FI480 EXAM 1 REVIEW QUESTIONS AND ANSWERS
A+ GRADED
3 Forms of business
1. Sole Proprietorship
2. Partnership
3. Corporation
Advantages of a sole proprietorship
1. Easy and inexpensive to start
2. Relatively few government regulations affect it
3. It pays no corporate income tax on profits, rather they pay at the proprietor's personal
tax level
Disadvantages of a sole proprietorship
1. Difficult to obtain funding
2. Unlimited personal liability (for debts)
3. Life of proprietorship is limited to the life of its founder
Advantages and disadvantages of a Partnership
Very similar to the proprietorship
Liabilities can be limited in a partnership by establishing:
a limited partnership
Limited partners
can lose only the amount of their investment in the partnership
General partners
have unlimited liability
Advantages of a corporation
1. Unlimited life
2. Easy transfers of ownership interests
3. Limited liability - (losses are limited to the actual funds invested)
Disadvantages of a corporation
1. Earnings may be subject to double taxation
2. Setting up a corporation involves preparing a charter, writing a set of bylaws, and
filing many required state and federal reports
What is the primary objective of a corporation?
To maximize shareholder wealth
The same actions that maximize intrinsic stock _____________ also benefits
society
values
Agency problem
Problem that occurs when an employee will work for their own best interests rather than
them acting to maximize company value
A+ GRADED
3 Forms of business
1. Sole Proprietorship
2. Partnership
3. Corporation
Advantages of a sole proprietorship
1. Easy and inexpensive to start
2. Relatively few government regulations affect it
3. It pays no corporate income tax on profits, rather they pay at the proprietor's personal
tax level
Disadvantages of a sole proprietorship
1. Difficult to obtain funding
2. Unlimited personal liability (for debts)
3. Life of proprietorship is limited to the life of its founder
Advantages and disadvantages of a Partnership
Very similar to the proprietorship
Liabilities can be limited in a partnership by establishing:
a limited partnership
Limited partners
can lose only the amount of their investment in the partnership
General partners
have unlimited liability
Advantages of a corporation
1. Unlimited life
2. Easy transfers of ownership interests
3. Limited liability - (losses are limited to the actual funds invested)
Disadvantages of a corporation
1. Earnings may be subject to double taxation
2. Setting up a corporation involves preparing a charter, writing a set of bylaws, and
filing many required state and federal reports
What is the primary objective of a corporation?
To maximize shareholder wealth
The same actions that maximize intrinsic stock _____________ also benefits
society
values
Agency problem
Problem that occurs when an employee will work for their own best interests rather than
them acting to maximize company value
