Better Business, 2e (Solomon) Chapter 6 Forms of Business Ownership

Better Business, 2e (Solomon)
Chapter 6 Forms of Business Ownership
1) A sole proprietorship is a common form of business ownership for startup businesses.

Answer: TRUE
Explanation: A sole proprietorship is a business owned, and usually operated, by a single
individual. Because no legal paperwork is necessary to establish a business as a sole
proprietorship, many small-business owners are sole proprietors without even knowing it.
Diff: 1 Page Ref: 167-168
AACSB: Reflective Thinking
Objective: 6-1 What are the strengths and weaknesses of a sole proprietorship?
Skill: Conceptual
2) The profits of a sole proprietorship are taxed as the personal income of the owner.
Answer: TRUE
Explanation: Since there is no legal distinction between the owner and the business, no separate
tax return is required. As a result, the income and expenses of a sole proprietorship flow through
the owner's personal tax return.
Diff: 1 Page Ref: 168
Skill: Conceptual
3) One disadvantage of a sole proprietorship is they usually have limited access to additional
financial resources.
Answer: TRUE
Explanation: The challenge in raising capital for sole proprietors occurs because banks will be
lending to you personally, not to your business, so they will be more reluctant to lend large
amounts, and the loan will be limited to the amount of your personal assets.
Skill: Conceptual
4) When establishing a sole proprietorship, it may be necessary to obtain local licensing or

permits.
Answer: TRUE
Explanation: Although sole proprietors do not need to file special government forms in order to
establish their business, they may need to obtain local licensing or permits to ensure they are
operating in an area zoned for business activity.
Skill: Conceptual
1
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5) A sole proprietorship can have only one owner, but it can have any number of employees.
Answer: TRUE
Explanation: Although the word sole implies only a single person is involved, it in fact refers
only to the ownership of such a business. A sole proprietor may employ others, as long as he or
she remains the only owner of the business.
Skill: Conceptual
6) Partnerships are taxed at the lowest corporate tax rate.

Answer: FALSE
Explanation: Partnerships are not a separate taxable entity. Income flows through individual
partners' tax returns and each partner pays tax on his or her share of income.
Objective: 6-2 What are the advantages and disadvantages of a partnership and a partnership
agreement?
Skill: Conceptual
7) To protect partnerships and minimize misunderstandings among partners, all terms of a

partnership should be spelled out in writing.
Answer: TRUE
Explanation: Having a partnership agreement in writing helps to settle conflicts when they arise
and may discourage small misunderstandings from erupting into larger disagreements.
agreement?
Skill: Conceptual
8) In a general partnership, all partners are entitled to an equal share of the firm's profits.
Answer: FALSE
Explanation: In general partnerships, profits are divided as the partners choose. It is best to
decide the division of profits prior to inception of the business in a partnership agreement.
agreement?
Skill: Conceptual
2
9) Tom has agreed to become a partner in a business. Since he will provide 30% of the capital to
start the company, he is entitled to 30% of any profits the company earns during its first year of
operation.
Answer: FALSE
Explanation: Profits are divided according to the partner's designation in a partnership
agreement, not necessarily in proportion to the amount of the initial investment. It is best to
decide the division of profits prior to inception of the business in a partnership agreement.
AACSB: Reflective Thinking, Analytic Skills
agreement?
Skill: Application
10) The biggest difference between general and limited partnerships involves who accepts most
of the business liability.
Answer: TRUE
Explanation: A general partnership is the default arrangement for a partnership; a limited
partnership is created when there is a need for additional capital. Limited partners are involved as
investors; they are not involved in day-to-day business activities. They are personally liable only
up to the amount of their investment in the business. General partners remain liable for all debts
and obligations of the business.
agreement?
Skill: Conceptual
11) A limited partner is an owner who assumes no management responsibility and has no
liability for losses beyond the amount invested.
Answer: TRUE
Explanation: Limited partners provide capital and are liable for the amount of their investment
only and are not involved in the day-to-day operations.
agreement?
Skill: Conceptual
3
12) A corporation is a specific form of business that is legally formed under state laws and is
considered a separate entity.
Answer: TRUE
Explanation: Corporations are a separate entity. Business owners find this an attractive
ownership structure because as a separate entity, corporations have limited liability.
Objective: 6-3 How is a corporation formed, and how does it compare with sole proprietorships
and partnerships?
Skill: Conceptual
13) If you want to terminate your ownership in a publicly traded corporation, you simply sell
your shares.
Answer: TRUE
Explanation: Transfer of ownership is simple and easy in a corporation. If you no longer want to
be an owner, you sell your shares. The corporation has perpetual life, but your ownership does
not need to be for life.
and partnerships?
Skill: Conceptual
14) The owners of a corporation are known as general corporate partners.

Answer: FALSE
Explanation: Corporate owners are called shareholders.
and partnerships?
Skill: Conceptual
15) The organizational structure of a corporation allows for shareholders to have control over the
company's daily operations.
Answer: FALSE
Explanation: Shareholders elect directors who in turn elect officers. The officers manage daily
operations.
and partnerships?
Skill: Conceptual
4
16) A disadvantage of corporations is that they generally require extensive paperwork.
Answer: TRUE
Explanation: Corporations do require specific federal and state filings to become incorporated.
In addition to the initial paperwork to establish corporations, other legal paperwork that must be
filed includes annual reports, minutes of annual meetings as well as bookkeeping records.
and partnerships?
Skill: Conceptual
17) S corporations are similar to C corporations because they both pay corporate income taxes.
Answer: FALSE
Explanation: Because they are taxed under Subchapter S of the Internal Revenue Service code, S
corporations do not pay corporate income taxes. Taxes are passed through the shareholders'
personal tax returns.
Objective: 6-4 What are the major differences between a C corporation, an S corporation, and a
limited liability company?
Skill: Conceptual
18) Like partnerships, shareholders in an S corporation pay income taxes based on their
proportionate share of the business profits.
Answer: TRUE
Explanation: Taxes in S corporations are paid based on their proportionate share of the business
profits through personal income tax filings making it a big advantage over C corporations.
Skill: Conceptual
19) A company with 200 shareholders can establish itself as an S corporation.

Answer: FALSE
Explanation: According to the qualification requirements set forth by the U.S. Internal Revenue
Code, to be an S corporation, a company may not have more than 100 shareholders.
Skill: Application
5
20) S corporations are restricted to a limited number of owners, whereas limited liability
companies can have an unlimited number of owners.
Answer: TRUE
Explanation: S corporations are limited to 100 owners, whereas limited liability companies can
have an unlimited number of owners.
Skill: Conceptual
21) Not-for-profit organizations are NOT required to incorporate.

