise money by selling units of ownership to the general public.

8) Partners are responsible for each other's action in a limited liability partnership.

9) Partnerships are subject to double taxation of income.

10) All owners in a general partnership and the general partners in a limited partnership face the same unlimited liability as sole proprietors.

11) A corporation is a legal entity distinct from the persons running the corporation.

1Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

12) The stock of a private corporation is made available for purchase by the public.

13) Liquidity is a measure of how easily and quickly an asset can be converted into cash.

14) A corporation itself has limited liability on its transactions.

15) Government agencies require publicly traded companies to publish extensive and detailed financial reports.

16) An S corporation has the federal taxation advantages of a partnership.

17) The number of shareholders is limited to fifty in a limited liability company.

18) A benefit corporation must pursue a stated non-financial goal.

19) Board of directors has the responsibility for the overall direction of the company and the selection of top executives.

20) Corporate officers of an organization are elected directly by the shareholders of a corporation.

21) Proxy is a document that authorizes another person to vote on behalf of a shareholder in a corporation.

22) The chief operating officer is the highest-ranking officer of a corporation.

23) One company buys a controlling interest in the voting stock of another company in a merger.


24) A horizontal merger occurs when different companies at the same stage or level merge.

25) A joint venture does not result in a separate legal entity.

26) A sole proprietorship ________.A) is taxed as a separate corporationB) requires immense paperworkC) does not have a legal statusD) is owned by only one personE) gives reduced control to the owner

27) Robert owns three restaurants in Atlanta. He pays taxes for the income from the restaurants as his personal income. Robert's business is an example of a ________.A) personal partnershipB) sole proprietorshipC) joint ventureD) small corporationE) limited liability firm

28) Profits of sole proprietorships ________.A) reach shareholders through intermediariesB) flow directly to the ownersC) are considered fixed assetsD) are taxed at corporate ratesE) are subject to double taxation

29) Which of the following statements is true of the liability of investors in a corporation?A) Majority investors are personally liable, whereas minority investors are not personally liable.B) Investors have personal liability for the business transactions in corporations.


C) Investor's liability is limited to the amount invested in the corporation.D) Investors are personally liable for transactions, whereas their property is not liable.E) Investors' property is liable for the business transactions but investors are not personally liable.

30) Which of the following business structures is the most complicated and expensive?A) unlimited partnershipB) corporationC) general partnershipD) sole proprietorshipE) limited partnership

31) Edwin runs an antique retail shop that is registered as a sole proprietorship. The liability exposure of Edwin's business ________.A) is limited to the amount he has invested on fixed assetsB) refers to the amount invested on variable assetsC) is more if the size of transactions is limitedD) refers to the total fixed investments made by himE) is unlimited for the business's personal obligations

32) Which of the following is a key difference between a corporation and a sole proprietorship?A) Establishing a corporation is easier compared to establishing a proprietorship.B) Unlike a corporation, a proprietorship is subject to double taxation.C) Regulatory requirements are less severe for corporations than sole proprietorships.D) Unlike a sole proprietorship, a corporation is subject to limited liability.E) Establishing a sole proprietorship has complex legal requirements unlike a corporation.


33) Which of the following is a key advantage of incorporating a business as a sole proprietorship?A) Owners receive tax exemptions when a business is a sole proprietorship.B) It helps proprietors file taxes separately from their personal income.C) It is easy to establish and requires less paperwork than other structures.D) Owner's risk is limited to the extent he/she has invested in the business. E) Risk associated with sole proprietorship is less compared to other structures.

34) In a sole proprietorship, the owner ________.A) obtains limited liability protection on the business's actionsB) is taxed more than once for the income generated C) and the business are legally inseparableD) has lesser responsibility compared to other formsE) does not have personal liability for the transactions of the business

35) A ________ is an unincorporated company owned by two or more people.A) limited companyB) partnershipC) corporationD) S corporationE) proprietorship

36) In a general partnership, ________.A) all partners have joint authority to make decisionsB) all partners have limited liabilityC) the number of partners is limited to fiveD) units of ownership are sold to the general publicE) risk is limited to the amount invested in a partnership

37) A ________ is allowed to raise money by selling units of ownership


to the general public in the same way corporations sell shares of stock to the public.A) master limited partnershipB) general partnershipC) sole proprietorshipD) unlimited proprietorshipE) limited liability partnership

38) A ________ is a partnership in which each partner has unrestricted accountability only for his or her own actions and at least some degree of responsibility for the partnership as a whole. A) master limited partnershipB) general partnershipC) sole proprietorshipD) combined proprietorshipE) limited liability partnership

39) Which of the following is a key difference between a master limited partnership (MLP) and other forms of partnerships?A) A MLP allows partnerships to sell units of ownership to the general public.B) Other partnerships should have more members than an MLP.C) Other partnerships have double-taxation disadvantage unlike an MLP.D) A MLP allows the partners to have limited liability on their investments.E) A MLP is characterized by double taxation unlike the other forms of partnerships.

