MGMT 3850 CHAPTER 5 HOMEWORK QUESTIONS AND ANSWERS

MGMT 3850 CHAPTER 5 HOMEWORK QUESTIONS AND ANSWERS Essentials of Entrepreneurship & Small Business Mgmt., 7e (Scarborough) Chapter 5 Forms of Business Ownership 1) The key to choosing the right form of ownership is: A) envisioning where your business will be in 10 years. B) understanding the characteristics of each form and knowing how they affect your business and personal circumstances. C) forming either an S corporation or a limited liability company since they are the only forms that offer owners liability protection. D) irrelevant since choosing a form of ownership is merely a technicality and has little impact on the business and its owner(s). Answer: B Diff: 2 Page Ref: 165 AACSB: Analytic Skills Learning Obj.: 1 2) Which of the following issues would influence an entrepreneur's choice of a form of business ownership? A) Tax considerations B) Management succession plans C) Liability exposure D) All of the above Answer: D Diff: 1 Page Ref: 165 AACSB: Analytic Skills Learning Obj.: 1 3) The most common form of business ownership that is also the simplest to create is the: A) sole proprietorship. B) partnership. C) corporation. D) S corporation. Answer: A Diff: 1 Page Ref: 169 AACSB: Analytic Skills Learning Obj.: 1 4) Marco is opening a new computer repair shop. He is owner and sole employee. He has paid the appropriate fees and licensing costs and begun his business. This is an example of a(n): A) S corporation. 2 B) partnership. C) corporation. D) sole proprietorship. Answer: D Diff: 1 Page Ref: 169 AACSB: Reflective Thinking Learning Obj.: 1 5) The most critical disadvantage of the sole proprietorship is: A) the owner's unlimited personal liability. B) limited access to capital. C) lack of continuity. D) limited skills and abilities of the owner. Answer: A Diff: 3 Page Ref: 170 AACSB: Analytic Skills Learning Obj.: 1 6) Which form of ownership generally has the least ability to accumulate capital? A) Partnership B) Sole proprietorship C) Corporation D) S corporation Answer: B Diff: 1 Page Ref: 169 AACSB: Analytic Skills Learning Obj.: 1 7) A partnership agreement defines how the partners will be compensated. Normally, A) partners are not entitled to salaries or wages, but are compensated by a share of the profits of the business. B) the general partner's salary is set at two times the salaries of the limited partners. C) both general and limited partners are permitted salaries, but all silent or dormant partners are compensated only by sharing in the profits. D) while the agreement establishes payout schedules, it does not spell out what constitutes profit. Answer: A Diff: 3 Page Ref: 171 AACSB: Analytic Skills Learning Obj.: 1 8) Probably the most important reason to have a partnership agreement is that: A) it identifies the name of the partnership and protects that name from infringement by others. B) it states the location and the purpose of the business. C) it determines how the partnership and the partners will pay taxes. D) it resolves potential sources of conflict that, if not addressed in advance, could later result in partnership battles and dissolution of an otherwise successful business. Answer: D 3 Diff: 2 Page Ref: 173 AACSB: Communication Learning Obj.: 1 4 9) Which of the following issues would a typical partnership agreement address? A) The contributions of each partner to the business B) How the partnership profits (or losses) will be distributed C) How a partner can sell her ownership in the business D) All of the above Answer: D Diff: 1 Page Ref: 171-172 AACSB: Communication Learning Obj.: 1 10) All of the following are advantages of a partnership except: A) partnerships are relatively easy and inexpensive to establish. B) partnerships avoid double taxation since the partnership itself is not subject to federal taxation. C) partnerships have the greatest ability to accumulate capital of all of the forms of ownership. D) partnerships offer the ability to combine the management and business skills of two or more people in a complementary and powerful fashion. Answer: C Diff: 1 Page Ref: 173 AACSB: Analytic Skills Learning Obj.: 1 11) In a partnership, the ________ partner(s) has (have) unlimited liability for the partnership's debts. A) limited B) dormant C) nominal D) general Answer: D Diff: 1 Page Ref: 173-174 AACSB: Analytic Skills Learning Obj.: 1 12) In a general partnership: A) each partner is held responsible for an agreement/decision made by any one of the partners. B) partners can be held responsible only for decisions they make personally. C) no partner can be held legally responsible for decisions since the partnership itself is a legal entity. D) no decision is binding unless all partners agree to it in writing. Answer: A Diff: 3 Page Ref: 173-174 AACSB: Analytic Skills Learning Obj.: 1 5 13) Which of the following is required to form a partnership? A) A general partner B) A limited partner C) A secret partner D) A silent partner Answer: A Diff: 2 Page Ref: 174 AACSB: Analytic Skills Learning Obj.: 1 14) A special type of limited partnership in which all partners who, in many states must be considered to be professionals, are limited partners. A) Limited liability partnership (LLP) B) Master limited partnership (MLP) C) General partnership D) Limited partnership Answer: A Diff: 2 Page Ref: 173 AACSB: Analytic Skills Learning Obj.: 1 15) Which of the following is not true of a limited liability partnership? A) All partners are limited partners. B) Most states restrict this form of ownership to certain types of professions such as attorneys, physicians, dentists, accountants, etc. C) Although LLPs have many of the characteristics of partnerships, they are taxed as a corporation. D) It must involve a general partner, a limited partner, a silent partner, and a dormant partner. Answer: C Diff: 2 Page Ref: 173 AACSB: Analytic Skills Learning Obj.: 1 16) A ________ partner is a person who makes financial investments in a partnership, does not take an active role in managing the business, and whose liability for the partnerships' debts is limited to the amount they have invested. A) limited B) master C) dormant D) silent Answer: A Diff: 3 Page Ref: 173 AACSB: Reflective Thinking Learning Obj.: 1