Answer: TRUE
Explanation: Not-for-profit organizations are not required to file for incorporation; however,
they do need to incorporate in order to become a separate entity and thus be released of unlimited
liability. Additionally, once a not-for-profit is incorporated, they must apply for tax-exempt
status with the federal government and sometimes the state in which they are incorporated.
Objective: 6-5 What are the characteristics of not-for-profit corporations and cooperatives?
Skill: Application
22) Not-for-profit organizations may NOT earn a profit.

Answer: FALSE
Explanation: Not-for-profit organizations may earn a profit in order to cover expenses and pay
employee salaries.
Skill: Conceptual
23) Members are the most important part of a cooperative.

Answer: TRUE
Explanation: Members of a cooperative finance it by purchasing shares and may even volunteer
for projects or serve on a board to support the organization. Without its members, cooperatives
would not exist.
Skill: Conceptual
6
24) In order to expand more quickly and remain competitive, companies integrate other
established businesses through the process of mergers or acquisitions.
Answer: TRUE
Explanation: A good corporate strategy to remain competitive is to integrate other established
businesses through the process of mergers or acquisitions. This allows companies to respond
quickly to market forces or grow their company to increase their competitive edge.
Objective: 6-6 What are the different types of mergers and acquisitions, and why do they occur?
Skill: Conceptual
25) All mergers and acquisitions are mutually desired by both companies.
Answer: FALSE
Explanation: Many mergers are friendly and mutually agreed upon, but often acquisitions are
unfriendly. An unfriendly acquisition occurs when one company tries to take control over
another company against its wishes and is referred to as a hostile takeover.
Skill: Conceptual
26) A conglomeration occurs when two companies selling different but related products in the
same market combine.
Answer: FALSE
Explanation: A conglomeration occurs when two companies that have no common or related
business areas combine. When two companies selling different but related products in the same
market combine it is called a product extension merger.
Skill: Conceptual
27) More than one-half of all mergers do not succeed in achieving greater market value.
Answer: TRUE
Explanation: More than one-half of mergers do not succeed in achieving greater market value.
The reasons for this include the fact that top executives take their eyes off the day-to-day
business while focusing on the merger. Revenues and profits ultimately suffer because day-to-
day activities are neglected. Conflicts may also arise due to divided loyalties, hidden agendas, or
power struggles within the newly combined management team. Employees may be nervous
because most mergers result in the elimination of jobs, and more turnover may be created.
Skill: Conceptual
7
28) Lucia owns her own dog walking business and has several employees. She filed no legal
paperwork and has no partners. Lucia's business is a ________.
A) limited liability company
B) corporation
C) sole proprietorship
D) separate legal entity
Answer: C
Explanation: C) A sole proprietorship is a business owned, and usually operated, by a single
individual. No legal paperwork is necessary to establish a sole proprietorship, therefore many
small-business owners such as Lucia may be sole proprietors without even knowing it.
Moreover, sole proprietorships can have any number of employees as long as there is only one
owner. It is not considered a separate entity, like corporations are, and therefore, Lucia would
have unlimited liability in her business.
Skill: Application
29) All of the following are advantages of sole proprietorship EXCEPT ________.
A) single ownership
B) no special forms
C) ease of formation
D) limited liability
Answer: D
Explanation: D) Sole proprietorship has many advantages including ease of formation, direct
control over business decisions because of single ownership, simplified tax filing, and minimal
paperwork. The primary disadvantage is that the sole proprietor is responsible for all debt and
liability of the business. Therefore, the sole proprietor's personal assets are at risk.
Skill: Conceptual
8
30) One disadvantage of sole proprietorship is the ________.
A) possibility of disagreements between different owners
B) unlimited liability the owner has for the debts of the company
C) fact that any income earned by this type of business is taxed twice
D) cost of starting or ending the company is higher than other businesses
Answer: B
Explanation: B) Sole proprietorships have one owner, which means there are no disagreements
between owners; it also means a simple cost-free process of ending the company. Double
taxation is a disadvantage of corporations; however, unlike corporations, sole proprietorships
have unlimited liability.
Skill: Conceptual
31) Paula is thinking of making homemade perfumes and selling them to her relatives. She has
not filed any legal documents to start her business. Paula would be operating as a(n) ________.
A) S corporation
B) corporation
C) sole proprietor
D) limited liability company
Answer: C
Explanation: C) A sole proprietorship is a business owned and operated by a single individual
that can be formed without filing legal documents; whereas a corporation, S corporation and a
limited liability company require paperwork to be filed with both the state and federal
government.
AACSB: Analytic Skills
Skill: Application
32) A sole proprietor's income and expenses flow through ________.

A) shareholders' tax returns
B) individual partners' tax returns
C) his or her personal tax returns
D) corporate tax returns
Answer: C
Explanation: C) Because a sole proprietorship is not considered a separated entity, taxes are
filed through the owners' personal tax returns.
Skill: Conceptual
9
33) Dan is excited to start marketing and selling his new indoor practice hockey tarps and would
like to start today. He already has several hockey associations waiting to make purchases. Dan's
best option for starting his business quickly and hassle free is a(n) ________.
A) S corporation
B) C corporation
C) general partnership
D) sole proprietorship
Answer: D
Explanation: D) Because a sole proprietorship only requires collecting income as a result of
performing a service or selling a product, this is Dan's best option. Corporations require
paperwork prior to doing business. Although partnerships do not require legal paperwork, it is
best to take the time to write a partner agreement before beginning business, and at this point
Dan is ready to get started on his own, without a partner.
Skill: Application
34) Arthur is a truck driver who owns his own business. He has been on the road for several
months, and the constant wear and tear on his truck results in the need for several major
mechanical repairs. This generates a loss for his business. Which of the following reflects how
this will affect Arthur's tax obligation?
A) Arthur's tax obligation will be increased.
B) Arthur's tax obligation will be reduced.
C) Arthur's tax obligation will not change at all.
D) Arthur will not be required to pay his tax obligation.
Answer: B
Explanation: B) When a sole proprietor incurs a loss for his or her business, the proprietor can
subtract that loss from his or her personal income taxes, reducing the proprietor's tax obligation.
Skill: Application
35) Unlimited liability with respect to business ownership means ________.