40) A major advantage of partnerships is that they ________.A) do not require owners to take personal responsibility for their actionsB) provide limited liability protection to partnersC) have a straightforward income tax structureD) are less vulnerable to conflicts between investorsE) allow investors to handle issues such as succession and termination


better

41) A potentially significant disadvantage of a partnership is that ________.A) it involves double taxation of the income generatedB) income tax is not straightforward and is complexC) it has more chances for disagreement and conflictD) it does not present opportunities to share costsE) the amount of money generated in a partnership is low

42) Which of the following is a valid observation of corporations?A) A corporation cannot own property of its own.B) All corporations should sell its stock to the public.C) The owners of a corporation are called directors.D) A corporation is distinct from the people running it.E) A corporation must be owned by less than fifty people.

43) Which of the following is a key difference between private corporations and public corporations?A) Private corporations are legally a group of people, whereas public corporations are distinct from any individual persons.B) Private corporations cannot own property, whereas public corporations can own property.C) Public corporations cannot own property, whereas private corporations can own property.D) Private corporations do not have the power to run business of its own, whereas public corporations can run a business of its own.E) Private corporations are owned by a few people, whereas public corporations can be owned by anyone who has the means to buy stake.

44) Which of the following is a key advantage that corporations have over sole proprietorships and partnerships?A) Management is less likely to lose control of operations in corporations than proprietorships and partnerships.B) Reporting requirements of corporations are simpler than sole


proprietorships and partnerships.C) Forming corporations involves less cost over sole proprietorships and partnerships.D) Investments in corporations have more liquidity than partnerships and sole proprietorships.E) Corporations have a less complex structure compared to sole proprietorships and partnerships.

45) A disadvantage of the corporate structure is that it ________.A) limits the business's ability to raise capitalB) limits the liquidity that businesses haveC) increases the risk of conducting businessD) involves strict reporting requirementsE) imposes unlimited liability on the owners

46) S corporation is a type of corporation that ________.A) combines limited liability of a corporation with the federal taxation advantages of a partnershipB) does not have such advantages as limited liability of investmentsC) does not split the ownership into smaller unitsD) files income tax returns in a country other than the country of operationE) combines limited ownership of a proprietorship with the capital-raising options of a corporation

47) A group of college graduates starts a business. They want to give their business a structure such that their risk is limited to the amount they have invested in the business. They also want to avoid double taxation of the income that they generate from the business. Which of the following structures is most suitable to satisfy these wants?A) sole proprietorshipB) corporationC) direct partnershipD) S corporationE) general partnership


48) A(n) ________ has most of the attributes of a regular corporation but adds the legal requirement that the company must also pursue a stated non-financial goal.A) limited liability corporationB) general partnershipC) S corporationD) sole proprietorshipE) benefit corporation

49) RSS Bank is registered as a corporation in Maryland. Apart from its financial objectives, the company has also formed a legal requirement to work for the welfare of the elderly citizens in the state. The bank is obligated to work for the cause even if there is a change in ownership. Based on this information, it can be concluded that RSS bank is a(n) ________.A) public corporationB) benefit corporationC) unlimited companyD) S corporationE) not-for-profit company

50) A public corporation refers to a corporation ________.A) that is allowed to sell stock only to a limited number of investorsB) whose stock is sold to general peopleC) that is owned solely by the federal governmentD) that is owned solely by state/federal governmentE) whose stock is not traded in stock exchanges or other markets

51) A corporation primarily or wholly owned by another company is known as a(n) ________.A) domestic companyB) alien companyC) subsidiaryD) parent company


E) holding company

52) Pacific Electronics is a Swiss corporation doing business in the U.S. It was incorporated in Switzerland, in the year 1997. The company sells products such as electronic measuring devices, microprocessors, and microcontrollers. Pacific Electronics is called a(n) ________.A) alien corporationB) foreign corporationC) domestic corporationD) external companyE) unlimited company