A) to have an obligation to pay all business debt
B) to have an obligation to pay only the money you invest in a business
C) to be liable for expenses incurred only by you, not your employees
D) to be liable for estimated business expenses only
Answer: A
Explanation: A) Unlimited liability means the owner is responsible for all the debts of the firm.
Because the liability is unlimited, the owner's personal assets may be used to pay the debts of the
business.
Skill: Conceptual
10
36) In a sole proprietor ownership, if business assets are not enough to pay business debts, then
personal assets, such as the sole proprietor's house, personal investments, and retirement plans
can be used to pay the debt. This is called ________.
A) unlimited liability
B) limited liability
C) non-liability
D) double taxation
Answer: A
Explanation: A) The most significant drawback of a sole proprietorship is unlimited liability,
which means that the sole proprietor is personally responsible for all business debts.
Skill: Conceptual
37) All of the following EXCEPT ________ would be an advantage to partnership.

A) pooled skills
B) increased financial resources
C) increased available time
D) unlimited liability
Answer: D
Explanation: D) Advantages of partnerships include a larger pool of skills, more time available
to increase sales, marketing or income and a larger pool of financial resources. A disadvantage is
unlimited liability.
agreement?
Skill: Conceptual
38) The most significant difference between a partnership and a sole proprietor is the ________.
A) amount of liability of owners
B) taxation process used by owners
C) number of government forms required for establishment
D) number of people contributing resources
Answer: D
Explanation: D) The biggest difference between a partnership and a sole proprietorship is the
number of people contributing to resources. In a sole proprietorship there is only one owner. In a
partnership, two or more individuals share ownership and thus contribute to the starting and
ongoing capital of the business as well as sharing in the workload and collaborating on business
decisions.
agreement?
Skill: Conceptual
11
39) A good reason why partners should spell out the details of their partnership arrangements in
writing is because ________.
A) the partnership is not a legally recognized business until the arrangement is in writing
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
Answer: B
Explanation: B) A drawback of a partnership is the potential for disagreements among the
partners. Spelling out the agreement in writing will help settle conflicts when they arise and may
discourage small misunderstanding from erupting into larger disagreements.
agreement?
Skill: Application
40) Jenny and Rose are hairstylists that have decided to open their own salon by starting a
general partnership. The first step to ensuring a successful partnership would be to ________.
A) insure they each have 25 clients to bring into the partnership
B) submit the partnership formation fee to the state
C) draw up a partnership agreement
D) submit the limited liability forms before they see clients
Answer: C
Explanation: C) Although no formal documentation is required to create a partnership, it is good
idea to draw up an agreement to help settle conflicts when they arise, which may discourage
small misunderstanding form turning into major conflict.
agreement?
Skill: Conceptual
41) In a partnership, all profits and losses flow through each partner's ________.
A) tax returns
B) savings
C) liabilities
D) investments
Answer: A
Explanation: A) Like sole proprietors, partnerships do not file a separate tax return. All profits
and losses of the partnership flow through each partner's own tax return.
agreement?
Skill: Conceptual
12
42) Which of the following parts of a partnership agreement spells out the policy regarding
partners entering into key financial or contractual agreements?
A) addition of partners
B) departure of partners
C) responsibilities of partners
D) decision-making process
Answer: C
Explanation: C) Partnership agreements are written to help prevent misunderstandings.
Partnership agreements should include the terms of the decision-making process. It should define
who will make the key decisions, so that when decisions on key financial or contractual
agreements need to be made, the partnership is prepared. This information is contained within
the section on responsibilities of partners.
agreement?
Skill: Conceptual
43) Policies regarding all of the following points should be included in a partnership agreement
EXCEPT ________.
A) division of stock
B) capital contribution
C) shares of profits or losses
D) decision-making process
Answer: A
Explanation: A) By including details about capital contributions, division of profits or losses,
and the decision-making processes, partners can avoid misunderstandings from erupting into
larger disagreements. There is no stock involved in a partnership so stock need not be included in
the agreement, however, division of capital contributions should be clearly defined.
agreement?
Skill: Conceptual
13
44) Jaden and Noel are starting a computer repair business together. Jaden insists on outlining
rules for the departure of partners in the partnership agreement, although Noel does not think it is
necessary. Which of the following statements might Jaden use to explain his insistence to Noel?
A) Provisions to remove a partner's ownership interest are necessary so the business would not
have to liquidate.
B) Determining the allocation of profits to new, junior partners is important to eliminate future
potential conflicts.
C) Responsibilities must be clearly delineated to avoid the possibility of one partner
overstepping his or her bounds.
D) As the partnership matures and ages, defining how profits and losses will be distributed must
be made.
Answer: A
Explanation: A) The departure of partners is one of several points that should be covered in a
partnership agreement. It is likely that over time, the composition of partners will change;
stipulations should be made in advance that clearly outline how this event will be handled.
agreement?
Skill: Application
45) In a partnership, the type of partner that is responsible for all claims against the company is
called a(n) ________.
A) investor
B) general partner
C) unlimited partner
D) limited partner
Answer: B
Explanation: B) In a partnership business structure, general partners have unlimited liability.
Limited partners are responsible only up to the amount of funds they have invested in the
company.
agreement?
Skill: Conceptual
14
46) Kris and Amy own a workout facility in which they are co-owners. Both take an active role
in the management of the business and each accepts unlimited liability. Kris and Amy operate as
a ________.
A) joint venture
B) general partnership
C) limited partnership
D) cooperative
Answer: B
Explanation: B) Since Kris and Amy 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. If either Kris or Amy were investors in the company and also did not have
active roles in the company they would be referred to as limited partners.
agreement?
Skill: Application
47) A partner who invests money in a business but is not involved in the day-to-day operation
and is only risking capital equal to what they have contributed is called a ________.
A) general partner
B) limited partner
C) partial partner
D) corporate investor
Answer: B
Explanation: B) Sometimes a business will add limited partners, mostly to provide capital and
earn a share of the profits. They are involved as investors and are personally liable only up to the
amount of their investment in the business.
agreement?
Skill: Conceptual
15
48) Which of the following is the limit of liability of a limited partner?
A) the amount of their investment
B) the amount of business capital
C) the amount of their shared profits
D) the amount of their personal assets
Answer: A
Explanation: A) Limited partners are involved as investors and are personally liable only up to
the amount of their investment in the business. The remainder of the liability lies with the
general partner. Limited partner's assets are not at risk.
agreement?
Skill: Conceptual
49) Alex and Bailey opened a dance studio together as general partners. They each invested
$10,000 of their personal savings. After one year in business, they decided to close the doors.
Their partnership agreement said they would divide profits and losses 50/50. They have more
debt than assets. Alex and Bailey will each ________.
A) lose only $10,000, the amount they invested since they agreed to share profits and losses
50/50
B) lose personal assets to repay the debt since a partnership is not considered to be a separate
entity from the partners who own it
C) collect the debt from their former customers since the customers accepted responsibility for
the business when they purchased services
D) avoid any liability for the debt since a partnership is considered to be a separate entity from
the partners who own it
Answer: B
Explanation: B) Partnerships have unlimited liability, which means Alex and Bailey are
responsible for the debt. They are not protected only to the amount they have invested as a
limited partner would be. They may choose to collect from former customers if they owe Alex
and Bailey, however, the debt is their responsibility, not the customers. Therefore, Alex and
Bailey's personal assets will be used to repay the debt.
agreement?
Skill: Application
16
50) Nick is investing $25,000 in a partnership with his sister and brother. Nick does not want to
be an active part of the partnership and can only afford to risk the $25,000 he is investing. His
brother and sister agree to let him share a proportionate amount of the profits. Nick is a
________ in this partnership.
A) limited partner
B) junior partner
C) general partner
D) sole partner
Answer: A
Explanation: A) A limited partner invests in a partnership, but has limited liability and does not
take an active role in managing the business.
agreement?
Skill: Conceptual
51) Which of the following statements about the operation of a corporation is correct?
A) A corporation is a separate entity and is legally formed under state laws.
B) A corporation automatically expires in 99 years and must be renewed if a 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.
Answer: A
Explanation: A) Shareholders own a corporation, making its existence independent of its
founders, easily transferable, and virtually alive forever. Corporations provide owners with no
liability to any corporate debt, making their liability limited. Corporations are more difficult to
set up than sole proprietorships or partnerships because they require paperwork to be filed with
both state and federal agencies. Therefore, the most correct statement is that a corporation is a
separate entity and is legally formed under state laws.
and partnerships?
Skill: Application
17
52) All of the following are advantages of forming a corporation EXCEPT ________.
A) extended life
B) capitalization
C) separated liability
D) ease of set up
Answer: D
Explanation: D) Corporations can conceptually live forever because should an owner die, shares
in the company are easily transferable. Raising capital is significantly easier in a corporation than
a sole proprietorship or a partnership. Liability is limited for corporations. A drawback is that the
set-up process can be cumbersome and costly.
and partnerships?
Skill: Conceptual
53) Which of the following is the MOST compelling argument for incorporating a business?
A) to hire more employees
B) to avoid paying federal taxes
C) to protect the owners' personal assets
D) to complete minimal legal requirements
Answer: C
Explanation: C) Unlike sole proprietors and partnerships, a corporate structure provides limited
liability, thus protecting owners' personal assets. When a corporation runs into problems, only
the corporate assets are at risk. The owners are not personally liable for business debt.
and partnerships?
Skill: Application
18
54) Traci and Sally have considered starting their own business but are concerned about the
possibility of losing their personal assets if the business fails. One way for Traci and Sally to
avoid this risk would be to organize their company as a ________.
A) general partnership
B) limited partnership
C) corporation
D) sole proprietorship
Answer: C
Explanation: C) A corporation offers the advantage of limited liability for all of its owners.
Although a limited partnership also has limited liability, even a limited partnership must have at
least one general partner with unlimited liability. Sole proprietors and general partnerships have
100% liability.
and partnerships?
Skill: Conceptual
55) Ben recently purchased 100 shares of stock in Feger's Sports, Inc. Ben is a(n) ________ of
Feger's Sports, Inc.
A) owner
B) manager
C) director
D) partner
Answer: A
Explanation: A) Shareholders are the owners of a corporation, therefore if Ben purchased stock,
he became an owner.
and partnerships?
Skill: Conceptual
19
56) If a corporation provides medical insurance, it will actually lower the company's taxes
because ________.
A) medical insurance benefits are legally deductible expenses
B) its employees will be healthy, creating higher productivity because of lower absenteeism
C) it increases the company's profits
D) IRS regulations allows medical benefits to be filed as a business loss
Answer: A
Explanation: A) Medical insurance benefits are legal tax deductions, not business losses, so it
will lower the company's taxes. Although medical insurance benefits may increase profits or
increase production because of lower absenteeism, the only assured benefit is reduced taxes.
and partnerships?
Skill: Application
57) Management and ownership roles would most likely be separate in what type of business
structure?
A) sole proprietorship
B) general partnership
C) corporation
D) limited liability partnership
Answer: C
Explanation: C) In sole proprietorships, general partnerships, and limited liability partnerships,
owners are usually the managers as well. In corporations, shareholders are the owners and
usually do not participate in the management roles. Rather, they elect directors who appoint
officers that manage the day-to-day operations.
and partnerships?
Skill: Application
58) Owners of limited liability companies are referred to as ________, while owners of
corporations are called ________.
A) partners; shareholders
B) shareholders; partners
C) shareholders; members
D) members; shareholders
Answer: D
Explanation: D) In corporations, stock ownership is the way to become an owner, therefore,
corporate owner are referred to as shareholders. LLC owners are referred to as members.
Diff: 1 Page Ref: 178, 182
and partnerships?
Skill: Application
20
59) In a large corporation, shareholders responsibilities include ________.
A) making major business and financing decisions
B) authorizing the issuance of stock
C) electing corporate officers
D) electing a board of directors
Answer: D
Explanation: D) Shareholders are responsible for electing and overseeing a board of directors,
bylaws and the articles of the organization. They also vote on major corporate issues. It is the
directors' job to elect corporate officers, authorize the issuance of stock, make major business
and financing decisions, and decide on major real estate transactions.
and partnerships?
Skill: Conceptual
60) The Sarbanes-Oxley Act of 2002 was enacted to provide a new set of standards of
accountability for ________.
A) corporate officers
B) board of directors
C) shareholders
D) business owners
Answer: B
Explanation: B) To prevent scandals such as those of Enron, WorldCom and Tyco from
occurring, accountability was placed on the board of directors. If the members of a board of
directors ignore their responsibilities, they incur the risk of fines and even prison sentences.
and partnerships?
Skill: Conceptual
61) Which of the following is a benefit of forming a corporation?

A) Corporations can be double taxed.
B) Owners of a corporation are passive investors.
C) Owners of a corporation are subject to unlimited liability.
D) Corporations can offer stock options to employees.
Answer: D
Explanation: D) Double taxation is a disadvantage of corporations. Owners of corporations have
limited liability and, due to stock options and other benefits, employees of corporations are quite
often shareholders, and thus/owners, of the corporations as well. Corporations can offer stock
options (the right to purchase shares of the corporation for a fixed price) to employees.
and partnerships?
Skill: Conceptual
21
62) Which of the following tasks is NOT the responsibility of the board of directors?
A) setting policies for the corporation
B) authorizing the issuance of stock
C) electing corporate officers
D) managing the company's daily operations
Answer: D
Explanation: D) Although the board of directors is responsible for setting corporate policy,
electing officers, and making major business and finance decisions, they do not actually manage
day-to-day operations. However, they are responsible for ensuring those who do manage daily
operations are doing their jobs.
and partnerships?
Skill: Conceptual
63) Which of the following is a disadvantage of forming a corporation?

A) unlimited liability of owners
B) difficult transfer of ownership
C) limited life
D) double taxation
Answer: D
Explanation: D) Corporations provide owners with no liability to any corporate debt, making
limited liability an advantage. Shareholders own a corporation, making its existence independent
of its founding members and easily transferable and virtually alive forever. Double taxation
occurs when taxes are paid twice on the same asset. For example, a corporation is taxed on its net
income, which is then redistributed to its owners as dividends. The income from the dividends is
taxed again on the owner's personal income tax filings. Therefore, double taxation is a drawback
to corporate structure. Although double taxation is a disadvantage, it only affects about 39% of
corporations that pay dividends.
and partnerships?
Skill: Conceptual
22
64) Leslie is excited to begin a personal shopping business. She is planning on having employees
and is concerned about losing personal assets should something happen to the business. She
would like to focus on profits and building a business but she does not want her business to pay
its own taxes. What ownership structure is Leslie's best choice?
A) sole proprietor
B) C corporation
C) S corporation
D) cooperative
Answer: C
Explanation: C) Sole proprietorship would allow Leslie to file company taxes through her own
personal taxes, but she would have unlimited liability. C corporations would provide Leslie the
limited liability she is looking for, but she would need to pay corporate taxes. With an S
corporation she has the limited liability she is looking for and can pay company taxes through
her personal taxes. Because Leslie is not looking to involve others in the ownership, cooperative
would not be a fit.
Skill: Application
65) Which of the following statements about S corporations is MOST accurate?

A) S corporations enable owners to avoid the problem of double taxation.
B) S corporations can have an unlimited number of owners.
C) S corporations must have fewer than 5 employees.
D) S corporation are easier to set up than sole proprietorships and partnerships.
Answer: A
Explanation: A) S corporations are not taxed as an entity. Therefore, owner profits are only
taxed in individual tax returns, thus avoiding double taxation. An S corporation is limited to 100
owners. The set up process for S corporations requires submitting paperwork, unlike the ease of
forming a sole proprietorship or partnership.
Skill: Conceptual
23
66) Many new business owners prefer a limited liability structure because there are ________.
A) fewer corporate formalities
B) fewer lawsuits
C) typically higher profits than other forms of ownership
D) more informal agreements
Answer: A
Explanation: A) Although the limited liability structure involves more formal paperwork than a
sole proprietorship or partnership, it is still a far simpler structure than a corporation and thus
easier for new business owners to navigate.
Skill: Conceptual
67) Which of the following types of ownership is limited to 100 owners?

A) C corporation
B) S corporation
C) sole proprietor
D) limited liability company
Answer: B
Explanation: B) According to the IRS, to be considered an S corporation the company must not
have more than 100 shareholders
Skill: Conceptual
24
68) Compared to the C corporation, the limited liability company is an attractive form of
business ownership because ________.
A) a limited liability company may be more expensive to form but it has a longer life than a C
corporation
B) a limited liability company allows only one owner, whereas a C corporation requires over 100
owners
C) a limited liability company provides owners with protection of their personal assets; whereas
C corporation owner's personal assets are at risk
D) a limited liability company does not require the firm to hold annual meetings and it can avoid
double taxation
Answer: D
Explanation: D) The costs involved in forming both types are ownership are similar since they
both must file articles of organization. Limited liability forms of ownership can have an
unlimited number of owners. Personal assets are protected by both forms of ownership. Limited
liabilities, if structured properly, will not be taxed as an entity, giving the option to avoid double
taxation. Unlike C corporations, limited liability companies do not hold annual meetings, nor do
they need to file annually.
Skill: Application
69) A disadvantage of a limited liability company is that it ________.

A) requires earnings to be taxed at the corporate rate
B) must dissolve when an owner leaves the company
C) requires the division of profits in a fixed proportion
D) has more restrictive ownership rules than S corporations
Answer: B
Explanation: B) Unlike corporations, when an owner leaves an LLC, the LLC must dissolve.
Some states also require that a dissolution date be listed in the articles of organization, so an LLC
has a limited life span.
Skill: Conceptual
25
70) Limited liability companies are unable to offer stock options or stock bonus incentives to
their employees because ________.
A) benefits such as these are too costly for these types of startup companies
B) extra profits are reinvested into the company, not into company stocks
C) limited liability companies do not have shareholders or stock
D) approval of stock benefits is difficult due to the number of members
Answer: C
Explanation: C) LLC's are attractive to many new business owners because they are simpler to
maintain than corporations; however, one drawback is that limited liability companies are unable
to offer certain fringe benefits, including stock options, to members.
Skill: Conceptual
71) Becca and Bob own a car rental business. Becca contributes 75 percent of the capital but
does only 20 percent of the work, while Bob contributes 25 percent of the capital but does 80
percent of the work. Both decide on a 50/50 allocation of profits. In which types of business
structures would this arrangement be possible?
A) limited liabilities and partnerships
B) S corporations and partnerships
C) sole proprietorships and limited liabilities
D) S corporations, limited liabilities and partnerships
Answer: A
Explanation: A) LLC's and partnerships may allocate profits in whatever manner best suits the
owners. However, S corporations must allocate profits in direct proportion to shareholder's
interest. Sole proprietorships are owned by single individuals.
Skill: Application
26
72) All of the following are reasons business owners consider using a corporation structure of
ownership EXCEPT ________.
A) the appearance of stability and legitimacy
B) protection from significant loss of personal assets
C) ease of forming and setting up the structure
D) eased ability of raising capital
Answer: C
Explanation: C) Some businesses decide to incorporate to appear more stable and legitimate,
which can help in gaining clients and lenders. It is much easier to raise capital through the sale of
stock. Because corporations have limited liability, owner's personal assets are protected.
However, set-up can be cumbersome.
Skill: Conceptual
73) The following are characteristics shared by both for-profit and not-for-profit corporations
EXCEPT ________.
A) electing a board of directors to run the organization
B) offering employee fringe benefits
C) having limited liability protection
D) issuing shares of stock
Answer: D
Explanation: D) The major distinctions between for-profit and not-for profit corporations is that
a not-for-profit may not form for the purpose of personal gain, which means it does not issue
stock. Not-for-profit corporations share many of the other benefits of a for-profit organization
including election of directors, limited liability, and fringe benefits for employees.
Skill: Conceptual
27
74) Which of the following statements BEST describes the distinction between a not-for-profit
corporation and a for-profit corporation?
A) Not-for-profits do not pay their employees.
B) Not-for-profits cannot be organized for any person's private gain.
C) Not-for-profits have to dissolve when the owner leaves or dies.
D) Not-for-profits cannot hire executive officers to run the business.
Answer: B
Explanation: B) Not-for profits maintain several of the same benefits as for-profit corporations
such as employee salaries, ease of transferring ownership, and hiring officers to run the business.
A not-for-profit may not, however, organize for the purpose of personal gain.
Skill: Conceptual
75) When a not-for-profit corporations dissolves, its assets are ________.