53) A company that is incorporated in one state (frequently the state of Delaware, where incorporation laws are more lenient) but that does business in several other states where it is registered is called a(n) ________.A) foreign corporationB) domestic corporationC) global corporationD) alien corporationE) international corporation

54) RK Associates is a firm incorporated in the state of Delaware. The company has operations in thirteen states. However, the company does not have any facilities in countries other than the United States. RK Associates is a(n) ________.A) international companyB) local corporationC) domestic companyD) alien corporationE) foreign corporation

55) In the United States, a corporation is called a domestic corporation if it ________.A) does business only in the state where it is chartered


B) files income taxes with the U.S. governmentC) does business only within the United StatesD) has more than 5 subsidiaries in the United StatesE) has incorporated its business in any of the U.S. states

56) The board of directors are ________.A) the highest-ranked managers of a corporationB) elected by corporate officersC) representatives of the shareholdersD) the top executives running a corporationE) elected by the employees of an organization

57) Which of the following is a document that authorizes another person to vote on behalf of a shareholder in a corporation?A) agency agreementB) proxyC) draftD) affidavitE) share certificate

58) Robex Retail is a retail chain that has more than 390 stores in the United States. The directors of the company decide to launch operations in Italy to increase the company's market reach. Many of the shareholders think that this decision is not appropriate in light of the economic slowdown in Europe. A group of shareholders unite to pressurize the board of directors to change their decision. This is an example of ________.A) shareholder protectionB) shareholder activismC) hostile takeoverD) corporate governanceE) shareholder resolution

59) Corporate officers are the ________.A) people who elect directors of a company


B) official representatives of shareholdersC) top executives who run a corporationD) middle level managers of a corporationE) lower level employees of an organization

60) Who is the highest-ranked officer of a corporation?A) chief information officerB) chief financial officerC) chief operating officerD) chief executive officerE) chief technology officer

61) Corporate officers of a company ________.A) are hired by the board of directors of a companyB) have voting rights in directorial meetingsC) are hired by the chief executives of a firmD) have voting rights on shareholding issuesE) are elected by the shareholders of the company

62) In a(n) ________, two companies join to form a single entity either by pooling their resources or by one company purchasing the assets of the other.A) limited partnershipB) acquisitionC) mergerD) joint ventureE) strategic alliance

63) In a(n) ________, two companies create a new, third entity that then purchases the two original companies.A) limited partnershipB) consolidationC) acquisitionD) joint ventureE) strategic alliance


64) In a(n) ________, one company simply buys a controlling interest in the voting stock of another company.A) limited partnershipB) consolidationC) acquisitionD) joint ventureE) strategic alliance

65) RDS Bank has been making losses for many years now. The company's management wants to continue with the same style of operations, whereas many shareholders demand a change in management. A majority of shareholders unite and vote against the management's wish to sell the company to a larger counterpart subject to pressures from an external buyer. This is an example of a(n) ________.A) forced joint ventureB) hostile takeoverC) strategic allianceD) majority mergerE) operational alliance

66) A ________ occurs when someone purchases a company's publicly-traded stock primarily by using borrowed funds, sometimes using the target company's assets as collateral for these loans.A) leveraged buyoutB) hostile takeoverC) forced joint ventureD) consolidationE) strategic alliance

67) A vertical merger occurs when ________.A) a merger expands the geographic range of markets that it can serveB) different stages or levels of the same industry uniteC) different companies at the same stage or level uniteD) a merger expands the mix of goods and services available for sale


E) two companies from unrelated industries unite to become a single company

68) An electronic appliance marketing company merges with one of its suppliers to form a larger company. This is an example of a ________ merger.A) market-extensionB) product differentiationC) conglomerateD) verticalE) product-extension

69) A product-extension merger occurs when ________.A) two companies from unrelated industries unite to become a single companyB) different stages or levels of the same industry uniteC) different companies merge to increase global reachD) a merger expands the mix of goods and services available for saleE) a merger expands the geographic range of markets that it can serve

70) A ________ merger occurs when different companies at the same stage or level merge.A) standardizedB) horizontalC) conglomerateD) verticalE) operational

71) Eurotec, a manufacturer of security systems in Italy, merges with a company in China to expand its reach. This is an example of a ________ merger.A) product-extensionB) verticalC) conglomerateD) retail


E) market-extension

72) A ________ merger occurs when companies in unrelated industries join to form a single entity.A) product-extensionB) verticalC) conglomerateD) retailE) market-extension

73) Froxer Electronics is an electronic appliance manufacturer. The company merges with a food manufacturer to form a larger company. This is an example of a ________ merger.A) product-extensionB) verticalC) retailD) market-extensionE) conglomerate

74) Which of the following is a key disadvantage of mergers and acquisitions?A) They limit the market reach of the companies involved.B) They reduce the chances of cross-selling products.C) They reduce the bargaining power of the companies.D) They might present issues related to cultural harmony. E) They limit the geographic range of the companies involved.