A) transferred to the government
B) distributed among major donors
C) passed to the owners' families
D) given to a similar not-for-profit group
Answer: D
Explanation: D) If a not-for profit dissolves it must give its assets to a similar nonprofit group.
Skill: Conceptual
76) Which of the following methods do not-for-profit corporations primarily use to generate
revenues?
A) withholding employees' salaries
B) scaling down big-budget projects
C) organizing fund-raising events
D) issuing shares of corporate stock
Answer: C
Explanation: C) Not-for-profit organizations depend primarily on fund-raising in order to
generate the revenues they need to continue operating and advancing their goals.
Skill: Conceptual
28
77) A not-for-profit corporation such as a church or ministry may be exempt from ________.
A) inheritance tax
B) property tax
C) dividend tax
D) value-added tax
Answer: B
Explanation: B) Not-for-profit organizations are exempt from paying most federal and/or state
corporate income taxes and may also be exempt from most state sales and property taxes.
Skill: Application
78) A cooperative is a type of business that is owned by ________ who use its products or
services.
A) members
B) shareholders
C) directors
D) partners
Answer: A
Explanation: A) Members are the most important part of a cooperative. They not only own the
organization but may volunteer for projects supported by the cooperative and serve on boards
and committees.
Skill: Conceptual
79) Mr. Gonzales wants to help fellow farmers in his community, but he is not interested in
making a personal profit. His main goal is to join with other farmers so they can have better
bargaining power when purchasing supplies. Which of the following business types will Mr.
Gonzales MOST likely form?
A) general partnership
B) sole proprietorship
C) cooperative
D) not-for-profit corporation
Answer: C
Explanation: C) A cooperative is a type of business that is owned and governed by members
who use its products and services. It is not motivated by profits, whereas profits is the goal of
general partnerships and sole proprietorships.
Skill: Conceptual
29
80) A(n) ________ occurs when two companies of about the same size mutually agree to create a
new combined company.
A) merger
B) acquisition
C) takeover
D) synergy
Answer: A
Explanation: A) Mergers happen when two companies come together to form one company.
This differs from an acquisition, which happens when one company purchases another company.
The purchased company ceases to exist and operates under the buying company's name.
Sometimes mergers and acquisitions are not friendly and are referred to as hostile takeovers.
Synergy can be a goal of mergers and acquisitions.
Skill: Conceptual
81) Companies MOST often resort to mergers and acquisitions when they want to expand their
markets and product lines because ________.
A) it minimizes conflicts that are rooted on hidden agendas and power struggles
B) it minimizes time and investment to research and develop new products
C) upper management prefers to concentrate on day-to-day activities
D) employees are motivated to work harder because of the resulting stability
Answer: B
Explanation: B) In order to remain competitive, companies must expand quickly. As a result,
mergers and acquisitions provide the best option for companies looking to develop new products
and expand their markets quickly and efficiently. Some of the risks involved in mergers and
acquisitions include reduced morale and motivation of employees resulting from a sense of
instability, which can increase turnover. Also, the focus may, in error, be entirely on the process
of the merger or acquisition resulting in a neglect of the day-to-day activities.
Skill: Conceptual
30
82) A proxy fight occurs when a company attempts to persuade the target company's
shareholders to replace the existing management with one that is ________ the goals of the
acquiring company.
A) unaware of
B) hostile toward
C) familiar with
D) sympathetic to
Answer: D
Explanation: D) A proxy fight is a form of hostile takeover in which the acquiring company
attempts to persuade the target company shareholders to vote out existing management and
replace them with management that is sympathetic to the goals of the acquiring company.
Skill: Application
83) Which of the following moves would MOST likely initiate a hostile takeover?
A) The buying company offers to buy the target company's stocks at a price higher than their
current value.
B) The buying company delivers an ultimatum to the target company's shareholders to give up
their shares.
C) The target company's shareholders offer their company's stocks at an attractive rate to the
buying company.
D) The target company's shareholders agree to sell their company's stocks all at the same time.
Answer: A
Explanation: A) An unfriendly or hostile acquisition attempt usually occurs through a tender
offer, in which the acquiring firm offers to buy the target company's stocks at a price higher than
their current value. If a target company's shareholders offer their company's stock at an attractive
rate, it would most likely indicate a friendly merger.
Skill: Conceptual
31
84) Lizzie is the CEO of a large corporation that offers accounting services to several companies.
She has tried to acquire her closest rival, but her rival's management is opposed to the idea. In
order to gain a competitive edge, Lizzie starts a campaign to persuade her rival company's
shareholders to vote out its existing management in the hopes of replacing it with a management
team more sympathetic to the goals of the acquiring company. Which method of acquiring a
company is Lizzie using?
A) conglomeration
B) proxy fight
C) tender offer
D) synergistic value
Answer: B
Explanation: B) One goal, not a strategy, of mergers and acquisitions is to gain a synergistic
value. A conglomeration occurs when two companies that have no common business areas
merge. Lizzie is planning a hostile takeover, taking control of a company against its wishes. The
two most common methods of a hostile takeover are a tender offer and a proxy fight. A tender
offer occurs when the acquiring company offers to buy the target company's stock at a price
higher than market value. Lizzie is planning a proxy fight, a plan to persuade the target
company's shareholders to vote out existing management and to introduce management that is
sympathetic to the goals of her company.
Skill: Application
85) A(n) ________ acquisition occurs when one company tries to take control over another
company against its wishes.
A) proxy
B) hostile
C) horizontal
D) extension
Answer: B
Explanation: B) Many mergers are friendly and mutually agreed upon, but often acquisitions are
unfriendly. An unfriendly acquisition occurs when one company tries to take control over
another company against its wishes and is referred to as hostile.
Skill: Conceptual
32
86) At a meeting to announce a merger with another company, which of the following
buzzwords is a business leader MOST likely to use to justify the decision?
A) accountability
B) bottom line
C) streamline
D) synergy
Answer: D
Explanation: D) Although accountability, bottom line and streamlining could all be reasons for a
merger, the buzzword most often used today to justify mergers is synergy. Synergy refers to the
concept of two companies merging so that each company can achieve more than they could
individually. It is often used to justify mergers and acquisitions because combined firms often
succeed in lowering costs by reducing staff, sharing resources, and otherwise achieving
economies of scale.
Skill: Conceptual
87) A merger involving a computer manufacturer and an electronics retailer that sells its
computers would be an example of a ________.
A) vertical merger
B) horizontal merger
C) product extension merger
D) conglomeration
Answer: A
Explanation: A) When two companies that have a company/customer relationship or a
company/supplier relationship merge it is called a vertical merger. In this example, the computer
manufacturer sells its product to the electronics retailer. Therefore, they have a company/supplier
relationship making this merger a vertical merger.
Skill: Application
33
88) When two companies in entirely different industries combine, it is known as a ________.
A) vertical merger
D) conglomeration
Answer: D
Explanation: D) Conglomerations occur when two companies that have no common business
merge to obtain diversification. Horizontal mergers occur when two companies that share the
same product lines combine. A product extension merger is the combining of two companies
selling different but related products. Last, a vertical merger occurs when two companies that
have a company/customer relationship or a company/supplier relationship combine.
Skill: Conceptual
89) A dance studio and a dancewear manufacturer decide to combine. This type of merger is
called a ________.
A) vertical merger
D) conglomeration
Answer: A
Explanation: A) A vertical merger occurs when two companies that have a company/customer
relationship or a company/supplier relationship combine. The dance studio purchases dance wear
from the manufacturer creating a company/supplier relationship, thus this would be classified as
a vertical merger.
Skill: Conceptual
90) Explain what is involved in starting a business as a sole proprietor and the advantages to
choosing this form of ownership.
Answer: A person starts business as a sole proprietor by simply collecting income for a product
or a service by himself. The advantages of establishing a business as a sole proprietor include the
ease of startup, minimal forms, no special taxes, no special government reporting and filing, and
full control of management and operations.
Skill: Conceptual
34
91) Diane and Julie own a coffee shop. Due to the growing number of customers, they need to
hire. At the beginning of their partnership it was agreed that Diane would manage human
resources. Diane independently interviewed and hired two servers. What makes Diane and Julie's
partnership successful in this situation?
Answer: Diane is able to interview and hire new employees without consulting Julie because
they made a partnership agreement when their business was established outlining their
responsibilities. Outlining the responsibilities of each person in a partnership helps to avoid
future conflict and keep partners focused on their own field of responsibility.
agreement?
Skill: Application
92) Melissa and Claudia are considering becoming business partners and establishing a clothing
boutique. They agree that they need to have a partnership agreement before they start the
business. What factors should Melissa and Claudia consider when writing their partnership
agreement?
Answer: Melissa and Claudia should consider the amount of capital that each of them will
contribute to the business. They should also agree on the responsibilities each of them will be
accountable for, how decisions will be made, how profits and losses will be shared, and what
should happen if one of them decides to leave the business or if a new partner is invited to join.
Forming a partnership agreement before entering into a partnership will help to settle any
conflict that may arise and establishes an effective working relationship.
agreement?
Skill: Application
93) What is the difference between a general partnership and a limited partnership? What would
be some reasons for choosing a limited partnership?
Answer: In a general partnership, each partner has unlimited liability and is active in managing
the business. In a limited partnership, partners invest money in the business and share in the
profits, but have limited liability and cannot legally assume any management responsibility.
Someone may enter into a limited liability partnership because they want to share in the profits
without taking on the risks to personal assets or the role of managing responsibilities.
agreement?
Skill: Conceptual
35
94) What is a C corporation and what are the advantages of this type of business ownership?
Answer: A C corporation is a form of business organization that is a separate entity apart from
its owner, legally formed under state laws. Advantages of C corporations include the following:
Limited liability: The personal assets of the owners are not at risk.
Company paid fringes: C corporations are allowed to provide benefits to its employees, which
can reduce the company's tax obligation by using the fringe benefits as legal deductible
expenses.
Tax saving: C corporations are taxed at 15% for the first $50,000 of profits, creating a nice tax
benefit for smaller corporations.
Capital: Obtaining capital is easier through the sale of stock.
and partnerships?
Skill: Conceptual
95) A small group of businesspeople decide that the best way to do business, while
simultaneously protecting their own assets, is to form a corporation. What steps do they need to
take in order to successfully establish a corporation?
Answer: To establish a corporation, the group should choose a name for the corporation, appoint
directors, file articles of incorporation, draft bylaws, hold a board meeting, issue stock, and,
finally, obtain business permits and licenses. They also need to file paperwork with both state
and federal agencies.
and partnerships?
Skill: Conceptual
96) Brian establishes a small shoe factory that specializes in custom-made shoes. As a sole
proprietor, he is immediately able to set up his business without needing to consult other people
to make decisions and establish policies. How would the establishment of policies be different
for Brian if he were a board member in a corporation?
Answer: Unlike a sole proprietorship, a corporation has a more complex organizational
structure. Brian would not be able to make decisions as easily if his business were a corporation.
In corporations, the major decisions are made by a board of directors. The directors set the
policies of the company. Brian would have to meet with the board of directors to set his
company's policies and make any financial decisions.
and partnerships?
Skill: Application
36
97) As a shareholder of an S corporation, Dave is entitled to a profit proportionate to his interest
in the corporation. How would Dave pay his taxes for the profits from his shares in the S
corporation?
Answer: As a shareholder of an S corporation, Dave needs to file and pay his taxes based on his
shares' income through his personal tax return. An S corporation passes the obligation of paying
taxes from corporation profits to the shareholders' individual tax returns.
Skill: Conceptual
98) An advantage of S corporations over C corporations is they avoid double taxation. Explain
how this works.
Answer: In a C corporation, profits are taxed through corporate tax files. Next, the profits may
be distributed to the shareholders, who must include this income on their personal tax reports;
thus the profits are taxed twice. Because all profits in an S corporation flow through directly to
the owners, taxation occurs only once, on the owners' personal tax filings.
Skill: Conceptual
99) Sarah, Mike and Mark are dentists who would like to form a partnership. They have decided
to form a limited liability corporation. Explain why this is a good choice for their dental practice.
Answer: As an LLC, they will enjoy the benefits of limited liability protection not provided in a
general partnership but the same tax advantages of a general partnership. They also have the
option of adding an unlimited number of owners, whereas an S corporation would limit the
number of owners.
Skill: Application
37
100) Emily wants to open a chain of sandwich shops and hopes to attract investors to help
finance growth. She considered forming a C corporation but wants to have more flexibility about
how the new business will be taxed. She also wants to offer investors limited liability. What form
of ownership will best meet Emily's objectives?
Answer: A limited liability company would be the best option for Emily. LLCs offer limited
liability protection while allowing the company the choice of being taxed as a corporation or as a
partnership. Also, an S corporation has more stringent ownership rules.
Skill: Conceptual
101) Jose lives in Mexico City and is a Mexican citizen. He has several friends in the United
States who own a company. If Jose wanted to invest in the company, why would it matter if the
company was an S corporation as opposed to a limited liability company?
Answer: One ownership restriction of an S corporation is that all owners must be U.S. citizens
or permanent residents of the United States. Jose would be able to invest in an LLC based in the
United States as they do not have the same ownership restrictions.
Skill: Application
102) Henry decides to become a member of a limited liability company (LLC). What will happen
to the company if Henry withdraws his membership and invests in other businesses?
Answer: If Henry decides to withdraw his membership from the limited liability company, the
LLC will have to dissolve. An LLC has a short life span because, unlike an S or C corporation, it
must dissolve when a member decides to leave. Some states also require that an LLC list a
dissolution date in the articles of organization.
Skill: Conceptual
38
103) After a successful five years, Double Z, LLC (a retirement ranch for race horses) thinks it
may be able to attract donations from animal activist groups and even the federal government if
it becomes a nonprofit corporation. Explain what changes the owners of Double Z would need to
make in order to be a not-for-profit corporation?
Answer: If Double Z decides to change its form of business ownership to a not-for-profit
corporation, it will not seek personal profits for its owners. If the owners work in the business,
they can expect a salary. The company cannot distribute any additional income to owners. It
must put all revenues and/or contributions back into the business.
Skill: Conceptual
104) Many citrus farmers and growers in the United States have direct and low-cost access to
packing houses. As such, they are able to directly process their harvest through these packing
houses, limiting the cost of production of packed citrus products. What attribute of a cooperative
is shown in this situation?
Answer: Cooperatives provide services to members through the pooling of finances and
purchasing of equipment that will benefit the members. People with common business interests
can form cooperatives and use the benefit of group power to negotiate within their marketplace.
Members enjoy reduced costs due to the greater bargaining power and market strength associated
with big groups.
Skill: Application
105) In September 2001, technology company Hewlett-Packard (HP) announced a proposal to