75) In a ________, the raider launches a public relations battle for shareholder votes, hoping to enlist enough votes to oust the board and management.A) poison pill tacticB) proxy fightC) tender offerD) direct offerE) white knight tactic


76) With a ________, a targeted company invokes some move that makes it less valuable to the potential raider, with the hope of discouraging the takeover.A) white knight tacticB) tender offerC) proxy fightD) direct offerE) poison pill defense

77) Integral Solutions is a firm that offers open source enterprise software services to small and medium companies. The company had a public issue two years ago and the company has shown significant growth in the current financial year. A major rival is silently amassing the company's shares to acquire majority stake in the company. In order to prevent this, the company issues shares to current shareholders at prices below the market value. This tactic used by Integral Solutions to prevent a takeover is an example of a ________.A) poison pill defenseB) proxy fightC) direct offerD) tender offerE) white knight tactic

78) With the ________, a third company is invited to acquire a company that is in danger of being swallowed up in a hostile takeover.A) poison pill defenseB) proxy fightC) direct offerD) tender offerE) white knight tactic

79) Albama Associates is a consulting firm owned by a few entrepreneurs. Rogo Consulting, a large consulting firm, tries to buy shares from some of the shareholders of Albama to obtain control of the


company without making a formal acquisition proposal with the management. Albama's management invites a third party to acquire the company to prevent a hostile takeover by Rogo Consulting. This approach used by Albama to prevent hostile takeover is an example of a ________.A) white knight tacticB) counterofferC) proxy fightD) direct offerE) poison pill defense

80) Which of the following is an action that allows the companies to collaborate without formally combining?A) strategic allianceB) joint ventureC) mergerD) acquisitionE) amalgamation

81) Strategic alliances are ________.A) internal agreements formed between the subsidiaries of a companyB) not helpful when a company has to gain credibility in a new fieldC) a means of permanently integrating two companies in a businessD) an alternative to mergers and acquisitions with less risk and workE) not helpful when a company's aim is expanding its market presence

82) Carton Life is an insurance firm. The firm wants to enter an Asian country that recently removed protectionist barriers in the insurance industry. The company wants to enter the country with the help of a local firm. However, the company does not want to permanently integrate with another firm. Which of the following arrangements is most suited for this company? A) amalgamationB) acquisitionC) merger


D) joint ventureE) strategic alliance

83) Which of the following statements is true of strategic alliances?A) Establishing strategic alliances have more legal requirements than mergers and acquisitions.B) Strategic alliances attract more work than other forms of business.C) Strategic alliances are not an effective way to collaborate.D) Establishing strategic alliances involves more risks than other forms.E) Strategic alliances don't create a unified entity with a single management structure.

84) Joint ventures ________.A) let companies create tightly integrated operationsB) are less risky compared to strategic alliancesC) are riskier to a firm than formal mergersD) disrupt the original companies and their businessE) would not help companies gain credibility in new fields

85) A company decides to establish a relationship with a local company in order to better its business in a foreign country. The company must choose joint ventures ahead of mergers and acquisitions if it wants to ________.A) establish a company that is totally differentB) create a single management structureC) create a unified business structureD) establish a well-structured arrangementE) avoid disrupting the original companies too much

86) Compare and contrast sole proprietorships and general partnerships.

87) Explain the advantages of operating as a sole proprietorship.

88) Compare and contrast a general partnership and a limited partnership.


89) Compare and contrast a master limited partnership and a limited liability partnership.

90) A group of friends is planning to start a business. Should they form a formal contract to

91) Compare and contrast private corporations and public corporations.

92) You work for a European company that is planning to launch business in the United States.

93) Explain the major disadvantages of incorporating a business as a corporation.

94) Compare and contrast a limited liability company and a benefit corporation.

95) Select an organization of your choice. Construct a model that shows the corporate

96) What is shareholder activism?

97) Explain the role of corporate officers in corporate governance.

98) Compare and contrast mergers and acquisitions.

99) Compare the three common types of mergers.

100) Distinguish between strategic alliances and joint ventures.


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