acquire Compaq Computer Corporation for $25 billion in stock. It offered shareholders a deal
whereby they could exchange one Compaq share for one HP share. At the time, HP shares were
worth 18% more than Compaq shares. In March 2002, shareholders narrowly approved the
takeover. What type of acquisition took place in this situation? Explain what happens in this type
of an acquisition.
Answer: By offering Compaq shareholders a chance to exchange their shares for shares of a
higher value, Hewlett-Packard made a tender offer, initiating a hostile takeover. Shareholders
were persuaded to sell their shares, allowing HP to acquire Compaq against the company's
wishes.
Skill: Application
39
106) Mergers and acquisitions occur when two companies decide to combine resources and work
toward a common goal. Although a number of acquisitions may not be friendly, they still help to
keep businesses alive. What are some of the factors that may influence one company to merge
with another?
Answer: Companies are often looking for opportunities to expand quickly. To research and
develop new products or to locate and build in new areas is time-consuming and costly. It is
often easier to merge with a company that is already established. The objective of a merger is for
both companies to achieve more while functioning as a single entity than they would as two
individual units. If a company believes that it will be able to achieve synergy with another
company, it may choose to merge. Obtaining a competitive advantage is another reason that may
influence a company to merge with another. If two rival companies join together to become a
dominant force in the market, the results can be mutually beneficial. Other companies may
merge in order to acquire the innovativeness of a smaller company or to give themselves the
opportunity to go public. Although mergers are often unsuccessful in achieving greater market
value, the benefits when they do succeed often make the process a worthwhile risk.
Skill: Application
107) Delta and Northwest Airlines merged in April 2008, creating an airline with a fleet of 800
planes. The merger took place amid widespread concern about rising fuel prices. What type of
merger took place between Delta and Northwest? Explain this type of merger.
Answer: The Delta and Northwest merger was a horizontal merger, as both companies were
airlines competing for the same customers. In a horizontal merger, two companies that share the
same product lines and market and are in direct competition with each other combine forces.
Skill: Application
108) A corporation that owns a chain of pastry shops on the west coast has seen a decrease in
revenue in recent months due to an increase in the price of flour. The company is considering
merging with another company in order to combine resources and save on costs. Which type of
merger would be most beneficial for the corporation and why?
Answer: The corporation would benefit most from a vertical merger. This is when two
companies, one a buyer and the other a supplier, merge to form a single company. This type of
merger cuts down on costs for the buyer company since it now gets its supplies from within its
own company and not from an outside supplier. As a result, production costs will be lowered. In
this instance, the pastry company could look to merge with a flour producer in order to combine
resources and lower its costs.
Skill: Application
40

Better Business, 2e (Solomon) Chapter 6 Forms of Business Ownership

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Better Business, 2e (Solomon)

Chapter 6 Forms of Business Ownership

1) A sole proprietorship is a common form of business ownership for startup businesses.

4) When establishing a sole proprietorship, it may be necessary to obtain local licensing or

6) Partnerships are taxed at the lowest corporate tax rate.

7) To protect partnerships and minimize misunderstandings among partners, all terms of a

14) The owners of a corporation are known as general corporate partners.

19) A company with 200 shareholders can establish itself as an S corporation.

21) Not-for-profit organizations are NOT required to incorporate.

22) Not-for-profit organizations may NOT earn a profit.

23) Members are the most important part of a cooperative.

32) A sole proprietor's income and expenses flow through ________.

35) Unlimited liability with respect to business ownership means ________.

37) All of the following EXCEPT ________ would be an advantage to partnership.

61) Which of the following is a benefit of forming a corporation?

63) Which of the following is a disadvantage of forming a corporation?

65) Which of the following statements about S corporations is MOST accurate?

67) Which of the following types of ownership is limited to 100 owners?

69) A disadvantage of a limited liability company is that it ________.

75) When a not-for-profit corporations dissolves, its assets are ________.

105) In September 2001, technology company Hewlett-Packard (HP) announced a proposal to

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